SECRETARIA DE ESTADO DE ECONOMÍA,
MINISTERIO SECRETARÍA GENERAL DE POLÍTICA ECONÓMICA DE ECONOMÍA Y ECONOMÍA INTERNACIONAL Y HACIENDA SUBDIRECCIÓN GENERAL DE ECONOMÍA INTERNACIONAL
CUADERNO DE DOCUMENTACION
Número 90º ANEXO VI
Alvaro Espina Vocal Asesor 1 de Marzo de 2010
BACKGROUND PAPERS:
1. What didn’t happen, The New York Times by Paul Krugman…6 2. Isn’t AIG’s stock worthless? The why is it $28 a share?, The Washington Post by Paul Smalera…8 3. The transformer: why VW is the car giant to watch, BusinessWeek by David Welch…10 4. Junkers calls for single eurozone representation, Collegio Carlo Alberto…14 5. Ominous lessons of the 1930s for Europe, FT.com by Paul De Grauwe…16 6. European commercial property rebounds, FT.com by Daniel Thomas …18 7. A systemic risk warning system, Vox by Anne Sibert…19 8. The “other” imbalance and the financial crisis, Vox by Ricardo Caballero…22 9. Eurozone monetary policy in uncharted waters, Vox by Martin Cihák, Thomras Harjes and Emil Stavrev…28 10. Arrogancia de Viejo estilo, El País de Santos Julia…33 11. Crisis y recuperación en América Latina, El País de Carmelo Mesa-Lago…35 12. Atados al euro, El País de Pierre Briançon…37 13. El turismo, ¿clave del nuevo modelo productivo?, El País de José Luis Zoreda…38 14. Los salarios resisten la presión, El País de Manuel V Gómez…41 15. Los precios de la vivienda caen cada vez menos, El País de Luis Doncel…43 16. La crisis y la reforma del sistema financiero, El País de Xavier Vives…45 17. La prueba griega, El País …48 18. Alemania elogia los esfuerzos de Grecia para frenar su déficit, El País, Agencias …48 19. Los contrastes de Suramérica, El País de Alejandro Rebossio…50 20. Despedidos por no remar con la empresa, El País de A. Bolaños y A. Trillas…52 21. Obama taxes the Banks – including the foreigners, Collegio Carlo Alberto …56 22. How the Icelandic saga should end, Financial Times by martin Wolf…58 23. Greece unveils 3-year plan to curb deficit, Ft.com by Kerin Hope and David Oakley…58 24. ECB warning to debt-ridden governments, FT.com by Ralph Atkins, Kevin Hope and David Oakley…60 25. Europe cannot afford a Greek default, FT.com by Simon Tilfod…61 26. Greek PM rejects fears over eurozone exit, FT.com by Kerin Hope …62 27. Why Greece will have to leave the eurozone, FT.com by Desmond Lachman…63 28. Eurozone: Paris et Luxembourg divergent autour du programme, Les Echos.fr par Julien Toyer…65 29. FDIC chief puts blame on Fed for crisis, FT.com by Tom Braithwaite …66 30. Bankers without a clue, The New York Times by Paul Krugman…70 31. Stein’s law, new application, The Conscience of a Liberal by Ezra Klein…71 32. I’m Czar of the world! By Eugene Fama…72 33. Percents and sensibility, BradDeLong…72 34. How many currencies?…73 35. Europe¡s Ok; the euro isn’t…74 36. A Fistful of Euros, The Teory strikes back by PO Neill…75 37. Danske on Eurozone debt-the peril of internal devaluations, by Claus Vistesen …76 38. Any takers in Greece?, Alpha sources cv…77 39. Quantifying Eurozone imbalances and the internal devaluation of Greece and Spain, Alpha Sources Cv by Claus Vistesen …78 40. The debt Hangover…85 41. Why standard and poor’s are right to worry about Spanish finances by Edward Hugh…88 42. The Chicago School and the Financial Crisis Posted, The New Yorker by John Cassidy…106 43. Interview with Eugene Fama, The New Yorket by John Cassidy…107 44. Interview with John Cochrane, The New Yorker by John Cassidy…113 45. Interview with Richard Posner, The New Yorker by John Cassidy…120 46. Interview with Gary Becker, The New Yorker by John Cassidy…125 47. Interview with James Heckman, The New Yorker, by John Cassidy…130 48. Postscript: Paul Samuelson, The New Yorker by John Cassidy…133 49. Krugman, Fox, McCain, Prescott and Company, Grasping reality with opposable thumbs, by Justin Fox…137 50. Leaders of SEC and FDIC say agencies’ failings contributed to financial crisi, The Washington Post by Brady Dennis…141 51. Accord reached on insurance tax for costly plans, The New York Times by Robert Pear and Steven Greenhouse…143 52. Developed markets are more at risk of default, FT.com by Charles Robertson…145 53. Obama attack obscene bonuses, FT.com by Krishna Guha …146
1 54. Overseas unlikely to follow levy move, FT.com by Chris Giles …147 55. Argentina woes will prove costly for comeback, FT.com by Jude Webber …148 56. Direct bids set to spark Treasury volatility, FT.com by Michael Mackenzie…150 57. The short view, FT.com by Jennifer Hughes…151 58. Banker’s fury at levy on US subsidiaries, FT.com by Francesco Guerrera…151 59. Citigroup plans to cap cash bonuses, FT.com by Francesco Guerrera…153 60. Obama vows to recover crisis cash, FT.com by Krishna Guha …154 61. Dear Wall Street: you can blame the media for that levy, Financial Times …155 62. La nueva recuperación de Latinoamérica, Finanzas e Inversión…156 63. España en 2010: ¿Prolongará el paro la salida de la crisis?, Finanzas e Inversión…160 64. Interdependencia global: ¿Están Estados Unidos y otros mercados sembrando las semillas de la próxima crisis?, Finanzas e Inversión…164 65. El dilema europeo: Aumentar la regulación sin sofocar el crecimiento, Finanzas e Inversión…169 66. Financial markets are betting on a Greek default, Collegio Carlo Alberto…174 67. Sovereign default risk loom, FT.com by George Magnus…176 68. A European sovereign upgrade cometh?, (surely some mistake, eh), Financial Times …177 69. Governments’ exit strategies from counter-cyclical policies are crucial, Moody’s Investors Service…179 70. Grecia y Portugal se exponent a una muerte lenta advierte Moodys’ La Razón…180 71. Greek default risk surges to record amid solw death concern, Bloomberg.com by Lukanyo Mnyanda and Abigail Moses…180 72. El bono español toca el 4% pero gana terreno frente al alemán, El País de M.J.…182 73. Wall Street titans face the flak, FT.com by Tom Braithwaite and Francesco Guerrera…183 74. Financial crisis inquiry commission: live coverage, Financial Times …185 75. Greece is still fiddling its data, Collegio Carlo Alberto…189 76. Tax Them Both, The New York Times …190 77. Obama plans fee on financial firms to recover TARP money, The Washington Post by Michal D Shear…192 78. France to raise 360 million euros from trader bonus tax, Times of the Internet …193 79. Paris looks for €360m from bank bonus tax, FT.com by Ben Hall and Sheherazade…194 80. French bankers have more to complain about than rivals, FT.com by Paul Betts…195 81. Questions for the bing bankers, The New York Times …196 82. German government plans to crack down on rating agencies, Spiegel On Line…199 83. Greek markets rattled as EU says deficit forecasts unreliable, Bloomberg.com by Maria Petrakis and Andrew Davis…201 84. The Botox Economy –Part I, Collegio Carlo Alberto by Satyajit Das… 203 85. The Botox Economy – Part II, Collegio Carlo Alberto by Satyajit Das…208 86. Banks braced for Basel battle, Ft.com by Brooke Master and Patrick Jenkins…214 87. What we can learn from Japan’s decades of trouble, FT.com …215 88. Why Obama must take on Wall Street, FT.com by Robert Reich217 89. Obama weighs tax on banks to cut deficit, The New York Times by Jackie Calmes…220 90. What the financial crisis commission should ask, The New York Times by Andrew Ross Sorkin…222 91. As China rises, fears grow on whether boom can endure, The New York Times by Michael Wines…225 92. Clinton, starting trip, acknowledges possible tension with China, The New York Times by Mark Landler…227 93. In China, fear of a real estate bubble, The Washington Post by Steven Mufson…228 94. Angela Merkel changed her mind on policy coordination –but there is a big caveat, Collegio Carlo Alberto…231 95. White man’s Burden?, The Conscience of a Liberal by Paul Krugman …233 96. Sovereign bonds seen as riskier than corporate, FT.com by David Oakley…237 97. Rate rise fears spark rush to issue bonds, FT.com by Jennifer Hughes…238 98. Bond rally continues but risks lie ahead, FT.com by Aline Van Duyn…239 99. Portugal warned about credit downgrade, Collegio Carlo Alberto…242 100. Portugal warned of threat to rating, FT.com by Peter Wise…244 101. Europe braced for boom in junk bonds, FT.com by Anousha Sakoui and Nicole Bullock…246 102. Investors focus on bonds despite a big stock rebound, The Washington Post by Tomoeh Murakami Tse…247 103. Learning from Europe, The New York Times by Paul Krugman…250 104. European decline – a further note, The Conscience of a Liberal …251 105. Bankers escape bonus blow, FT.com by Patrick Jenkins and Megan Murphy…253 106. To leave or not to leave, Ft.com by Patrick Jenkins and Kate Burgess…255 107. Held hostage by the City’s bankers, FT.com …256 108. Investors must not pay, say shareholders, FT.com …257
2 109. Sense of unease awaits financiers in Basel, FT.com by Henny Sender…259 110. Top banks invited to Basel risk talks, FT.com by Henny Sender…260 111. How to make the bankers share the losses, FT.com by Neil Record…261 112. Banks prepare for bigger bonuses, and public’s wrath, The New York Times by Louise Story and Eric Dash…263 113. The other plot to wreck America, The New York Times by Frank Rich…266 114. Are they really?, The New York Times …269 115. Health reform, the States and Medicaid, The New York Times …270 116. China Becomes biggest exporter, The New York Times by The Associated Press…272 117. Who’s sleeping now?, The New York Times by Thomas L Friedman…273 118. Bernanke, ¿héroe o villano?, El País de Sandro Pozzi…275 119. La soledad de Bernanke, Editorial…278 120. La justicia del rescate financiero, El País, J Bradford Delong…279 121. Grandes maestros y crecimiento mundial, El País by Kenneth Rogoff…280 122. Invitation to Disaster, The New York Times, by Bob Herbert…283 123. Jobs and Politics, The New York Times Editorial…285 124. Bubbles and the Banks, The New York Times by Paul Krugman…286 125. Payrolls and paradigms, The Conscience of a Liberal, …288 126. From Chicago School to just another (excellent) economics department, The Curious Capitalist by Justin Fox…289 127. After the Blowup, The New Yorket, by John Cassidy…294 128. Financial crisis panel seeks bankers’ testimony, The Washington Post by Binyamin Appelbaum…296 129. Report says Mersh to succeed Papademos, Collegio Carlo Alberto…298 130. The case for optimism: Three reasons why global GDP growth will accelerate in 2010, Collegio Carlo Alberto by Eric Chaney…300 131. Stark says no bail-out for Greece, Collegio Carlo Alberto…305 132. Iceland stakes EU entry by refusing to sign Icesave, Collegio Carlo Alberto …306 133. Greek’s revised stability programme – first hints, Collegio Carlo Alberto…309 134. Is Spain getting left behind?, Euro Watch by Edward Hugh …311 135. Zapatero embarks on mission to raise natio’n profile, FT.com by Mark Mulligan …314 136. Krugman sees 30-40% chance of US recession in 2010 (Update3), Bloomberg.com by Steve Matthews…315 137. Pessimistic into 2010, Collegio Carlo Alberto…318 138. Harvard’s Feldstein: Economy might run out of steam in ’10, Real Time Economics by Michael S. Derby … 139. Virgin prepares for banking push, FT.com by Adan Jones…321 140. Licences given for £100 bn wind farm scheme by Ed Crooks, Energy Editor…322 141. Hoppe in one lesson, illustred in welfare economics, Ludwig von Mises Institute, by Jeffrey M Herbener…324 142. Bis, FT.com …328 143. Top banks invited to Basel risk talks by Henny Sender…328 144. The three magi of the Meltdown, The New York Times by William D Cohan …330 145. El paro se duplica durante la crisis, El País de Manuel V. Gómez…332 146. El alto gasto permite mantener a raya la cifra de parados sin cobertura, MVG…332 147. Año pésimo en el Mediterráneo, El País de C. Pérez…336 148. Señales confusas, El País …336 149. El número de parados se ha duplicado en dos años de crisis, El País …337 150. The eurozone’s next decade will be tough, FT.com by Martin Wolf…338 151. A stumbling Spain must guide Europe…340 152. Fed Missed this bubble. Will it see a New One?, The New York Times by David Leonhardt…341 153. The cause of our criss has not gone away, FT.com by John Kay…343 154. Taylor disputes Bernanke on Bubble, Blaming low rates (Update1), Bloomberg.com by Steve Matthews…345 155. Bernanke calls for stronger financial regulation, FT.com by Tom Braithwaite …347 156. Mankiw’s Baseless Arguments, Ludwig von ises Institute, by Robert Murphy…347 157. That 1937 feeling, The New York Times by Paul Krugman…352 158. Chinese New Year, by Paul Krugman…352 159. The Big Zero, The New York Times by Paul Krugman…355 160. Tidings of Comfort, The New York Times by Paul Krugman…357 161. Beware the crisis around the corner, Ft.com by Clive Crook…359 162. Unlearnt lessons of the great depression by DianeC…361 163. House prices are too high, say economists, FT.com by Chris Giles and Daniel Pimlott…362 164. Unlearnt lessons of the Great Depression, FT.com by Harold James…364 165. The baby boomers come of old age, FT.com …365
3 166. After the decade of debt: a couse to chart, Ft.com by Michael Mackenzie…367 167. Credit crunch in the Eurozone intensifies: loans to non-financial corporations decrease further, Beta Roubini Gobal Economics…372 168. These days, countries in Misery have lots of company, The New York Times by Floyd Norris…373 169. Ratio rentals, Economist.com Finance and Economics…375 170. The great stabilisation, Economist.com …378 171. To lose one decade may be misfortune, Economist.com …380 172. An end to the Japanese lesson, Economist.com…382 173. Lessons from “The Leopard” Economist.com …384 174. Earth-friendly elements, mined destructively, The New York Times by Keith Bradsher…386 175. The Economists’ voice, Bepress Journals by Casey B Mulligan…389 176. Citigroup completa la devolución de 14.000 millones al Tesoro, El Pais by EFE…392 177. Roubini’s latest Project syndicate op-ed: the gold bubble and the gold bugs, Beta Roubini by Nouriel Roubini…393 178. Las reformas esquivan el parón de la vivienda al subir un 10,8%, El Pais de Europa Press…395 179. Moody’s alerta al BCE del riesgo de su política para Grecia, El País de A. González…396 180. Tax credit gives a lift to housing, The New York Times by Javier C. Hernández…398 181. November existing-home sales surge by Dina ElBoghdady and Neil Irwin…400 182. Agencies issue final rules on risk-based pricing notices, Board of Governos of the Federal Reserve System…402 183. US recovery expectations drive dollar up, gold down, The Washington Post by Reuters …403 184. Farewell, Richard Posner, Ludwig von Mises Institute, Mises Daily by Richard Posner …404 185. Labor data show surge in hiring of temp workers, The New York Times by Louis Uchitelle…406 186. Fed’s approach to regulation left banks exposed to crisis, Te Washington Post by Biyamin Appelbaum and David Cho…408 187. A dangerous Dysfunction, The New York Times by Paul Krugman… 414 188. The Wysiwyg president, The Conscience of a Liberal…414 189. Why economics is the way it is…416 190. Spain versus Florida…417 191. The curse of Montagu Norman…417 192. The world needs further monetary ease, not an early exit, Peterson Institute for International Economics by Joseph E Gagnon…418 193. Taming the fat cats, The New York Times, Editorial…420 194. El coup de whisky que provocó el crack del 29, Libertad Digital…421 195. Los grifos abiertos de Greenspan, Libertad Digital de Juan Ramón Rallo…423 196. EU Stress Tests, Beat Roubini Global Economics… 425 197. Another view: forget Ideology. Let’sfix the economy, The New York Times …428 198. El “stock” seguirá ejerciendo presión, Cinco Dias de Raquel D. Guijarro…430 199. Germany: Economic Profile, Beta Roubini Global Economics…432 200. La llegada de las SOCIMI en enero ofrece una alternativa a los fondos inmobiliarios, El Pais de Piedad Oregui…435 201. Moody’s abaisse à son tour la note de la Grèce, Les Echos…437 202. Allemagne: nouveau coup de blues des consommateurs, Les Echos…438 203. Accès au crédit: l’industrie allemande se plaint de nouvelles restrictions, Les Echos…438 204. Greek Banks: Troubles at home and abroad, Beta Roubini…439 205. ¿Cómo terminará la tragedia griega?, El País de Wolfgang Munchau…441 206. No hay plan B, Grecia tiene que salir de ésta por sus propios medios, El País de Alicia González…443 207. Los Gobiernos suben impuestos y reducen gasto público ante el alza del coste del endeudamiento. El País …445 208. Los empresarios no creen en una mejora rápida de la economía, El País …447 209. Precios, salarios y empleo: triángulo descompuesto, El País de Angel labroda…448 210. Financiación frente al cambio climático, El País de George Soros…451 211. El coche eléctrico va a cambiar el modelo de negocio, El País de Ramón Casamayor…453 212. ¿Se deberían pagar impuestos por consumir productos financieros?, El País de Carlos Arenillas…455 213. Una respuesta predecible 20/12/2009, El País de Peter Thal Larsen and Nicholas Paisner…458 214. No pequemos de optimismo, El País de Carmen Alcaide…459 215. La economía española en 2010, El País.com de Antonio España y Emiliano Carluccio…461 216. Angela Merkel has secured a majority for her stimulus, Collegio Carlo Alberto…463 217. Greetings from Roubini Global Economics! Roubini Global Economics…465 218. Should the Fed be the natio’s bubble fighter?, Econbrowser…467 219. Bubbles and Policy, Tim Duy’s Fed Watch 469 220. Pass the Bill, The New York Times by Paul Krugman…471
4 221. Ireland’s economy exits recession: GDP Grows, Beta Roubini Gobal Economics…475 222. Las bolsas latinoamericanas triunfan en 2009, ¿pero mantendrán su atractivo en 2010?, Finanzas e Inversión…478 223. Alemania, la locomotora europea, enciende el motor de Europa, Liderazgo y Cambio …481 224. ¿Quiénes son los responsables de la crisis financiera?, Etica Empresarial…485 225. Habitat pide una quita del 50% a cambio de beneficios, El Pais, de Lluis Pellicer…489 226. La poderosa Bolsa secreta de la gran banca, Cinco Días de Fernando Martínez…490 227. Is Greece already defaulting?, Collegio Carlo Alberto…491 228. ECB cals time on 12-month liquidity offer, FT.com by Ralph Atkins…492 229. How will Greek tragedy end?, Collegio Carlo Alberto by Wolfgang Munchau…494 230. House passes temporary measures to end 2009 The Washington Post by Paul Kaen and Perry Bacon Jr …496 231. Fed signals pullback in liquidity supports, FT.com by Krishna Guha …498 232. Eurozone services growth hits two-year high, FT.com by Stanley Pignal…499 233. Federal reserve edges away from crisis measures, The Washington Post by Neil Irwin…500 234. American hold a gloomy outlook on the economy, despite positive indicators, The Washington Post…502 235. Press Release, Federal Reserve press release…504 236. Financial markets give thumbs down to Papandreou, Collegio Carlo Alberto…505 237. Greece: The start of a systemic crisis of the Eurozone?, Vox by Paul De Grauwe…507 238. Charles wyplosz bailouts: the next step up?, Vox by Charles Wyplosz…511 239. House democrats discard larger debt limit, The Washington Post by Paul Kane…513 240. TIC Data and the US current account deficit: still buying treasuries, Beta Roubini Global Economics …515 241. RGE Strategy flash: elections and banker compensation in the UK, Beta Roubini Global Economics …516 242. Fragile investor confidence: Is Germany’s economic recovery losing momentum?, Beta Roubini Global Economics…517 243. US industrial production: expansion at a slow pace, Beta Roubini Gobal Economics…518 244. Wednesday Nota, Roubini Global Economics, …521 245. United States: Monetary Policy exit strategy, Beta Roubini Global Economics…522 246. Commodities, Beta Roubini Global Economics…529 247. United States: labor market, Beta Roubini Global Economics…532 248. Déjà vu: will the US undergo a reprise of 1937?, Beta Roubini, Global Economics by Mikka Pineda…536 249. Comparing three crises, Beta Roubini Global Economics by Mikka Pineda…545 250. Bad news from Greece: It is open season for the speculators, Collegio Carlo Alberto…562 251. Eurozone industrial output falls, FT.com by Stanley Pignal…565 252. Abu Dhabi comes through with funds to avoid Dubai Inc’s default, Beta Roubini Global Economics…566 253. China and US hit strident impasse at climate talks, The New York Times by John M Broder and James Kanter…570 254. Poll reveals depth and trauma of joblessness in US, The New York Times by Michael Luo and Megan Thee-Brenan…573 255. The economists’ voice, vol 6 Iss 11, Bepress Journals by Jonathan Carmel…576 256. Spending measure clears senate, The Washington Post, by Ben Pershing…578 257. The banking crisis – a rational interpretation, Collegio Carlo Alberto by Patrick Minford…580
5 Opinion
January 18, 2010 OP-ED COLUMNIST What Didn’t Happen By PAUL KRUGMAN Lately many people have been second-guessing the Obama administration’s political strategy. The conventional wisdom seems to be that President Obama tried to do too much — in particular, that he should have put health care on one side and focused on the economy. I disagree. The Obama administration’s troubles are the result not of excessive ambition, but of policy and political misjudgments. The stimulus was too small; policy toward the banks wasn’t tough enough; and Mr. Obama didn’t do what Ronald Reagan, who also faced a poor economy early in his administration, did — namely, shelter himself from criticism with a narrative that placed the blame on previous administrations. About the stimulus: it has surely helped. Without it, unemployment would be much higher than it is. But the administration’s program clearly wasn’t big enough to produce job gains in 2009. Why was the stimulus underpowered? A number of economists (myself included) called for a stimulus substantially bigger than the one the administration ended up proposing. According to The New Yorker’s Ryan Lizza, however, in December 2008 Mr. Obama’s top economic and political advisers concluded that a bigger stimulus was neither economically necessary nor politically feasible. Their political judgment may or may not have been correct; their economic judgment obviously wasn’t. Whatever led to this misjudgment, however, it wasn’t failure to focus on the issue: in late 2008 and early 2009 the Obama team was focused on little else. The administration wasn’t distracted; it was just wrong. The same can be said about policy toward the banks. Some economists defend the administration’s decision not to take a harder line on banks, arguing that the banks are earning their way back to financial health. But the light-touch approach to the financial industry further entrenched the power of the very institutions that caused the crisis, even as it failed to revive lending: bailed-out banks have been reducing, not increasing, their loan balances. And it has had disastrous political consequences: the administration has placed itself on the wrong side of popular rage over bailouts and bonuses. Finally, about that narrative: It’s instructive to compare Mr. Obama’s rhetorical stance on the economy with that of Ronald Reagan. It’s often forgotten now, but unemployment actually soared after Reagan’s 1981 tax cut. Reagan, however, had a ready answer for critics: everything going wrong was the result of the failed policies of the past. In effect, Reagan spent his first few years in office continuing to run against Jimmy Carter. Mr. Obama could have done the same — with, I’d argue, considerably more justice. He could have pointed out, repeatedly, that the continuing troubles of America’s economy are the result of a financial crisis that developed under the Bush administration, and was at least in part the result of the Bush administration’s refusal to regulate the banks.
6 But he didn’t. Maybe he still dreams of bridging the partisan divide; maybe he fears the ire of pundits who consider blaming your predecessor for current problems uncouth — if you’re a Democrat. (It’s O.K. if you’re a Republican.) Whatever the reason, Mr. Obama has allowed the public to forget, with remarkable speed, that the economy’s troubles didn’t start on his watch. So where do complaints of an excessively broad agenda fit into all this? Could the administration have made a midcourse correction on economic policy if it hadn’t been fighting battles on health care? Probably not. One key argument of those pushing for a bigger stimulus plan was that there would be no second chance: if unemployment remained high, they warned, people would conclude that stimulus doesn’t work rather than that we needed a bigger dose. And so it has proved. It’s important to remember, also, how important health care reform is to the Democratic base. Some activists have been left disillusioned by the compromises made to get legislation through the Senate — but they would have been even more disillusioned if Democrats had simply punted on the issue. And politics should be about more than winning elections. Even if health care reform loses Democrats votes (which is questionable), it’s the right thing to do. So what comes next? At this point Mr. Obama probably can’t do much about job creation. He can, however, push hard on financial reform, and seek to put himself back on the right side of public anger by portraying Republicans as the enemies of reform — which they are. And meanwhile, Democrats have to do whatever it takes to enact a health care bill. Passing such a bill won’t be their political salvation — but not passing a bill would surely be their political doom. http://www.nytimes.com/2010/01/18/opinion/18krugman.html?th&emc=th
7
Isn't AIG's stock worthless? Then why is it $28 a share? By Paul Smalera Sunday, January 17, 2010; G05 One of the strangest things to come out of Steve Brill's piece on Kenneth Feinberg's role as compensation czar is the bit about American International Group stock. Feinberg made stock- based compensation a major plank in his guidelines for the TARP companies whose compensation practices he is in charge of regulating. Paying people in stock rather than cash is supposed to encourage executives to stick around the company and put shareholder interests above personal ones. So it seemed perverse that AIG argued that stock-based compensation wouldn't work in its case, because AIG stock was essentially worthless. Brill writes that AIG Vice Chairman Anastasia Kelly presented the argument to Feinberg: "Second, and more important, those top executives at AIG who hadn't received the retention bonuses refused to accept the salarized stock as part of their pay packages. They wanted all cash. AIG's Kelly told Feinberg that their position was that AIG's stock -- which was trading in the late summer and fall at around $40 -- was, in a word that Feinberg says he remembers vividly, 'worthless.' Kelly explained AIG's position this way: 'We wanted compensation for people at AIG that they would see value in.' " Brill goes on to explain that the New York Fed concurred: AIG's stock was worthless. The solution was a "basket" of stock that reflected the value of only four profitable AIG divisions, most of which, it was planned, would be spun off into separate companies. Feinberg agreed to the plan; Brill makes it sound as if more than a gentle push was given for Feinberg to reach this conclusion. (Kelly, by the way, was one of two AIG execs to quit over her compensation, suggesting even this compromise wasn't enough to retain her services.) Given this, you would think the value of AIG stock would plummet dramatically, but it's still hovering around $28 per share. That's despite the company and the government both saying AIG stock is worthless. In August, AIG argued that stock-based compensation was something AIG executives would run from, because they, too, knew it was worthless. When Feinberg tried to draw a line in the sand over the issue, the New York Fed told Feinberg it agreed with AIG: The stock was worthless. In all this time, though, the stock has never gone to zero. (It was coming close, but AIG executed a 1-for-20 reverse split in July, turning 20 shares of $1.16 stock in one share of $23 stock.) Still, zero times a million is zero. So how can AIG shares be retaining any value? That's the question I was originally trying to answer when I read a report from the Wall Street Journal that said AIG stock payments to executives would be made solely in common shares after all. So the company and the New York Fed went to bat against Feinberg to create a special basket of stocks that would be awarded only to AIG executives. Because the stock was "worthless." Then AIG decided its stock wasn't so bad after all. Its filing reads, "On December 24, 2009, AIG determined to use stock units reflecting the value of AIG's common stock for 2009 stock salary grants, which will be cash-settled on the transferability date required by the Initial Determination Memorandum." Needless to say, AIG didn't bother explaining why. And Feinberg, having won a
8 battle he thought he'd lost, didn't feel the need to issue any explanation either. But what's clear is that AIG specifically went back and asked Feinberg for the option to pay in common stock, rather than from the basket the now-departed Kelly had fought so hard for. The filing, without saying so, indicates a major shift in chief executive Robert Benmosche's plans for the bailed-out company. Now he seems to have no plans to wind down the company at all. Otherwise, there's no way AIG executives would accept major parts of their compensation in AIG common stock, because that stock, under chief executive Ed Liddy, was supposed to disappear. So people who have been holding the stock at $28 a share, rather than looking like fools, now look as though they know something about AIG that the rest of us do not. It appears that Benmosche has a plan to rid the company of the large obligations owed by AIG's Financial Products unit and keep the four profitable parts of its business together, after all. What's hardly been noted is that Feinberg provided for a bonus mechanism: If AIG can pay back TARP funds within a year, executives can sell the first one-third of their stock after holding it for one year, rather than two. Each subsequent third of stock is eligible to be sold a year sooner. There seemed to be no possible way for AIG to repay taxpayers. But, clearly, stranger things have happened in recent history. The other possibility that makes any sense is that if AIG does end up spinning off its profitable units, it might be able to construct the IPOs in such a way as to grant executives valuable stock in the new companies, in exchange for their worthless AIG shares. That would amount to AIG's corpse bailing out shareholders, something that's not supposed to happen under the reorganization plans we know about. Whatever is going on, AIG is not only a public company -- its 80 percent majority owner remains the U.S. government. If AIG somehow finds a way to stick taxpayers with all its debts and obligations, and spin off the profitable companies for the benefit of its executives, that would be as unprecedented as the scope of the original bailout itself. http://www.washingtonpost.com/wp-dyn/content/article/2010/01/15/AR2010011504660_pf.html
9 January 13, 2010, 11:00PM EST The Transformer: Why VW Is the Car Giant to Watch Volkswagen is bent on displacing Toyota as the world's biggest car company—and it just may succeed By David Welch Editor's note: The original version of this story said Volkswagen sold 35,000 Passats in 2009. The company sold 11,000. When Volkswagen (VOW:GR) CEO Martin Winterkorn said two years ago that he was determined to zoom past Toyota (TM) to become the world's biggest automaker, the notion seemed laughable. At the time, the German automaker sold 3 million fewer vehicles than Toyota, was losing ground in the U.S., and had a reputation for iffy quality. Toyota, then set to pass General Motors as the best-selling carmaker on the planet, seemed unassailable. Today Toyota is vulnerable, and Winterkorn's ambitions seem a lot less outlandish. In November, for the first time, VW built more cars than its Japanese rival. Toyota still sells more each year, but VW has closed the gap to less than 1.5 million cars. Quality continues to be an issue for VW in the U.S., but Toyota is the one suffering negative headlines after a series of embarrassing recalls. Toyota's CEO—in an act of extreme self-flagellation—has even said his company's best days may be behind it. Winterkorn sees an historic opportunity. And with the backing of his formidable boss and mentor, VW Chairman Ferdinand Piëch, he's seizing it. By 2018, Winterkorn vows, VW will pass Toyota. "VW saw a chink in Toyota's armor and realized they could act on their ambitions," says Stephen Pope, who follows the industry for Cantor Fitzgerald in London. "They went for it straightaway." All over the globe, Winterkorn, 62, is punching the accelerator. VW has agreed to buy a 20% stake in Suzuki Motors (7269:JP) to gear up for an assault on the rapidly growing markets of Southeast Asia and India. Winterkorn is going after BMW (BMW:GR) and Mercedes (DAI), committing $11 billion over the next three years to Audi, VW's luxury brand. Peter Schwarzenbauer, a board member who oversees Audi's sales and marketing, says the brand plans 10 new models, including the A1, the world's first "premium subcompact." Aiming Downmarket Winterkorn's most ambitious plans are in the U.S., where he aims to double sales by 2012. It was only five years ago that VW tried and failed to move upmarket in the U.S. Remember the Phaeton, the VW with a sticker price of $85,000? Now Winterkorn is reversing course. He's betting that Volkswagen can steal customers from Toyota, Honda (HMC), Ford (F), and others by selling Americans on German engineering and style at affordable prices. This year, VW will introduce a compact priced to compete with cars like the $16,000 Toyota Corolla. "We have to bring the masses to VW," says Mark Barnes, VW's U.S. chief operating officer. Beating Toyota won't be easy. For starters, VW sells fewer vehicles in the U.S. than Subaru (7270:JP) or Kia and still has a reputation for making unreliable, overpriced cars. In Southeast Asia—a Toyota stronghold—the VW brand is practically unknown. Ditto for India. Winterkorn's
10 plan to double Audi's sales in the U.S. by 2018, meanwhile, isn't exactly scaring BMW. "They have been saying that for years," says Jim O'Donnell, president of BMW of North America. Still, VW is a formidable competitor; it earned $975 million in the first three quarters of 2009, despite the global collapse of car sales, and it has $33.3 billion in cash. "We want to make [VW] the economic, ecological, and technological leader by 2018," Winterkorn wrote in an e-mail. "Our goal is not just about size—we are aiming for quality-driven growth." Piëch has long wanted to move beyond VW's bases in Europe, China, and Brazil. In the 1990s, as Audi chairman and later VW CEO, Piëch acquired lower-end brands, including Spain's SEAT and the Czech Republic's Skoda. Later he added ritzy names like Bentley, Lamborghini, and Bugatti. "He used to privately talk about selling a car for every purse and purpose like Alfred Sloan did at GM," says Garel Rhys, president of the Center for Auto Industry Studies at Cardiff University in Wales. Fixing VW's America Problem By the end of 2006 it was clear that VW's move upmarket wasn't working, and in January 2007 Piëch installed Winterkorn as CEO. Before his elevation, Winterkorn ran Audi, where he boosted quality and supercharged growth with new models that rivaled BMW's cars. Winterkorn rewarded employees for speaking their minds and bringing ideas to his attention. In the summer of 2007, Winterkorn and the board met to brainstorm ways to become the world's biggest automaker, says VW's U.S. chief, Stefan Jacoby. High on the agenda was fixing VW's America problem. That year, VW expected to sell 200,000 cars in the U.S., a 40% drop from 2000 and a third of what VW sold in 1970 when the Bug and Bus were Hippie icons. Jacoby says executives at the meeting saw three choices: They could continue to lose buckets of money selling cars that were too small and too expensive; they could wave the white flag; or they could go on the offensive. They chose Door No. 3. Jacoby says he persuaded the board to build VW's first U.S. plant since closing a Pennsylvania factory in 1988. He recalls arguing that doing so would help VW overcome resistance in the American heartland to imported vehicles. If VW built the plant, Jacoby recalls saying, he would sell 150,000 cars from that factory alone each year. The board approved the plan and allocated $1 billion for the facility, which is scheduled to open next year in Chattanooga, Tenn. VW's decision to build cars in the U.S. has not gone unnoticed by its main rival. "The fact that they are producing in the U.S. gives them a leg up," says Donald V. Esmond, senior vice-president for automotive operations at Toyota Motor Sales USA. "But we'll just keep focusing on our customers." Jacoby's most pressing challenge is devising a roomy family sedan at a price Americans will pay. Today's Passat, despite being smaller than most mid-size sedans, sells for $28,000, or $8,000 more than a Toyota Camry. That's largely why VW sold only 11,000 Passats in the U.S. last year, compared with some 350,000 Camrys. VW plans to stretch the Passat's successor four inches, add three inches of legroom, and sell it for a starting price of about $20,000. Timothy Ellis, VW's U.S. marketing chief, says he expects to move more than 135,000 mid-size sedans a year starting in 2011. James N. Hall, principal of the auto consulting firm 2953 Analytics, is skeptical. Typically, Hall says, it takes two generations for a new mid-size sedan to get traction in the U.S. "The first-generation car is going to have to hit it out of the park," he says. Expansion Plans for U.S. Lineup Industry analysts say Winterkorn's mass market approach could work in the U.S. VW will be the only company offering affordable European cars. BMW and Mercedes sell German engineering, but their cheapest models start at $30,000.
11 According to a source briefed on VW's plans for the U.S., the company plans to expand its lineup from 10 cars today to 14 in five years. VW will have new compact and mid-size sedans priced for the American market, plus a small SUV. VW also may introduce its Polo compact—now available in Europe, China, and other markets—to the U.S. VW will have to convince Americans its cars are worth buying. In J.D. Power & Associates' (MHP) Initial Quality Study, which ranks cars in the first three months of ownership, VW came in 15th out of 37 last year. The company's ranking improved from 24th in 2008. But VW still trails Toyota, Honda, and Nissan (NSANY), as well as the Chevrolet and Ford brands. What's more, though 78% of Americans know the VW brand, only 2% buy the cars. Most Americans recognize the Beetle and Jetta, says Ellis, but draw a blank on VW's other eight U.S. models. "Volkswagen has a bigger brand than it deserves," he says. "But we have a low sense of awareness for our products." Turning around those perceptions will take a sustained marketing push. VW's new American commercials will debut during the Super Bowl on Feb. 7 in a campaign called "Punch Dub," (as in Vee Dub). It's a reference to a game kids used to play back in the original Beetle's heyday: The first kid to see a Beetle would yell, "punch Bug," and slug their friend. In the ads, people will say, "punch Dub," when a Jetta, Passat, or any other Volkswagen model drives by. The idea: Show millions of Americans that VW sells something besides the Beetle. Asia Push If VW is playing catch-up in the U.S., it is many laps behind its rivals in India and Southeast Asia. Indians now buy about 2 million cars a year; Southeast Asians about 1 million. VW is lucky to sell 20,000 cars a year in each region. It will have to steal customers from Honda and Toyota, which have dominated Southeast Asia for many years. That's where Suzuki comes in. By buying a stake in the Japanese company, VW gets access to Suzuki's small-car technology. Suzuki's Indian joint venture already does well with its Alto and Swift subcompacts. "India has a massive road-building program," says Cantor Fitzgerald's Pope. "With Suzuki, VW will be able to put out very efficient vehicles." VW has tapped Weiming Soh to oversee its Asia push. A U.S.-educated Singaporean, Soh most recently helped orchestrate a turnaround of VW's operations in China. Soh says VW Group, which includes VW, Audi, and Skoda, will add or freshen 20 models in China by late 2011. His goal is to double VW's Chinese retail network to 1,600 dealers in five years and sell 2 million cars. As part of his Southeast Asia strategy, Soh plans beachheads in Hong Kong and Singapore. Those markets are tiny, selling 30,000 and 100,000 cars a year, respectively. But Soh says Singapore sets trends for Southeast Asia, and Hong Kong is influential in southern China. "My aim is to make these two markets VW states," Soh says. Winterkorn and Piëch have put in place the pieces of their global strategy. Now that VW's two main rivals, Toyota and GM, are retrenching, they're speeding up their plans. The big question is whether size for size's sake generates real benefits for a car company. Automakers like to get big so they can spread the huge costs of developing new models over mass volumes. Of course, car companies have a tendency to get so big that they become unmanageable. That's what happened to GM. Bolting together various acquisitions also can be problematic. Exhibit A: the unhappy Daimler-Chrysler marriage. Winterkorn and his executives argue that they can retain management control of their sprawling enterprise because VW is more decentralized than many automakers. "The critical factor is that each brand has its independence, a clear positioning, and autonomous management," Winterkorn wrote in his e-mail to Bloomberg BusinessWeek. Eric Noble, president of auto consultant The CarLab, says that Winterkorn's tactical moves make sense. But, he adds, "VW had best be making these acquisitions for reasons other than size
12 alone." Looming over the debate is Toyota. A few years ago, its management decided Toyota needed to be bigger than GM. Look what happened. Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network Evolution of an Emblem A photo- and illustration-packed post on the blog Neatorama traces the evolution of the VW logo from its inception in 1939, when it resembled an iron cross (once the symbol of the German armed forces), to today's more pared-down look. The logos of Audi, Porsche, and a host of other carmakers get similar treatment. http://www.businessweek.com/magazine/content/10_04/b4164000146966.htm?campaign_id=ma g_Jan14&link_position=link20
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18.01.2010 Junker calls for single eurozone representation
In a letter to the 16 finance ministers in which he outlines his priorities for his next presidency, Jean Claude Junker reiterated his calls for a single representation of the euro area in international financial institutions, writes FT Deutschland. Junker uses the political momentum that the large eurozone member states might be willing to rethink their resistance after the recent bad experience on the climate summit Kopenhagen and the G20 in London. In the letter he evokes that the Lisbon treaty provides a special legal framework for a unified representation (Article 138 of the Lisbon Treaty offers the opportunity to decide on a unified representation within financial institutions and conferences, if a qualified majority of euro zone member states agree). Junker is expected to be reconfirmed as president of the eurogroup today. Les Echos highlighted another aspect of Junker’s letter to the finance ministers. Better economic surveillance, and what to do if a member states policy is not in line with the eurozone and could risk the well-functioning of the eurozone. In such a case the Commission would have the right to address that country and the Ecofin would then have a frank discussion with that member state to assure that efficient measures are taken. On the agenda of the eurogroup meeting today is also a discussion about whether or not to follow Obama’s plans for a 0.15% tax on unsecured liabilities. El Pais writes that the Spanish government is open to such an idea as it would suit its banking system. But European experts argue that there are serious flaws with this proposal as many of the subprime mortgages would be exempted, and it could lead to double taxation. The article goes on saying that European states are more likely to impose a sort of “Tobin tax” and to tax bonuses as introduced by France and the UK. Comeback ....of European property markets Commercial real estate investment has risen by more than 40% in Europe in Q4 2009 to the highest level since the collapse of Lehman Brothers in 2008, writes the FT. One third of the new investment took place in the UK, followed by Germany (15%). The strongest growth was in central and Eastern Europe, with high investments from German funds and other sovereign wealth funds outside Europe...... of private equity
14 BC partners, a British private equity investor most active in Germany, wants to raise €5.8bn funds for company buyouts, reports the FT Deutschland. If it succeeds, it would be the worldwide largest fund since 2008. Private equity benefits from low interest rate policy of central banks, the current boom in company bond markets and the fact that many companies, threatened by the economic downturn , are now cheap to buy. Germany to control bank bonuses Germany plans to control bonus payments through its supervisory authority BAFIN, writes the FT Deutschland. The finance ministry should get the power to regulate the details of a bonus system thereby following the Financial Stability Board. The objective is link bonus payments with long term success and to prevent high bonus payments despite losses of the company. It is the third measure in Germany to regulate bonuses in the financial sector. Last year, BAFIN issued a code of conduct and eight large banks and insurers accepted voluntarily to implement the G20 bonus rules. Weak assumptions in the Greek stability pact Kathimerini lists several shaky assumptions behind the Greek Stability programme, which was presented last Friday to the European Commission. In the stability programme growth is assumed to be marginally negative in 2010 (-0.3%), considered too optimistic by analysts. Also daring are the assumptions of recovering €1.2bn from tax fraud in times of recession. Unconvincing are the privatisation schemes without clear reference to which public companies it refers to and the €1.8bn cost cutting programme through suspended recruitment, without a clear indication of the number of civil servants. Anne Sibert on the ESRB Anne Sibert has a good comment in Vox, in which she criticises the European System Risk Board. Here is the nutgraph: “The Eurozone has already swung into action, creating the European Systemic Risk Board (ESRB), set to begin this year. Unfortunately, this board, responsible for macro-prudential oversight of the EU financial system and for issuing risk warnings and recommendations, is far from the ideal. It is to be composed of the 27 EU national central bank governors, the ECB President and Vice-President, a Commission member and the three chairs of the new European Supervisory Authorities. In addition, a representative from the national supervisory authority of each EU country and the President of the Economic and Financial Committee may attend meetings of the ESRB, but may not vote. This lumbering army of 61 central bankers and related bureaucrats is a body clearly designed for maximum inefficiency; it is too big, it is too homogeneous, it lacks independence, and its members are already sufficiently employed.” Paul de Grauwe on an overvalued euro Writing in the Financial Times, Paul de Grauwe says the continental European countries are repeating the same mistake as they did in the early 1930s, by allowing the UK and the US to devalue, and thus delay their own recovery. There reason is, in both cases, the relatively conservative monetary policy. While the ECB has provided the markets with ample liquidity, it did not do so with the same vigour as the Fed, which is one of the reasons for the euro’s strong appreciation. http://www.eurointelligence.com/article.581+M58007806bf6.0.html#
15 COMMENT Ominous lessons of the 1930s for Europe By Paul De Grauwe Published: January 17 2010 16:37 | Last updated: January 17 2010 16:37 The Great Depression taught us several lessons. The first one is that central banks must be ready to provide ample liquidity to save the banking system. Present-day central banks did exactly that. They did not repeat the mistakes of the 1930s when their predecessors tightened money in the face of a banking crisis. The second lesson is that governments should not try to balance the budget when economic activity collapses. Governments today did not repeat the mistakes made by many governments in the 1930s that desperately tried to balance their books when the economy crashed. There is one area of policymaking where authorities may not have learned the lessons of history and are in the process of repeating the same mistakes. During much of the 1930s a number of continental European countries, the so-called gold bloc countries (France, Italy, Belgium, the Netherlands and Switzerland) kept their currencies pegged to gold. When in the early 1930s Great Britain and the US went off gold and devalued their currencies, the gold bloc countries found their currencies to be massively overvalued. This had the effect of depressing their exports and of prolonging the economic depression in these countries. It is remarkable to see that the same mistakes are being repeated today involving some of the same countries as during the 1930s. This time it is again the continental western European countries tied together in the eurozone that have seen their currency, the euro, become strongly overvalued. The two countries that in the 1930s responded to the crisis by devaluing their currencies, the US and the UK, today have also allowed their currencies to depreciate significantly. Since the start of the financial crisis the pound has depreciated against the euro by about 30 per cent. After having strengthened against the euro prior to the banking crisis of October 2008, the dollar has depreciated against the euro by close to 20 per cent. Thus, as in the 1930s, the dividing line is the same. The US and the UK have allowed their currencies to depreciate; the continental European countries tied in the euro area have allowed their currency to become significantly overvalued. Even the numbers are of the same order of magnitude. During the 1930s the overvaluation of the gold-bloc currencies amounted to 20 to 30 per cent. Today, the euro is overvalued by similar percentages against the dollar and the pound. Why do the euro area countries repeat the same policies as the gold bloc countries in the 1930s? The answer is economic orthodoxy. In the 1930s it was the orthodoxy inspired by the last vestiges of the gold standard. Today the economic orthodoxy that inspires the European Central Bank is very different, but no less constraining. It is the view that the foreign exchange market is better placed than the central bank to decide about the appropriate level of the exchange rate. A central bank should be concerned with keeping inflation low and not with meddling in the forex market. As a result, the ECB has not been willing to gear its monetary policy towards some exchange rate objective. Just as in the 1930s, the euro area countries will pay a price for this orthodoxy. The price will be a slower and more protracted recovery from the recession. This will also make it more difficult to deal with the internal disequilibria within the eurozone between the deficit and the surplus countries that Martin Wolf described so vividly in these pages.
16 One could object to this analysis that the central bank is powerless to affect the exchange rate. This is a misconception. A central bank can always drive down the value of its currency by a sufficiently large increase in its supply. And that is what the US and the UK have done with their policies of quantitative easing that have gone farther in flooding the US and UK money markets with liquidity than in the euro area. True, since the start of the crisis, the ECB has injected plenty of liquidity in the euro money markets to support the banking system. Yet it has been much more timid than the US Federal Reserve and the Bank of England in creating liquidity. While the latter more than doubled the size of their balance sheets since October 2008 and thereby more than doubled the supply of central bank money, the ECB’s balance sheet increased by less than 50 per cent. Such an imbalance in the expansion of central bank money inevitably spills over in the foreign exchange markets. The massive supply of dollars and pounds created by the US and UK monetary authorities was transmitted to other financial markets in search of higher yields and in so doing put upward pressure on the value of the euro. Thus the greater timidity of the ECB in providing liquidity is an important factor explaining why the euro has rallied since the start of the banking crisis and why it is now excessively overvalued. Ultimately a central bank has to make choices. The Fed and the Bank of England have opted for massive programmes of liquidity creation, attaching a low weight to the possible inflationary consequences of their actions. The ECB has been more conservative in its liquidity, creating programmes attaching a low weight to the consequences for the exchange rate and to the chances of a quick recovery. The future will tell us which of these choices was right. The writer is professor of economics at the University of Leuven Paul De Grauwe Ominous lessons of the 1930s for Europe January 17 2010 http://www.ft.com/cms/s/0/18f5f38e-0386-11df-a601-00144feabdc0.html
17 COMPANIES European commercial property rebounds By Daniel Thomas, Property Correspondent Published: January 17 2010 19:18 | Last updated: January 17 2010 19:18 Commercial real estate investment has risen by more than 40 per cent in Europe in the past three months to the highest level since the collapse of Lehman Brothers in 2008. More than €25.7bn of property deals were sealed in the fourth quarter of 2009, an increase of 42 per cent on the previous quarter and double the levels traded in the first two quarters of the year, according to CB Richard Ellis, the property consultancy. US commercial property attracts new wave of money - Jan-10 Commercial property rally on shaky foundations - Jan-15 Property funds attract renewed interest - Jan-15 Merryn Somerset Webb: China’s going the way of Spain, Ireland and Japan - Jan-15 UK commercial property recovery to hold up - Dec-29 Analysis: Vacant possessions - Dec-06 This is the highest quarterly trade since Lehman’s collapse and the beginning of the sharpest point of the property slump . The data support anecdotal evidence of a rush back to property investment by a range of institutions after a bounce in values in markets such as the UK since the summer. The jump in fourth-quarter activity brought total 2009 turnover to €70bn, still lower than the €121bn in 2008. Almost every European market saw an increase in investment activity in the fourth quarter. The UK took by far the largest share of the new investment, with more than a third spent on British property. Investment in the UK increased by 64 per cent in the second half compared with the first six months of the year. The next largest market was Germany, which accounted for about 15 per cent of investment activity. The fourth quarter is generally one of the busiest periods owing to the rush of deals being completed towards the end of the year, although CBRE said the turnround was expected to be sustained into 2010. Michael Haddock, CBRE’s director of European research and consulting, said the upturn started in the most important European markets but was spreading. The strongest growth occurred in central and eastern Europe, an area traditionally seen as higher risk than more established markets in western Europe, though the pick-up came from a lower base. There was a rise in cross-border investment in the second half, in contrast to the preceding half, which was dominated by domestic investors. German open-ended funds alone spent more than €1bn in December, with at least 13 acquisitions across seven markets. Sovereign wealth funds from outside Europe contributed to the rise in activity. The biggest acquisition in the second half was the purchase of HSBC’s headquarters in London’s Canary Wharf by South Korea’s National Pension Service of Korea. Mr Haddock said: “Despite the increase in investment activity across Europe, investor interest is still fixated on prime product and the most liquid markets.” http://www.ft.com/cms/s/0/58cbe2ce-039b-11df-a601-00144feabdc0.html
18 vox Research-based policy analysis and commentary from leading economists Anne Sibert A systemic risk warning system
Anne Sibert 16 January 2010
Economists largely neglected systemic risk in the financial sector. This column discusses how governments should gather data about systemic risk and assess its implications. It says the new European Systemic Risk Board is far from the ideal – it is too big, too homogeneous, and lacks independence. Economists have been widely reviled in the popular press for failing to predict the current financial crisis. To some extent, this criticism is unfair. As David K. Levine (2009) has argued, future economic outcomes are functions of future fundamental random variables. Even if economists could perfectly model the world and even if they knew all of the potential fundamental random variables and their distributions, they could at most describe the statistical distribution of future economic outcomes. However, even if economists could not have predicted the timing of the current collapse, it might be argued that they should have realised the extent of the systemic risk in the financial sector. If economists had properly assessed the systemic risk in the global financial system in early 2007, the vulnerability of financial institutions would have been recognised, and it would have been understood that if events triggered the collapse of just one or a few important financial firms, then an entire national, or even the international, financial system could be endangered. Given the importance of the financial system to the real economy’s infrastructure, the danger of a damaging or even catastrophic blow to the real economy would have been seen. Yet, few – if any – economists sounded a widely heard alarm on this point. In the period prior to the credit crisis of August 2007, many economists voiced concerns about the rise in US house prices and the size of global imbalances. Not many, however, argued that systemic risk was excessively high in the financial sector. One reason for this is that systemic risk is not yet well understood. Another reason is that, while housing and balance of payments data is widely available, few economists knew that financial firms had become so leveraged or comprehended the nature of the real-estate-backed assets that these firms held. Finally, most economists had little incentive to analyse systemic risk; they were rewarded for doing other things. Identifying systemic risk in the financial sector will require having the data to measure it and rewarding some body of research economists and related professionals for spotting it. Gathering data on systemic risk In his testimony to the US House of Representatives, Andrew Lo describes how the first condition can be met. He proposes setting up an independent agency to collect, organise, analyse, store, and protect data on the market prices of the on- and off-balance sheet assets and liabilities of all US financial firms, including those in the shadow banking sector. Such data would allow an assessment of how leveraged and liquid the US banking system is. It would allow economists to assess the correlation of asset prices and estimate portfolios’ sensitivity to changes in economic conditions. The Eurozone should also set up such an agency, although, as Lo emphasises, collecting the raw
19 data, maintaining it, and turning it into something usable would not be easy or inexpensive. It would require a change in the rules so that all financial entities are required to report their balance sheet positions. As many financial firms are multinational enterprises, international coordination, say through the BIS or IMF, would desirable, but that may be politically difficult. In addition to being costly, it should be noted that the benefits of such a systemic risk data set are limited. The data will, at most, allow policy makers to observe the symptoms of financial vulnerability. Using a systemic risk data set in an early warning system is no substitute for sensible economic policy and good supervision and regulation. Also, as previously mentioned, systemic risk is not yet well understood, and this creates obvious difficulties in interpreting the data. In particular, a key feature of a crisis caused by systemic risk factors is the domino-like collapse of a chain of financial institutions after the demise of a just one or a few. This may be because of the size of the first institutions to go, or it may be because they were too interconnected to fail without damaging the entire system. Current efforts to measure interconnectedness typically employ network theory. Soramäki et al. (2007), for example, use a network map of the US Fedwire interbank payment system to look at “connectedness” in the US financial system. But, neither size nor conventional connectedness may be necessary for a financial crisis to propagate. Instead, a new or old-style bank run or speculative attack in one market may make a similar run or attack a focal outcome or, as recent research by Stephen Morris and Hyun Song Shin (2009) demonstrates, a tiny amount of contagious adverse selection can shut down a market. Given the harm a financial crisis can inflict, even the limited benefits of a systemic risk data set make it worth the cost. However, once it is available, the dataset cannot be used mechanistically. One reason is that a change in a variable may be unimportant on its own but dangerous in combination with other factors. An example, due to Lo (2009), is that the greater availability of refinancing opportunities for homeowners appears benign, but in combination with higher real estate prices and higher interest rates, it can lead to householders synchronising equity withdrawals via refinancing and becoming increasingly leveraged with no way of reducing their leverage should house prices drop. The result can be a wave of defaults and foreclosures across the economy. Thus, along with an agency to collect and manage the data, the Eurozone must have a systemic risk assessment committee to interpret this and other relevant data, in light of the current macroeconomic and regulatory and supervisory environment. Designing a systemic risk assessment committee This committee should be small and diverse. I suggest that ideally it should be composed of five people: a macroeconomist, a microeconomist, a financial engineer, a research accountant, and a practitioner. The reason for the small size is that, consistent with the familiar jokes, it is a stylised fact that the output of committees is not as good as one would expect, given their members. Process losses due to coordination problems, motivational losses, and difficulty sharing information are well documented in the social psychology literature; not everyone can speak at once; information is a public good and gathering it requires effort; no one wants to make a fool of themselves in front of their co-members. As the size of a group increases so does the pool of human resources, but motivational losses, coordination problems, and the potential for embarrassment become more important. The optimal size for a group that must solve problems or make judgements is an empirical issue, but it may not be much greater than five. The reason for diversity is that spotting systemic risk requires different types of expertise. A board composed of entirely of macroeconomists might, for example, see the potential for risk pooling in securitisation, whereas a microeconomist would see the reduced incentive to monitor loans. The committee should be composed of researchers outside of government bodies and
20 international organisations; career concerns may stifle the incentive of a bureaucrat to express certain original ideas. It is of particular importance that the board not include supervisors and regulators. This is for two reasons. First, it is often suggested that supervisors and regulators can be captured by the industry that they are supposed to mind, and this may make them less than objective and prone to the same errors. Second, a prominent cause of the recent crisis was supervisory and regulatory failures, and these are more apt to be spotted and reported by independent observers than the perpetrators. Finally, it is important that the board be made sufficiently visible and prominent that a member’s career depends on his performance. Given the importance of the task, pay should be high to attract the best qualified, and the members should not have outside employment to distract them. The Eurozone has already swung into action, creating the European Systemic Risk Board (ESRB), set to begin this year. Unfortunately, this board, responsible for macro-prudential oversight of the EU financial system and for issuing risk warnings and recommendations, is far from the ideal. It is to be composed of the 27 EU national central bank governors, the ECB President and Vice-President, a Commission member and the three chairs of the new European Supervisory Authorities. In addition, a representative from the national supervisory authority of each EU country and the President of the Economic and Financial Committee may attend meetings of the ESRB, but may not vote. This lumbering army of 61 central bankers and related bureaucrats is a body clearly designed for maximum inefficiency; it is too big, it is too homogeneous, it lacks independence, and its members are already sufficiently employed. References Levine, David K. (2009), “An Open Letter to Paul Krugman,” Huffington Post, 18 September. Lo, Andrew (2009) “The Feasibility of Systemic Risk Measurements: Written Testimony for the House Financial Services Committee on Systemic Risk Regulation,” October. Morris, Stephen, and Hyun Song Shin (2009), “Contagious Adverse Selection”. Soramäki, K., Bech, M., Arnold, J., Glass, R. and W. Beyeler (2007), “The Topology of Interbank Payment Flows,” Physica A 379, 317-333.
Anne Sibert A systemic risk warning system16 January 2010h ttp://www.voxeu.org/index.php?q=node/4495
21 vox
Research-based policy analysis and commentary from leading economists The “other” imbalance and the financial crisis
Ricardo Caballero 14 January 2010
Global imbalances have been suggested as the root cause of the global crisis. This column argues that another imbalance is the guilty party. The entire world had an insatiable demand for safe debt instruments that put an enormous pressure on the US financial system and its incentives. This structural problem can be alleviated if governments around the world explicitly absorb a larger share of the systemic risk. One of the main economic villains before this crisis was the presence of large “global imbalances”, which refer to the massive and persistent current account deficits experienced by the US and financed by the periphery. The IMF, then in a desperate search for a new mandate that would justify its existence, had singled out these imbalances as a paramount risk for the global economy. That concern was shared by many around the world and was intellectually grounded on the devastating crises often experienced by emerging market economies that run chronic current account deficits (DeLong 2008). The main trigger of these crises is the abrupt macroeconomic adjustment needed to deal with a sudden reversal in the net capital inflows that supported the previous expansion and current account deficits (the so called “sudden stops”). The global concern was that the US would experience a similar fate, which unavoidably would drag the world economy into a deep recession. Lessons to be learned when the "wrong" crisis happened However, when the crisis finally did come, the mechanism did not at all resemble the feared sudden stop, as I argued recently in my Baffi Lecture at the Bank of Italy (Caballero 2009). Quite the opposite occurred. During the crisis, net capital inflows to the US were a stabilising rather than a destabilising force. The US as a whole never experienced, not even remotely, an external funding problem. This is an important observation to keep in mind as it hints that it is not the global imbalances per se, or at least not through their conventional mechanism, that should be our primary concern. I argue instead that the root imbalance was of a different kind – although not entirely unrelated to global imbalances. The entire world had an insatiable demand for safe debt instruments – including foreign central banks and investors, but also many US financial institutions. This put enormous pressure on the US financial system and its incentives (Caballero and Krishnamurthy 2008). The financial sector was able to create micro-AAA assets from the securitisation of lower quality ones, but at the cost of exposing the system to a panic, which finally did take place. The crisis itself was the result of the interaction between the initial tremors in the financial industry created to supply safe assets, caused by the rise in subprime defaults, and the panic associated to the chaotic unravelling of this complex industry. Safe-asset demand as the key factor
22 In this view, the surge of safe-asset demand was a key factor behind the rise in leverage and macroeconomic risk concentration in financial institutions in the US as well as the UK, Germany, and a few other developed economies. These institutions sought the profits generated from bridging the gap between this rise in demand and the expansion of its natural supply. In all likelihood, the safe-asset shortage was also a central force behind the creation of highly complex financial instruments and linkages, which ultimately exposed the economy to panics triggered by Knightian uncertainty (Caballero and Krishnamurthy 2008, Caballero and Simsek 2009a,b). This is not to say that the often emphasised regulatory and corporate governance weaknesses, misguided homeownership policies, and unscrupulous lenders played no role in creating the conditions for the surge in real estate prices and its eventual crash. Instead, these were mainly important in determining the minimum resistance path for the safe-assets imbalance to release its energy, rather than being the structural sources of the dramatic recent macroeconomic boom-bust cycle. Role of global imbalances Similarly, it is not to say that global imbalances did not play a role. Indeed, there is a connection between the safe-assets imbalance and the more visible global imbalances. The latter were caused by the funding countries’ demand for financial assets in excess of their ability to produce them (Caballero et al 2008a,b), but this gap is particularly acute for safe assets since emerging markets have very limited institutional capability to produce these assets. Thus, the excess demand for safe-assets from the periphery greatly added to the US economy’s own imbalance caused by a variety of collateral, regulatory, and mandated requirements for banks, mutual funds, insurance companies, and other financial institutions. This safe-asset excess demand was exacerbated by the NASDAQ crash, which re-alerted the rest of the world of the risks inherent to the equity market even in developed economies. Internal-external axis versus the safe-risky axis The point is that the gap to focus on is not along the external dimension we are so accustomed to, but along the safe-asset dimension. Shifting the focus provides a parsimonious account of many of the main events prior to, as well as during, the onset of the crisis – something the global (current account) imbalances view alone is unable to do. New insight: How the pre-crisis mechanism worked Within this perspective, the main pre-crisis mechanism worked as follows: • By 2001, as the demand for safe assets began to rise above what the US corporate sector and safe-mortgage-borrowers naturally could provide, financial institutions began to search for mechanisms to generate triple-A assets from previously untapped and riskier sources. • Subprime borrowers were next in line, but in order to produce safe assets from their loans, “banks” had to create complex instruments and conduits that relied on the law of large numbers and tranching of their liabilities. • Similar instruments were created from securitisation of all sorts of payment streams, ranging from auto to student loans (see Gorton and Souleles 2006). • Along the way, and reflecting the value associated with creating financial instruments from them, the price of real estate and other assets in short supply rose sharply. • A positive feedback loop was created, as the rapid appreciation of the underlying assets
23 seemed to justify a large triple-A tranche for derivative CDOs and related products. • Credit rating agencies contributed to this loop, and so did greed and misguided homeownership policies, but most likely they were not the main structural causes behind the boom and bust that followed. Systemic fragility of the new instruments From a systemic point of view, this new found source of triple-A assets was much riskier than the traditional single-name highly rated bond. As Coval et al (2009) demonstrate, for a given unconditional probability of default, a highly rated tranche made of lower-quality underlying assets will tend to default, in fact it can (nearly) only default, during a systemic event. This means that, even if correctly rated as triple-A, the correlation between these complex assets distress and systemic distress is much higher than for simpler single-name bonds of equivalent rating. The systemic fragility of these instruments became a source of systemic risk in itself once a significant share of them was kept within the financial system rather than sold to final investors. • Banks and their "special purpose vehicles" – attracted by the low capital requirement provided by the senior and super-senior tranches of structured products – kept them in their books (and issued short term triple-A liabilities to fund them), sometimes passing their (perceived) infinitesimal risk onto the monolines and insurance companies (AIG, in particular). • The recipe was copied by the main European financial centres (Acharya and Schnabl 2009). Through this process, the core of the financial system became interconnected in increasingly complex ways and, as such, it developed vulnerability to a systemic event. The straw that broke the back… and systemic panic The triggering event was the crash in the real estate “bubble” and the rise in subprime mortgage defaults that followed it. But this cannot be all of it. The global financial system went into cardiac arrest mode and was on the verge of imploding more than once. This seems hard to attribute to a relatively small shock that was well within the range of possible scenarios. The real damage came from the unexpected and sudden freezing of the entire securitisation industry. Almost instantaneously, confidence vanished and the complexity which made possible the “multiplication of bread” during the boom, turned into a source of counterparty risk, both real and imaginary. Eventually, even senior and super-senior tranches were no longer perceived as invulnerable. Making matters worse, banks had to bring back into their balance sheets more of this new risk from the now struggling ‘Structure Investment Vehicles’ and conduits (see Gorton 2008). Knightian uncertainty took over, and pervasive flights to quality plagued the financial system. Fear fed into more fear, causing reluctance to engage in financial transactions, even among the prime financial institutions. Along the way the underlying structural deficit of safe assets worsened as the newly found source of triple-A assets from the securitisation industry dried up and the spike in perceived uncertainty further increased demand for these assets. Safe interest rates plummeted to record low levels. • Initially, the flight to quality was a boon for money market funds. They suddenly found
24 themselves facing a herd of new clients. • To capture a large share of this demand expansion form these new clients who had a higher risk-tolerance than their usual clients, some money market funds began to invest in short-term commercial paper issued by the investment banks in distress. • This strategy backfired after Lehman’s collapse, when the Reserve Primary Fund “broke- the-buck” as a result of its losses associated with Lehman’s bankruptcy. • Perceived complexity reached a new level as even the supposedly safest private funds were no longer immune to contagion. • Widespread panic ensued and were it not for the massive and concerted intervention taken by governments around the world, the financial system would have imploded. Global imbalances and sudden reversals nowhere to be seen Global imbalances and their feared sudden reversal never played a significant role for the US during this deep crisis. In fact, the worse things became, the more domestic and foreign investors ran to US Treasuries for cover and treasury rates plummeted (and the dollar appreciated). Instead, the largest reallocation of funds matched the downgrade in perception of the safety of the newly created triple-A securitisation based assets. Moreover, global imbalances per se were caused by large excess demand for financial assets more broadly (Bernanke 2007 and Caballero et al 2008b). This had as a main consequence (and still has) the recurrent emergence of bubbles (Caballero 2006 and Caballero et al 2008a). But it was not a source of systemic instability in the developed world until it began to drift toward safe assets. It was only then that the financial system became compromised, as it was a required input to the securitisation process. This drift was probably the result of the rise in risk awareness following the NASDAQ crash and the increase in the relative importance of global public savings in the demand for financial assets. What is to be done? One approach to addressing these issues prospectively would be for governments to explicitly bear a greater share of the systemic risk. There are two prongs within this approach. • On one hand, the surplus countries (those that on net demand financial assets) could rebalance their portfolios toward riskier assets. • On the other hand, the asset-producer countries have essentially two polar options (and a continuum in between):
o either the government takes care of supplying much of the triple-A assets, or o it lets the private sector take the lead role with government support only during extreme systemic events. If the governments in asset-producing countries were to do it directly, then they would have to issue bonds beyond their fiscal needs, which in turn would require them to buy risky assets themselves. From the point of view of a balanced allocation of risks across the world, this option appears to be dominated by one in which sovereigns in surplus countries (e.g. China) choose to demand riskier assets themselves. The public-private option A more cumbersome but more promising avenue is to foster a public-private option within asset- producing countries. The reason this is an option at all is that the main failure during the crisis was not in the private sector’s ability to create triple-A assets through complex financial
25 engineering, but in the systemic vulnerability created by this process. It is possible to preserve the good aspects of this process while finding a mechanism to relocate the systemic risk component generated by this asset-creation activity away from the banks and into private investors (for small and medium size shocks) and the government (for tail events). This transfer can be done on an ex ante basis and for a fair fee, which can incorporate any concerns with the size, complexity, and systemic exposure of specific financial institutions. There are many options to do so, all of which amount to some form of partially mandated governmental insurance provision to the financial sector against a systemic event. References Acharya, Viral V. and Philipp Schnabl (2009). “How Banks Played the Leverage ‘Game’”, Chapter 2 in Acharya, Viral V. and Matthew Richardson, eds., Restoring Financial Stability: How to Repair a Failed System, New York University Stern School of Business,John Wiley & Sons. Caballero, Ricardo (2009). “The Paolo Baffi Lecture”, delivered at the Bank of Italy on December 10th. Caballero, Ricardo J. and Alp Simsek (2009a). “Complexity and Financial Panics.” MIT mimeo, June. Caballero, Ricardo J. and Alp Simsek (2009b). “Fire Sales in a Model of Complexity.” MIT mimeo, July. Caballero, Ricardo J. and Arvind Krishnamurthy (2008). “Knightian uncertainty and its implications for the TARP,” Financial Times Economists’ Forum, November 24 Caballero, Ricardo J. and Arvind Krishnamurthy, 2008a. “Collective Risk Management ina Flight to Quality Episode.” Journal of Finance, Vol. 63, Issue 5, October. Caballero, Ricardo J. (2006). “On the Macroeconomics of Asset Shortages.” In The Role of Money: Money and Monetary Policy in the Twenty‐First Century The Fourth European Central Banking Conference 9‐10 November, Andreas Beyer and Lucrezia Reichlin, editors. Pages 272‐283. Caballero, Ricardo J. (2009a). “Dow Boost and a (Nearly) Private Sector Solution to the Crisis.” VoxEU.org, February 22. Caballero, Ricardo J. (2009b). “A Global Perspective on the Great Financial Insurance Run: Causes, Consequences, and Solutions.” MIT mimeo, January 20.
Caballero, Ricardo J., Emmanuel Farhi and Pierre‐Olivier Gourinchas, (2008a). “Financial Crash, Commodity Prices, and Global Imbalances.” Brookings Papers on Economic Activity, Fall, pp 1‐55.
Caballero, Ricardo J., Emmanuel Farhi and Pierre‐Olivier Gourinchas, (2008b). “An Equilibrium Model of 'Global Imbalances' and Low Interest Rates.” American Economic Review, 98:1, pgs 358‐393. Coval, Joshua D., Jakub W. Jurek and Erik Stafford. (2009). “The Economics of Structured Finance.” Journal of Economic Perspectives, Vol. 23, No. 1, Winter
26 DeLong, J. Bradford (2008). “The wrong financial crisis”, VoxEU.org, 10 October. Gorton, Gary B. (2008). “The Panic of 2007.” In Maintaining the Stability in a Changing Financial System. Proceedings of the 2008 Jackson Hole Conference, Federal Reserve Bank of Kansas City. Gorton, Gary B., and Nicholas Souleles. (2006). “Special Purpose Vehicles and Securitization.” In The Risks of Financial Institutions, edited by Rene Stulz and Mark Carey. University of Chicago Press.
http://www.voxeu.org/index.php?q=node/4488
27 vox Research-based policy analysis and commentary from leading economists Eurozone monetary policy in uncharted waters
Martin Cihák Thomas Harjes Emil Stavrev 15 January 2010
The global crisis forced central banks to take unconventional measures. This column says that the ECB’s “enhanced credit support” helped support the transmission of monetary policy by reducing money market term spreads. The substantial increase in the ECB’s balance sheet also likely contributed to a reduction in government bond term spreads and a somewhat flatter yield curve. In response to the financial crisis and its fallout on economic activity, inflation, and inflation expectations, central banks around the globe flooded markets with liquidity and slashed interest rates to unprecedented low levels. The ECB led the way in actively providing financial markets with massive amounts of liquidity. After the real impact of the crisis had become apparent, the ECB cut its policy rate, reducing it to an all time low of 1% by early 2009.
The ECB’s unconventional measures, or “enhanced credit support”, comprised several key ingredients. When interbank money market stress erupted in the second half of 2007, the ECB reacted promptly with significant adjustments in its liquidity management operations (soon followed by other central banks). It provided liquidity in copious amounts, especially at longer maturities (Figure 1). When interbank trading came to a virtual halt in mid-September 2008, the ECB made further significant adjustments to its regular operations by extending the (already long) list of collateral assets, substantially increasing the share of private sector assets in the process. Meanwhile, the (already large) number of counterparties participating in ECB’s refinancing operations increased to 2200 from 1700 before the crisis, as refinancing through money markets became more difficult. In May 2009, the ECB extended the maturity of its long- term refinancing operations to 12 months and announced a program to purchase covered bonds up to €60 billion. Reflecting the importance of the banking sector in credit provision in the Eurozone, the ECB’s measures focused on providing banks with sufficient liquidity in a flexible manner.
How effective have the ECB’s unconventional measures been in dealing with the market tensions during the global financial crisis? There is some indication that the measures helped to improve functioning of the money market. Liquidity premia in term euro money markets declined sharply, primarily as a result of the ECB’s proactive liquidity management. Following the unlimited provision of longer-term funds at fixed rates, commencing in late October 2008, term money market spreads dropped sharply and now match closely measures of counterparty risk, while liquidity premia seem to have virtually been eliminated. Spreads remain at somewhat elevated levels as perceptions of elevated counterparty risk in the banking sector persist.
28 Figure 1. ECB’s open market operations, 2005–2009.
Taking a closer look In a recent study (Čihák, Harjes and Stavrev 2009), we examined the ECB’s response to the financial crisis more rigorously, using a combination of econometric approaches, ranging from vector autoregression (VAR) models to more sophisticated methods, such as a theory-based general equilibrium model, to analyse empirically the transmission from policy rates to market interest rates. In addition, we applied a macro-financial model, adapted from Bernanke, Reinhart, and Sack (2004), to analyse the effect of the unconventional measures on the term spreads of Eurozone government benchmark bonds. Interest rate pass-through We have used the VAR model to study the pass-through of policy rate changes to various market interest rates before and during the crisis. The results (Figure 2) show that even during the crisis, policy rate changes have continued to be transmitted to market rates, but the pass-through to all market rates has slowed down during the crisis. In particular, impulse responses from the bivariate VARs in first difference imply that the time for the full adjustment of market rates has increased from 3–6 months before the crisis to over 12 months. In addition, the pass-through from the policy rates to market rates has become less reliable during the crisis. Specifically, the variance of the residuals of the equations for the market rates has increased since the beginning of 2008, in most cases significantly.
29 Figure 2. Eurozone: The impact of crisis on policy rate pass-through
Source: Authors’ estimates. Impact on government bond rates The “enhanced credit support” measures have been primarily implemented to support the flow of credit in the economy, but they may have also affected term spreads and the yield curve of Eurozone government benchmark bonds. To investigate if such effects occurred, we have used a macro-financial model as applied by Bernanke, Reinhart, and Sack (2004). This is a VAR-based model that additionally imposes a no-arbitrage condition, commonly applied in affine term structure finance models. The model as applied in our paper comprises four macroeconomic variables as state variables, which are the factors for pricing bonds:
30 (i) a measure of the output gap obtained by detrending with a Hodrick-Prescott filter an index of economic activity that is the weighted average of seasonally adjusted industrial production (30%) and retail sales (70%); (ii) year-on-year inflation as measured by the ECB’s Harmonised Index of Consumer Prices; (iii) the monthly average of overnight interest rate (EONIA); and (iv) the one-year Euribor interest rate as a proxy for market expectations of short-term rates and inflation that may not be fully captured by the other variables, given that separate data for interest rate futures and inflation expectations in the Eurozone are only available very recently. Data are monthly observations from January 1999 to January 2009. Following Rudebusch, Swanson, and Wu (2006), we estimate the model in two stages. First, the VAR model is estimated. Second, the coefficients from the VAR model are taken as given, and the stochastic pricing kernel factor loadings are estimated using nonlinear least squares to fit the bond yield data. We find that the predicted yields from the model track actual bond yields very closely (see Figure 7 in our paper). Short-term (two-year) model residuals do not have an obvious trend, but model residuals for long-term government bonds have been more or less consistently negative since 2004–05. This reflects the fact that, as in the US (where former Federal Reserve Chairman Alan Greenspan famously called it a “conundrum”), long-term rates did not rise much when the ECB raised its policy rates. The residuals have fluctuated since the onset of the crisis but sharply turned negative in October 2008, when the ECB introduced a host of new non-standard measures. In the subsequent period, the actual yield curve has become lower and flatter than the predicted yield curve. These results provide an indication that the ECB’s policy actions during the crisis had some effect on yields, although the results should be treated only as preliminary and illustrative. The lower level of the yield curve could, for example, reflect the increase in the monetary base and the relative supply of money relative to bonds, as suggested by the portfolio rebalancing channel. Moreover, the flattening of the yield curve could imply that markets interpreted the ECB’s policy actions as implicit commitments to keep policy rates low longer than anticipated and the current state of the economy (as captured by the simple VAR) would suggest. This finding should be interpreted cautiously, given that the time period under investigation is short, and given that we analyse the impact of the ECB’s measures only indirectly. Despite these caveats, the fact that the level of the yield curve has been lower and the slope flatter than predicted by the macroeconomic variables suggests that the unconventional monetary policy may have also lowered the risk of deflation. Conclusion Our results suggest that the unconventional monetary policy in the Eurozone was broadly effective. Even during the crisis, the core part of ECB’s monetary policy transmission – from policy rates to market rates – continued to operate. But the transmission was somewhat slower (the lags between policy rates and market rates were longer), requiring cuts in the policy rate to unprecedented low levels to stabilise the economy and inflation expectations. The ECB’s “enhanced credit support” contributed to a reduction in money market term spreads, facilitating the pass-through from policy to market rates. Finally, the yield curve for Eurozone government bonds has been lower and flatter than predicted by standard macro variables since September 2008, indicating that the policy measures may have had some beneficial effects.
31 The ECB’s experience can also provide some useful pointers in designing central bank operational frameworks with market-stabilising features. Elements found particularly useful in this respect include flexibility with regard to collateral requirements, counterparty eligibility, and maturity of operations (Chailloux, Gray, McCaughrin 2008; Chailloux et al. 2008). References Bernanke, Ben, Vincent Reinhart, and Brian Sack (2004), "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Board of Governors of the Federal Reserve, Finance and Economics Discussion Series 2004-48, September. Chailloux, Alexandre, Simon Gray, and Rebecca McCaughrin (2008), "Central Bank Collateral Frameworks: Principles and Policies", IMF Working Paper 08/222, September. Chailloux, Alexandre, Simon Gray, Ulrich Kluh, Seiichi Shimizu, and Peter Stella (2008), "Central Bank Response to the 2007–08 Financial Market Turbulence: Experiences and Lessons Drawn", IMF Working Paper 08/210, September. Čihák, Martin, Thomas Harjes, and Emil Stavrev (2009), “Eurozone Monetary Policy in Uncharted Waters,” IMF Working Paper No. 09/185. Rudebusch, Glenn, Eric Swanson, and Tao Wu (2006), “The Bond Yield ‘Conundrum’ from a Macro-Finance Perspective,” Federal Reserve Bank of Dallas Working Paper No. 2006–16. http://www.voxeu.org/index.php?q=node/4489
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SANTOS JULIÁ OPINIÓN Arrogancia de viejo estilo SANTOS JULIÁ 17/01/2010 Cuando una publicación como The Economist no tiene mejor ocurrencia que titular "Old Spanish practices" un artículo sobre la presidencia española del Consejo de la UE, ilustrándolo con dos bailaores y un guitarrista al fondo -y menos mal que no cuelga de la pared la cabeza de un toro de lidia- puede temerse lo peor: ignorancia, estereotipos y un ramalazo de aquella "Old British arrogance", de cuando Gran Bretaña era única potencia mundial. The Economist es una revista solvente, leída en todo el mundo, y su corresponsal en Bruselas, que firma Charlemagne, persona muy aguda e ilustrada. Pero en esta ocasión se han dejado llevar de tópicos manidos que, por nuestro resto de papanatismo, han conseguido más difusión que si los hubiera pronunciado el oráculo de Delfos. Sostiene Charlemagne que España, hasta entrar en "the block" -la Comunidad de los diez- era "un lugar pobre, rural y proteccionista". ¿Lo era? España se incorporó a la Comunidad, tras sortear zancadillas francesas y demoras impuestas por el cheque británico, en enero de 1986. En ese momento, su población ocupada en agricultura era el 15%, otro 32 y pico trabajaba en industria y construcción y algo más del 52% en servicios. ¿Rural una sociedad en la que 85 de cada 100 personas no se dedicaban a tareas agrarias? Desde luego, no era rica ni su comercio con el exterior estaba libre de barreras, que desmontó por completo sin agotar el plazo de siete años. Incorporó la peseta al mecanismo de cambio del sistema monetario europeo en 1989, y en febrero de 1992 firmó el Tratado de Maastricht, del que nacieron la Unión Europea y la moneda única, a la que accedió desde el primer momento, cumpliendo todos los requisitos exigibles. En resumen, la adhesión de España a la CE y su activa participación en la construcción de la UE es la historia de un éxito, cumplido en un estrecho margen de tiempo, imposible si en el punto de partida hubiera sido "a poor, rural, rather protectionist place". Había ya formado un capital humano de excelente calidad. No por azar, los dos últimos comisarios de Economía y Asuntos Monetarios de la UE han sido españoles: Pedro Solbes y Joaquín Almunia. Ni a ellos, ni a los presidentes del Consejo, Felipe González en 1989 y 1995, José María Aznar, en 2002, puede atribuirse ninguna "old Spanish practice", si con esta expresión se quiere decir algo más que una tontería. La historia es, por supuesto, la de un beneficio mutuo, como no se le escapa a Charlemagne, aunque quizá no más que el de las relaciones entre el Reino Unido y la Unión, con la balanza siempre inclinada del lado de allá del Canal. Ha transcurrido un cuarto de siglo. El dinamismo europeísta de los años ochenta, el impulso integrador de los noventa, la expectativa de la moneda única como cimiento de una mayor unidad política son cosas del pasado. Pero Europa, que no es, ni aspira a ser, un "gigante" al estilo de Estados Unidos o de China, tampoco puede resignarse a la condición de un "puñado de Estados de tamaño medio", como es el propósito de los británicos y diagnostica Charlemagne. Para eso, es preciso no resignarse a administrar lo ya conseguido y decir de vez en cuando algo que en Londres suene increíble, por ejemplo, Acta Única, Unión Europea, moneda única, iniciativas a las que desde el Reino Unido respondieron los más arrogantes arqueando las cejas y los más listos prediciendo el fracaso. No son los que corren buenos tiempos para la lírica. Los tropiezos de los últimos años llevan aparejada una lección: "si quieres que tu consejo se escuche, necesitas decir algo creíble". Vale,
33 pero ¿ha dicho el presidente del Gobierno español algo increíble en relación con la presidencia rotatoria del Consejo? No, a no ser que tal parezcan las "medidas correctivas", traducidas, como hace The Wall Street Journal, como "penalties" aunque quedara claro que no son "sanctions". Más bien, la presidencia de turno se ha limitado a presentar un programa a la altura de los tiempos, o sea, inocuamente razonable, y hasta anodino, como reprocha otro vacuo editorial, el del Financial Times: consolidar la presidencia permanente, utilizar el Tratado de Lisboa para hablar con voz propia en el mundo, impulsar la estrategia 2020, que no es cosa de la presidencia sino de la Comisión. Esos editoriales que por toda Europa -según informa Charlemagne- se han mofado de la idea de que Zapatero pueda dar consejos sobre la recuperación económica han puesto la venda antes de la herida y habría que tomarlos más como viejos ejercicios en altanería que como análisis de una situación. http://www.elpais.com/articulo/opinion/Arrogancia/viejo/estilo/elpepusocdgm/20100117elpdmg pan_4/Tes
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TRIBUNA: Laboratorio de ideas CARMELO MESA-LAGO Crisis y recuperación en América Latina CARMELO MESA-LAGO 17/01/2010 En 2009 la crisis provocó una caída promedio del 2,2% en la economía mundial, pero en su informe anual la Comisión Económica de Naciones Unidas para América Latina y el Caribe (CEPAL) nota algo inusual: las economías desarrolladas cayeron un 3,6%, mientras que las economías en desarrollo un 2,9% (excepto China y la India que crecieron) y América Latina y el Caribe (ALC) sólo bajaron un 1,7%. Un número de Nueva Sociedad sobre los efectos de la crisis en la región concluye "ni quiebre absoluto ni prosperidad en medio de la recesión mundial", y José Antonio Campo, ex secretario ejecutivo de la CEPAL, afirma que esta crisis ha sido menos severa que la de la deuda en los ochenta y las de las economías emergentes en los noventa. La región estaba mejor preparada debido a su crecimiento en los últimos seis años, superávit en las cuentas externas, mejora en las finanzas públicas, reducción en la deuda exterior, incremento en las reservas internacionales y control de la inflación. Además, los organismos financieros internacionales y regionales han dado fuerte apoyo a las políticas anticíclicas. Pero los países latinoamericanos tuvieron un desempeño diverso: la mitad experimentó un aumento y la otra mitad una contracción (la peor en México, -6,7%). La crisis redujo el comercio internacional y con ello las exportaciones y demanda de materias primas de ALC, provocando una caída en sus precios y un deterioro en los términos de intercambio y la Balanza de Pagos. Bajaron la inversión externa (30%), la inversión interna (16%), el turismo, las remesas externas y el crédito internacional. Debido al aumento del gasto público, en parte por medidas anticíclicas, el déficit fiscal promedio se duplicó, aun así moderado respecto a crisis anteriores. La recesión tocó fondo en 2009 y en el segundo trimestre comenzó una recuperación que se generalizó en la segunda mitad del año. La producción industrial, el comercio mundial y el acceso a los mercados financieros internacionales se están recobrando gradualmente, lo cual estimula el alza en el precio mundial de las materias primas. Aun así, la economía regional está a la mitad del nivel que alcanzó durante el boom. El Banco Mundial proyecta un crecimiento mundial del 2,5% en 2010, y la CEPAL, una tasa promedio del 4% para ALC, desde el 1,5% en Honduras al 5,5% en Brasil. El crecimiento en los países desarrollados será menor que el promedio mundial (1% en la UE). Los indicadores sociales latinoamericanos en 2009 no se han deteriorado tanto como en la crisis de los ochenta y más si los comparamos con los países desarrollados. El desempleo subió del 7,4% al 8,3%, la mitad que en los ochenta y menos que en Estados Unidos (10%) y en la Unión Europea (19% en España). Se augura un incremento de 3,6 millones de indigentes, capaz de enfrentarse con programas focalizados. La inflación disminuyó de un 8% a un 4,5% y ayudó a aumentar el valor real de los salarios en la mitad de los países. Los programas sociales contribuyeron a aliviar la crisis, incrementando los subsidios a los precios de alimentos esenciales, así como las transferencias a las familias pobres. Varias políticas implementadas antes de la crisis funcionaron de manera anticíclica: los múltiples programas brasileños focalizados en los pobres; la reforma chilena de pensiones que creó una pensión asistencial universal y mejoró las prestaciones básicas; el incremento notable de la pensión asistencial en Costa Rica; las medidas para mantener el paquete básico de prestaciones sanitarias en Argentina y Uruguay (el último reforzó la atención primaria), y el ajuste de las
35 pensiones a la inflación en Brasil, Costa Rica y Uruguay. A mediados de 2009, El Salvador y Panamá crearon pensiones focalizadas en los pobres. La cobertura de la fuerza laboral por las pensiones se mantuvo e incluso continuó ascendiendo (aunque a un ritmo menor) en 8 de 11 países sobre los cuales hay información. A ello contribuyó el reforzamiento del control de la evasión en Costa Rica y Uruguay. La cobertura sanitaria se sostuvo por regímenes con subsidio estatal para los pobres en Colombia, Chile y la República Dominicana, y la extensión de la cobertura a los desempleados en México. El valor de los fondos de pensiones en 12 países en diciembre de 2008 declinó un 13% en promedio respecto al mismo mes en 2007: en 6 países cayó de un 6% a un 33% (principalmente en Chile y Perú), pero en 6 países creció de un 8% a un 42% (especialmente en la República Dominicana y Bolivia). La rentabilidad promedio de los fondos de pensiones en el año anterior a diciembre de 2008 descendió un 11%; las peores caídas (entre el 19% y el 27%) fueron en Perú, Uruguay y Chile. A mediados de 2009 los fondos se recuperaban y en promedio estaban sólo un 1% por debajo del valor del cenit de 2007; a fines de 2009, Chile y Brasil ya habían superado el nivel anterior a la crisis, aventajando con creces el desempeño de los fondos de pensiones en Estados Unidos. Los países con las proporciones mayores de sus fondos invertidos en acciones e instrumentos extranjeros fueron los más afectados en el corto plazo (Chile, Perú), mientras que los que tenían el grueso invertido en títulos públicos no fueron afectados o incrementaron su rentabilidad. El promedio de ésta a largo plazo ha sido positiva y alta en medio de la crisis (8,8%), especialmente en los fondos que habían invertido en acciones y emisiones extranjeras. La República Dominicana tuvo el mejor desempeño en el corto plazo pero el peor en el largo plazo, mientras que lo opuesto ocurrió en Chile y Perú (Brasil logró combinar de manera óptima su desempeño a corto y largo plazo). Aunque la recuperación no es completa, puede ser lenta y es desigual entre los países, la evidencia indica que América Latina, al contrario de lo ocurrido en crisis anteriores, no fue un factor causante de la recesión y, además, ha sido menos afectada que los países desarrollados como Estados Unidos que generó la peor crisis mundial desde la Gran Depresión. http://www.elpais.com/articulo/primer/plano/Crisis/recuperacion/America/Latina/elpepueconeg/2 0100117elpneglse_5/Tes
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REPORTAJE: Laboratorio de ideas - BREAKINGVIEWS Reuters Atados al euro Abandonar la moneda única es casi imposible PIERRE BRIANÇON 17/01/2010 Por qué preocuparse de los hechos cuando la ficción es mucho más interesante? La posibilidad de "abandonar la zona euro" está extendiéndose (por así decirlo), ya que Grecia no parece capaz de solucionar sus problemas fiscales. Hace aproximadamente un año se planteó el mismo "¿y si?" respecto a Irlanda. El año anterior fue Italia. Analistas con muchísima imaginación han empezado a preguntarse sobre el futuro del euro si cualquiera de los países decidiera abandonarlo y volver a su moneda nacional. Es necesario sacarlos de ese reino fantástico. El razonamiento de quienes piensan que un país podría dejar la zona euro es el siguiente. Un país incluido en dicha zona y que no pueda o no esté dispuesto a solucionar sus problemas de balanza de pago y endeudamiento no puede devaluar para hacerse más competitivo. Si no puede poner su casa en orden, por razones políticas, y otros países no pueden ayudarlo, porque los actuales tratados lo prohíben, no tendría más remedio que abandonar el sistema. La consiguiente devaluación restauraría su competitividad. Pero esta historia tiene muchos peros. En primer lugar, una medida así no podría tomarse de la noche a la mañana, de modo que la consiguiente crisis de confianza empeoraría los problemas del país en cuestión. El mero hecho de acuñar y poner en circulación nuevas monedad llevaría como mínimo unos cuantos meses. El único modo de actuar con rapidez e impedir una huida masiva de capitales sería tomar medidas autoritarias como introducir controles de cambio de moneda. Está, además, la cuestión de la deuda. Si el país que abandona el sistema decidiera cambiar sus deudas en euros a la nueva moneda -para reducir los costes que supone pagar la deuda-, los mercados lo tratarían como un impago. Por tanto, en este frente la devaluación no aportaría beneficios. Todo el proceso desencadenaría importantes enfrentamientos jurídicos y políticos. Esto lo convertiría en algo mucho peor que una devaluación normal como la sufrida por Rusia y las economías del este de Asia a finales de la década de 1990, o la que experimentó el Reino Unido a comienzos de la misma década. El país en cuestión acabaría perdiendo el apoyo de sus aliados más importantes. Por último, está la cuestión de la credibilidad. A no ser que el país optase por una autarquía como la cubana o la norcoreana, tendría que esforzarse para conservar la credibilidad en los mercados financieros. Eso supondría apretarse el cinturón, exactamente lo que quería evitar en un principio. Naturalmente, su competitividad seguiría beneficiándose de la devaluación. Pero hasta eso quedaría erosionado por la inflación importada. Teniendo en cuenta todos estos obstáculos, es algo que sencillamente no va a suceder. - http://www.elpais.com/articulo/primer/plano/Atados/euro/elpepueconeg/20100117elpneglse_7/T es
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TRIBUNA: Laboratorio de ideas JOSÉ LUIS ZOREDA El turismo, ¿clave del nuevo modelo productivo? JOSÉ LUIS ZOREDA 17/01/2010 El año 2009 ha sido el más complejo de las últimas décadas para el conjunto del sector turístico español. Destinos y empresas han sufrido, con mayor intensidad que otros sectores de la economía española, la contracción del consumo y recorte en el gasto en viajes realizados por los turistas españoles y europeos, que hoy siguen representando el 95% del total de la demanda turística en España. A modo de síntesis, estimamos que el indicador del PIB turístico que anticipamos desde Alianza para la Excelencia Turística (Exceltur) descenderá un -5,6% al cierre de 2009, una caída un 50%, superior a la media estimada por el consenso de analistas para el conjunto de la economía española y en línea con los recientes datos del INE, que revelan que en 2008 el PIB turístico cayó en España un -2,9%. Ese descenso en un año en el que la construcción ya no ejerció de motor esencial de la economía revela y reitera la gradual pérdida de competitividad del sector turístico, que lleva 8 años consecutivos con tasas de crecimiento inferiores en un tercio a las del conjunto de la economía española, lastrado por los crecientes problemas de madurez de oferta de ciertos destinos vacacionales del litoral mediterráneo, Baleares y Canarias. Así, mientras el impacto económico del turismo creció según el INE un 1,1% en media anual de 2000-2008, la economía española lo ha hecho casi al triple, a tasas del 3,1% en ese mismo periodo. El reflejo en la cuenta de resultados de las empresas de esas caídas de actividad turística en España se ha acentuado por el reiterado y generalizado recurso a la bajada de precios a través de ofertas y descuentos a lo largo de todo 2009, como instrumento esencial para tratar de dinamizar la demanda. Como resultado, la rentabilidad de las empresas se ha reducido drásticamente, hasta bordear y alcanzar en muchos casos los números rojos. La velocidad e inusitada virulencia con la que nos ha afectado la actual crisis económica y financiera internacional no nos debería llevar, sin embargo, a perder el foco sobre los verdaderos retos a los que aún se enfrenta el sector turístico español. La profundidad e impacto de la crisis sobre el sector nos ha conducido en ocasiones a diagnósticos y debates algo superfluos, incapaces de aportar respuestas ambiciosas de mayor calado, más allá de la coyuntura, para abordar los problemas de fondo que subyacen en buena parte de la oferta turística vacacional española del litoral, asociado al sol y la playa. Por si fuera poco, a escala mundial, la ciudadanía se enfrenta a la redefinición de muchos de sus valores y relaciones socioeconómicas impuestas por los nuevos desafíos de la crisis financiera y sus efectos sobre el tejido productivo, junto a los retos ineludibles que exige una mayor preservación del medio ambiente. Como consecuencia de todo ello es de esperar que afloren nuevas conductas y sensibilidades entre los consumidores, que afectarán sus decisiones y hábitos de compra de servicios turísticos. Estas tendencias consolidan día a día una nueva realidad turística que reclama distintas respuestas para los diferentes destinos y actores públicos y privados españoles. La historia demuestra que cualquier liderazgo requiere diseñar y abordar nuevas propuestas ante cualquier cambio de escenario, evitando cualquier recreación nostálgica de viejos tiempos y modelos que
38 ya no volverán, anticipándose a las nuevas demandas sociales y transformando los riesgos en oportunidades que les permitan salir fortalecidos. Pero en 2009 hemos pasado de debatir si el turismo iba a ser inmune o no a los efectos de la crisis para, una vez constatada la intensidad de la contracción del consumo de las familias, argumentar que el desplome de los indicadores de demanda turística en España iba a ser menor que el registrado en otros sectores de nuestra economía. Descartada esta última hipótesis por la contundencia de los datos disponibles del PIB y rentabilidad empresarial, el siguiente axioma voluntarista es que el sector turístico español será uno de los primeros en salir de la crisis y ejercerá de revulsivo de la economía española. ¿Pero es que el conjunto del sector turístico español ha mostrado en el pasado más reciente una pujanza suficiente para persuadirnos de tal capacidad? ¿Creemos realmente que el mero deseo pueda ser suficiente para transformar la realidad y superar los retos competitivos a los que se enfrenta parte de la oferta turística española? ¿Es posible que el turismo en España recupere su papel dinamizador con las mismas lógicas con las que perdió peso en los años de mayor bonanza del ciclo económico 2000- 2008? Sin duda, el turismo es un sector de gran futuro y el deseo de disfrutar del ocio viajando no hará sino aumentar en los próximos años, pero no es menos cierto que la pugna por atraer esos segmentos de demanda será cada vez más intensa y exigente por la creciente competencia mundial tanto de destinos ya consolidados como de otros emergentes. Ante este panorama, España cuenta con un extraordinario acervo de recursos y atractivos para hacer del turismo una actividad económica más sostenible, que ayude a impulsar un cambio de modelo productivo, aunque necesita un giro radical en la ambición y convergencia de nuevas propuestas para diversificar y reposicionar una oferta con más valor añadido para atraer a un perfil de turista con mayor capacidad de gasto en destino. Todo apunta ya a que en el escenario poscrisis regirán más limitaciones al acceso de recursos básicos y nuevas pautas de los consumidores que refuercen aceleren la obligación de cambiar ciertos modelos de gestión turística del litoral. La sobreconstrucción de nueva oferta alojativa, que en ciertos destinos del mediterráneo, Baleares y Canarias han contribuido a la desvalorización y bajada de su rentabilidad operativa, y donde aún no se ha afrontado la necesaria rehabilitación y reinversión en sus espacios urbanos, no sólo se ha mostrado insostenible, sino incluso es muy probable que los haga progresivamente inviables en años venideros de no tomarse medidas. Y es que a corto plazo y aunque pareciera que la crisis nos obligase a ello para tratar de dinamizar la demanda, el futuro turístico de España no pasa por competir meramente por precio con otros países con costes de transformación muy inferiores. La clave está en sustituir gradualmente la prestación de servicios masivos e indiferenciados en lugares cada vez menos lúdicos y más obsoletos, por la satisfacción individual de experiencias únicas en destinos revalorizados, preservados y dotados de la mayor autenticidad. Ello pasa ineludiblemente por asumir diagnósticos más rigurosos, consensuar todas las actuaciones y comprometer más recursos públicos y privados para anticiparnos a las nuevas necesidades del mercado que vienen configurándose en los últimos años y que la crisis acabará de perfilar en un contexto cada vez más globalizado y más competitivo. Muchos son aún hoy los interrogantes que se plantean sobre el plazo y condicionantes de la deseada recuperación, así como sobre las tendencias y conductas del consumidor y las estrategias empresariales más determinantes en el escenario poscrisis para facilitar, desde una perspectiva más estructural, la diversificación y reposicionamientos más idóneos de las diversas cadenas de valor que se integran en los destinos españoles. Con el objetivo de propiciar todas estas reflexiones, conocer de primera mano la visión de los máximos responsables de países, regiones,
39 empresas líderes mundiales y reconocidos economistas expertos sobre estos temas, Exceltur organiza en Madrid la víspera de Fitur, abierto a todo el sector y en colaboración con la Organización Mundial de Turismo, la quinta edición de su Foro de Liderazgo Turístico. Esperamos que de este primer gran foro turístico, de alcance y relevancia mundial en 2010, emanen nuevas orientaciones para promover actuaciones más ambiciosas y consensuadas, dirigidas a consolidar el liderazgo y atractivo turístico español, bajo nuevas claves que permitan la evolución de nuestros actuales modelos de gestión turística en torno a escenarios socioeconómicamente más rentables y ambientalmente más sostenibles. - http://www.elpais.com/articulo/primer/plano/turismo/clave/nuevo/modelo/productivo/elpepuecon eg/20100117elpneglse_10/Tes
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REPORTAJE: Economía global Los salarios resisten la presión Pese a la debilidad de los precios, los sueldos regulados por convenio suben un 2,6%
MANUEL V. GÓMEZ 17/01/2010 Poco han notado los salarios la debilidad de los precios. El IPC apenas subía un 0,8% en diciembre, todavía menos (un 0,3%) si se tiene en cuenta la media anual. En cambio, los salarios en convenio han crecido un 2,6%, según el Ministerio de Trabajo. Desde comienzos de año, la caída de la inflación, hasta casi llegar a la amenazante deflación, metió mucha presión a la revisión de los sueldos en 2009. Los empresarios no admitieron el tradicional referente, el objetivo de inflación del Banco Central Europeo (el 2%). Recomendaron revisiones entre el 0% y el 1%. Mientras que los sindicatos situaron sus demandas en el porcentaje tradicional. El desencuentro acabó con el acuerdo estatal que sirve de guía para la renovación de convenios por primera vez desde que nació en 2002. A la luz del resultado final, los últimos han vencido esta batalla. "Ha habido un trabajo de presión sindical", explica Toni Ferrer, secretario de Acción Sindical de UGT. Con esta frase, Ferrer alude al aumento de denuncias sindicales en los juzgados para que se cumplan las revisiones pactadas en los convenios colectivos plurianuales. La otra razón que da para aclarar los motivos del incremento hace referencia a la inercia de la negociación colectiva de años anteriores. Según los datos que suministra el otro gran sindicato español, CC OO, de los 4.082 convenios que se firmaron en 2009, 3.461 son revisiones de pactos plurianules. La subida salarial del 2,6% afecta, en realidad, a los trabajadores que gozan de convenio colectivo en sus empresas y lo han renovado a lo largo de este año, unos 8,5 millones. Pero el aumento es todavía mayor si se toma en cuenta la encuesta de coste laboral, que registra un 3,1% hasta septiembre. No obstante, aquí hay que considerar el efecto estadístico que provoca la
41 destrucción de empleo, que está afectando más a los trabajadores temporales que disfrutan de un menor salario. Para José Luis Feito, economista y presidente de la Comisión de Economía de CEOE, el aumento de salarios en plena recesión se está traduciendo en una caída del empleo. Él recurre al argumento de que la contracción de la economía y la subida salarial sumados provocan una caída similar del empleo en el sector privado. Discrepa radicalmente de él Ramón Górriz, secretario de Acción Sindical de CC OO. Para este representante de los trabajadores, los recortes salariales acaban por traducirse en destrucción de empleo, ya que no estimulan el consumo y arrastra consigo la actividad económica. Dicho de otra forma, una bajada de sueldos hubiera acabado por traer una mayor destrucción de empleo, según Ramón Górriz. El profesor de la Universidad de Salamanca Miguel Ángel Malo comparte su tesis, con matices. Este académico cree que "los recortes agregados de salarios pueden traducirse en caídas del consumo". No obstante, matiza: "Entre un recorte salarial y un aumento del 2,59% hay mucha diferencia". En opinión de Malo, "a medio plazo la revisión salarial debería aproximarse más a los aumentos de productividad". Y añade que el dato de este año revela que hay un ajuste lento entre la evolución de los precios y de los salarios, que revela la existencia de un "problema con la estructura de la negociación colectiva". Entre las soluciones que propone está la de ir hacia convenios plurianuales. "Si hubiera una tendencia a pactar convenios más largos, sería menos complicado llegar a subidas pequeñas o más próximas a la evolución de los precios", concluye. Precisamente, ésta ha sido una de las propuestas sindicales para lograr un pacto marco para los convenios de 2010. Hablan de un acuerdo con una vigencia de tres años y recomiendan que la revisión salarial se sitúe en una horquilla entre el 1% y el 2%, más en línea con las previsiones de inflación de los analistas para este año (según FUNCAS: 1,3%) que con el objetivo que se marca anualmente el Banco Central Europeo. "Es una propuesta moderada, como la subida salarial de 2009", defiende Ferrer, que, inmerso desde comienzos de mes en las conversaciones para alcanzar un acuerdo, de momento, ve lejos el pacto con los empresarios. Más optimistas se muestran en CC OO, donde confían en llegar a un acuerdo a finales de mes o comienzos de febrero que abra la puerta al diálogo social. Celosos de la autonomía de sindicatos y empresarios, piden al Gobierno que no se precipite con anuncios de reformas laborales y de la Seguridad Social, y meta presión con ellos para que se alcancen acuerdos en otros puntos. http://www.elpais.com/articulo/economia/global/salarios/resisten/presion/elpepueconeg/2010011 7elpnegeco_1/Tes
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Los precios de la vivienda caen cada vez menos Los pisos son un 6% más baratos que hace un año, pero en 20 provincias ya han subido en el último trimestre
LUIS DONCEL - Madrid - 16/01/2010 Pocas alegrías para los que están a la espera del derrumbe de los precios con la idea de comprar por fin un piso. Porque, según la estadística que elabora el Ministerio de Vivienda, la tendencia a la baja continúa, pero pierde fuelle. Lo dijo ayer la responsable ministerial que presentó los datos: "La caída continúa, aunque es cada vez menos acentuada". Pocas alegrías para los que están a la espera del derrumbe de los precios con la idea de comprar por fin un piso. Porque, según la estadística que elabora el Ministerio de Vivienda, la tendencia a la baja continúa, pero pierde fuelle. Lo dijo ayer la responsable ministerial que presentó los datos: "La caída continúa, aunque es cada vez menos acentuada". Anunciación Romero compareció para informar de que la vivienda libre se abarató durante 2009 un 6,3%. Así, el metro cuadrado cuesta ahora 1.892 euros. Si se contabiliza únicamente el último trimestre del año, la caída se queda en un ligero 0,6%. Con éste, la estadística oficial ya encadena dos años de bajadas. Pero desde mediados del año pasado los descensos son cada vez más moderados, lo que hace presagiar que la estabilización no anda muy lejos.
43 Se trata de un dato relevante. Pero en un mercado tan diversificado como el de la vivienda, es casi más significativo otro que se extrae de la estadística: 20 provincias ya parecen acariciar el repunte del precio del ladrillo. En estos territorios -Zaragoza, Asturias, Burgos, León, Palencia, Salamanca, Soria, Zamora, Albacete, Ciudad Real, Guadalajara, Toledo, Barcelona, Girona, Lleida, A Coruña, Ourense, Navarra, Guipúzcoa y Ceuta-, los pisos eran a finales de 2009 más caros que tres meses antes. Por ahora sólo cuatro provincias (Cáceres, Ourense, Pontevedra y La Rioja) registran tasas interanuales positivas, pero todo apunta a que esta lista se engrosará en los próximos trimestres. Anunciación Romero aseguró ayer que los precios bajan más en el arco mediterráneo y en zonas limítrofes de Madrid, donde se concentra "el mayor volumen de stock" de pisos sin vender. No son sólo los precios. La estadística de transacciones que elabora el Instituto Nacional de Estadística (INE) también da síntomas de que los desplomes han llegado a su fin. Las 34.828 transacciones de viviendas que se registraron en noviembre suponen 2,6% menos que las cerradas en el mismo mes del año anterior. Esta caída es la menor desde que el INE comenzara a elaborar esta estadística, en enero de 2008. En toda la serie, sólo ha habido tres meses con caídas inferiores a los dos dígitos. Las compraventas de viviendas se han movido habitualmente en caídas superiores al 20%. http://www.elpais.com/articulo/economia/precios/vivienda/caen/vez/elpepueco/20100116elpepie co_9/Tes
ViñetasSábado, 16/1/2010, 16:36 h
44 Versión para imprimir TRIBUNA: XAVIER VIVES La crisis y la reforma del sistema financiero Se ha evitado una gran depresión, pero urge la limpieza del balance bancario para recuperar la normalidad financiera y que la salida de la crisis no sea en falso. Es clave el resultado de este debate en Estados Unidos XAVIER VIVES 15/01/2010 En otoño de 2008 el sistema financiero internacional estaba al borde del abismo, con los indicadores de volatilidad y riesgo en valores extremos. Un año más tarde, la crisis del sistema se ha superado gracias a inyecciones masivas de liquidez, tipos de interés cercanos a cero y generosos programas de ayuda al sector bancario. Al mismo tiempo, y gracias a programas de estímulo fiscal, se ha evitado que la crisis del sistema financiero derivara en un nuevo episodio de gran depresión, quedando simplemente en gran recesión. Se ha superado la fase crítica de la crisis financiera, y las Bolsas se han recuperado parcialmente, pero los problemas de solvencia de la banca todavía están ahí, a pesar de la mejora de los indicadores de rentabilidad. La mejora de las perspectivas económicas no se consolidará hasta que el balance de la banca, empezando por la de Estados Unidos, no esté limpio de activos dañados. Una banca con problemas en su balance es una rémora para el crecimiento económico puesto que no puede proporcionar el crédito necesario a la economía. La idea de que una recuperación económica vigorosa alimentada por tipos de interés bajos saneará el balance de la banca por sí sola es atractiva, y cómoda, pero peligrosa. El ejemplo de Japón es claro. Las consecuencias del estallido de su burbuja sin posterior saneamiento bancario todavía se están pagando ahora, con más de una década de estancamiento. Urge, pues, la limpieza del balance bancario para recuperar el funcionamiento normal del sistema financiero y no salir en falso de la crisis. En noviembre de 2008, en estas mismas páginas, planteaba tres tareas en relación a la crisis. La primera tarea era tomar medidas coordinadas para evitar una gran depresión. Esto está hecho, aunque con la sombra del saneamiento del sector bancario. La segunda tarea era cómo paliar las consecuencias perniciosas de las ayudas al sector bancario. En efecto, la ayuda generalizada a las entidades con problemas implica que no se castiga la asunción de riesgo excesivo y, por consiguiente, se pone la semilla de comportamientos irresponsables en el futuro. Además, las entidades que han sido prudentes no se ven recompensadas e incluso se pueden ver en inferioridad de condiciones, con un coste de capital más elevado dado que no gozan del subsidio público. Aquí, los resultados han sido mixtos. Mientras que la Comisión Europea ha insistido en que las entidades que hayan recibido ayudas se reestructuren y reduzcan su tamaño vendiendo activos, como en los casos del Royal Bank of Scotland o de ING, las autoridades en EE UU no han actuado de forma paralela con Citigroup o Bank of America. En cualquier caso, la sensación de que una entidad puede tomar mucho riesgo, ser salvada porque es "demasiado grande para quebrar", y después el contribuyente pagar los platos rotos, queda ahí para el futuro. No es un buen ejemplo. La tercera tarea propuesta era la reforma del sistema financiero para hacerlo más robusto y evitar una nueva crisis general. Los avances en este sentido han sido pequeños y corremos el peligro de que las lecciones de la crisis no se hayan aprendido. El Comité de Estabilidad Financiera (Financial Stability Board ) propuesto por el G-20 ha determinado unos principios para reformar el sistema: fortalecer los requisitos de capital -
45 incluyendo provisiones contracíclicas, en las que el Banco de España ha sido pionero-; introducir requisitos de liquidez con especial atención a las operaciones internacionales; reducir el riesgo sistémico inducido por el comportamiento de las instituciones "demasiado grandes para quebrar"; fortalecer y homogeneizar los estándares contables; mejorar los métodos de remuneración de los empleados de las entidades financieras para controlar los incentivos a tomar riesgo; extender el control supervisor a todas las entidades que actúan como bancos; elevar los estándares de control de riesgo para los mercados de derivados over-the-counter; revitalizar la titulización de activos en un contexto de mayor transparencia, menor complejidad y alineación de incentivos entre los inversores y los emisores; y, finalmente, asegurar la coherencia internacional de la regulación y la supervisión. Estos principios deben inspirar la reforma de la regulación y las reglas prudenciales dictadas por el Comité de Basilea. En la Unión Europea, a resultas del informe de Larosière se ha impulsado la creación de un sistema europeo de supervisores financieros en las áreas de banca, seguros y mercados para aumentar la coordinación en la supervisión de instituciones y mercados. Por otra parte, se ha propuesto la creación de un Comité Europeo de Riesgo Sistémico (CERS) para asesorar y prevenir en esta materia y en donde el Banco Central Europeo (BCE) está llamado a jugar un papel importante. Esto supone un paso, aún tímido, hacia una mayor integración de la supervisión financiera en la UE. Sin embargo, la UE sigue sin tener una línea de autoridad clara en casos de crisis sistémicas. El propuesto CERS no tendrá capacidad operativa y no es evidente que el BCE cuente con la necesaria información supervisora sobre las entidades individuales. Además, el problema de la resolución de la quiebra de entidades transfronterizas, con el caso de Fortis como ejemplo, sigue ahí. Este problema se paliaría con el requisito que las entidades paneuropeas suscribiesen un seguro de depósito y se constituyera un fondo de garantía europeo. Al mismo tiempo, se tiende a una regulación más estricta de los gestores de hedge funds y de capital riesgo. Esta regulación corre el peligro de ser reglamentista y poco efectiva. Algunos países han instituido límites a las retribuciones de los ejecutivos bancarios, y el Reino Unido un impuesto extraordinario temporal sobre los bonos recibidos, al que la City ha reaccionado con desagrado. La idea del impuesto extraordinario es que los beneficios recientes obtenidos por la banca se deben a las ayudas recibidas más que a la gestión realizada. En Estados Unidos se debate la arquitectura de la regulación financiera. El Congreso propone un papel preponderante de la Reserva Federal en la gestión de crisis, un consejo de riesgo sistémico, y la creación de una agencia de protección de los consumidores. El Senado está considerando una propuesta de creación de un super-regulador que quitaría competencias de supervisión a la Reserva Federal, la cual quedaría en segundo plano entre el regulador y el consejo de riesgo sistémico. Se especula incluso con la posibilidad de que el banco central no actúe como prestamista de última instancia del sistema para así poder preservar su independencia. La batalla promete ser dura puesto que la Reserva Federal, y Ben Bernanke en particular, están en entredicho por su papel antes del estallido de la crisis y por su reacción ante ella. El presidente Bernanke ha defendido recientemente, para sorpresa de muchos, que la política de tipos de interés bajos antes de la crisis no es responsable de la burbuja inmobiliaria, sino una regulación inadecuada. De acuerdo con la ortodoxia precrisis, un banco central no puede ni debe hacer nada para prevenir la formación de burbujas de activos reales o financieros. La llamada "opción de Greenspan", de acuerdo con la cual la desinflación de los precios de los activos se combate con bajadas de los tipos de interés, parece más viva que nunca. De hecho, la espectacular recuperación actual de la Bolsa no es ajena a la actual política de tipos de interés. El panorama es, pues, complejo, y tanto la regulación financiera como la configuración de su arquitectura están en el aire. Existe un consenso en los puntos generales del Comité de Estabilidad Financiera pero no en los detalles. Asimismo está en juego el papel de los bancos
46 centrales en la preservación de la estabilidad del sistema financiero. El resultado del debate en EE UU tendrá repercusiones internacionales. La reforma sustantiva de la regulación no puede quedarse en agua de borrajas, con cambios esencialmente cosméticos que reflejen un "aquí no ha pasado nada". Si esto fuera así, la crisis habría sido una oportunidad perdida para construir un sistema financiero más robusto y solamente cabría esperar nuevos episodios en los que nos volveríamos a acercar al abismo. http://www.elpais.com/articulo/opinion/crisis/reforma/sistema/financiero/elpepiopi/20100115elp epiopi_11/Tes
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EDITORIAL La prueba griega La Unión Europea no puede abandonar al socio que padece la situación económica más grave 16/01/2010 16/01/2010 Nunca un Gobierno de la UE había cumplido sus primeros 100 días con un balance económico tan inquietante. Ni antes un miembro perteneciente a la eurozona había generado tanta desconfianza acerca de su capacidad para sanear sus finanzas públicas. Tampoco un Estado miembro había sido acusado tan directamente de falsificación de la información sobre las finanzas públicas. Todo esto es Grecia. Esa percepción del riesgo es la causa de que las agencias de calificación crediticia estén ampliando las advertencias o, directamente, las degradaciones y de que la deuda pública de algunos Estados de economías avanzadas esté cotizando con una prima de riesgo creciente. No es precisamente muy creíble que un déficit público del 12,7% del PIB en 2009 pueda caer en un plazo razonable de tiempo (desde luego no en 2012, como ha sugerido el Gobierno) por debajo del 3%, como exige el Pacto de Estabilidad. Sobre todo si el crecimiento económico brilla por su ausencia: no es probable que aumente el PIB griego este año y las posibilidades de expansión a medio plazo son ciertamente limitadas. Las amenazas de aplicación de sanciones comunitarias no son más intimidadoras que las derivadas de una severa y duradera penalización por los mercados de bonos, donde el Estado griego ha de financiar su igualmente creciente deuda pública. Frente a una situación tal, el Gobierno griego ha de definir un plan creíble de saneamiento de las finanzas públicas. Es algo que va a exigir serios sacrificios en su población con el fin de restaurar la capacidad competitiva que ha sido notablemente erosionada en el seno de la eurozona, sin posibilidad de recurrir a modificaciones del tipo de cambio con el fin de paliar esas pérdidas de competitividad. Las autoridades igualmente han de garantizar la absoluta transparencia en las cuentas públicas y el abandono de prácticas informativas heredadas de anteriores gobiernos que en nada favorecen sus compromisos comunitarios. Pero sin menoscabar el cumplimiento estricto de esas obligaciones, Grecia tiene derecho al apoyo de las instituciones europeas, sin menoscabo del que pueda conseguir de instituciones multilaterales como el FMI. Contemplar su exclusión de la unión monetaria es un ejercicio peligroso, no sólo para ésa y otras economías hoy vulnerables por similares razones, sino para la estabilidad del conjunto de la eurozona. http://www.elpais.com/articulo/opinion/prueba/griega/elpepuopi/20100116elpepiopi_2/Tes
Alemania elogia los esfuerzos de Grecia para frenar su déficit AGENCIAS - Bruselas - 16/01/2010 Angela Merkel destacó ayer los esfuerzos "hercúleos" de Grecia para controlar su déficit por medio de un plan destinado a recortar el gasto y aumentar sus ingresos este año por encima de los 10.000 millones de euros. Esta afirmación de la canciller alemana contrasta con la del pasado
48 miércoles, cuando vaticinaba que el precario estado de las finanzas del país heleno podría "dañar el euro". El presidente del Ecofin (Consejo de ministros de Economía y Finanzas de la UE) y primer ministro de Luxemburgo Jean Claude Juncker recalcó también que Grecia "no irá a la bancarrota", pero tendrá que hacer "grandes esfuerzos" Por otro lado, el primer Consejo de los 27 ministros de Finanzas bajo presidencia española, que tendrá lugar el próximo martes, amonestará a Grecia por las deficiencias observadas en la producción de sus estadísticas fiscales, según un informe reciente de la Comisión Europea, "sujetas a presiones políticas y ciclos electorales". El estudio añade que el sistema empleado por Atenas para aportar sus datos de déficit y deuda "no garantiza la independencia de las autoridades nacionales de estadística". El Ecofin pretende así evitar escándalos como el descubierto en 2004 tras falsear Grecia sus resultados para entrar en el euro. Al llegar al poder en 2009, los socialistas revisaron las estimaciones de déficit para ese año del 3,7% al 12,5%. El viernes pasado, Grecia envió a la UE un plan destinado a recortarlo hasta el 2,8% de aquí a 2012. El Ecofin examinará su viabilidad. http://www.elpais.com/articulo/economia/Alemania/elogia/esfuerzos/Grecia/frenar/deficit/elpepu eco/20100116elpepieco_5/Tes
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Los contrastes de Suramérica Brasil se convierte en país de moda y Chile entra en la OCDE, mientras la inestabilidad económica e institucional sacude Argentina y Venezuela
ALEJANDRO REBOSSIO - Buenos Aires - 16/01/2010 La economía de Suramérica presenta historias de contrastes. Las de Chile, que el lunes ingresó al selecto club de la Organización para la Cooperación y el Desarrollo Económico (OCDE); y de Brasil, una de las potencias emergentes de moda. Las de Venezuela, cuyo presidente, Hugo Chávez, anunció el pasado día 8 una devaluación en medio de cortes de servicios básicos como la electricidad y el agua; y Argentina, donde tres días antes se había desatado una crisis por las reservas y la jefatura de su Banco Central. Las cuatro mayores economías de Suramérica viven la crisis que ha sacudido el mundo de modos muy diferentes. "Argentina es un caso de torpeza máxima", observa Roberto Frenkel, economista del argentino Centro de Estudios de Estado y Sociedad. "Había crecido en los últimos años más que Chile y Brasil, pero tiene inflación -añade Frenkel, que participa de una investigación sobre macroeconomía, crecimiento, empleo y distribución del ingreso en Latinoamérica-. No tiene nada que ver con Venezuela, que siempre que el petróleo está alto, aumenta el gasto y cuando cae, entra en problemas. Chile, en cambio, ha ahorrado cuando el cobre estaba alto en un fondo anticíclico para reducir el impacto de la recesión. Brasil apenas tuvo recesión porque tiene un crecimiento estable y una política social para compensar el impacto externo". Lía Valls, investigadora de la Fundación Getulio Vargas, destaca que en Chile, "a pesar de la dictadura (1973-1990), hay una tradición de estabilidad de reglas e instituciones". Valls mencionó que cuenta con una economía más abierta que Brasil, pero más vulnerable por su dependencia del cobre. "En Brasil la historia de estabilidad de reglas es más reciente. Fue una novedad en la transición entre el Gobierno de Fernando Henrique Cardoso (1995-2003) y Lula. Tiene petróleo, industria, es la octava economía del mundo, pero la pobreza aún es muy grande", advierte Valls, del Instituto de Economía Brasileña de la fundación. "No es novedad que en Argentina haya crisis institucionales y cambios de políticas. En los noventa, con una economía abierta, a la industria no le fue tan bien y ahora Fernández quiere protegerla. Había crecido mucho en los últimos años porque venía de una recesión enorme [1998-2002]". Jorge Leiva, director del Programa Económico de la Fundación Chile 21, coincide en que "las historias de Argentina y Venezuela no son de estabilidad". Recuerda que los bajos precios del petróleo en los noventa afectaron a Venezuela e impulsaron la llegada de Chávez al poder: "Al principio, su Gobierno era precario, hubo un intento de golpe, pero cuando despejó la incertidumbre política tampoco afirmó las finanzas". Sobre Argentina, Leiva observa que "venía
50 de una inestabilidad grande cuando llegó al poder Néstor Kirchner (2003-2007) y logró estabilidad política y una recuperación rápida con una política económica heterodoxa exitosa, pero también ha ido generando problemas", como la desconfianza del sistema financiero internacional o el déficit energético. Por el contrario, primero Chile y más tarde Brasil han mantenido políticas fiscales y monetarias "prudentes" y programas sociales "para mantener la cohesión". El Producto Interior Bruto (PIB) de Brasil había crecido un 5,1% en 2008. En 2009, pese a la crisis global, aún creció el 0,6%, según la Comisión Económica para América Latina y el Caribe (CEPAL), si bien el FMI estima una ligera caída. A fin del año pasado, su presidente, Luiz Inácio Lula da Silva, declaró que su país salía de la debacle fortalecido. No crece tanto como China o India, pero el Gobierno brasileño se ampara en que mantiene a raya la inflación (un 4,2% en 2009), mientras el paro bajó del 10% de hace cuatro años al 7,9% en 2008, pero subió al 8,1% en 2009. Chile se convirtió en el primer socio suramericano de la OCDE, a la que pertenecen 29 países desarrollados y México. "La OCDE ya no es un club de países ricos, sino de los países bien organizados", aclaró esta semana el ministro de Relaciones Exteriores chileno, Mariano Fernández. El Chile de Michelle Bachelet, que mañana celebra elecciones presidenciales, creció un 4,7% en 2007 y el 3,2% en 2008 hasta que cayó un 1,8% el año pasado. Pasó de una inflación del 7,1% en 2008 a una deflación del 1,2% en 2009. El paro, que rondaba el 7% en los años anteriores, subió al 9,8% en 2009. Venezuela devaluó un 50% el bolívar para fortalecer los ingresos fiscales que genera su principal exportación, el petróleo. Para evitar más inflación, Chávez llamó el pasado domingo a los militares a controlar los precios en las calles y a cerrar los comercios que los aumentaran, una amenaza que se ha hecho realidad en centenares de ellos. En 11 años de Gobierno de Chávez, el bolívar ha perdido en torno al 90% de su valor pese a que el petróleo ha multiplicado su precio por ocho. Venezuela llevaba semanas con cortes de electricidad por la sequía en la presa de su tercera central hidroeléctrica y la falta de inversión en nuevas centrales después de que hace unos años el Gobierno nacionalizase las principales eléctricas privadas. Chávez aplicó el miércoles un plan de ahorro eléctrico, pero al día siguiente lo echó por tierra. Su economía crecía mucho (un 8,4% en 2007) hasta que la cotización del petróleo dejó de batir récords y la expansión se redujo al 4,8% en 2008 y devino recesión (-2,8%) en 2009. La inflación siempre fue alta (28,9% el año pasado), mientras que el paro ronda el 8%, si bien buena parte del empleo está en la economía informal. Su déficit fiscal fue del 5,5% del PIB en 2009, según CEPAL. Chile, país dependiente del cobre, sufrió un desfase del 3,6%. Brasil, uno del 2,9%. Argentina, que carece de financiación externa por la suspensión de pagos de 2001, padeció un déficit fiscal del 0,8% del PIB. Su clima político e institucional se ha enturbiado desde que el 6 de enero la presidenta, Cristina Fernández de Kirchner, decidió remover al gobernador del Banco Central del país, Martín Redrado, que se resistía a cederle reservas internacionales para pagar deuda pública. Una juez, con el respaldo de la oposición, ha frenado la transferencia y la destitución del gobernador. El PIB venía creciendo al 8,7% en 2007, se desaceleró al 5,8% en 2008, el año del conflicto entre Fernández y los agricultores, y cayó un 2,2% en 2009, según el banco Barclays, asesor del Gobierno argentino en la pendiente reestructuración de una parte de la deuda. Su inflación alta (23% en 2008 y 13,8% en 2009, según Barclays) se combinó con un subibaja del paro: del 10,2% en 2006 al 7,9% en 2008 y desde ahí hasta 9,1% actual, según las cuestionadas estadísticas públicas.Las previsiones del FMI apuntan a que Brasil y Chile saldrán de la crisis con mucha más fuerza que Argentina y que el PIB venezolano aún caerá este año. http://www.elpais.com/articulo/economia/contrastes/Suramerica/elpepueco/20100116elpepieco_7/Tes
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REPORTAJE: vida&artes Despedidos por no remar con la empresa Las compañías empiezan a apuntar al compromiso y la actitud como clave en los ajustes de plantilla - Pero ¿cómo medir, elegir y justificar el bajo rendimiento en cargos directivos? A. BOLAÑOS / A. TRILLAS 16/01/2010 El nuevo presidente de Seat, el británico James Muir, fue aupado al cargo por Volkswagen (VW) en septiembre pasado con el encargo de dar un volantazo: la filial española deja un reguero de pérdidas (228 millones hasta septiembre de 2009) y, para volver a la rentabilidad, Muir arrancó su proyecto con un rumbo en el GPS: vender más. En noviembre, cogió velocidad: "En España, Seat no es una marca, sino una institución. No todos reman en este barco en la misma dirección, echaré a quienes no remen, necesitamos un equipo ganador". Y, esta semana, metió la quinta. La compañía confirmó el despido de 330 directivos y cargos medios, a través de indemnizaciones o prejubilaciones, por "bajo rendimiento". "Necesitamos a trabajadores comprometidos al máximo", añadió este lunes en un comunicado. Implicar a los empleados y lograr así que sean más productivos es uno de los mandamientos del directivo moderno. Pero incluso entre los valedores de estas teorías, se duda de las consecuencias que tendrá el acelerón de Muir, amén del inmediato rechazo sindical. Lo habitual en los despidos, también porque es más fácil de argumentar, es alegar pérdidas económicas, necesidades de organización o cuestiones técnicas. La novedad es que el bajo rendimiento, mucho más difícil de precisar y defender en una negociación, se abre paso incluso en los expedientes de regulación de empleo (ERE). En el mensaje de Seat, trasluce la estrategia, la intención de sentar una doctrina. "Cada vez se valora más la actitud en la empresa. Y más ahora en recesión, con tanta mano de obra formada sin puesto de trabajo, lo que nos diferencia cada vez más es la actitud", afirma Carmen Mur, presidenta de la consultora de recursos humanos Man Power. "La actitud no es como los conocimientos técnicos, es difícil que pueda enseñarse. Y es más que difícil de medir", concede. La contundente decisión del nuevo equipo gestor de Seat ha atraído los focos, pero está muy lejos de ser la excepción. Hasta hace bien poco, el bajo rendimiento apenas era alegado por las empresas al presentar un despido, pese a ser una de las causas reconocidas por el Estatuto de los Trabajadores. Pero las estadísticas sobre expedientes de regulación de empleo (ERE) autorizados -no hay recuento oficial de las causas de despidos individuales-, evidencian que, con la crisis, eso ha cambiado: el peso de esta causa en el total de personas afectadas por ERE se ha triplicado (del 2,5% al 7,5%). "Una compañía tiene sus estrategias para llevar a buen puerto su proyecto. Y tiene derecho a elegir las personas que estén en el barco", añade Mur. En plena crisis, sería ingenuo pensar que las empresas no buscan, sobre todo, reducir gastos. Lo que se pone ahora sobre la mesa es otro criterio, el bajo rendimiento, que persigue además fomentar el compromiso de los que se quedan. La cuestión es cómo se evalúa esa productividad y si la única solución es el despido. "Las empresas estudian sistemáticamente el rendimiento de los trabajadores, la fórmula más habitual es analizar el rendimiento por objetivos", explica Miguel Ángel García, profesor de Sociología en la Universidad de Valencia. Pero matiza: "También es cierto que, incluso en los años de resultados económicos positivos, ha habido ajustes de plantilla masivos en grandes
52 compañías como Telefónica, o los bancos". Al sociólogo, algunas de las frases utilizadas por los directivos de Seat le recuerdan a una escena de La Cuadrilla, de Ken Loach, cuya trama se centraba en los despidos por la privatización del servicio ferroviario británico. "En la película, cuando un empleado pidió una negociación, encontró como respuesta: 'Hay que hacer borrón y cuenta nueva". "Estamos habituados a que las empresas usen las palabras para despedir sin que se note, no al revés", puntualiza Cristina Simón, decana de Psicología en la escuela de negocios IE University. "Nos falta información, pero más que evaluar el rendimiento, la decisión parece encajar mejor en la necesidad de la empresa de cambiar y de descartar aquellos perfiles con menos capacidad de adaptación a una cultura más agresiva, más comercial", agrega. La decisión de Seat no sólo suponen despidos, también la contratación de 150 personas con un perfil enfocado al marketing. Además, aduce que el área de producción ha asumido en los últimos años la mayor parte de los ajustes y que otras actividades indirectas están sobredimensionadas. La manera de afrontar el proceso dispara las dudas entre los expertos. La selección de los despidos la ha realizado un comité de 35 gerentes dirigido por Muir en apenas tres meses. "Son procesos de evaluación de plantillas que garantizan la imparcialidad y la no arbitrariedad", asegura un portavoz de la compañía, sin dar precisiones sobre cómo han hecho esa evaluación. "Los sistemas de gestión del rendimiento se basan en evaluaciones del ciclo empresarial, normalmente más amplios, y acaban en decisiones individuales", explica Simón. La decana de Psicología de IE University resalta además que los dos colectivos afectados, administración y cargos medios, "están entre los que más problemas presentan para medir el rendimiento", a diferencia de otras áreas como la comercial (por ventas) o las vinculadas directamente a las fábricas (por producción). La decisión del nuevo equipo de Muir es llamativa, precisamente, por tratarse de Seat. La filial española de VW, la industria que a más trabajadores emplea en Cataluña (14.000 personas), ha recortado un 22% su plantilla en la última década, pero casi siempre mediante ERE, y con tradición de negociación y acuerdo con los sindicatos. Ahora, la compañía busca acuerdos individuales. Seat insiste en que el ajuste es ajeno a un recorte de gastos y esgrime las condiciones ofrecidas en las prejubilaciones (85% del sueldo) o las bajas incentivadas (indemnizaciones de hasta 60 días por año trabajado). "Es cierto que hay una burocracia terrible en las oficinas centrales y que las empresas tienen difícil incentivar a los empleados para que tomen riesgos", explica un académico, conocedor de las interioridades de la compañía, que pide conservar el anonimato. "Pero un mensaje tan contundente puede llevar a la desmotivación del resto de los trabajadores", advierte. Y se queja de que, ante la dificultad de encontrar criterios de rendimiento, se vuelva a recurrir a la edad, como es habitual en la empresa española. "No sólo es porque se desperdicie la experiencia, sino que además se induce a otros trabajadores de edad avanzada a jubilarse mentalmente", afirma. "Moralmente, es un golpe duro. No tanto en el caso de las prejubilaciones [120 trabajadores las han aceptado], sino para los trabajadores de menor edad. ¿Qué carta de recomendación se está dando a una persona de 40 años que haya salido de Seat en esta hornada de despidos, cuando todo el mundo creerá que no rinde?", se pregunta Matías Carnero, presidente del comité de empresa de Seat. "No está claro qué criterio siguen", explica, "nadie puede decir que no cumplan con su tarea. Dicen que tiene que ver con las actitudes, pero parece una purga en toda regla". La falta de transparencia es un pecado capital, según Miguel Ángel García. "Si el proceso se hace sin información y de modo unilateral puede desembocar en un proceso arbitrario", apostilla el sociólogo de la Universidad de Valencia. Y resalta su escepticismo sobre los mensajes de implicación y la actitud: "En España, al menos, hay muy pocos casos en los que se implique a los
53 trabajadores en decisiones sobre el reparto de tareas o los objetivos, se les consulta poco o nada. La gestión empresarial busca la adhesión total y, al tiempo, pide trabajar más rápido y mejor, dar más calidad en el producto o el servicio, sin compensaciones adicionales. Es esquizofrénico". El despido conjunto de más de 300 trabajadores podría obligar a Seat a presentar un expediente de regulación. Así lo creen los sindicatos, que presentaron ayer una denuncia ante la Inspección de Trabajo por este motivo. Marc Carrera, director en Barcelona del bufete Sagardoy, da una razón para esquivar los ERE: "Los acuerdos individuales son un modo de evitar el filtro o la intermediación de los sindicatos, que ejercen su presión. En muchos casos, esa presión precisamente logra arañar indemnizaciones más elevadas en el caso de ERE, es decir, que hay un tema de costes que suele desempeñar un papel". "Tal y como está planteado, lo lógico hubiese sido un ERE", añade Antonio Ojeda, catedrático de Derecho del Trabajo de la Universidad de Sevilla. Ojeda explica que, de no llegar a acuerdo con la empresa, el juez suele dar la razón al trabajador - "Es muy difícil probar la disminución continuada y voluntaria en el rendimiento, como exige la ley", acota-, y declarar despido improcedente, lo que no evita que el empleado se vaya a casa, aunque sea con una indemnización de 45 días por año trabajado -menor en este caso a lo que plantea Seat-. Ambos juristas confiesan, con cautela, cierto asombro ante cómo se ha transmitido la decisión. "Me llama mucho la atención, es una gerencia agresiva, aquí se suele hacer de otra forma", indica el catedrático. "No es habitual que las empresas presenten públicamente un problema de bajo rendimiento que afecte a un grupo amplio de empleados. Puede parecer algo agresivo", coincide el director del bufete Sagardoy. Cristina Simón insiste en que, pese a todo, la implicación del trabajador, pilar de la responsabilidad social corporativa, se abre paso. "Los despidos unilaterales no están bien vistos, y aunque todo depende siempre de la viabilidad del negocio, en esta crisis vemos que muchas direcciones de Recursos Humanos buscan maneras de bajar gastos hasta debajo de las piedras, antes de medidas más drásticas como la reducción de salarios o despidos, que la crisis obliga a tomar de todos modos en muchos casos", afirma la profesora de IE University. Lo óptimo sería mantener la vinculación con el trabajador mientras vienen mal dadas, una vía que ensayaron las grandes consultoras a principios de la década, con contratos a tiempo parcial asociados a proyectos. En esta crisis, se ha resucitado, sobre todo en empresas pequeñas, lo que los expertos en recursos humanos llaman gainsharing -en inglés, ganancia compartida-. Los empleados se integran en grupos de trabajo con la gerencia; deciden de forma conjunta recortes en gastos y asumen cobrar una parte de la paga en variable, lo que implica a todos en el objetivo de volver a los beneficios. El camino para sortear los despidos lo abrieron, paradójicamente, las empresas del automóvil hace décadas, con los acuerdos para reducir jornada y salarios en las fábricas cuando la actividad decaía y evitar así despidos. En esta recesión, los expedientes de regulación de empleo temporal (y las ayudas públicas) han permitido salvar buena parte del empleo en las fábricas, pero la medida no es aplicable en otras áreas. En tiempos de crisis, la insistencia en el bajo rendimiento como motivo del despido tiene una doble lectura. De cara al mercado, se transmite que se está dispuesto a hacer cualquier sacrificio por competir ahora que ganar cuota es imprescindible ante el bajón de las ventas.De cara a la plantilla, se refuerza la idea de que la productividad es el baremo esencial, que hay que arrimar el hombro. Por si no había quedado claro, el director de Seat en España, Marçal Ferreras, recalcó el día después de comunicar los despidos: "El que no suma tiene que salir, no es lógico tener a personas que reman en dirección opuesta a la que lo hace la empresa".
54 "El mensaje para los que quedan en la plantilla es terrible. Se dice buscar más implicación, pero lo que acaba funcionando más es la parte coactiva, el miedo a ser descalificado, a no llegar", opina el sociólogo Miguel Ángel García. "Tras un ajuste, es imposible evitar la desmoti-vación de la plantilla durante varios meses", dice Cristina Simón, "se han intentado alternativas, como dar stock options, pero eso no ha evitado un descenso automático del compromiso". Como explicaba en el arranque de la crisis al New York Times Wayne Cascio, catedrático de la Universidad de Colorado y estudioso de los efectos de los despidos sobre la productividad: "A menudo, la primera víctima de un reajuste de plantilla es la moral de los empleados".
http://www.elpais.com/articulo/sociedad/Despedidos/remar/empresa/elpepisoc/20100116elpepiso c_1/Tes
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15.01.2010 Obama taxes the banks – including the foreigners
President Obama is cracking down on Wall Street with a levy to raise $90bn from the 50 largest financial institutions as a pay back for the large financial aid granted to the financial sector during the crisis. The FT writes that Tim Geithner wants other countries to adopt the same measures. Dominique Strauss Kahn from the IMF welcomed this moved, while the UK said that they already had introduced their own plan – one off bonus tax – and see no point in reopening the package. European countries have tended to prefer surplus taxes, while the US will be imposing a levy, to set at a rate of 15 basis point on debt liabilities other than insured deposits and tier one capital. See also the FT’s Lex column for more on this. Lex argues that the structure of this levy is discriminatory. About 60 per cent of the fees will be born by the top 10 institutions. The FT writes in another story that non-US banks no Wall Street are seething after Obama’s crack-down on the financial sector, as they have to pay a tax without have any recourse to US government financial aid. One bankers call it taxation with representation. They complain that the new tax, designed to raise $90bn, does not discriminate between Citibank and the subsidiaries of European or Japanese banks.
The French try to push Juncker towards more co- ordination Just days ahead of his likely re-reelection as president of the eurogroup, Jean Claude Juncker will show President Nicolas Sarkozy his work programme, which is likely to fall short of Paris’ demands of an ambitious steps towards more policy co-ordination. Les Echos quotes French diplomats as saying there is no doubt about Juncker’s re-election, but the French are likely to give a run for his money ahead. One diplomat is quoted as saying that Sarkozy will make his objections to Juncker, who will then have three days to add two or three paragraphs to his programme.
56 Greece produces 3-year plan, and disappoints once again Nobody really trusts this plan, but here it is. The deficit should go down from 12.7% (if it not already higher which many observers think), to 2.8% in 2012. This path depends on growth projectsion from minus 0.3% this year to 1.5% in 2011 and 1.9% in 2012. Most of the cuts will be in cutting down on waste in hospitals and defence spending, plus higher excise tax on alcohol and tobacco, the FT writes. Kathimerini has further details, saying that finance minister Papaconstantinou plans to hold back 10% of each department allocation as a safety net. The market reaction to this plan was disappointing. The most common voiced criticism was that the plan was too short on detail, and that the growth assumptions were too optimistic. Jean- Claude Trichet said yesterday that Greece will recieve “no special treatment” from the ECB, but said the idea of Greece leaving the euro area was absurd. How to solve the Iceland problem Martin Wolf offers a solution for the Iceland problem. The now likely collapsed Icesave deal assumed that the repayment would come from the liquidation of Landesbanki’s assets. The obvious solution then should be: “if the assets of the bank are that valuable, why not write off the debt, in return for the claims on these assets? That would be a generous gesture. It is, more importantly, one that would do much to improve the morale of a battered and vulnerable little country. Threatening such a country with destruction... has done, is simply shameful. The UK and the Netherlands should stop this self-righteous bullying at once.” Tilford on the euro area Writing in the FT, Simon Tilford says Germany’s current account surplus with the rest of the euro area was a matter for a concern, especially given the continued economic weakness in other parts of the euro area. As Germany’s private consumption is falling, the economy is once more recovering on the back of an export-led boom, again with a real devaluation. Spain and Greece will not recover unless they can get their economies growth. And for that to happen they must rebalance their trade with the euro area. This is why the euro area needs rules on current account deficits and surpluses, in addition to the fiscal rules. http://www.eurointelligence.com/article.581+M58d2eed6cba.0.html
ft.com/economistsforum How the Icelandic saga should end January 14, 2010 11:34pm by Martin Wolf, the FT's chief economics commentator Iceland is famous for its sagas. But the latest one is truly dramatic: the balance sheets of its privatised financial sector grew from twice to 10 times gross domestic product, in five years. In the absence of a lender of last resort, this story had to end badly. In the panic of 2008, it did. Because Iceland was a member of the European Economic Area, its banks were allowed to set up branches freely. To raise money, Landsbanki, one of Iceland’s now collapsed banks,
57 set up an internet bank, Icesave, which gulled depositors by offering attractive interest rates. Under the European Union directive, Iceland also had an obligation to establish a deposit insurance scheme, which it did, through a levy on those banks. Then came the collapse. Some Icelanders blame Gordon Brown, Britain’s prime minister, for pulling the plug on their banks. That is unreasonable. Competent observers had long concluded that the financial system was a house of cards. It was sure to collapse in a panic. Less unreasonable is the complaint over the UK’s use of a section of its anti-terrorism laws to freeze assets. But some such action was justified. http://blogs.ft.com/economistsforum/2010/01/how-the-icelandic-saga-should-end/
Greece unveils 3-year plan to curb deficit By Kerin Hope in Athens and David Oakley in London Published: January 14 2010 12:57 | Last updated: January 14 2010 19:17 Greece on Thursday announced an ambitious three-year plan to curb its runaway budget deficit but failed to convince sceptical markets its targets for growth and fiscal reform were feasible. The stability and growth plan calls for the budget deficit to be cut from 12.7 per cent to 2.8 per cent of gross domestic product by the end of 2012. ECB warning to debt-ridden governments - Jan-14 In depth: Greek debt crisis - Dec-21 Greek PM rejects fears over eurozone exit - Jan-13 Opinion: Greece will have to exit eurozone - Jan-11 Greece condemned for falsifying data - Jan-12 EU calls for Greece to make bigger cuts - Jan-08 The economy is projected to shrink by 0.3 per cent this year before rebounding with growth of 1.5 per cent in 2011 and 1.9 per cent in 2012. The deficit would be reduced this year by 4 percentage points of GDP, with deep cuts made in hospital and defence spending where waste and corruption are widespread, according to officials. Revenue increases would be driven by higher excise taxes on tobacco and alcohol, an overhaul of the tax system and a crackdown on tax evasion. “This plan can be achieved, we’re confident of that,” said George Papandreou, the prime minister, after an outline was presented at a televised cabinet meeting. The plan is seen as Greece’s passport to borrowing almost €54bn ($78bn, £48bn) on international markets to fund a swollen public debt expected to rise this year from 113 per cent to more than 120 per cent of GDP. But markets reacted negatively almost as soon as George Papaconstantinou, finance minister, finished his presentation at a cabinet meeting broadcast live on Greek television under the government’s policy of promoting transparency. The cost to insure Greek debt rose to fresh heights as investors continued to worry about the parlous state of the country’s finances. The Greek bond markets also sold off, dipping to 12- month lows.
58 Insurance costs to protect investors against the default of Greek debt rose by $12,000 to $340,000 for every $10m of debt annually over five years. This is the highest level since 2004, when the market was launched. Greek 10-year bond yields, which have an inverse relationship with prices, rose to 6.03 per cent, a 17-basis point jump. This is the highest level since January last year. “We think these forecasts are too optimistic … we doubt the government will meet its fiscal targets – the recent renewed surge in government bond yields may therefore have further to go”, said Ben May of Capital Economics in note published on Thursday. “The two targets – growth and public deficit – are inconsistent and at least one won’t be achieved,” BNP Paribas said in a note. Mr Papaconstantinou rejected criticism of the plan’s growth targets, saying, “A process of deficit reduction from high levels can be growth-enhancing.” “Recovery will be investment-led. This includes €16bn in EU funds waiting to be used in the next three years,” he added. Greece will send the draft to the European Commission on Friday, but the Commission may insist on deeper spending cuts before the plan is approved by European Union finance ministers next month, given the uncertainty over whether the finance ministry can collect a projected €1.2bn in revenues from cracking down on tax evasion. “We are ready to bring a supplementary budget and take additional measures if necessary,” Mr Papaconstantinou said. Swift adoption of structural reforms included in the plan, including an overhaul of the tax system and of the state pension system, is a overriding priority, said Platon Monokroussos, head of financial markets research at EFG Eurobank. “The key will be to promote structural reforms in order to avoid protracted recession, otherwise the fiscal situation will not improve as expected,” Mr Monokroussos said. Commission officials visiting Athens last week to inspect details of the plan voiced concern that the government’s growth forecasts for 2010 and 2011 were over-optimistic. Greece’s business environment remains gloomy, with unemployment showing a steady rise. The official jobless rate reached 9.8 per cent at the end of 2010 but this figure fails to reflect growing numbers of jobs lost in small family-owned businesses, according to analysts. Early bookings suggest tourist arrivals will increase only marginally after an estimated fall of 12 per cent last year. Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/0fcd668a-010a-11df-a4cb-00144feabdc0.html?catid=20&SID=google
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ECB warning to debt-ridden governments By Ralph Atkins in Frankfurt, Kerin Hope in Athens and David Oakley in London Published: January 14 2010 12:45 | Last updated: January 14 2010 20:12 The European Central Bank on Thursday issued a blunt warning to high-borrowing governments that they risked a damaging backlash from financial markets as it escalated the pressure on Greece to bring its public debts under control. Comments by Jean-Claude Trichet, ECB president, making clear that Greece would receive “no special treatment,” highlighted the wrath Athens faces after years of misleading statistics that hid the scale of its problems. Money supply blog: The ominpresent ECB - Jan-14 Martin Wolf: The eurozone’s tough years ahead - Jan-05 In depth: Central banks - Nov-16 German recovery stalls in the fourth quarter - Jan-13 Mr Trichet also went further than before in warning that highly indebted eurozone countries risked “rapid changes in market sentiment” hitting economic growth and undermining credibility of European Union rules and institutions. With the ECB demanding greater transparency in budget setting, Greek television broadcast a live cabinet presentation on Thursday by George Papaconstantinou, finance minister, of the country’s three-year plan to curb its budget deficit. But financial markets reacted negatively. The cost of insuring Greek debt rose on Thursday to the highest levels seen since the market was launched in 2004. The Greek bond markets also sold off, dipping to 12-month lows. Mr Trichet spoke after the ECB left its main interest rate unchanged at a record low of 1 per cent for the eighth consecutive month. The ECB forecast of “moderate” growth and inflation this year also remained unchanged, encouraging markets to push to 2011 the expected date of its first interest rate rise. Mr Trichet sought to downplay the wider repercussions of the Greek crisis, dismissing as “absurd” the idea that Greece would leave the eurozone. Greece accounted for only about 2.5 per cent of eurozone gross domestic product, he pointed out. But Mr Trichet’s remarks signalled ECB opposition to any broader European bail-out plans. “The problem is not to get help but to help oneself,” he said. Greece’s ambitious three-year stability plan, unveiled on Thursday, calls for cutting a soaring budget deficit from 12.7 per cent to 2.8 per cent of gross domestic product by the end of 2012. A rebound in growth is also projected, with the economy forecast to expand by 1.5 per cent of GDP in 2011 and 1.9 per cent in 2012 after shrinking by 0.3 per cent this year. http://www.ft.com/cms/s/0/df61c58e-00f7-11df-a4cb-00144feabdc0.html
60 COMMENT Europe cannot afford a Greek default By Simon Tilford Published: January 14 2010 20:11 | Last updated: January 14 2010 20:11 The eurozone cannot afford to make an example of crisis-hit Greece. Claims by officials and politicians in the currency bloc’s fiscally more robust economies – including Wolfgang Schauble, Germany’s finance minister – that the Greeks will have to find their own way out of the crisis, are not credible. They ignore the fact that Greece’s problems cannot be solved by it alone. Nor would a Greek default be the cleansing experience that many people in the stronger member states appear to imagine. Eurozone members are rightly furious with the Greek authorities for falsifying budget data. But Greece is just the starkest example of the problems facing economies that have lost competitiveness within the eurozone and now have weak public finances and poor growth prospects. They must cut budget deficits while lowering costs relative to the rest of the eurozone, and this when economies such as Germany and the Netherlands are flirting with deflation and investors are jittery about sovereign risk. On Thursday, Greece announced plans to cut its budget deficit from an estimated 12.7 per cent of gross domestic product in 2009 to just 2.8 per cent in 2012. Given the country’s dire economic prospects, cuts in spending of this order would lead to slump and deflation – crippling for a highly indebted economy – and threaten social stability. If the eurozone fails to support Greece or makes the terms of any bail-out politically impossible for the country’s authorities to meet, Greece could default on its sovereign debt. The eurozone would then face a big problem. The financial markets would quickly turn their attention to other euro bloc economies with unsustainable fiscal positions and poor growth prospects. Italy, Spain and Portugal would find themselves paying dramatically higher borrowing costs, raising the likelihood of further fiscal crises. Such a scenario would almost certainly deter the European Union’s remaining central and eastern European member states joining the eurozone any time soon. And the political fallout would be huge. Moreover, if a eurozone member defaults, the risk of it leaving the currency union cannot be completely discounted. If Greece defaulted and remained in the eurozone it would still be deeply uncompetitive. The Greek government would still find it difficult to tap financial markets on affordable terms, because investors would be sceptical about growth prospects. Leaving the eurozone and devaluing would be very high risk but provide a route back to growth, at least short-term, and that could prove a political necessity. A partial unravelling of the eurozone would do the EU incalculable damage. Of course, Greece, as well as Italy and Spain, have to get serious about boosting productivity and confronting widespread public-sector rent-seeking. But Germany (and other members running big structural current account surpluses) also need to accept they are part of the problem. It makes little sense to argue that weaker member states should try to emulate Germany. A big reason for the relative strength of Germany’s public finances is the size of the country’s trade surplus with the other eurozone economies. But this is hardly something all eurozone states can aspire to: one country’s surplus is another’s deficit.
61 One disturbing trend of the last few months is that Germany’s surplus with the rest of the eurozone is rebounding rapidly from the crisis, despite extreme economic weakness elsewhere in the bloc. The German economy is recovering on the back of exports; private consumption is actually falling. The weakness of domestic demand will no doubt lead to renewed falls in real wages and to a further decline in Germany’s trade-weighted exchange rate within the eurozone. But it will be all but impossible for the likes of Spain and Greece to put their public finances in order unless they can get their economies growing. For this, they must rebalance their trade with the rest of the eurozone. The eurozone needs tougher fiscal rules. But it also has to set limits on intra-eurozone current account surpluses and deficits. Fiscal rules will mean little without the latter. The alternative to such rules is a fiscal (hence political) union. This would involve the “stronger” economies transferring money to the “weaker” ones on an ongoing basis, much as happens within individual member states. No one appears to want this, least of all the “strong” countries.
The writer is chief economist at the Centre for European Reform Simon Tilford Europe cannot afford a Greek default January 14 2010http://www.ft.com/cms/s/0/cd89c236- 0141-11df-8c54-00144feabdc0.html
Greek PM rejects fears over eurozone exit By Kerin Hope in Athens Published: January 13 2010 18:58 | Last updated: January 13 2010 18:58 Greece’s prime minister on Wednesday dismissed speculation the country could be forced out of the eurozone or made to seek assistance from the International Monetary Fund to rescue its battered economy. “There’s no issue of leaving the euro or of asking for help from the IMF,” George Papandreou told a news conference marking his socialist administration’s first 100 days in office. Opinion: Greece will have to exit eurozone - Jan-11 Greece condemned for falsifying data - Jan-12 EU calls for Greece to make bigger cuts - Jan-08 Greek stability plan faces tough scrutiny - Jan-05 Money Supply: Spain left behind - Dec-28 In depth: Greek debt crisis - Dec-21 The prime minister’s remarks came as spreads on Greek bonds over their German equivalents widened to levels last seen in mid-December, when investor confidence in Greece’s future hit an unprecedented low. The jump in spreads indicated markets were not yet convinced the government would be able to achieve this year’s ambitious fiscal targets, analysts said. The yield on the benchmark Greek 10-year bond rose on Wednesday by 23 basis point to 5.86 per cent. Bond yields have an inverse relationship with prices. The cost of insuring Greek debt against default also hit record levels on Wednesday.
62 Moody’s, the rating agency, warned that Greece and Portugal both faced “downwards rating pressure now that they must implement politically difficult fiscal retrenchment if they are to avoid an inexorable decline in their debt metrics”. The finance ministry fears it may struggle to borrow about €54bn ($78bn, £49bn) this year to fund a public debt projected to rise from 113 per cent to 125 per cent of gross domestic product. “We are in a state of emergency, it’s true, but we can turn this crisis into an opportunity. This year will be one of radical reforms both of the economy and the public administration,” Mr Papandreou said. The finance ministry is due on Thursday to unveil a three-year stability plan aimed at reducing the budget deficit from 12.7 per cent to less than 3 per cent of GDP. The prime minister said structural reforms would be accelerated “wherever possible”. http://www.ft.com/cms/s/0/56f6d29e-0074-11df-b50b-00144feabdc0.html
COMMENT Why Greece will have to leave the eurozone By Desmond Lachman Published: January 11 2010 20:03 | Last updated: January 11 2010 20:03 Having spent a career studying emerging market economies at the International Monetary Fund and on Wall Street, I have seen more than my share of supposedly immutable fixed exchange rate arrangements come unstuck. I have also observed at close quarters the rather well-defined and predictable stages through which countries go as their currency regimes unravel. This experience informs me that, much like Argentina a decade ago, Greece is approaching the final stages of its currency arrangement. There is every prospect that within two to three years, after much official money is thrown its way, Greece’s euro membership will end with a bang. The first stage on the road to a currency crisis occurs when a country, motivated by the desire to import policy discipline from abroad, adopts a fixed exchange rate to which its economy is patently ill-suited. A serially defaulting Argentina did so in 1991, when it adopted a convertibility plan that rigidly pegged the peso to the dollar in the vain hope of ending its tendency towards hyperinflation. After failing to meet the criteria for euro membership at the currency’s 1999 launch, a chronically profligate Greece managed to qualify in January 2001 by engaging in creative budget accounting. Going an important step further than Argentina, Greece abandoned its currency in favour of the euro. It joined a club whose very founding envisions no exit option for any of its member countries. The next stage on the road to ruin occurs when the country pursues domestic policies that are inconsistent with its new currency arrangement. In recent years Athens has thrown any notion of budget discipline to the wind. Euro membership supposedly obliges a country to abide by the Maastricht criteria of keeping its budget deficit below 3 per cent of gross domestic product and its public debt-to-GDP ratio below 60 per cent. Greece’s budget deficit has widened to 12.7 per cent of GDP, while its debt-to-GDP ratio is projected to reach 120 per cent in 2010.
63 A ballooning budget deficit, coupled with inappropriately low interest rates imported from abroad, sets the stage for the end-game. It does so not simply by putting the country’s public finances on an unsustainable path but also by eroding its international competitiveness, which gives rise to a massive external imbalance. In this department as well, Greece has managed to outdo the Argentina of old by losing over 30 per cent in competitiveness through consistently higher wage and price inflation than its European partners. As market doubts surface as to the sustainability of the currency arrangement, the country’s external official sponsors ride to its rescue. In Argentina’s case, the sponsor was a US-backed IMF. For Greece, it has been the European Central Bank. The fly in the ointment, however, is that the official sponsor understandably bridles at the prospect of providing unconditional or unlimited funding. Rather, it insists that the country adopts hair-shirt adjustment policies. In Argentina’s case, conditional IMF support staved off the inevitable for a couple of years before the proposed adjustment measures led to rioting in the streets and it became clear to the IMF that it was dealing with a solvency rather than a liquidity problem. It is difficult to see how Greece’s present crisis can end on a happier note. Any attempt to bring the budget deficit down to the Maastricht target would only deepen the recession. Attempting to restore Greek competitiveness through wage cuts would lead to years of painful and politically unacceptable deflation. The omens do not look good for retrenchment: budget cut announcements have already sparked widespread labour market unrest. Nor is there much prospect of indefinite ECB funding. Rating agencies have downgraded Greece to below A-, while Jürgen Stark, an ECB official, recently said that the EU would not help bail out Greece were the need to arise. If there is anything that the Greek authorities might learn from Argentina, it is the folly of attempting to fight the inevitable. Not only does this saddle a country with a mountain of official debt that cannot be rescheduled; it also deepens and prolongs the recession from which any post- devaluation recovery might begin. Athens should leave the eurozone sooner rather than later. However, that is not the way that Greek tragedies play out. The writer is a resident fellow at the American Enterprise Institute http://www.ft.com/cms/s/0/a920bae4-fee9-11de-a677-00144feab49a.html
64 Eurogroupe : Paris et Luxembourg divergent autour du programme [ 14/01/10 - 17H14 - Reuters ] par Julien Toyer BRUXELLES, 14 janvier (Reuters) - Quatre jours avant la confirmation attendue de Jean-Claude Juncker à la présidence de l'Eurogroupe, la France et le Luxembourg peinent à accorder leurs violons sur le programme que celui-ci devra défendre au cours des prochains mois, indiquent des sources européennes. Le Premier ministre luxembourgeois devait rencontrer Nicolas Sarkozy à l'Elysée ce jeudi à 17h30 (16h30 GMT) et, en dépit des demandes répétées de Paris pour qu'il présente une feuille de route ambitieuse sur le renforcement de la coordination des politiques économiques en Europe, celui-ci n'a pas prévu d'aller plus loin que l'énumération de ses priorités semestrielles. "Il soumettra lundi son programme de travail pour 2010, mais c'est un exercice auquel il se prête tous les semestres", explique une source participant à la préparation de la réunion, précisant que Jean- Claude Juncker ne semblait pas avoir prévu de coucher sur le papier un programme spécifique. "Ce sera un programme semestriel classique", ajoute cette même source, qui précise que le plus ancien membre de l'Eurogroupe peut être "optimiste" sur sa réélection, "rien n'ayant été entendu qui pourrait faire douter de la décision que prendra l'Eurogroupe lundi soir". Le 1er décembre dernier, lors de la première réunion de l'Eurogroupe après l'entrée en vigueur du traité de Lisbonne, qui confère une existence formelle à ce forum de discussion jusqu'à maintenant informel, les ministres des Finances des seize pays partageant la monnaie unique avaient fait part d'un consensus sur cette reconduction. Mais plusieurs d'entre eux avaient exigé qu'il présente un programme détaillé en janvier. La ministre française, Christine Lagarde, avait ainsi indiqué qu'il lui avait été demandé "d'identifier les moyens nécessaires, les objectifs, les priorités qu'on se fixe, la nécessité ou non d'avoir un secrétariat". "Cela nous amènera à nous poser la question de politiques économiques un peu plus communes", avait-elle ajouté, précisant que cet exercice était une occasion pour les Européens de se rapprocher d'une gouvernance économique de la zone euro, un voeu cher aux Français mais qui irrite plusieurs de leurs partenaires, dont les Allemands. "(Christine) Lagarde a été très claire. La demande était un programme ambitieux (...) Si ce n'est pas le cas, sans candidat alternatif, il sera certes réélu mais il y aura une négociation en séance. Et si c'est insuffisant, il lui sera donné une feuille de route. C'est d'ailleurs le scénario le plus probable", explique un diplomate européen de haut rang. "La séquence est bonne. Il va présenter sa copie à Nicolas Sarkozy, qui va lui dire si c'est suffisant ou pas (...) Cela va ensuite éventuellement lui laisser trois jours pour ajouter deux ou trois paragraphes", explique encore ce diplomate. (Julien Toyer, édité par Jean-loup Fiévet) http://www.lesechos.fr/info/inter/reuters_00221784.htm?xtor=RSS-2059
65
FDIC chief puts blame on Fed for crisis By Tom Braithwaite in Washington Published: January 14 2010 14:59 | Last updated: January 14 2010 23:58
‘Regulators were wholly unprepared and ill-equipped for a systemic event,’ said Sheila Bair before the Financial Crisis Inquiry Commission
The Federal Reserve was blamed by a fellow regulator for contributing to the financial crisis on Thursday as the central bank and one of its former chairmen fought back against congressional moves to curb its powers. In unusually pointed criticism, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, told the Financial Crisis Inquiry Commission that “much of the crisis may have been prevented” had the Fed dealt with subprime mortgages seven years before it did. In New York, Paul Volcker, former Fed chairman and now White House economic adviser, was making the case for the defence. He said there was “a compelling case that central banks should have a strong voice and authority in regulation and supervisory matters”. Both Ms Bair and Mr Volcker carry weight on Capitol Hill, where the Fed has drawn blame for aspects of the crisis. Deposits regulator points finger at Fed - Jan-14 SEC eyes bank sales practices - Jan-14 In depth: Financial crisis inquiry - Jan-12 Opinion: Separating investment banks will not make us safer - Jan-14 Money Supply: Bair’s blame - Jan-14 Live blog: Financial crisis hearings - Day 2 - Jan-14 Mr Volcker told the Economics Club of New York he was “particularly disturbed” about moves to take away the Fed’s regulatory function. Chris Dodd, Senate banking committee chairman, has proposed consolidating bank supervision into a single regulator.
66 The Fed published a paper on Thursday, which had been sent to Mr Dodd on Wednesday, arguing that its financial stability and monetary policy roles were complemented by supervising bank holding companies. Institutions at the centre of the crisis, such as Lehman Brothers, AIG and Countrywide, had been outside its jurisdiction and subject to “far less comprehensive” regulation, it said. The Fed paper marks a public and proactive stance by a body whose culture and independence from Congress have made it less willing than other agencies to fight for power in the altered regulatory landscape. It acknowledged some failures but said the Fed was at the forefront of new and improved techniques of oversight, such as “cross-firm, horizontal exams” to assess common exposures and vulnerabilities, and “forward-looking stress testing based on alternative projections for the macroeconomy”. Mr Volcker said: “What seems to me beyond dispute, given recent events, is that monetary policy and the structure and condition of the banking and financial system are irretrievably intertwined.” Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/0a3b97c8-0114-11df-a4cb-00144feabdc0.html
Financial Crisis Inquiry Commission: Live Coverage January 14, 2010 2:00pm
Alan Rappeport (Please refresh for updates. Live-blog begins from the bottom up.) 11:45am: The panel, which was much less contentious than Wednesday’s, is taking a 10 minute break. Up next are Lisa Madigan, John Suthers, Denise Voight Crawford and Glenn Theobald. Streaming video is here. 11:43am: As things are wrapping up, Mr Angelides comes back to the 2004 decision to change leverage limits on broker dealers. He asks for a written explanation as to why limits were lifted and the impact this had. 11:40am: Commissioner Heather Murren requests a list of all the institutions that are included in the “shadow” banking system. 11:36am: Short-selling continues to be under fire and Ms Schapiro said that new rules introduced this fall and proposals on an uptick rule and a “circuit-breaker” rule could be helpful. 11:31am: Ms Schapiro, asked about how accountants can be more useful, said that she supports independent accounting standard-setting and that accounting rules, set by FASB, should be geared toward giving investors as much information as possible to make investing decisions. 11:26am: Compensation has been largely missing from the discussion, and Commissioner Robert Graham brings it up, asking what “external” factors should be considered when setting compensation, rather than just profitability. Ms Bair said that the FDIC is focused on pay incentives that promote riskier behaviour and that shareholders and board members should be focused on corporate citizenship and leadership when setting pay packages. 11:19am:
67 Both Ms Schapiro and Ms Bair take shots at Fannie and Freddie, calling them out as areas of government involvement that played a role in the financial crisis. Ms Schapiro ducks an opportunity to knock her predecessor, Chris Cox, when the SEC is called “missing in action” during key points of the crisis. “I wasn’t there,” Ms Schapiro said. She went on to say that any form of voluntary regulation is not useful and that the SEC did not have the resources to be the type of “consolidated” regulator that was needed to cope with the crisis. 11:11am: The commission is probing Lanny Breuer on the role of mortgage fraud in the housing market collapse and Mr Holder’s understudy said that last year there were about 70,000 reports of “suspicious” mortgage activity that led to fraud investigations. 11:05am: Echoing John Mack’s comments on Wednesday, Ms Schapiro said that making the ratings agencies “eat their own cooking” would be interesting to explore. That was in response to a question about agencies being paid with the securities that they rate, rather than in cash. 10:58am: Ms Bair notes that 25 banks failed in 2008, 142 failed in 2009 and there are 552 on its troubled banks watch list. 10:51am: Mr Thompson addresses the topic of a single regulator, comparing the US situation to other countries that use a “super” regulator as opposed to a “patchwork quilt”. Ms Schapiro, perhaps protecting the value of her own job, said that systems in other countries did not prove to be more resilient or effective in the financial crisis. 10:49am: Commissioner John Thompson asks Ms Schapiro if the new regulations in place could have stopped the financial crisis. After some filibustering, she said that it’s really more about supervision, not the rules in place. 10:43am: Ms Bair says that the FDIC should have sufficient funds as long as the economy does not face further difficulties. She estimates $100bn in losses from 2008 to 2013. Now, she says, most of the difficulties facing banks are due to the broader economy and credit deterioration from job losses. 10:35am: The commission digs into Ms Schapiro on manipulative short selling and she says that they are still investigating. She is also asked for a memo on the “uptick” rule. 10:29am: Ms Bair is questioned about how regulators can take action to limit risk on activities that are profitable, which proved difficult leading up to the crisis. “It can be very difficult to take away the punch bowl when people are making money,” she said, noting that regulators need to be supported by Congress. 10:24am: Reiterating the request he made on Wednesday to the Wall Street “titans”, Mr Angelides asked to see any internal reviews that the regulators have made that explain the “colossal” oversight failure that allowed the financial crisis. All three agreed to hand-over their report cards. 10:18am: Ms Schapiro acknowledges that a 2004 “consolidated supervised entity programme” that was supposed to oversee large investment bank holding companies was “clearly not a success”. She said that the scheme was understaffed, which was a problem for a new regulatory programme. 10:12am: Ms Bair says that the OTC derivatives market could pose a systemic risk to the economy and they are on top of her list of priorities. She says that prior legislation has left these in the dark, shielded from regulators. 10:03am: Bill Thomas, the vice-commissioner, is questioning Ms Bair on the tax policies that helped fuel the housing crisis. He said that home-owners have received tax benefits that allow them to take equity out of their homes every month without appropriate tax penalties. 9:57am: Mr Angelides rips into the ratings agencies. “It was proven to be worthless, broken and it remains so today”. Ms Schapiro agrees that the business model where the rated pay for their ratings is flawed and said she is encouraging new business models that will get some “competition into the space”. Ms Bair said that the FDIC is
68 considering a new rule that will prevent financial institutions from being able to use ratings of structured products to set their capital limits. 9:54am: Mr Holder ducks out early after a brief tussle with Mr Angelides over sharing information with the commission. “This is an important inquiry,” Mr Holder said. “It is our strong desire to cooperate with you.” An unsatisfied Mr Thomas replied, “that doesn’t sound like a yes”. 9:52am: Mr Holder is dancing around a question from Commissioner Bill Thomas on information sharing. The attorney general says that he wants to be helpful, but is clinging to the cloak of secrecy required for “ongoing investigations”. 9:44am: Mr Angelides is questioning Mr Holder on white collar crime resources, wondering what impact the shift in resources after the 9/11 attacks has had on the growth in fraud. Mr Holder aknowledges the shift in attention to national security issues, but also notes that there are currently 2,800 FBI investigations looking at mortgage fraud, for example, and that they are ramping up their efforts. 9:38am: Testimony is over. Phil Angelides is set to begin the grilling. 9:34am: Consolidated regulation is not a “panacea”, Ms Schapiro says. Still need better capital requirements and better oversight. Going forward, the SEC needs to be more “aggressive” and “even-handed”. 9:30am: Mary Schapiro, SEC chairman, lists her top lessons from the financial crisis. She starts off blaming mortgage securitisation and over-reliance on the ratings agencies. Under her watch there will be more “accountability” and “transparency”. The next problem was complexity and the lack of regulation on “OTC” - over the counter - derivatives. These need to be subject to central trading and clearing. 9:26am: In terms of prescriptions, Ms Bair is calling for a “resolution authority” to handle too-big-to-fail institutions so that they can be unwound without taxpayer help. She lauds the bankers for suggesting this too. Further, she said the US needs better oversight and transparency of the derivatives markets, and uniform consumer protection practices across the financial system. 9:23am: Ms Bair makes the argument that “some banks themselves exploited the opportunity for arbitrage by funding higher risk activity through third parties or in more lightly regulated affiliates” and that if the US just adds new layers to regulation, it will give incentives for financial activity to seek less regulated venues. 9:21am: Up next is Sheila Bair, FDIC chair. She’s giving some historical context on the financial crisis, educating the panel on the thrift and banking crisis of the 1980s. 9:19am: Four main types of fraud the DoJ is looking to fight are mortgage fraud, securities fraud (Ponzi schemes), Recovery Act fraud (people manipulating stimulus funds) and financial discrimination (predatory lending). 9:17am: Mr Holder says that the “dramatic” action that the Justice Deparment is taking is intended “not just to hold accountable those whose conduct may have contributed to the last meltdown, but to deter future conduct as well”. 9:15amET: Eric Holder, US attorney general, is on first because he has to leave early. First off he’s tackling financial fraud. 9amET: Day two of the FCIC hearings begins shortly, with Eric Holder, Lanny Breuer, Sheila Bair and Mary Schapiro due to face off against the panel. Streaming video can be found here. http://blogs.ft.com/gapperblog/2010/01/financial-crisis-inquiry-commission-live-coverage-2/
69 Opinion
January 15, 2010 OP-ED COLUMNIST Bankers Without a Clue By PAUL KRUGMAN The official Financial Crisis Inquiry Commission — the group that aims to hold a modern version of the Pecora hearings of the 1930s, whose investigations set the stage for New Deal bank regulation — began taking testimony on Wednesday. In its first panel, the commission grilled four major financial-industry honchos. What did we learn? Well, if you were hoping for a Perry Mason moment — a scene in which the witness blurts out: “Yes! I admit it! I did it! And I’m glad!” — the hearing was disappointing. What you got, instead, was witnesses blurting out: “Yes! I admit it! I’m clueless!” O.K., not in so many words. But the bankers’ testimony showed a stunning failure, even now, to grasp the nature and extent of the current crisis. And that’s important: It tells us that as Congress and the administration try to reform the financial system, they should ignore advice coming from the supposed wise men of Wall Street, who have no wisdom to offer. Consider what has happened so far: The U.S. economy is still grappling with the consequences of the worst financial crisis since the Great Depression; trillions of dollars of potential income have been lost; the lives of millions have been damaged, in some cases irreparably, by mass unemployment; millions more have seen their savings wiped out; hundreds of thousands, perhaps millions, will lose essential health care because of the combination of job losses and draconian cutbacks by cash-strapped state governments. And this disaster was entirely self-inflicted. This isn’t like the stagflation of the 1970s, which had a lot to do with soaring oil prices, which were, in turn, the result of political instability in the Middle East. This time we’re in trouble entirely thanks to the dysfunctional nature of our own financial system. Everyone understands this — everyone, it seems, except the financiers themselves. There were two moments in Wednesday’s hearing that stood out. One was when Jamie Dimon of JPMorgan Chase declared that a financial crisis is something that “happens every five to seven years. We shouldn’t be surprised.” In short, stuff happens, and that’s just part of life. But the truth is that the United States managed to avoid major financial crises for half a century after the Pecora hearings were held and Congress enacted major banking reforms. It was only after we forgot those lessons, and dismantled effective regulation, that our financial system went back to being dangerously unstable. As an aside, it was also startling to hear Mr. Dimon admit that his bank never even considered the possibility of a large decline in home prices, despite widespread warnings that we were in the midst of a monstrous housing bubble. Still, Mr. Dimon’s cluelessness paled beside that of Goldman Sachs’s Lloyd Blankfein, who compared the financial crisis to a hurricane nobody could have predicted. Phil Angelides,
70 the commission’s chairman, was not amused: The financial crisis, he declared, wasn’t an act of God; it resulted from “acts of men and women.” Was Mr. Blankfein just inarticulate? No. He used the same metaphor in his prepared testimony in which he urged Congress not to push too hard for financial reform: “We should resist a response ... that is solely designed around protecting us from the 100-year storm.” So this giant financial crisis was just a rare accident, a freak of nature, and we shouldn’t overreact. But there was nothing accidental about the crisis. From the late 1970s on, the American financial system, freed by deregulation and a political climate in which greed was presumed to be good, spun ever further out of control. There were ever-greater rewards — bonuses beyond the dreams of avarice — for bankers who could generate big short-term profits. And the way to raise those profits was to pile up ever more debt, both by pushing loans on the public and by taking on ever-higher leverage within the financial industry. Sooner or later, this runaway system was bound to crash. And if we don’t make fundamental changes, it will happen all over again. Do the bankers really not understand what happened, or are they just talking their self-interest? No matter. As I said, the important thing looking forward is to stop listening to financiers about financial reform. Wall Street executives will tell you that the financial-reform bill the House passed last month would cripple the economy with overregulation (it’s actually quite mild). They’ll insist that the tax on bank debt just proposed by the Obama administration is a crude concession to foolish populism. They’ll warn that action to tax or otherwise rein in financial-industry compensation is destructive and unjustified. But what do they know? The answer, as far as I can tell, is: not much. http://www.nytimes.com/2010/01/15/opinion/15krugman.html?th&emc=th
January 14, 2010, 11:28 am Stein’s Law, New Application
Stein’s Law: If something cannot go on forever, it will stop. This is usually applied to things like trade deficits. But it also applies to matters non-economic. Americans not getting fatter By Ezra Klein | January 14, 2010; 9:55 AM ET That's what the Centers for Disease Control and Prevention say, anyway. Obesity rates have held steady for five years among men and a solid 10 years among women, which is good news. So what's the cause here? Better eating habits? Exercise? Or can we just not get any fatter? Dr. Ludwig said the plateau might just suggest that “we’ve reached a biological limit” to how obese people could get. When people eat more, he said, at first they gain weight; then a growing share of the calories go “into maintaining and moving around that excess tissue,” he continued, so that “a population doesn’t keep getting heavier and heavier indefinitely.”
71 Furthermore, Dr. Ludwig said, “it could be that most of the people who are genetically susceptible, or susceptible for psychological or behavioral reasons, have already become obese.” That leaves us with a third of American adults who are obese, and 17 percent of children. So it's good news in the sense of less bad news. It's a bit like unemployment, actually: Stopping the upward trend is good, but what we really need to do is bring those numbers down. And that would be real good news: The easiest way to control costs in the health-care system would be for people to need less health care. And the easiest way for that to happen would be for people to lower their risk of chronic diseases. http://voices.washingtonpost.com/ezra-klein/2010/01/americans_not_getting_fatter.html
January 13, 2010, 7:32 pm I’m Czar Of The World!
Or at least want to be, says Eugene Fama. But where are my Faberge eggs? What happened to my Cossacks? January 13, 2010, 7:29 pm Eh Some readers were puzzled by my somewhat cryptic remarks about Canada in my optimal currency area post. What did I mean by saying that Canada is closer to the United States than it is to itself? Why is Canada a counterexample to Europeans who insist that a single currency is essential? OK, on the first: Canada is a 3000-mile-wide country the great bulk of whose population lives quite close to its southern border. Without the national boundary, you’d think of Ontario as part of the Midwest, British Columbia as part of the Pacific Northwest, rather than as being in any natural sense part of the same unit. This should, you might think, mean real problems for having a Canadian currency distinct from the U.S. dollar. Wouldn’t that put Canadian producers at a big disadvantage compared with U.S. producers who can deal with their main markets without having to worry about the transactions costs and uncertainty created by separate currencies? Certainly European countries not on the euro are lectured all the time about the great importance of getting with the program. But Canada doesn’t seem much worried about problems created by its currency independence. That seems revealing to me — it suggests that Europeans made too much of the need for the euro. January 13, 2010, 7:16 am Percents And Sensibility Brad DeLong makes a very good point: If you believe that the Fed kept the fed funds rate 2% below its proper Taylor-rule value for 3 years, that has a 6% impact on the price of a long-duration asset like housing. Even with a lot of positive-feedback trading built in, that’s not enough to create a big bubble. And it wasn’t the bubble’s collapse that caused the current depression–2000-2001 saw a bigger bubble collapse, and no depression. This is actually a very broad problem with all accounts of the crisis that try to exonerate the private sector and place the blame on the government and/or the Fed: none of the proposed evil deeds of policy makers were remotely large enough to cause problems of this magnitude unless
72 markets vastly overreacted. That is, you have to start by assuming wildly dysfunctional financial markets before you can blame the government for the crisis; and if markets are that dysfunctional, who needs the government to create a mess? This logic applies, as Brad suggests, to all attempts to explain the crisis in terms of excessively low Fed funds rates for a few years. It applies to John Cochrane’s story that financial markets are efficient, but were terrorized by George W. Bush’s scary speech, and John Taylor’s basically similar claim that policy uncertainty in the couple of weeks after Lehman fell did it. It applies to claims that the Community Reinvestment Act and/or Fannie Freddie somehow led to massive bubbles in high-end housing and commercial real estate. Put it this way: if our financial system is so high-strung, so manic-depressive, that low rates for a few years can inflate a monstrous bubble, while a few discouraging words from high officials can send them into a tailspin*, this doesn’t make the case that policy must walk on eggshells, forgoing any attempt to fight prolonged unemployment. Instead, it makes the case for much, much stronger financial regulation. *I find myself thinking of the old comedy routine in which a doctor tells his patient, “You’re a very sick man; the least shock could kill you” — whereupon the patient lets out a strangled cry and drops dead. January 12, 2010, 12:13 pm How Many Currencies? Some commenters on my Europe/euro post offer a reductio ad absurdum: if Spain should have its own currency, why not every state/town/family in America? Strange to say, economists have thought about that — a lot. It’s called optimal currency area theory
73 January 11, 2010, 9:48 am Europe’s OK; the euro isn’t One addendum to today’s column: Europe is OK, but the single currency is having exactly the same problems ugly Americans warned about before it was created. My goal, in the column, was to take on the all-too-prevalent U.S. view of Europe as a conservative morality play: see, when those do-gooding liberals get their way, it wrecks your economy. As I pointed out, this morality play isn’t actually borne out by the facts (which leads many conservatives to invent their own facts). The euro is a quite different issue. Back when the single currency was being contemplated, the fundamental concern of many economists on this side of the Atlantic was, how will Europe adjust to asymmetric shocks? Suppose that some members of the euro zone are hit much harder by a downturn than others, so that they have much higher-than-average unemployment; how will they adjust? In the United States, such shocks are cushioned by the existence of a federal government: the Social Security and Medicare checks keep being sent to Florida, even after the bubble bursts. And we adjust to a large degree with labor mobility: workers move in large numbers from depressed states to those that are doing better. Europe lacks both the centralized fiscal system and the high labor mobility. (Yes, some workers move, but not nearly on the US scale). To be sure, America has at least minor-league versions of the same problems: we are having fiscal crises in the states, and the housing slump has depressed mobility in the recession. But we’re still better able to cope with asymmetric shocks than the eurozone. Was the euro a mistake? There were benefits — but the costs are proving much higher than the optimists claimed. On balance, I still consider it the wrong move, but in a way that’s irrelevant: it happened, it’s not reversible, so Europe now has to find a way to make it work. Still, I think it’s important that just because I think Europe does better than Americans imagine doesn’t mean that it does everything right. http://krugman.blogs.nytimes.com/2010/01/11/europes-ok-the-euro-isnt/
74 A Fistful of Euros January 7, 2010 The European Union The Theory Strikes Back by P O Neill In November of last year, an economic research paper appeared on the website of the European Commission’s Economic and Financial Affairs section entitled The euro: It can’t happen, It’s a bad idea, It won’t last. US economists on the EMU, 1989-2002. It’s by Lars Jonung and Eoin Drea. There are 2 ways to read it.
Summary for non-specialists [81 KB] :
This study of approximately 170 publications shows (a) that US academic economists concentrated on the question "Is the EMU a good or bad thing?", usually adopting the paradigm of optimum currency areas as their main analytical vehicle, (b) that they displayed considerable scepticism towards the single currency, (c) that economists within the Federal Reserve System had a less analytical and a more pragmatic approach to the single currency than US academic economists, and (e) that US economists adjusted their views and analytical approach as European monetary unification progressed. In particular, the traditional optimum currency approach was gradually put into question.
(European Economy. Economic Papers. 395. December 2009. Brussels. PDF. 56pp. Tab. Graph. Ann. Bibliogr. Free.)
One is an intellectual history of the attitudes of US-based economists to the Eurozone project from inception to it being up and running. The second is, as the Americans would say, a spike of the football in the endzone in the faces of the defensive players after a touchdown has been scored (”We find it surprising that economists living in and benefiting from a large monetary union like that of the US dollar were so sceptical of monetary unification in Europe”). In other words: the Euro worked, and the American economists thought it wouldn’t. And the title suggests that some element of the 2nd reading is intended. Now one awkward thing about this is the timing. November 2009 was not exactly the time to be claiming that silly American economists were too wedded to optimal currency area theory to see the wisdom of the Eurozone. But instead of belaboring this point, take a look at another superb Martin Wolf column in the FT and his bracing conclusion – When the eurozone was created, a huge literature emerged on whether it was an optimal currency union. We know now it was not. We are about to find out whether this matters. And whether that matters is ultimately a political decision. To dig into the pop culture well, the US-based economists who form the sample in the Jonung-Drea paper were giving the Star Trek answer: “Damn it Jim I’m an economist not a politician.” Looking at the predicament of Ireland, Greece, Spain, Portugal, and Italy, they may still be right. http://fistfulofeuros.net/afoe/the-european-union/the-theory-strikes-back/
75 Economics and demography Danske on Eurozone Debt - The Peril of Internal Devaluations by Claus Vistesen January 5, 2010 This is really a follow-up to the earlier piece I wrote on my own blog today and my last piece on Eurozone imbalances and internal devaluation. In particular, I want to point you towards two things. Firstly, Edward has, no doubt after a long hard thought, come to the conclusion that Greece should be sent to the IMF or rather that it is ok to ask the fund for help in order credibly sort out the mess in Greece (and possibly Spain). This is not news as such since the proposition of sending ailing Eurozone countries to the IMF has been on the table for a while now. The main question basically is, as it has always been, whether the program proposed by Greece in conjunction with the EU and set in relation to what ever we might have left of the stability and growth pact (SGP) is really credible as a working solution. Meanwhile, Danske Bank had a very interesting research note Danske research, 4/01/2010,
76 that while Eurozone economies, in a pre crisis context, enjoyed high GDP growth (nominal) and low funding costs it is expected to be the exact opposite going forward. This represents a gordian knot since it means that not withstanding the extremely tough austerity that Greece, Ireland and Spain (etc) now need to take in order to get the ship back into the wind through forced primary deficits, they cannot be sure that this in itself will bring the debt to GDP back on track. Much will of course depend on global yields here and the general discourse on fiscal adjustment and how sovereign risk (rising across the board) will quantitatively be reflected in bond yields. Yet, I don’t want to focus so much on bond yields here (although I do think they are important); rather I would like to focus on the other part of the equation as it were, namely that of nominal GDP. You see, this is where it not only gets complicated but also outright problematic. Consequently and since Greece, Spain, and Ireland are members of the Eurozone, the have no independent currency and thus the nominal exchange correction that would almost certainly had occured had these economies had a floating exhange rates now must occur through internal devaluation or outright price deflation. So this is not only about public debt but also about net external borrowing which these economies now have to shed in order to become competitive and essentially in order to achieve growth in nominal GDP. However, in order to reach this point they need a large and severe bout of deflation exactly, one would imagine, brought about in part by running primary surpluses to simply shock-force the economy onto a more sustainable path. Notwithstanding the obvious cost on the employment from this process it has another very tangible costs. Price deflation thus, through its effect on nominal GDP, increases the real value of the debt and it is exactly this mechanism and how it intersects with the perspective offered by Danske Bank which is so damn important to understand here. And incidentally, as an aside, it is this point which Edward has been desperately trying to pass on during the past two month’s worth of writing (see overview from link above). — PS1: I am lining up a paper on Eurozone imbalances (quantifying them essentially) which will also tackle the issues mentioned above in some detail. PS2: Danske Bank’s piece is worth reading in its entirety. http://fistfulofeuros.net/afoe/economics-and-demography/danske-on-eurozone-debt-the- peril-of-internal-devaluations/
Any Takers in Greece? Tuesday, January 5, 2010 at 08:17PM I am rushing this week so I won't have time for long and analytical pieces (no doubt to the joy of many :)), but I would be remiss if I did not point out this one for my readers which highlights the predicament Greece currently finds itself in even if a private bid is not significant in itself. (quote Bloomberg) Greece may borrow privately through banks by the end of January, the second such transaction in as many months, following cuts to the government’s credit ratings, according to the country’s
77 debt manager. The decision on whether to use a private placement will depend on reaction to the country’s stability and growth program, Spyros Papanicolaou, the managing director of Greece’s Public Debt Management Agency, said today. The country had earlier considered offering bonds through a syndicate of banks. “We are yet to decide whether to go ahead with a syndication,” Papanicolaou said today in a telephone interview from Athens. “We might do a private placement instead. It will depend on how the stability and growth program is received by the European Commission and the markets.” Greece, whose credit grade was lowered by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service last year, sold 2 billion euros ($2.9 billion) of floating-rate notes through a private placement in December. The government hired National Bank of Greece SA, Alpha Bank AE, EFG Eurobank Ergasias SA, Piraeus Bank SA and Banca IMI SpA for the transaction, which Finance Minister George Papaconstantinou said was part of the country’s financing program for this year. In private placements, issuers offer securities directly to chosen investors rather than sell them through an auction or via a group of banks in a syndicate. The main question is of course. Who holds the bid in these private auction and will they remain bidders as we move forward? http://clausvistesen.squarespace.com/alphasources-blog/2010/1/5/any-takers-in-greece.html
Quantifying Eurozone Imbalances and the Internal Devaluation of Greece and Spain Claus Vistesen Monday, December 28, 2009 at 09:29AM Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. (Churchill 1942) Summary
• The extent, so far, of the internal devaluation process depends on the time period used for analysis. Using Q3-2007 as the beginning of the economic crisis suggest that Greece and Spain have not corrected relative to Germany as a benchmark. However, if we look entirely at the world in a post-Lehmann context the picture is different with Greece and Spain having observed excess deflation relative to Germany to the tune of -1.7% and - 4.5% respectively for unit labour costs and -5.4% and -1.7% respectively for the PPI. • The correction observed in the context of unit labour costs appears technical as German unit labour costs have increased sharply since Q4-2008 due to a large reduction in working hours and an increase in short time work. In comparison, the relative correction in the PPI looks more solid. • The internal devaluation has not yet trickled down into the overall price level represented by the CPI. Both using the period Q3-07 to Q3-09 and Q4-08 to Q3-09 as the relevant time horizon reveals that there has been no meaningful internal devaluation in Greece and Spain measured on the CPI.
78 • While the analysis presented here may go some way to quantify the intra-Eurozone imbalances and the course of the internal devaluation so far it is impossible to say precisely how far (and for how long) Greece and Spain (and indeed Latvia, Hungary etc) have to go here. More importantly, it is impossible to say exactly which measures that must be taken albeit that they have to be severe in the context of reigning in public spending and, ultimately, the public debt and ongoing deficit. Likewise, it is difficult to quantity just how high unemployment should drift and for how long it should stay there in order to grind down past excess. As 2009 is fast approaching an end it is worth asking whether this also means an end to the financial and economic crisis. Even if 2009 will be a year thoroughly marked by a global recession it could still seem as if the worst is behind us. Most of the advanced world swung into positive growth rates in H02 2009, risky assets have rallied, volatility has declined to pre-crisis levels, and interest rates and fiscal stimulus have been adeptly deployed to avert catastrophe. However and precisely because the last part has been a crucial prerequisite for the first three and as policy makers are now adamant that emergency measures must be scaled back or abandoned either because of necessity or a balanced assessment, it appears as if Churchill's well known paraphrase is an adequate portrait of the situation at hand. In this way, what is really left in the way of global growth once we subtract the boost from fiscal and monetary stimuli and what is the underlying trend growth absent the crutches of extraordinary policy measures? This question is likely to be a key theme for 2010. Nowhere is this more relevant than in Greece and Spain who, together with Eastern Europe, have slowly but decisively taken center stage as focal points of the economic crisis. With this change of focus a whole new set of issues have emerged in the context of just how efficiently (or not) the institutional setup of the Eurozone and EU will transmit and indeed endure the crisis. I won't go into detail on this here mainly because I would simply be playing second fiddle to what Edward has already said again (and again) in the context of his ongoing analysis of the Spanish and Greek economy to which I can subscribe without reservations. It will consequently suffice to reiterate two overall points in the context of Spain and Greece. Firstly, the main source of these economies' difficulties, while certainly very much present in the here and now, essentially has its roots in population ageing and a period, too long, of below replacement fertility that has now put their respective economic models to the wall. It is interesting here to note that while it is intuitively easy to explain why economic growth and dynamism should decline as economies experience ongoing population ageing, it is through the interaction with public spending and debt that the issue becomes a real problem for the modern market economy. Contributions are plentiful here but Deckle (2002) on Japan and Börsh-Supan and Wilke (2004) on Germany are good examples of how simple forward extrapolation of public debt in light of unchanged social and institutional structures clearly indicate how something, at some point, has to give. Whether Spain and Greece have indeed reached an inflection point is difficult to say for certain. However, as Edward rightfully has pointed out, this situation is first and foremost about a broken economic model than merely a question of staging a correction on the back of a crisis. Secondly and although it could seem as stating the obvious, Greece and Spain are members of the Eurozone and while this has certainly engendered positive economic (side)effects, it has also allowed them to build up massive external imbalances without no clear mechanism of correction. Thus, as the demographic situation has simply continued to deteriorate so have these two economies reached the end of the road. In this way, being a member of the EU and the Eurozone clearly means that you may expect to enjoy protection if faced with difficulty, but it also means that the measures needed to regain lost competitiveness and economic dynamism can be very
79 tough. Specially and while no-one with but the faintest of economic intuition would disagree that the growth path taken by Greece and Spain during the past decade should have led to intense pressure on their domestic currencies, it is exactly this which the institutional setup of the Eurozone has prevented. I have long been critical of this exact mismatch between the potential to build internal imbalances and the inability to correct them, but we are beyond this discussion I think. Especially, we can safely assume that the economists roaming the corridors in Frankfurt and Brussels are not stupid and that they have known full well what kind of path Greece and Spain (and Italy) invariably were moving towards. Essentially, what Greece and Spain now face (alongside Ireland, Hungary, Latvia etc) is an internal devaluation which has to serve as the only means of adjustment since, as is evidently clearly, the nominal exchange rate is bound by the gravitional laws of the Eurozone. Now, I am not making an argument about the virtues of devaluation versus a domestic structural correction since it will often be a combination of the two (i.e. as in Hungary). What I am trying to emphasize is simply two things; firstly, the danger of imposing internal devaluations in economies whose demographic structure resemble that of Greece and Spain and secondly, whether it can actually be done within the confines of the current political and economic setup in the Eurozone. On the last question I personally adamant that it has to since failure would mean the end of the Eurozone as we know it but this is also why I am quite worried, and intrigued as an economist, on the first question. Specifically and as Edward and myself have been at pains to point out (and to test and verify) this medicine while certainly viable in theory has three principal problems. Firstly, it takes time and may thus amount to too little too late in the face of an immediate threat of economic collapse. Secondly, an ageing population spiralling into deflation may have great problems escaping its claws, and thirdly, because of the pains associated with the medicine the patient may be very reluctant to acccept the treatment. Especially, the last point is very important to note from a policy perspective and was made abundantly clear recently in the context of Latvia where The Constitutional Court ruled that the very reforms demanded in the context of the IMF program to reign in costs through cutting pensions would violate the Latvian constitution. And as Edward further points out, the situation is the same in Hungary where voters recently (and quite understandably one could say) decided to reject a set of health charges that were exactly proposed as part of a reform program designed to reign in public spending. We are about to see just how willing Spain and Greece are in the context of accepting the austerity measures that must come, but similar dynamics are not alltogther impossible. Consequently, and while I agree with Edward as he turns his focus on the inadequacy of the political system in Spain and Greece to realize the severity of the mess; it remains an inbuilt feature of imposition of internal devaluations through sharp expenditure cuts that they are very difficult to sustain given the political dynamics. This is then a question of a careful calibration of the stick and carrot where the former especially in the initial phases of an internal devaluation process is wielded with great force. Internal Devaluation, What is it All About Then? If the technical aspects of an internal devaluation have so far escaped you it is actually quite simple Absent, a nominal exchange depreciation to help restore competitiveness the entire burden of adjustment must now fall on the real effective exchange rate and thus the domestic economy. The only way that this can happen is through price deflation and, going back to my point above, the only way this can meaningfully happen is through a sharp correction in public expenditure accompanied with painful reforms to dismantle or change some of the most expensive social security schemes. This is naturally all the more presicient and controversial as both Spain and Greece are stoking large budget deficits to help combat the very crisis from
80 which they must now try to escape. Positive productivity shocks here à la Solow's mana that fall from the sky may indeed help , but in the middle of the worst crisis since the 1930s it is difficult to see where this should come from. Moreover, with a rapidly ageing population it becomes more difficult to foster such productivity shocks through what we could call "endogenous" growth (or so at least I would argue). With this point in mind, let us look at some empirical evidence for the process of internal devaluation so far. In order to establish some kind of reference point for analysis I am going to compare Greece and Spain with Germany. This is not because Germany, in any sense of the words, stands out as an example of solid economic performance as the burden of demographics is clearly visible here too. However, for Spain and Greece to recover they must claw back some of the lost ground on competitiveness relative to Germany. This highlights another and very important part of the internal devaluation process. Spain, Greece etc will not only be fighting their own imbalances; they will also fight a moving target since they may not be the only economies who face deflation or near zero inflation as we move forward. Beginning with the simple overall inflation rate measured by the CPI we see that the level of prices (100=2005) has risen much faster in Greece and Spain than in Germany. Compared to 2005 the price level in Germany stood 7.1% higher in Q3-09 which compares to corresponding figures for Spain and Greece at 11.5% and 10.3% respectively. However, this does not tell the whole story about the build up of imbalances since the inception of the Eurozone. Consequently, since Q1-00 the price index has increased some 15% in Germany whereas it has increased a healthy 29.3% and 27.2% in Greece and Spain respectively.
Turning to the bottom chart which plots the annual quarterly inflation rate a similar picture reveals itself with a high degree of cross-correlation between the yearly CPI prints, but where the German inflation rate has been persistently lower than that of Greece and Spain. The average inflation rate in Germany from Q1-1997 to Q3-2009 was 1.6% and 3.5% and 2.8% for Greece and Spain respectively. It is important to understand the cumulative nature of the consistent divergence in inflation rate since it is exactly this feature that contributes to the build-up of the
81 external debt imbalance. From 2000-2009(Q3) the accumulated annual increases in the CPI was 57% for Germany versus 109.4% and 104% for Greece and Spain respectively. Assuming that Germany remains on its historic path of annual CPI readings (which is highly dubious in fact), this gives a very clear image of the kind of correction Greece and Spain needs to undertake in order to move the net external borrowing back on a sustainable path which in this case means that these two economies are now effectively dependent on exports to grow. If the divergence in Eurozone CPI represents a general measure of the built-up of external imbalances and the need for an internal devaluation through price deflation two other measures provide more direct proxies. These two are unit labour costs and the producer price index (PPI) which are both key determinants for the competitiveness of domestic companies on international markets. Intuitively one would expect unit labour costs as an important input cost to drive the PPI which measures the price companies receive for their output. Yet this is only going to be the case if the companies in question have market power on the domestic market. Consequently, if you regress the quarterly change of the PPI on the quarterly change on unit labour costs you get a negative coefficient in Germany and a positive coefficient in Greece and Spain (highly significant for Spain and not so for Greece). This is exactly what one would expect since German companies are highly exposed to the external environment (where they enjoy no market power) and thus has to suffer any increase in the cost of labour input through a decline in their output price. Conversely in Spain, the connection between an increase in unit labour costs and the PPI is strongly positive which suggest that Spanish companies has enjoyed considerable market power due to a vibrant domestic economy [1]. It is exactly this that must now change.
If we look at unit labour costs and abstract for a minute from the increase in German unit labour costs from Q2-08 to Q2-09 in Germany [2], both Greece and Spain have seen their labour cost surge relative to Germany since the inception of the Eurozone. Since Q1-00 the accumulated change in the German index has consequently been 15.2% which compares to 97.7% and 105.6% for Greece and Spain respectively. More demonstratively however is the fact that since the second half of 2006 the labour cost index of Spain and Greece have been above the Germany relative to 2005 which is the base year. Consider consequently that the labour cost index in Greece and Spain was 13.3% and 16.4% below the German ditto in Q1-2000 and now (even with
82 the recent surge in German labour costs), the Greek and Spanish labour cost index stands 7.2% and 5.2% above the German index. Turning finally to producer prices the similarity between the three countries in question are somewhat restored which goes some way to support the notion of persistent lower labour cost growth relative to fellow Eurozone members as the main source of the build-up of Germany's "competitive advantage" and in some way the build-up of intra Eurozone imbalances.
Essentially, and while definitely noticeable the divergence between Greece/Spain and German on the PPI is less wide than in the context of unit labour costs and the CPI. Consequently, and if we look at the index, the divergence which saw Spanish and Greek producer prices increase beyond those of Germany came very late in the end of 2007. Moreover, the correction so far has been quite sharp in both Greece and Spain relative to Germany with the PPI falling 14.8%, 5.7% and 2.8% (yoy) in Q2-09 and Q3-09 in Greece, Spain and Germany. The accumulated increase however, in the PPI, from 2000 to Q3-09 has been 85% in Germany and 136% and 101.7% in the Greece and Spain respectively. If the numbers above indicates the extent to which intra Eurozone imbalances have manifested themselves in divergent price levels and rates of inflation, the concept of internal devaluation concerns the net effect on the prices in Greece and Spain relative to, in this case, Germany. On this account, and if we put the beginning of the financial crisis as Q3-07 (i.e. when BNP Paribas posted sub-prime related losses) the butcher's bill look as follows. From Q3-07 to Q3-09 and in relation to the CPI the average quarterly inflation rate in Greece in Spain has been 1% and 0.66% higher than in Germany. The accumulated excess inflation rate over the German inflation has been 8% in Greece and 5.29% in Spain. Only in the context of Spain do we observe some indication of the initial phases of a relative internal devaluation as Spain has seen an accumulated inflation rate lower than that of Germany to the tune of 1.28%. Turning to unit labour costs the picture changes quite a lot depending on the time horizon. Using the same period as above, the average quarterly excess increase in unit labour costs of Greece and Spain relative to Germany has been 1.75% and 0.3% in Greece and Spain respectively. The
83 accumulated increase in unit labour costs has consequently been a full 14% and 2.8% higher in Greece and Spain relative to Germany. However, if we focus the attention on the period from Q4-08 to Q2-09 and due to the fact that labour hours in Germany have gone down further than in Greece and Spain, labour costs have corrected sharply in Greece and Spain relative to in Germany to the tune of -5.2% and 13.7% (accumulated) and -1.7% and -4.6% respectively. The fact that German producers have so far cut down sharply on labour hours could mean that Germany should claw back some of the lost ground vis-a-vis Greece and Spain if and when these two economies follow suit. Finally, in relation to producer prices the picture is very much the same as in the context of unit labour costs with the notable qualifier that the relative excess deflation observed in Greece and Spain from Q4-08 and onwards is likely to be less "technical" and thus more "real" than in the case of labour costs. In this way the period Q3-07 to Q3-09 saw the excess rate of produce price inflation reach 14.8% and 6.8% (accumulated) and 1.8% and 0.8% (quarterly average) in Greece and Spain respectively. However, if we focus the attention on Q4-08 to Q3-09 the picture reverses and reveals a substantial degree of excess deflation over the Germany PPI in Greece and Spain to the tune of 16.1% and 5.2% (accumulated) and 5.4% and 1.7% (quarterly average) for Greece and Spain respectively. The End of the Beginning As we exit 2009 it is quite unlikely that we will also be able to leave behind the effects of the economic and financial crisis and this is not about me being persistently negative or even a perma-bear. Things have definitely improve and much of this improvement owes itself to rapid, bold, and efficient policy measures. However, some economies are in a tighter spot than others and this most decisively goes for Spain and Greece who now have to correct to the fundamentals of their economies with rapidly ageing populations. As this correction largely has to come in the form of an internal devaluation the following conclusions are possible going into 2010. • The extent, so far, of the internal devaluation process depends on the time period used for analysis. Using Q3-2007 as the beginning of the economic crisis suggest that Greece and Spain have not corrected relative to Germany as a benchmark. However, if we look entirely at the worldin a post-Lehmann context the picture is different with Greece and Spain having observed excess deflation relative to Germany to the tune of -1.7% and - 4.5% respectively for unit labour costs and -5.4% and -1.7% respectively for the PPI. • The correction observed in the context of unit labour costs appears technical as German unit labour costs have increased sharply since Q4-2008 due to a large reduction in working hours and an increase in short time work. In comparison, the relative correction in the PPI looks more solid. • The internal devaluation has not yet trickled down into the overall price level represented by the CPI. Both using the period Q3-07 to Q3-09 and Q4-08 to Q3-09 as the relevant time horizon reveals that there has been no meaningful internal devaluation in Greece and Spain measured on the CPI. • While the analysis presented here may go some way to quantify the intra-Eurozone imbalances and the course of the internal devaluation so far it is impossible to say precisely how far (and for how long) Greece and Spain (and indeed Latvia, Hungary etc) have to go here. More importantly, it is impossible to say exactly which measures that must be taken albeit that they have to be severe in the context of reigning in public spending and, ultimately, the public debt and ongoing deficit. Likewise, it is difficult to
84 quantity just how high unemployment should drift and for how long it should stay there in order to grind down past excess. In this sense, 2009 will not go down as the end in any sense of the word, but more likely as the end of the beginning. --- [1] - Naturally, this argument assumes non-sticky prices and thus a 1-to-1 relationship in time between a change in input costs and output prices of companies. Since contractual arrangements are likely to make both sticky in the short run and likely with divergent time paths too, the quantitative results are not robust. The results for Germany are significant at 10% whereas those for Spain are significant at 1%. Mail me for the estimated equations if you really want to see the results. [2] - The index rose 7.8% over the course of the year ending Q2-2009 which is way above 3 standard deviations of the "normal" annual change in the index from 1997 to 2009. The explanation is really quite simple and relates to the fact that German manufactures (in particular) has sharply cut overtime work and short time work has been rapidly extended (see e.g. this from Q2-09) which is obviously not the case in Greece and Spain. The fact that German producers have so far cut down sharply on labour hours means that Germany should claw back some of the lost ground vis-a-vis Greece and Spain if and when these two economies follow suit. http://clausvistesen.squarespace.com/alphasources-blog/2009/12/28/quantifying-eurozone- imbalances-and-the-internal-devaluation.html The Debt Hangover
Monday, December 14, 2009 at 07:00AM
If Friday was the day Macro Man had to pay for a wet evening in the company of alcoholic beverages, it was my turn yesterday as I spent the day trying to recover from a night where the amount of alcohol consumed had been beyond excessive. Thus, as I woke up, in agony, some time in the early Sunday afternoon felling like the bloke to the left, I was initially filled with self-pity which gradually gave way to the realization that I had it coming [1]. The idea of hangover as repayment is not, as it turns out, an entirely useless allegory in the context of the themes that dominate the discourse on global markets and the economy moving into 2010. The Eurozone's Cracking Periphery Last week we consequently saw the issue of Greek sovereign debt race to the forefront of the agenda with Fitch handing the Greek government an early ill-wanted Christmas present in the form of a downgrade from A- to BBB+ which saw yields rise significantly as well as it brought all kinds of nasty (but important) questions in relation to the Eurosystem/ECB. Firstly, it essentially raised the question of who exactly is going to pay for Greece should push come to shove and secondly; it raised a more technical question of eligible collateral at the ECB and whether the downgrade could, in the event it was followed by the other rating agencies, mean that Greek government bonds would loose their formal standing as eligible collateral at the ECB. (quote: Bloomberg)
85 Greek bonds plunged to their lowest in seven months on Dec. 9 and stocks slumped after Fitch Ratings cut Greece one step to BBB+, saying Papandreou’s two-month-old government isn’t doing enough to tame a deficit of 12.7 percent of output, the highest in the European Union. A day earlier, Standard & Poor’s put its A- rating on watch for downgrade. The yield on Greece’s 2-year bond has surged 127 basis points to 3.15 percent this week, driving it above Turkey’s for the first time. Edward has already discussed the significance of this Greek tragedy extensively and I really encourage you to carefully read his posts since I can say with the utmost objectivity that they offer the best current round-up of the flurry. Especially, the link between the ECB's decision to withdraw enhanced credit support and the widening spreads in an intra-Eurozone context is absolutely crucial to understand in this case. The following is then a key point; Well, using ECB facilities made sense for Greek banks for a number of reasons. In the first place, ECB funding is relatively cheaper for Greek banks than for their European peers since the ECB makes no adjustment to the rates charged for the perceived higher risk of the Greek banks. As Goldman Sachs point out a Greek bank operating in Greece pays the same price as a French bank in France, even though the French bank operates in a lower risk environment and should, in theory, be able to finance at lower rates in the market. But this is what enhanced liquidity support is all about, if only those responsible for the financial and economic administration of Greece understood the situation. Secondly, the current spreads on Greek government bonds (around 200 base points over German 10 year equivalents) offer Greek banks an exceptional arbitrage opportunity, since by taking advantage of the uniform ECB liquidity rate Greek banks can buy higher Greek government bonds with a much higher yield than the government bonds which their French or German counterparts buy. Regardless of the risk implied through by the Greek CDS spread, Greek government bonds carry a zero risk weighting when calculating riskweighted assets for capital purposes. So for Greek banks this arbitrage carries no capital impact whatsoever. That is to say the Greek banks have been doing very nicely indeed out of the Greek sovereign embarassment, thank you very much. Hence it is not difficult to understand the ECB's growing sense of outrage with the situation. (...) So to be absolutely clear, the Greek banks have been making money from arbitrage on ECB exceptional liquidity funding and in the proces financing the Greek government to carry out spending programmes while at the same time basically hoodwinking the European Commission about what it was they were actually up to. That is to say, the ECB has been effectively paying to lead the EU Commission straight down the garden path. Needless to say, the ECB is not stupid and even if I, and others, have had hard time showing the direct link between ECB financing and government deficit spending, the situation described above is another matter. Yet, and for all the outrage the ECB and the commission must feel towards Greece (and perhaps Spain and Italy) the obvious problem is naturally what will happen to government yields in the Eurozone once Enhanced Credit Support is wound down. Comments made last week by ECB Executive Board member Gertrude Tumpel-Gugerell suggest that while the ECB is indeed ready to play hard ball when it comes to normalization, it also looks with worry at the prospects of sharply rising bond yields going into 2010. It would then seem that normalization of monetary policy without a subsequent normalization of fiscal policies that would take the latter on to a more sustainable path entails huge risks for government finances. Moreover, and as Edward has already eloquently detailed, the ECB will not simply sit back and play ball through the continuation of liquidity provisions. And so, we end up with the overall problem with the Eurozone that one set of policy tools for a lot of diverse economies simply do not work and although the ECB may very well "agree", they are not able nor willing to implement special policies for Spain or Greece. Thus and in my opinion it is, by now, really a question of whether the commission/EU has the needed force and will to force upon Spain and Greece what would effectively be extreme harsh policies in terms of fiscal austerity. Such drastic prospects handed to Spain and Greece by part of their very own brethern could only work if they also came with some form of guarantee from Germany and France that they would help with "help" here being a very clear commitment to . What you need to understand here is then that if the for example Greece and Spain were forced (committed) to move just within the boundaries of the growth and stability pact that stipulates a running fiscal deficit of no more than 3% of GDP, the subsequent deflationary impact would be massive and destructive; and while this may indeed be the inevitable route we much travel here it would be best, I think, realizing that this is exactly the case in a transparent fashion. So far though, both in Spain/Greece and the EU itself the recovery is "on track" and the longer we continue to believe this to be the case the harder it will to reverse. In line with the theme cast above, rising bond yields in 2010 may prove a timely wakeup call.
86 And in Japan ... On the back of the BOJ's emergency meeting which effectively re-instigated QE with the promise to provide funding to commercial banks and where the BOJ was also, more or less, arm-wrestled by the MOF into committing to buy additional government debt notes, it seems that the mounting debt is beginning to worry parts of the new government. Consequently, Japanese Finance Minister Hirohisa Fujii was quoted last week of saying that government should "cap" bond sales next year at 44 trillion yen ($495 billion); (Quote Bloomberg) Japanese Finance Minister Hirohisa Fujii said the government must cap bond sales at 44 trillion yen ($495 billion) next year, in contrast with Prime Minister Yukio Hatoyama, who indicated he is prepared to abandon the pledge. “Such a figure doesn’t need to be seen as a big problem for the Cabinet,” Fujii said at a news conference in Tokyo today. “We have to do it,” he said of the bond limit, which was the amount that the previous government budgeted for the current fiscal year ending in March 2010. Naturally and with some knowledge of the general government debt situation in Japan which will at some point result in a prolonged hangover in the form a debt restructuring, one finds it hard to see this talk of a cap as nothing more but a proverbial drop of water in the ocean. However, it does signify that Mr. Fujii is tuned in to the likelihood that governments will struggle to maintain the fiscal tap open throughout 2010 even if you, in the case of Japan, is likely to be shouldered by a BOJ that stands ready to print the JPYs necessary to soak up large parts of the nominal supply. The point here is simply that Japan won't naturally be immune to a general tendency in which governments will stand to face an increase in their financing costs in 2010. The 2010 Debt Hangover Given my emphasis above, it should be no surprise that I agree, at least in part, with Morgan Stanley's Joachim Fels, Manoj Pradhan and Spyros Andreopoulos who recently rolled out the banks' 2010 themes of which the main points are posted over at the GEF. Especially, I like the idea that as exit from monetary QE measures will not be synchronous with the scaling back of fiscal deficit spending, bond yields (especially in key economies) are likely to react as they are no longer supported by the bid from central bank funded liquidity be it from direct or indirect demand. This is interesting since if the former is a prerequisite for the latter we are likely to observe a battle (like the one currently observed in the Eurozone) in which policy makers will be prone to pushing central bankers into supporting deficit spending through outright government bond purchases or other liquidity measures. Morgan Stanley for their part focuses on the likelihood that QE exit strategies will exactly be halted in their tracks in this context, something which there is ample precedent for in e.g. Japan. (...) markets are likely to increasingly worry about longer-term fiscal sustainability, and rightly so. Importantly, the issue is not really about potential sovereign defaults in advanced economies. These are extremely unlikely, for a simple reason: most of the government debt outstanding in advanced economies is in domestic currency, and in the (unlikely) case that governments cannot fund debt service payments through new debt issuance, tax increases or asset sales, they can instruct their central bank to print whatever is needed (call it quantitative easing). Thus, in the last analysis, sovereign risk translates into inflation risk rather than outright default risk. We expect markets to increasingly focus on these risks in the year ahead, pushing inflation premia and thus bond yields significantly higher. Put differently, the next crisis is likely to be a crisis of confidence in governments' and central banks' ability to shoulder the rising public sector debt burden without creating inflation. I agree that this would definitely imply an increase in the focus on government finances and most definitely provide a push to bond yields although I could easily imagine a situation in which bond yields of key economies were to rise regardless of the bid from central banks. Moreover, I have another rather large qualifier here. Consequently, and while I can see this kind of dynamics taking place in the UK, the US and especially in Japan (at least potentially), the Eurozone is an entirely different case. In fact, when MS notes that "they can instruct their central bank to print whatever is needed (call it quantitative easing)", this categorically does not apply to the Eurozone where the ECB has pretty much made it clear that in terms of providing some form of "special" support to some economies this is not going to happen. So what happens then? Well, we will see won't we. One thing is for sure; just as I spent Sunday regretting decisions the night before, so will some economies likely face equal regrets in 2010. http://clausvistesen.squarespace.com/alphasources-blog/2009/12/14/the-debt-hangover.html
87 Spain Economy Watch
By Edward Hugh Tuesday, December 22, 2009 Why Standard and Poor's Are Right To Worry About Spanish Finances "Spain's weaknesses over the developing crisis reflect mainly the reversal of the continuous domestic demand expansion of over a decade, which was associated with high indebtedness of the private sector, large external deficits and debt, an oversized housing sector compared with the euro area average and fast rising asset prices, notably of real estate assets." European Commission assessment of Spain's Response to the Excess Deficit Procedure, Brussels 11 November 2009. “The latest services PMI data suggests that the Spanish economy remains on a downward trajectory. The fact that variables such as activity, new orders and employment all fell at sharper rates during November is real cause for concern, with the prospects for 2010 becoming increasingly gloomy. Businesses report that consumers remain cautious of making any major purchases, particularly those requiring credit. It appears that any economic recovery over the next twelve months will be gradual and drawn-out.” Andrew Harker, economist at Markit commenting on the November Spanish Services PMI survey. According to Spanish Prime Minister José Luis Rodriguez Zapatero Spain's government is firmly committed to reducing its fiscal deficit, and is intent on lowering it as requested by the EU Commission by 1.5% of GDP annually, until it finally brings it within the EU 3 per cent of gross domestic product limit by 2013 at the latest. What's more he is quite explicit about how this is going to be possible: Spain is right now, and even as I write, on the verge of emerging from the long night of recession in whose grip it has been for the last several quarters. As such it will soon resume its old and normal path onwards down the highway of high speed growth. There is only one snag here: few external observers are prepared to share Mr Zapatero's optimism. “The return to growth and the expected fiscal consolidation will allow us to reach the stability pact objectives by 2013,” Mr Zapatero said in a speech last week, using a rhetoric by which few outside Spain are now convinced, and indeed only the day before the credit rating agency Standard & Poor’s had revised its outlook for Kingdom of Spain sovereign debt to negative from stable. The decision followed their earlier move last January to downgrade Spanish debt by revising their long term rating from AAA to AA+. S&Ps justified their latest decision by stating that they now believe Spain will experience a more pronounced and persistent deterioration in its public finances and a more prolonged period of economic weakness versus its peers than looked probable at the start of the year. So things have been getting worse and not better, and indeed, the EU Commission themsleves seem to take a similar view, since while they have lifted their immediate excess deficit procedure in the short term (see below) their longer term worries have only grown. Standard and Poor's feel that reducing Spain’s sizable fiscal and economic imbalances requires strong policy actions, actions which have yet to materialize, and the EU Commission and just about everyone else agree, and the only people who seem to take the view that the current policy mix is "just fine" are José Luis Zapatero, and the political party that maintains him in office. Effectively S&P's are concerned about two things: i) growing fiscal deficits; and ii) growth prospects:
88 The change in the outlook stems from our expectation of significantly lower GDP growth and persistently high fiscal deficits relative to peers over the medium term, in the absence of more aggressive fiscal consolidation efforts and a stronger policy focus on enhancing medium-term growth prospects. Compared to its rated peers, we believe that Spain faces a prolonged period of below-par economic performance, with trend GDP growth below 1% annually, due to high private sector indebtedness (177% of GDP in 2009) and an inflexible labor market. These factors, in turn, suggest to us that deflationary pressures could be more persistent in Spain than in most other Eurozone sovereigns, which we expect would further slow the pace of fiscal consolidation in the medium term. Even some inside Spain are now openly questioning the viability of the government's strategy. The downward revisision in Spain's credit outlook, was "hard to deny," according to Spanish representative on the European Central Bank Governing Council, Jose Manuel Gonzalez-Paramo - "The ECB is not taking issue with whether Standard & Poor's should cut Spain's rating, but the report that accompanies this warning is hard to deny" he told the Spanish Press agancy EFE, adding that he was "convinced that the Spanish authorities share this analysis and will do whatever is needed to avoid S&P's negative outlook resulting in a change in rating". However Standard and Poor's explicitly justified the negative outlook by referring to the fact that Spain was not showing signs of taking adequate action to cut its longer term fiscal deficit as required by the EU Commission, and Spanish Prime Minister Jose Luis Rodriguez Zapatero himself stated he could see no no reason why ratings agency Standard & Poor's should downgrade the long-term sovereign debt rating of Spain. So it is hard to share Gomez-Paramo's (rather diplomatic) optimism at this point. The World Turned Inside Out Just how realistic is the view being taking by the Spanish administration at this point, and just what are the prospects of that imminent and sutainable return to growth in the Spanish economy on which everything seems to depend? That is the question we will try to ask ourselves in that follows. Certainly the situation we are looking at is a rather peculiar one, since Mr Zapatero's recovery hope seems to be a widely shared one inside Spain. Certainly, if the ICO Consumer Confidence reading is anything to go by, Spaniards are feeling pretty hopeful at this point that the worst of the economic crisis is now behind them. Evidently confidence is still not back to its old pre-crisis level, but it is now well up from its July 2008 lows.
What is even more interesting is to look at the breakdown of some of the ICO consumer confidence index components. According to the ICO data series I looked at, the expectations index has only been above the present level three times since the series started in January 2004 (in September 2004, in January 2005, and in August 2009). That is, the Spanish people currently have the third highest level of expectations about the future registered at any point over the last five years. I find that pretty incredible. Evidently Mr Zapatero is not alone in assuming that S&P's have it wrong.
89
But is such a viewpoint rationally founded, and even more to the point, is there any economic justification which lies behind it? What could explain such dyed-in-the-wool optimism? It is hard to understand, unless, perhaps, the alternative - that Spain is in for a long and difficult economic correction, after many years of relatively "painless" economic growth - is very hard to contemplate for a population who are severely unaccustomed to such pressures. Possibly the Financial Times' Victor Mallet puts his finger on another important ingredient - after two years of being told that they have been living though the worst crisis in recent memory, many Spaniards have quite simply never had it so good, so how could anything horrible possibly happen now? The pre-Christmas mood in Madrid is a curious mixture of pessimism and cheeriness.On the one hand, anxious Spaniards are told they are suffering the worst economic crisis in 50 years and fear for their jobs. On the other, those still in employment have rarely had more money to spend. It is not surprising that the city’s restaurants are packed with noisy but neurotic diners as the holiday season approaches. The reasons for this odd combination of economic gloom and robust personal consumption are no secret. Unemployment has risen sharply – to 18 per cent of the workforce in Spain – but emergency measures around the world to avert another depression have kept economies flush with liquidity and cut interest rates (and monthly mortgage payments) to historically low levels. Inflation is low or negative. Low interest rates, safe jobs (or pensions) and salaries rising faster than the rate of inflation all combine to make "the worst" not that bad at all, especially if the government are shelling out 12% percent of GDP per annum to pay for it all. But as Javier Díaz-Giménez, economy professor at IESE business school says (and S&P's well know) “It is easy to raise the deficit to 10 per cent of GDP....But we really don’t know how to get back down to a deficit of 3 per cent of GDP.” This then is the problem, especially as a reducing deficit, rising taxes and utility charges, and eventually rising interest rates all make the task of restoring economic growth seem a rather daunting one. Think about it this way: Spain's construction industry amounted to around 12 percent of GDP, now government borrowing of around the same size has stepped in to fill the gap, but once this poly-filla solution no longer holds, where is the employment creating activity to come from? As Michael Hennigan, Founder and Editor of Finfacts Ireland says in the (similar) Irish context: "The scale of the task of creating sustainable jobs in the international tradable goods and services sectors, is illustrated... by stark statistics from State agency, Forfás, which show that in the ten years to 2008, less than 4,000 net new jobs were added by foreign and Irish-owned firms, while overall employment in construction, the public sector, retail and distribution, expanded by over half a million...... Total Irish employment in December 1998 was 1.54 million and was 2.05 million in December 2008 - a surge of 33 per cent. In the peak boom year of 2006, 83,000 new jobs were added in the economy while direct job creation in the export sectors was less than 6,000." I don't have the comparable Spanish figures to hand, but the situation is surely not that different.
90 Meanwhile Spanish Industry and Services Show No Real Signs Of Recovery There was no let up in the contraction in the Spanish manufacturing sector in November, and PMI data pointed to a further deterioration of operating conditions. Moreover, the rates of decline of key variables such as output, new orders and employment all accelerated during the month, with the seasonally adjusted Markit Purchasing Managers’ Index falling to 45.3, from 46.3 in October. The Spanish manufacturing PMI has now been below the neutral 50.0 mark for two years, with the latest reading being the lowest since last June.
Commenting on the Spanish Manufacturing PMI survey data, Andrew Harker, economist at Markit, said: “The Spanish manufacturing sector looks set to endure a bleak winter period, characterised by falling new business, job cuts and heavy price discounting. The glimpse of a possible recovery seen during the summer appears to have been only a temporary reprieve, with even the stabilisation of demand now seeming some way off again.”
The impression gained from the PMI data is broadly confirmed by the monthly output statistics supplied by the Spanish statistics office (INE) to Eurostat. True, in October the output index was up fractionally over September (a preliminary 0.29% on a seasonal and calendar adjusted basis), but there is no sign of any sort of recovery and the drift is still downwards.
Output has now fallen around 32% from its July 2007 peak.
91
Nor is the situation in the Spanish services sector much better, and November PMI data indicated that operating conditions among Spanish service providers worsened again during the month, and at a sharper pace than in the previous survey period. Business activity, new business and employment all fell more quickly than in October. The headline seasonally adjusted Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – dropped to 46.1 in November, from 47.7 in the previous month. The latest reading pointed to the fastest rate of decline since August.
The situation is also confirmed by the Spanish INE Services Activity Index, which shows that activity was down 7.9% in October over October 2008, following a 9.8% drop in October 2008 over October 2007.
Which means that activity was own a total of 17.4% from the July 2007 peak, or an average of 23% over the three months August - October, just better than the 25% average drop registered in January to March. Which means that while there is plenty of evidence that the contraction has stabilised during the last six
92 months, this seems to be stability with a negative (and not a positive) outlook, given that things have now started to deteriorate again, and we must never forget that this stability has been achieved via a massive fiscal injection from the government, an injection which cannot be sustained indefinitely.
Construction Activity and House Prices Continue to Fall Activity fell around one percent in October over September.
While total output is now down nearly 35 percent from the July 2006 peak. That is to say, this Christmas Spanish construction output will have been falling for nearly three and a half years, and this decline is going to be permanent, the only outsanding issue is what activity is going to replace it.
Spain's Employment Minister Celestino Corbacho was widely quoted in the Spanish press last week as saying that he could see clear signs that the housing market had "bottomed". I would really badly like to know where he is finding such signs. In the first place Spain’s residential construction sector continues to shrink at an unprecedented rate. Housing starts fell by 47% (to 33,140) in Q3 compared to the same period in 2008, according to the latest
93 figure from the Ministry of Housing. If we exclude social housing the fall was much greater - 61% less homes started in the period, and even 20% down compared to the second quarter. At the other end of the production line the Housing Ministry reported 83,500 construction completions in the third quarter (excluding social housing), 41% down year on the same time last year and 13% down on the previous quarter. Over a 12 month period construction completions were down 35% to 444,544, and this in a market where sales of new properties are running at a rate of something like 200,000 properties a year. That is to say, the stock of unsold houses continues to swell. And prices continue to fall, since even though the Tinsa property price index for November showed that average prices fell by only 6.6% over the previous 12 months (down from 7.4% last month - the smallest annual fall in a year) this piece of data is not that illuminating in a market where prices have now been falling for more than twelve months. So while TINSA's own annual price graphs make for a very encouraging looking trend line, you need to remember that they plot the percentage change in house prices on an annual basis. If we look at the overall index (below) we see pretty much the same picture as with everything else, slower decline, but decline nonetheless. No bottom hit yet.
And, of course, if we look at the peak to present chart, then the percentage fall simply continues, and house prices are now down 14.75% on the December 2007 peak.
And it isn't only sceptics like me who think there is still a long, long way to go with Spain's house price adjustment. According to the latest report on the housing market by BBVA, Spanish property prices were 30% over-valued at the end of 2007, since they only fell by something like 10% in 2008, they have another 20% or so to drop before the correction is over. BBVA thus expect prices to fall by 7% in 2009, 8% next year, and 5% in 2011 Prices won’t stabilise until 2012, and the price correction is likely to be a protracted and long drawn out affair. What the likely impact of this on the real economy, and on their balance sheet, is likely to be they don't say.
94 BBVA mentions another key reason why the fall in Spanish house prices is far from over - the high ratio of house prices to annual disposable income. This ratio (house prices / annual disposable income) rose to 7.7 years at the height of the boom, and has now fallen back to 6.6 years. But that is a long way off the historical average of 4, not to mention the 3.5 it has fallen to in the US. Meanwhile, a new report from BNP Paribas Real Estate, the real estate arm of French bank BNP Paribas, argues that banks in Spain (currently the largest holders of unwanted real estate) will need to start offering bigger discounts (of up to 50% in 2010 they suggest) if they are to really start to move their stock of property. Spain's banks claim to be offering discounts to buyers, but as BNP Paribas Real Estate argue, judging by the growing inventory they hold, these are not big enough to attract the volume of sales they really need. In fact, after several months of dithering towards a recovery the Spanish housing market fnally relapsed again in October, with the number of houses falling by 24% compared to the same month last year, according to the latest figures from the National Institute of Statistics (INE).
In fact sales in October fell below the 30,000 transactions per month rate for the first time since last April. Sales were down by 10% over September. According to Mark Stucklin of Spanish Property Insight the explanation for this relapse is to be found in the breakdown between new build and resales. During the first half of 2009 sales of newly built homes were significantly higher than resales, whereas in normal years it’s the other way around. Indeed, if new build sales hadn’t been higher this year the market crash would have been significantly worse. But many of the new build sales recorded this year were actually sold off plan during the boom, and many others were banks buying properties from developers to keep them afloat, so not they were not really sales at all. Naturally, as those sources of sales start to dry up
95 (either as the stock of sold off plan evaporates, or banks cannot accept too many more), then new build sales begin to head south. As you can see from the above chart which Mark produced for his post, new build sales dropped sharply in October, almost to the level of resales. And if we look at the rate of monthly house sales in the P2P chart below, you will see that monthly sales have now dropped by neary 60% from their peak. That is to say, we are still having something over 400,000 new houses coming off the production line, and only a maximum of 200,000 new home purchases. Even as output drops towards an annual 100,000, this level of sales would only clear off the backlog at a rate of something like 100,000 a year, which mean we would be well over a decade clearing off that massive backlog, and meantime who foots the bill for maintaining such a large stock?
The chart above tells the story eloquently. It shows cumulative sales over 12 months to the end of every quarter, and you can see how the market has shrunk from just above 1 million sales over the 12 months to the end of Q1 2006, to just above 400,000 sales at the end of Q3 this year. In terms of transactions, the market has shrunk by around 60% over that period. And we get a similar picture on the mortgages front, with the volume of new residential mortgages signed in September being 62,411, down 4.2% compared to the same month last year. In value terms the fall was more pronounced, with new residential mortgages dropping 16% to 7.3 billion Euros. The good news is the annual decline in new mortgage lending has been bottoming out in the last few months. It fell 31% in June, 19% in July, 7% in August, and 4.% in September.
And looking towards the future again, the number of new homes started in the third quarter was down 54% compared to the same period in 2008, according to the latest figures from Spain’s College of Architects. Excluding social housing, there were just 17,500 planning approvals in the third quarter, compared to 28,400 last year. To put this into perspective, planning approvals were down by 94% from the 287,000 granted in the third quarter of 2006, at the height of Spain’s construction boom. The chart (below, and which comes again from Mark Stucklin) shows just how dramatically Spain’s residential
96 construction production chain has collapsed in the last few years. This year there are likely to be a total of just over 100,000 planning approvals, the lowest level in more than 20 years.
Unemployment Rising Towards the 20 Percent Mark and Beyond Spain's registered jobless total rose for the fourth consecutive month in November according to data from the employment office INEM, and is obviously bound to rise further as the recession drags on and the multi-billion euro stimulus package gradually loses steam. Seasonally unadjusted data showed Spanish jobless claims rose by 60,593 in November from October to reach a total of almost 3.9 million people, almost a million more than a year ago.
The rise was milder than the almost 100,000 layoffs in October and leap of around 170,000 seen in November 2008, but this should not be taken as a sign the economy will begin to create jobs any time soon. Data showed the jobless rate in the service industry rose 1.7 percent month-on-month and by 1.3 percent in construction. Joblessness also increased by 0.6 percent in the industrial sector and by 2.6 percent in agriculture.
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The Spanish government has injected some 8 billion euros (nearly one percent of GDP) into the economy this year in order to create more than 400,000 mostly low-skilled jobs in order to put a temporary patch on the hole left by the paralysed housing sector. The 30,000 or so infrastructure contracts created under what is know as plan E will be completed by the end of the year, and with little sign of a general return to growth, or a revival in job creating activity the majority of those employed on these projects will surely soon be finding their way back onto the dole queues. The government has announced plans for a new 5 billion euro stimulus plan for 2010, but this, in theory, will be aimed at sustainable long-term growth sectors like renewable energy, environmental tourism and new technologies.
November's 1.5% rise in jobless claims is nonetheless weaker than the 2.6 percent rise in October, the 2.2 percent in September and the 2.4 percent in August. And the annual rate of increase fell sharply, from 42.7% in October to 29.43% in November. But does the month mark a new trend, or will we see renewed deterioration as the winter advances? The Spanish administration officially provides only quarterly (unadjusted) data on the unemployment rate but does forward a monthly (and seasonally adjusted) rate to
98 according to the European Union statistics agency Eurostat, based on the Labour Force Survey (which is generally regarded as a more accurate (and internationally comparable) assessment of the true level of unemployment than simple Labour Office signings. This stood at 19.3 percent in October, the second highest rate in the entire EU, and behind only Latvia. Of course, as ever with this administration, hope springs eternal. The Spanish economy will likely return to growth early next year and start creating new jobs toward the end of next year, according to Finance Minister Elena Salgado: "I think there is a high probability we will start to grow in early 2010," she told the Cadena Ser radio station, although she did admit that the trend of rising unemployment will not likely be broken until late 2010 or early 2011. "We think we will start to see net job creation in some sectors at the end of 2010, and more clearly in 2011," she said. This realism about job creation is, of course, a by- product of the very low 2010 growth rate envisaged by even the optimistic forecast of the Spanish government (less than one percent), which given the need for drastic productivity improvement in Spain would evidently not be enough to create new employment. And, of course, others are less optimistic, with both the EU Commission and the IMF foreseeing negative growth in 2010. Indeed the EU Commission still anticipates unemployment to be over 20 percent in 2011. Basically the outlook is bleak, and unemployment is far more likely to continue rising than it is to fall. My own current estimate (which in part depends on how much consumer prices fall, on how seriously the government follows the agreed 1.5% reduction in the fiscal debt, and on how rapidly interest rate expectations rise at the ECB) is that we should be moving towards the 25% range around next summer.
Domestic Consumption Continues To Decline Despite the best efforts of the Spanish government stimulus programme household consumption continues to decline, at a slower rate in the third quarter, but still decline. The quarter on quarter drop was 0.1% as
99 compared with a 1.5% drop in the second quarter, and a 2.4% fall in the first one. On an annual basic household consumption was down 4.2% in the third quarter following a 7.5% drop in the second one (see chart). And retail sales simply keep falling, more slowly than before, but down and down they go. In October they fell back again over September, and were down a total of 10.3% from their November 2007 peak.
So Why Should We Expect Recovery In 2010? Or better put, why should we suspect that we might not see a Spanish economic recovery in 2010? Well, let's take a quick look at some of the structural features of Spanish GDP. As the Spanish administration never lose an opportunity to point out, Spain's economic contraction to date has been significantly less extreme than both the Eurozone 16 and the EU 27 averages. GDP never actually declined as dramatically as it did in some other countries.
But looking at the situation in this way is rather misleading, since in fact, as can be seen in the chart below (which comes from the Spanish statistical office - the INE - as does the chart above) in fact domestic demand in the Spanish economy fell every bit as rapidly as in other European countries, but this was offset by changes in the external balance which moved in such a way as to add percentage points to the final GDP reading. On analysing the two main components of Spanish GDP from the expenditure side in in the third quarter, the INE found, on the one hand, that national demand reduced its negative contribution to annual GDP movements by nine tenths as compared with the previous quarter, from minus 7.4 to minus 6.5 points, whereas conversely, the external balance reduced its positive contribution to aggregate growth by seven points, from 3.2 to 2.5 percentage points. Now all of this is, as I say, rather strange to those unaccustomed to the niceties of GDP analysis, since the positive contribution from external trade to GDP growth has got nothing to do with extra exports, but
100 rather it is a product of the fact that Spain was running a whopping trade deficit, and simply reducing this trade deficit gave the positive impetus to GDP, whereas the third quarter negative impact of external trade was the product of, guess what, a further deterioration in the trade balance as imports once more started to rise more rapidly than exports (see chart below). It is this dynamic - of yet another deterioration in the trade balance as the ression slows and as the government pumps demand into the economy - which raises concerns about long term economic stability, since obviously no susbtantial recovery in competitiveness has taken place.
The thing is, behind this whole situation there lies the problem of debt, and indebtedness. Basically, despite the fact that many, many Spaniards have never had it so good as they did in 2009, Spanish living standards have actually been falling since the amount of money available for current spending has been falling. What we need to take into account here is the sum of actual earned income PLUS what Spanish citizens are able to borrow during any given time period. Essentially when you borrow you shift disposable income from one time period to another. This is why Franco Mogigliani advanced what has come to be called the life cycle theory of saving and borrowing, since patterns change across the age groups, and naturally as whole populations age the pattern of any particular country changes. A younger country - Ireland, the US - is much more likely to be a net borrower, while an older country - Japan, Sweden, Germany - is much more likely to be a net saver. So why is all this important. Well, during the years you borrow, you spend more. I think this is obvious, and this is also why when there are less capital inflows there are less imports. Capital flows are to finance borrowing, and borrowing improves living standards in the short term, until it has to be paid back. Remember the saying, "I am a rich man till the day I have to pay my debts". Spain was rich in this sense, as José Luis Zapatero never ceased to remind its citizens. But Spain's citizens were rich based on very heavy borrowing levels - households owed about 100% of GDP, and corporates around 120% - borrowing
101 which had been used to inflate land, house and commercial property values to well beyond their true market equivalents, and hence these "riches" were in fact very unreal. The impact of the sort of capital flows Spain was receiving is that in the short term your disposable income goes up (someone gives you money to spend), while later on it goes down (as you have to subtract from earned income to pay back). This latter situation is where Spain is now. The capital flows have been sustained in the short term via the ECB liquidity process, which has fuelled domestic demand via government borrowing and spending, but at some point all of this needs to be reversed and the debts need to be paid down, and that will mean lower disposable income (in terms of money to spend) for the internal population as a whole, which is why without sales abroad domestic consumption will only continue to fall and unemployment will continue to rise. The only way to compensate for this is to export and run a trade surplus, since in this way the debt payments can be made without subtracting from current income. Indeed, as we can see from the chart below, despite the fact that households and corporates have now started deleveraging, total Spanish indebtedness (as a % of GDP) continues to rise, thanks in part to the growing indebtedness of the state (which is, in the end, a liability for all Spain's citizens), and in part to the fact that GDP is itself contracting. This is Keynes paradox of thrift at work if ever there was a case, since the more Spanish savings rise, the more indebted Spain becomes. And now, as the fiscal stimulus is withdrawn, if GDP falls faster, then the position may well not improve, especially if prices fall and Spain enters a deflationary spiral.
Of course, borrowing is not income neutral in the longer term either, since it all depends what the borrowed funds are spent on. If you spend the borrowed money on infrastructure, education and new productive capacity (ie useful investment) then evidently you can raise the trajectory of GDP in the longer term, while if you only use it to finance short term consumption - or invest in a lot of houses no one really needs - then you simply get a destruction of internal productive capacity, massive price distortions and long term GDP on a lower trajectory. This is where Spain, Greece and much of Eastern Europe are now.
102 Basically, for those countries who lack their own currencies there is now real alternative to a rather painful “internal devaluation” to restore export competitiveness and the trade surplus. And this of course is why everyone from Standard and Poor's to the EU Commission and the ECB are now insisting not only on a return to fiscal order, but deep structural reforms to restore competitiveness. EU Excessive Deficit Procedure Now The Key On 27 April 2009 the European Council (Ecofin, the Finance Ministers of member states basically) decided, in accordance with Article 104(6) of the Treaty establishing the European Community, that an excessive deficit existed in Spain and issued recommendations to correct the excessive deficit by 2012 at the latest. At the time this appeared to imply an average annual fiscal reduction of 1.25 % of GDP would be required over the period 2010-2013. The Council also established a deadline of 27 October 2009 for effective action to be taken. According to the Commission January 2009 interim forecast, Spain's GDP was projected to decline in by 2 % in 2009 and by a further 0.2 % in 2010. However, Spain's economic outlook deteriorated rapidly during the course of 2009 and the Commission autumn forecast projected a GDP decline of 3.7 % in 2009 and a further decline of 0.8 % in 2010 (basically the same as the IMF October outlook). As the Commission stress, the downward revision in nominal (current price) terms has been even stronger, since prices (and the GDP deflator) have been falling over the period, and this is a strong negative factor for both revenue and outstanding debt to GDP levels.
Spain’s fiscal outlook also worsened in the course of 2009 reflecting this sharper-than-expected fall in economic activity. Notably, the Commission autumn forecast project the 2009 general government deficit to come in at 11.2 % of GDP, compared with the 6.2 % deficit envisioned in the January forecast. In particular, revenue has fallen sharply more than expected, as the result of the stronger-than-assumed fall in activity and of the fact that tax proceeds are reflecting falling activity much more strongly than the normal long-term tax elasticity considerations would have suggested. Thus in the Commission review of the Spanish Excess Deficit Procedure carried out at the end of October, they found that the plans for government expenditure foreseen in the January 2009 update of the Spanish stability programme had been broadly observed (and this is the big difference with the Greek case) although the expenditure-to-GDP ratio increased on account of the lower-than-expected nominal GDP level. The Commission now expect the 2009 deterioration in the fiscal outlook to continue into 2010, although the discretionary fiscal measures adopted by the Spanish government post January 2009 were considered to have played no role in the intervening deterioration in the fiscal outlook. They thus took the view that "unexpected adverse economic events with major unfavourable consequences for government finances" had occurred and thus recommended a provisional lifting of the Excess Deficit Procedure, conditional on substantial further progress in bringing the deficit within the 3% of GDP limit by 2013.
103 Looking ahead to 2010, the Commission took the view that the draft 2010 Budget Law published in late September 2009, which targeted a general government deficit of 8.1 % of GDP in 2010. was credible, given that the combined impact of the withdrawal of the temporary stimulus measures, on the one hand, and of the new discretionary measures presented in the draft 2010 Budget Law, on the other, could yield a significant improvement of the fiscal balance by some 1.75 % of GDP in 2010. Further in the light of the unanticipated deterioration in Spanish government finances an average annual fiscal effort in excess of that originally recommended - at least 1.25 % of GDP - is needed between 2010 and 2013 in order to bring the headline government deficit below the 3 % of GDP reference value by 2013. The Commission aregue that this correction would represent an average annual fiscal effort of above 1.5 % of GDP over the period 2010-2013. The Commission autumn forecast, projects a government deficit of 11.2 % of GDP in 2009 and 10.1 % of GDP in 2010. Assuming unchanged policies, and GDP growth of 1 % in 2011, the deficit would then be 9.8 % of GDP. A credible and sustained adjustment path thus requires the Spanish authorities to implement the budgetary plans outlined in the draft 2010 Budget Law; ensure an average annual fiscal effort of above 1.5 % of GDP over the period 2010-2013; and, most importantly, to specify the measures that are necessary to achieve the correction of the excessive deficit by 2013. As the Spanish administration constantly point out, Spain's accumulated national debt is a lot lower as a percentage of GDP than that of many other EU member states, and even after 2011 will remain below the EU average. However, as given the difficult situation likely to be faced by Spanish banks and the heavier than average weight of ageing in Spain, the burden of Spain's finances in the context of an economy which may struggle to find growth over the next decade should not be underestimated. According to the Commission autumn forecast, general government debt is projected to reach 54.3 % of GDP in 2009, up from 39.7 % in 2008. Although it is currently still below the 60 % of GDP EU reference value, debt is expected to increase further in 2010 and 2011 to 66 % and 74 % of GDP respectively. And evidently there is strong downside risk here should growth be lower than anticipated, and/or prices fall, this number could rise significantly, and it could should Spain's banks need a substantial bailout at some point.
As the Commission point out, the long-term budgetary impact of ageing in Spain is well above the EU average - mainly as the result of a projected high increase in pension expenditure as a share of GDP over the coming decades. The budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap. The Commission thus stresses the importance of improving the primary balance over the medium term and of further reforms to Spain's old-age pension and health-care systems in order to reduce the risk to the long-term sustainability of public finances. Indeed, the Council of Finance Ministers (Ecofin) specifically "invited" the Spanish authorities to improve the long-term sustainability of public finances by implementing further old-age pension and health care reform measures when they lifted the Excess Deficit Procedure at the start of December. The Council also invited the Spanish authorities to implement reforms with a view to raising potential GDP
104 growth.
As Standard and Poor's stressed, their decision to revise the Spanish sovereign outlook to negative reflected the perceived risk of a further downgrade within the next two years in the absence of more aggressive actions by the authorities to tackle fiscal and external imbalances. It is the continuing silence which surrounds this absence which is so ominous, and makes the concerns of the EU Commission and the various ratings agencies at this point more than understandable. Posted by Edward Hugh at 11:28 AM http://spaineconomy.blogspot.com/2009/12/why-standard-and-poors-are-right-to.html 1 comments:
Chistopher said... Great review Edward. One wonders what the 'real' fall in Spain GDP 2009 would be without the statistical niceties of its calculation which you have described, (I'll need to read that bit again), and the massive and at times senseless stimulus packages implemented by the government.
I think things are now going to move quickly. The state is now, on a monthly basis, spending 70% more than it's collecting, totally unsustainable for any length of time and likely to deteriorate further as struggling businesses reduce their tax payments in 2010 (legally or illegally) and consumers cut spending as benefits, severance payments, etc, begin to run out. Not to mention what could happen with interest rates. There is only a very weak plan to raise some taxes after next summer by which time the situation will be far worse. Anyway, as Spaniards say after losses arising from their voluntary contributions of 3 bil € to the Hacienda in La Loteria de Navidad.: "Salud!" Chris. http://www.cosasdelacrisis.es/deficit-estado-se-dispara-noviembre/
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John Cassidy on economics, money, and more. January 8, 2010
The Chicago School and the Financial Crisis Posted by John Cassidy
Happy New Year everybody. I’ve got a new article in this week’s magazine about how free-market Chicago economists have been reacting to the financial blowup. If you have a subscription to The New Yorker, you can read it online. If you haven’t got a subscription, I’m afraid you will have to take one out online, go the newsstand—very twentieth century, I know—or ask a friend to fax you a copy. Several people have asked why the piece isn’t available online. The answer should be obvious. In order to pay me and my colleagues, The New Yorker needs to raise some revenues, and giving everything away for free isn’t a sustainable business strategy. I’d much prefer that everybody could read the piece without going to the trouble of BUYING it, but, hey, this is our livelihood, fellas! For people interested in the subject, and there seems to be a lot of you, the good news is that I’m planning on posting here much fuller versions of the interviews I did in Chicago, with the likes of Gene Fama, Gary Becker, and Richard Posner, who recently converted to Keynesianism. It’s the nature of long-form magazine journalism that a lot of interesting stuff gets left out of the finished article, but, thanks to the Web, there’s no reason it shouldn’t appear in some form. Plus, I think it’s a good time to let the Chicago economists speak for themselves. Over the last couple of years, they have taken a battering at the hands of myself, Paul Krugman, Joe Stiglitz, and others. Having just finished writing a book entitled “How Markets Fail,” I went to the Windy City eager to learn first hand how the critiques of Chicago economics were being received. Some of what I was told, I don’t agree with, but at this time of intellectual tumult I think it makes fascinating reading. I’ll try and post one or more of the interviews later today and the rest at the start of next week. And in the meantime, a subscription to The New Yorker, which includes 47 paper issues a year and full access to the Web site and archive, costs just $39.95—far too little, in my opinion, but that’s a subject for another day… http://www.newyorker.com/online/blogs/johncassidy/2010/01/the-chicago-school-and-the- financial-crisis.html
January 13, 2010
The Chicago Interviews Posted by John Cassidy
Apologies for the delay in posting the interviews I promised. Before putting them up for public inspection, I thought it was only right to ask the interviewees for approval. Thankfully, everybody I spoke with agreed to be quoted at greater length. One thing I will say for Chicago economists—and it has been true for a long time: they are, for the most part, genuine intellectuals, not mere opportunists or party hacks, and they enjoy the cut and thrust of intellectual debate. As Gary Becker put it in a note to me, “I do believe in the marketplace of ideas.” So do I, and it is in that spirit that I am posting these interviews. Since some of them are pretty long, I will post them in three batches, with the subjects appearing roughly in the order they appeared in my piece in the magazine. I will start out with Richard Posner, Eugene Fama, and John Cochrane. Tomorrow, I will try to post three more, and finish up on Friday. For the record, all of the interviews were done in October, about a year after the financial crisis. The banking system had stabilized, and an economic recovery had begun, but then, as now, the future shape of the regulatory system was very unclear
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John Cassidy on economics, money, and more. January 13, 2010 Interview with Eugene Fama Posted by John Cassidy This is the second in a series of interviews with Chicago School economists. Read “After the Blowup,” John Cassidy’s story on Chicago economists and the financial crisis. (Subscribers only.) I met Eugene Fama in his office at the Booth School of Business. I began by pointing out that the efficient markets hypothesis, which he promulgated in the nineteen-sixties and nineteen-seventies, had come in for a lot of criticism since the financial crisis began in 1987, and I asked Fama how he thought the theory, which says prices of financial assets accurately reflect all of the available information about economic fundamentals, had fared. Eugene Fama: I think it did quite well in this episode. Stock prices typically decline prior to and in a state of recession. This was a particularly severe recession. Prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that. That was exactly what you would expect if markets were efficient. Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market—that there was a credit bubble that inflated and ultimately burst. I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning. I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals. That’s what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it. It’s easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time. Are you saying that bubbles can’t exist? They have to be predictable phenomena. I don’t think any of this was particularly predictable. Is it not true that in the credit markets people were getting loans, especially home loans, which they shouldn’t have been getting? That was government policy; that was not a failure of the market. The government decided that it wanted to expand home ownership. Fannie Mae and Freddie Mac were instructed to buy lower grade mortgages. But Fannie and Freddie’s purchases of subprime mortgages were pretty small compared to the market as a whole, perhaps twenty or thirty per cent. (Laughs) Well, what does it take? Wasn’t the subprime mortgage bond business overwhelmingly a private sector phenomenon involving Wall Street firms, other U.S. financial firms, and European banks? Well, (it’s easy) to say after the fact that things were wrong. But at the time those buying them didn’t think they were wrong. It isn’t as if they were naïve investors, or anything. They were all the big
107 institutions—not just in the United States, but around the world. What they got wrong, and I don’t know how they could have got it right, was that there was a decline in house prices around the world, not just in the U.S. You can blame subprime mortgages, but if you want to explain the decline in real estate prices you have to explain why they declined in places that didn’t have subprime mortgages. It was a global phenomenon. Now, it took subprime down with it, but it took a lot of stuff down with it. So what is your explanation of what happened? What happened is we went through a big recession, people couldn’t make their mortgage payments, and, of course, the ones with the riskiest mortgages were the most likely not to be able to do it. As a consequence, we had a so-called credit crisis. It wasn’t really a credit crisis. It was an economic crisis. But surely the start of the credit crisis predated the recession? I don’t think so. How could it? People don’t walk away from their homes unless they can’t make the payments. That’s an indication that we are in a recession. So you are saying the recession predated August 2007, when the subprime bond market froze up? Yeah. It had to, to be showing up among people who had mortgages. Nobody who’s doing mortgage research—we have lots of them here—disagrees with that. So what caused the recession if it wasn’t the financial crisis? (Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity. Let me get this straight, because I don’t want to misrepresent you. Your view is that in 2007 there was an economic recession coming on, for whatever reason, which was then reflected in the financial system in the form of lower asset prices? Yeah. What was really unusual was the worldwide fall in real estate prices. So, you get a recession, for whatever reason, that leads to a worldwide fall in house prices, and that leads to a financial collapse... Of the mortgage market…What’s the reality now? Everybody talks about a credit crisis. The variance of stock returns for the market as a whole went up to, like, sixty per cent a year—the Vix measure of volatility was running at about sixty per cent. What that implies is not a credit market crisis. It would be stupid for anybody to give credit in those circumstances, because the probability that any borrower is going to be gone within a year is pretty high. In an efficient market, you would expect that debt would shorten up. Any new debt would be very short-term until that volatility went down. But what is driving that volatility? (Laughs) Again, its economic activity—the part we don’t understand. So the fact we don’t understand it means there’s a lot of uncertainty about how bad it really is. That creates all kinds of volatility in financial prices, and bonds are no longer a viable form of financing. And all that is consistent with market efficiency? Yes. It is exactly how you would expect the market to work. Taking a somewhat broader view, the usual defense of financial markets is that they facilitate investment, facilitate growth, help to allocate resources to their most productive uses, and so on. In this instance, it appears that the market produced an enormous amount of investment in real estate, much of which wasn’t warranted... After the fact...There was enormous investment across the board: it wasn’t just housing. Corporate investment was very high. All forms of investment were very high. What you are really saying is that somewhere in the world people were saving a lot—the Chinese, for example. They were providing capital to the rest of the world. The U.S. was consuming capital like it was going out of sight. Sure, but the traditional Chicago view has been that the financial markets do a good job of allocating that capital. In this case it, they didn’t—or so it appears.
108 (Pauses) A lot of mortgages went bad. A lot of corporate debt went bad. A lot of debt of all sorts went bad. I don’t see how this is a special case. This is a problem created by a general decline in asset prices. Whenever you get a recession, it turns out that you invested too much before that. But that was unpredictable at the time. There were some people out there saying this was an unsustainable bubble… Right. For example, (Robert) Shiller was saying that since 1996. Yes, but he also said in 2004 and 2005 that this was a housing bubble. O.K., right. Here’s a question to turn it around. Can you have a bubble in all asset markets at the same time? Does that make any sense at all? Maybe it does in somebody’s view of the world, but I have a real problem with that. Maybe you can convince me there can be bubbles in individual securities. It’s a tougher story to tell me there’s a bubble in a whole sector of the market, if there isn’t something artificial going on. When you start telling me there’s a bubble in all markets, I don’t even know what that means. Now we are talking about saving equals investment. You are basically telling me people are saving too much, and I don’t know what to make of that. In the past, I think you have been quoted as saying that you don’t even believe in the possibility of bubbles. I never said that. I want people to use the term in a consistent way. For example, I didn’t renew my subscription to The Economist because they use the world bubble three times on every page. Any time prices went up and down—I guess that is what they call a bubble. People have become entirely sloppy. People have jumped on the bandwagon of blaming financial markets. I can tell a story very easily in which the financial markets were a casualty of the recession, not a cause of it. That’s your view, correct? Yeah. I spoke to Richard Posner, whose view is diametrically opposed to yours. He says the financial crisis and recession presents a serious challenge to Chicago economics. Er, he’s not an economist. (Laughs) He’s an expert on law and economics. We are talking macroeconomics and finance. That is not his area. So you wouldn’t take what he says seriously? I take everything he says seriously, but I don’t agree with him on this one. And I don’t think the people here who are more attuned to these areas agree with him either. His argument is that the financial system brought down the economy, and not vice versa. Well then, you can say that about every recession. Even if you believe that, which I don’t, I wonder how many economists would argue that the world wasn’t made a much better place by the financial development that occurred from 1980 onwards. The expansion of worldwide wealth—in developed countries, in emerging countries—all of that was facilitated, in my view, to a large extent, by the development of international markets and the way they allow saving to flow to investments, in its most productive uses. Even if you blame this episode on financial innovation, or whatever you want to blame, would that wipe out the previous thirty years of development? What about here in Chicago—has there been a lot of discussion about all this, the financial crisis, and what it means, and so on? Lots of it. Typical research came to a halt. Everybody got involved. Everybody’s got a cure. I don’t trust any of them. (Laughs.) Even the people I agree with generally. I don’t think anybody has a cure. The cure is to a different problem. The cure is to a new problem that we face—the “too-big-to-fail” problem. We can’t do without finance. But if it becomes the accepted norm that the government steps in every time things go bad, we’ve got a terrible adverse selection problem. So what is the solution that problem? The simple solution is to make sure these firms have a lot more equity capital—not a little more, but a lot more, so they are not playing with other people’s money. There are other people here who think that leverage is an important part of they system. I am not sure I agree with them. You talk to Doug
109 Diamond or Raghu Rajan, and they have theories for why leverage in financial institutions has real uses. I just don’t think that those effects are as important as they think they are. Let’s say the government did what you recommend, and forced banks to hold a lot more equity capital. Would it then also have to restructure the industry, say splitting up the big banks, as some other experts have recommended? No. If you think about it...I’m a student of Merton Miller, after all. In the Modigliani-Miller view of the world, it’s only the assets that count. The way you finance them doesn’t matter. If you decide that this type of activity should be financed more with equity than debt, that doesn’t particularly have adverse effects on the level of activity in that sector. It is just splitting the risk differently. Some people might say one of the big lessons of the crisis is that the Modigliani-Miller theory doesn’t hold. In this case, the way that things were financed did matter. People and firms had too much debt. Well, in the Modigliani-Miller world there are zero transaction costs. But big bankruptcies have big transaction costs, whereas if you’ve got a less levered capital structure you don’t go into bankruptcy. Leverage is a problem... The experiment we never ran is, suppose the government stepped aside and let these institutions fail. How long would it have taken to have unscrambled everything and figured everything out? My guess is that we are talking a week or two. But the problems that were generated by the government stepping in—those are going to be with us for the foreseeable future. Now, maybe it would have been horrendous if the government didn’t step in, but we’ll never know. I think we could have figured it out in a week or two. So you would have just let them... Let them all fail. (Laughs) We let Lehman fail. We let Washington Mutual fail. These were big financial institutions. Some we didn’t let fail. To me, it looks like there was not much rhyme or reason to it. What about Ben Bernanke and Hank Paulson’s argument that if they hadn’t taken action to save the banks the whole financial system would have come crashing down? Maybe it would have—for a week or two. But it pretty much stopped for a week or two anyway. The credit markets stopped for more than a week or two. But I think that was really a function of increased uncertainty about the future. Did you think this at the time—that the government should let the banks fail? Yeah—let ‘em, let ‘em. Because the failures of, like, Washington Mutual and Wachovia—other banks came swooping in to pick up their deposits and their other good assets. Of, course, they didn’t want their bad assets, but that’s the nature of bankruptcy. The activities that these banks were engaged in would have continued. Why do you think the government didn’t just step back and let it happen? Was the government in hock to Wall Street, as many have claimed? No. I think the government, Bernanke...Bob Lucas, I shouldn’t quote Bob Lucas, but what he says is “not on my watch.” That, basically, there is just a high degree of risk aversion on the part of people currently in government. They don’t want to be blamed for bad outcomes, so they are willing to do bad things to avoid them. I think Bernanke has been the best of the performers. Back to Chicago economics. Is there still anything distinctive about Chicago, or have the rest of the world and Chicago largely converged, which is what Richard Posner thinks? The rest of the world got converted to the notion that markets are pretty good at allocating resources. The more extreme of the left-leaning economists got blown away by the collapse of the Eastern bloc. Socialism had its sixty years, and it failed miserably. In that way, Chicago theory prospered. Milton Friedman and George Stigler were fighting that battle pretty much alone in the old days. Now it is pretty general. An experience like we’ve had rehabilitates the remnants of the old socialist gang. (Laughs) Unfortunately, they seem to be in control of the government, at this point. In the old days, a person like (Richard) Thaler would have had trouble getting a job here. But that was a period of time when Chicago economics was basically under attack the world over. There was a kind of a bunker mentality. But now we’ve become more confident. Now, our only criterion is we want the best
110 people who do whatever they do. As long as they are honest about it, and they respect other people’s work, and we respect their work, great. I know the business school has a lot of diversity, but is that also true of the university economics department? Sure. John List is over there. He’s a behavioral economist. Steve Levitt is a very unusual type of economist. His brand of economics, which is an extension of Gary’s is taking over microeconomics. I spoke to Becker. His view is that what remains distinctive about Chicago is its degree of skepticism toward the government. Right—that’s true even of Dick (Thaler). I think that is just rational behavior. (Laughs) It took people a long time to realize that government officials are self-interested individuals, and that government involvement in economic activity is especially pernicious because the government can’t fail. Revenues have to cover costs—the government is not subject to that constraint. So you don’t accept the view, which Paul Krugman, Larry Summers, and others have put forward, that what has happened represents a rehabilitation of government action—that the government prevented a catastrophe? Krugman wants to be the czar of the world. There are no economists that he likes. (Laughs) And Larry Summers? What other position could he take and still have a job? And he likes the job. What is your view on regulating Wall Street? Do we need more of it? I think it is inevitable, if you accept the view that the government will bail out the biggest firms if they get into trouble. But I don’t think it will work. Private companies are very good at inventing ways around the regulations. They will find ways to do things that are in the letter of the regulations but not in the spirit. You are not going to be able to attract the best people to be regulators. That sounds like an old-fashioned Chicago argument—skepticism about regulation. Yes. We have Ragu (Rajan), Doug Diamond—they are as good banking people as there are in the world. I have been listening to them for six months, and I would not trust them to write the regulations. In the end, there is so much uncertainty, and so much depends on how people will react to certain things that nobody knows what good regulation would be at this point. That is what is scary about government bailouts of big institutions. So what should we do? If the President called you tomorrow and said, “Gene, I don’t think our way is working. What should we do?” How would you respond? I don’t know if these are even the big issues of the time. I think that what is going on in health care could end up being more important. I don’t think we are going down the right road there. Insurance is not the solution: it’s the problem. Making the problem more widespread is not going to solve it. When all this (the financial crisis) started, I joined the debate. Then I stepped back and said, I’m really not comfortable with my insights into what the best way of proceeding is. Let me sit back and listen to people. So I listened to all the experts, local and otherwise. After a while, I came to the conclusion that I don’t know what the best thing to do it, and I don’t think they do either. (Laughs) I don’t think there is a good prescription. So I went back and started doing my own research. Couldn’t we just ban further bailouts, passing a constitutional amendment if necessary? That would be in line with your views, wouldn’t it? Right, but is that credible? It’s very difficult to explain how A.I.G. issued all the credit default swaps it issued if people didn’t think the government was going to step in and bail them out. Government pledged, in any case, have little credibility. But that one—I think it’s pretty sure that we they couldn’t live up to it. What will be financial crisis’s legacy for the subject of economics? Will there be big changes? I don’t see any. Which way is it going to go? If I could have predicted that, that’s the stuff I would have been working on. I don’t see it. (Laughs) I’d love to know more about what causes business cycles. What lessons have you learned from what happened?
111 Well, I think the big sobering thing is that maybe economists, like the population as a whole, got lulled into thinking that events this large couldn’t happen any more—that a recession this big couldn’t happen any more. There’ll be a lot of work trying to figure out what happened and why it happened, but we’ve been doing that with the Great Depression since it happened, and we haven’t really got to the bottom of that. So I don’t intend to pursue that. I used to do macroeconomics, but I gave (it) up long ago. Back to the efficient markets hypothesis. You said earlier that it comes out of this episode pretty well. Others say the market may be good at pricing in a relative sense—one stock versus another—but it is very bad at setting absolute prices, the level of the market as a whole. What do you say to that? People say that. I don’t know what the basis of it is. If they know, they should be rich men. What better way to make money than to know exactly about the absolute level of prices. So you still think that the market is highly efficient at the overall level too? Yes. And if it isn’t, it’s going to be impossible to tell. For the layman, people who don’t know much about economic theory, is that the fundamental insight of the efficient market hypothesis—that you can’t beat the market? Right—that’s the practical insight. No matter what research gets done, that one always looks good. What about the findings that long periods of high returns are followed by long periods of low returns? Now, there is no evidence of that...The expected return on stocks is just a price—the price people require to bear the market risk. Like any price, it should vary from time to time, and maybe it should vary in predictable ways. I’ve done a lot of work purporting to show there’s a little bit of predictability in overall market returns, but that branch of the literature has so many statistical problems there’s not a lot of agreement. The problem is that, almost surely, expected returns vary through time because of risk aversion—wealth, everything else varies through time. But measuring that requires that you have a good variable for tracking (risk aversion) or good models for tracking it. We don’t have that. The way that people do it, including me, is by using kind of ad hoc variables to pick it up. All the argument centers on whether what’s picked up by these variables is really what’s there, or whether it is just kind of a statistical fluke. There’s a whole issue of the Review of Financial Studies with people arguing very vociferously on both sides of that. When that happens, you know that none of the results are very reliable. Do you and Dick Thaler discuss this stuff when you are playing golf? Sure. We don’t want to discuss his golf game, that’s for sure. Has the advance of all this behavioral stuff, behavioral finance, made you rethink anything? Yes, sure. I’ve always said they are very good at describing how individual behavior departs from rationality. That branch of it has been incredibly useful. It’s the leap from there to what it implies about market pricing where the claims are not so well-documented in terms of empirical evidence. That line of research has survived the market test. More people are getting into it. But you are skeptical about the claims about how irrationality affects market prices? It’s a leap. I’m not saying you couldn’t do it, but I’m an empiricist. It’s got to be shown. Thanks very much. Finally, before I go, what about Paul Krugman’s recent piece in the New York Times Magazine, in which he attacked Chicago economics and the efficient markets hypothesis. What did you think of it? (Laughs) My attitude is this: if you are getting attacked by Krugman, you must be doing something right.
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January 13, 2010 Interview with John Cochrane Posted by John Cassidy This is the third in a series of interviews with Chicago School economists. Read “After the Blowup,” John Cassidy’s story on Chicago economists and the financial crisis. (Subscribers only.)
I interviewed John Cochrane in his office at the Booth School of Business, and I began by asking him about the economics of today’s Chicago, and how it differed from the strident free-market school of a bygone era—the Chicago of Milton Friedman and George Stigler.
John Cochrane: This is not an ideology factory. This is a place where we think about ideas and evidence. Gene Fama is in the next-door office. Dick Thaler is across the hall. Rob Vishny is just down the corridor. The Chicago of today is a place where all ideas are represented, thought out, argued. It’s not an ideological place. The real Chicago is about thinking hard and arguing with evidence... We like good quality stuff no matter where it comes from. And you have some banking experts who can, perhaps, claim to be among the few economists that warned us about this crisis. Raghu Rajan, and so on? (Laughs) Well, every conference I go to lately, everybody says, “The crash proved my last paper right.” But Raghu and Doug (Diamond) have a better claim to that than most people. But there is still a Chicago view of the world, even if it is not as dominant as it once was, is there not? One that favors free markets? Well, many of us at least view free markets as a good place to start, because of the centuries of experience and thought that it reflects. All science is, to some extent, conservative. You find one butterfly that looks weird, you don’t say, “Oh, Darwin was wrong after all.” We have a similar centuries-long experience that markets work tolerably well, and governments running things works pretty disastrously. We have got to think hard before we throw all of that out. Even our behavioralists are not jumping into “the government needs to run everything.” They are pretty good about (saying) well, if we’re irrational, the guys who are going to regulate us are just as irrational, and they are subject to political biases too. You don’t jump from “We are irrational” to “the federal government is the father who can come and make everything right again.” Did the government have to step in and save the banks, or should it have let them collapse? Isn’t the free- market view that if Citigroup had been allowed to collapse, Citigroup 2 would quickly have arisen from the ashes? Yes, this is a good debate we can have. I tend to be fairly sympathetic to that view. Though, in some sense, the government had painted itself into a corner. We did not wake up on September 24 (of 2008) with a completely free market that collapsed. We had a mortgage market that was very much run by the federal government, a very regulated banking system, and everybody expecting that the government was going to bail out the big players. To say, “wake up on September 24, 2008 and get some spine” is a very different recommendation to saying we need to build a system in which there is less government intervention. If everybody expects you to bail them out than not doing so is much harder. So, given the circumstances of the time, do you think the federal government did the right things? No. I don’t want to criticize personalities. If I’m the captain of the Titanic and I’m woken up and somebody says there’s an iceberg two hundred yards ahead, would I have done any better? I don’t know.
113 But I’ve been on the record saying that the TARP policy and the TARP idea—that the key to stabilizing the system was buying up mortgage-backed securities on the secondary market—was a bad idea. Those speeches provoked the panic, probably more than the fact of Lehman going under. When you get the President going on national television and saying, “The financial markets are near collapse,”...if you weren’t about to take all of your short-term debt out of Citigroup, you are going to do so now. Do you think that what we witnessed was a government failure rather than a market failure? I think it was a combination, a failure of both. The government set up some regulations. The banks were very quick to get around them. Lots of people did not think enough about counterparty risk, because they thought the government will take care of it. But this was hardly a libertarian paradise gone wrong. What about today? Do we need more regulation, or should Wall Street be deregulated further, like trucking or telecoms? Not completely, but a lot more than it is now. And the path we are headed on is allowing the great big banks to do whatever they want with a government guarantee, basically. And then future regulators are going to be so much smarter than the last ones that they’ll keep the banks from getting in trouble, even though we all know we are guaranteeing their losses. This strikes me as a recipe for disaster. The right and the left agree on that, no? Yes. (Laughs) If you are going to guarantee them, you can’t guarantee and not regulate. A central bank, a lender of last resort, deposit insurances with the supervision that comes with it—these are reasonable regulations. If you just say regulation versus no regulation that becomes an undergraduate 2 A.M. bullshit fest. Talking about “regulation” vs. “deregulation” in the abstract is pointless. We have to talk about specifics if we want to get anywhere. Stuff like, Do you think credit default swaps should be forced on to exchanges? It’s all very boring to your readers, but unless you are specific you don’t get anywhere... If you are vague, it sounds kind of fun: ideology, Chicago versus Harvard, and so on. But to get anywhere you have to be specific. The banking research that was done in Chicago before the crisis, about liquidity and so on: Did it attract much internal attention here? Goodness gracious, yes. It was central. I regard what we went through as not something special or new. We’ve had regular banking panics since at least about 1720. The Diamond and Dybvig paper—(“Bank Runs, Deposit Insurance, and Liquidity,” the Journal of Political Economy, 1983)—which Doug and Phil should have got the Nobel Prize for already, described the fragility of assets where you can run. I don’t think we have systemically dangerous institutions. I think we have systemically dangerous contracts, and bank deposits are one of them, as Doug described. A bank can have risky assets but tell you, “We’ll always pay you a dollar, first come first served.” Doug described how that thing can cause problems, and I think that’s basically what happened. Doug’s here for a reason. We all said, “Wow, that’s great!” And he’s devoted a career to deepening that analysis. He’s been one of our stars ever since he came here, which must be thirty years ago now. The two biggest ideas associated with Chicago economics over the past thirty years are the efficient markets hypothesis and the rational expectations hypothesis. At this stage, what’s left of those two? I think everything. Why not? Seriously, now, these are not ideas so superficial that you can reject them just by reading the newspaper. Rational expectations and efficient markets theories are both consistent with big price crashes. If you want to talk about this, we need to talk about specific evidence and how it does or doesn’t match up with specific theories. In the United States, we’ve had two massive speculative bubbles in ten years. How can that be consistent with the efficient markets hypothesis? Great, so now you know how to define “bubbles” for me. I’ve been looking for that for twenty years. So you take the Greenspan view that bubbles can’t be identified except in retrospect? In 2005, you didn’t think there was a housing bubble?
114 I think most people mean by a “bubble” just, “Prices were high and I wish I sold yesterday.” The efficient markets (hypothesis) never told you that wasn’t going to happen. What efficient markets says is that prices today contain the available information about the future. Why? Because there’s competition. If you think it’s going to go up tomorrow, you can put your money where your mouth is, and your doing it sends (the price) up today. Efficient markets are not clairvoyant markets. People say, “nobody foresaw saw the market crash.” Well, that’s exactly what an efficient market is—it’s one in which nobody can tell you where it’s going to go. Efficient markets doesn’t say markets will never crash. It certainly doesn’t say markets are clairvoyant. It just says that, at that moment, there are just as many people saying its undervalued as overvalued. That certainly seems to be the case. Ok, now you know what “efficient markets” means. What is there about recent events that would lead you to say that markets are inefficient? The market crashed, to which I would say, we had the events last September in which the President gets on television and says the financial markets are near collapse. On what planet do markets not crash after that? There are things, by the way, that I saw last year that say markets are not efficient, but not the ones you had in mind. The interesting things about efficiency are going to be more boring to your readers. There were lots of little arbitrages. For example, you could buy a corporate bond or you could write a credit default swap and buy a Treasury (bond). Those are economically the same thing, but one of those was trading about three per cent higher than the other: one was eighty-two, the other was eighty-five. So there were arbitrage opportunities? Well, close to arbitrage opportunities. The problem was that you need funding. You needed to be able to borrow money to buy the corporate bond, and it was hard to borrow money. Those are, strictly speaking, violations of efficiency. Two ways of getting the same thing for a different price—that smells. You’ve gotta rethink some part of your theory. What we saw were funding and liquidity frictions. Those were really interesting last winter. But that’s not: Why did we see house prices go up and come down? Why did we see stock prices go up and come down? Those things are not new. We saw stock prices go up and come down in the nineteen- twenties, the nineteen-fifties, the nineteen-seventies... You appear to be saying that the efficient markets hypothesis doesn’t have any implications for the absolute level of prices, just relative prices. How can that be a theory of pricing? It does have implications for absolute pricing, and the focus of rational/irrational debate is exactly on this question. But last fall was not a particularly new and puzzling data point. The phenomenon of prices going up and coming down is something we have been chewing on for twenty years. So here are the facts: When house prices are high relative to rents, when stock prices are high relative to earnings—that seems to signal a period of low returns. When prices are high relative to earnings, it’s not going to be a great time to invest over the next seven to ten years. That’s a fact. It took us ten years to figure it out, but that’s what (Robert) Shiller’s volatility stuff was about; it is what Gene (Fama)’s regressions in the nineteen- eighties were about. That was a stunning new fact. Before, we would have guessed that prices high relative to earnings means we are going to see great growth in earnings. It turned out to be the opposite. We all agree on the fact. If prices are high relative to earnings that means this is going to be a bad ten years for stocks. It doesn’t reliably predict a crash, just a period of low returns, which sometimes includes a crash, but sometimes not. Ok, this is the one and only fact in this debate. So what do we say about that? Well, one side says that people were irrationally optimistic. The other side says, wait a minute, the times when prices are high are good economic times, and the times when prices are low are times when the average investor is worried about his job and his business. Look at last December (2008). Lots of people saw this was the biggest buying opportunity of all time, but said, “Sorry, I’m about to lose my job, I’m about to lose my business, I can’t afford to take more risk right now.” So we would say, “Aha, the risk premium is higher!” So that’s now where this debate is. We’re chewing out: Is it a risk premium that varies over time, or is it psychological variation? So your question is right, but it is not as obvious as: “Stocks crashed. We must all be irrational.”
115 And if the explanation is time-varying risk premiums, it could all be consistent with rationality and market efficiency? Yes. Now, how do you solve this debate? This is supposed to be science. You need a model. You need some quantifiable way of saying, “What is the right risk premium?” or, “What is the level of irrationality—optimism or pessimism?” And we need that not to be a catchall explanation that says, “Oh, tomorrow if prices go up it must mean there is a return to optimism.” That’s the challenge. That’s what we all work on. Both sides say, “We don’t have that model yet.” (Later in the interview, I brought up the efficient market hypothesis again. This time, Cochrane argued that in some ways what happened to the credit markets was a vindication of the theory, because it showed investors generally can’t beat the market without taking on more risk. Here is what he said:) If you listened to Eugene Fama and believed that markets are efficient, you wouldn’t have invested in auction rate securities that claimed to be as good as cash, but which offered fifty extra basis points. You wouldn’t have invested in a Triple A rated mortgage-backed securities pool that said this is as good as Treasuries, but offered fifty extra basis points of yield. The whole point of efficient markets theory is that you can’t beat the market without taking on more risk. People (here) were saying for years, if you invest in hedge funds that make abnormally high returns there is an earthquake risk, a tail risk, that nobody is telling you about. What about the rational expectations hypothesis? Richard Posner is a Keynesian now? I don’t want to comment on Posner. He’s a nice guy. But I spend my life trying to understand this stuff. My last two papers, which took me three years, were on determinacy conditions in New-Keynesian models. It took me a lot of time and a lot of math. If Posner can keep with that and with Law and Economics, good for him. (Laughs) Rational expectations. Again, it is good to be specific. What is rational expectations? It is the statement that you fool all the people all the time. In the nineteen-sixties, people said the government can give us a burst of inflation, and that will give us a little boom in output because people will be fooled. They’ll think inflation means they are getting paid better for their work and they’ll be fooled into working harder. The rational expectations guys said, “Well that may happen once or twice, but sooner or later they will catch on.” The principle that you can’t fool all the people all the time seems a pretty good principle to me. So, again, I say be specific. What do you see about the world that invalidates the theory of rational expectations? O.K. The rational expectations hypothesis by itself is a technical device. But when you marry it to what is, basically, a market-clearing model, which is what Bob Lucas and others did, there is no room for involuntary unemployment, for example. Recessions are a matter of workers voluntarily substituting leisure for work. Is that realistic? O.K. Now, we are going beyond Lucas to Ed Prescott and the real business cycle school. Today, there is no “freshwater versus saltwater.” There is just macro. What most people are doing is adding frictions to it. We are playing by the (Finn) Kydland and Prescott rules but adding some frictions. But unemployment is now ten percent. That seems to be inconsistent with a market-clearing model, no? It’s not as simple as that. Unemployment is job search. I think the rational expectations guys made incredibly valuable contributions. First, the way you do macro. You don’t just write down consumption, investment, and so forth. You really write down an economy. You talk about people and what they want. You talk about their productive opportunities. You talk about market structure. That revolution in macroeconomics remains. New-Keynesians? One hundred per cent, yes: this is how we do things. The second valuable contribution: As of the seventies, people took for granted is that the way the economy should work is that potential output always looks like this. (Cochrane stood up at the chalk board and drew and straight line rising from left to right.) And anything that looks like this (Cochrane drew a line that zig-zagged as it rose from left to right) is bad. Unemployment should always be constant. Well, wait a minute. That’s not true. The upward trend comes from productivity, and where is it written on tablets that productivity grows at 3.0259 percent constantly. In the nineteen-nineties, you discover the Internet, and it makes sense for output to grow faster, and for everybody under the age of thirty to spend
116 twenty hours a day writing websites. So the baseline of an economy working well will include some fluctuations, and the baseline of an economy well will also include some fluctuations in unemployment. When we discover we made too many houses in Nevada some people are going to have to move to different jobs, and it is going to take them a while of looking to find the right job for them. There will be some unemployment. Not as much as we have, surely, but some. Right now, ten percent of people are unemployed. Many of them could find a job tomorrow at Wal-Mart but it is not the right job for them— and I agree, it is not the right job for them. That doesn’t mean the world would be right if they took those jobs at Wal-Mart. But some component of unemployment is people searching for better fits after shifts that have to happen. The baseline shouldn’t be that unemployment is always constant. So that is a big and enduring contribution—some amount of fluctuation does come out of a perfectly functioning economy. Now have to talk about how much, not just look at any unemployment and say markets are busted. Is ten per cent the right number? Now we are talking opinions. My opinion is I agree with you. What we are seeing is the after-effects of a financial crisis that is socially not optimal—agreed one hundred per cent. But what we need is models, data, predictions to really talk about this. Not my opinion versus your opinion. Years ago, Bob Lucas said something similar to what you are saying about the Great Depression—that many of the unemployed could have taken jobs at lower wages. Yes, but it wasn’t the right thing for them to do. Let me not even hint that this is the right thing now. We had a financial crisis last fall which was socially not optimal. This is probably where the Minnesota crowd would disagree. It seems to me pretty obvious that we had a financial crisis last fall, a freezing up of short-term credit markets, a flight to quality. As a result of that financial crisis, we saw a lot of real effects that didn’t have to happen. Businesses closed and people lost their jobs. It didn’t have to happen. Now in a way, this is what we saw in 1907, 1921, 1849—you can say we’ve seen these things before. There I would agree with you, rather than with some mythical figure from Minnesota who says finance is just totally irrelevant. That makes no sense. Is that the lesson here—that we need to integrate finance into macroeconomics? Well, yeah...I’ve been preaching that for twenty years. I do half finance and half macro. I see this as a great research opportunity. People who are trained in macro, they think about the interest rate. They don’t think about variation in credit spreads or risk premiums. In my finance (research), I see risk and risk premiums as being what matters most. Macro until a couple of years ago wasn’t really thinking about risk and risk premiums. It was just, oh, the Fed and the level of interest rates. So I’ve thought these things should marry each other for a long time. But that’s an easy thought to have. Doing it is the hard part. Has anybody got anywhere on it? Oh yeah, but it’s hard. Asking big questions, talking about fashionable ingredients is easy, it’s the answers that are hard, actually cooking the soup. People also say economics needs to incorporate the insights of psychology. Great. Thanks. I’ve heard that from (Robert) Shiller for thirty years. Do it! And do it not just in a way that can explain anything. Let’s see a measure of the psychological state of the market that could come out wrong. That’s hard to do. Calling for where research should go is fun, but I think it’s far too easy. Back to John Maynard Keynes. Judge Posner is not the only who has rediscovered him and his policy prescriptions. You have been very critical of the Obama administration’s stimulus package and of the Keynesian revival. Why? Look, evaluating economic models is a lot harder than just staring out the window and saying, “This is going on. Keynes was right.” Nothing in the incoming data has removed the inconsistencies that plagued Keynesian economics for forty years until it was thrown out. I mean, we threw it out for a reason. It didn’t work in the data. When inflation came in the nineteen-seventies that was a major failure of Keynesian economics. It was logically incoherent. What happened is the government wanted to spend a lot of money. They said “Keynesian stimulus” and people got excited. What event, what data says we’ve got to go back to Keynesianism? Again, I’m going
117 to throw it back on you. What about it other than that Paul Krugman thinks we need another stimulus tells us that this is an idea to be rehabilitated? You don’t believe stimulus packages work. You are arguing what—every dollar the government dissaves somebody else saves with an eye to the future tax burden? The so-called “Ricardian equivalence” argument: Is that it? I would go further. Ricardian equivalence is a theorem, a theorem whose “ifs” are false. But it is a nice background theorem. In the world of that theorem, deficit finance spending has no effect whatsoever— really, no effect different from taxing people now and spending—because, as you mentioned, people offset it by saving more. Now, we know that theorem is false. One of the ifs is “if the government raises taxes by lump sum payments.” In fact, the government raises money by taxes that distort incentives, so, if anything, you are going to get a negative multiplier—a bad thing. However, government spending also changes the composition of output. You build roads. There are lots of models where you can have a positive effect, so I don’t want to say exactly zero. But if you want to get a multiplier you have to say exactly which “if” is false, exactly what friction you think the government can exploit to improve things by borrowing and spending and how. What do you think the fiscal policy multiplier is? I think it is the wrong question. In many models with positive multipliers it is socially bad to do it. Just because you get more output doesn’t mean it is a good thing. People have pointed to World War II and (said), oh, there’s a case where we had lots of output. “Well, let’s fight World War II again” is not socially good. So is that your argument against the stimulus? Or you just don’t think it will work? The claim was that this would, on net, reduce unemployment, create jobs, improve the economy in some quantifiable way. I just don’t think it is going to happen. My guess is (that the impact is) a lot closer to zero, and probably slightly negative, for deficit spending right now. Why? What is the mechanism that prevents it from working? It is even deeper than saying people will respond by saving. First of all, there’s this presumption that spending is good and saving is bad—except that we also want saving to be good and consuming bad. Let me try to put it (like this): You save money. It goes into a bank, which lends it out to somebody to buy a forklift. Why is that bad, but you buying a car with the same money is good? So, presumption number one, that consuming rather than saving is good for the economy, I don’t get that. The Chinese are investing fifty per cent of their income, and they seem to be booming. Second, just on basic accounting: I’m going to be the government, I’m going to borrow from you, and I’m going to spend it. So over here, that’s more output. But you were going to do something with that dollar, which is now invested in government debt. Now, what else were you going to do with it? Well, you were going to buy a mortgage backed security; you might have bought a car. You were going to do something with that money. So, on basic dollar accounting, if I take that money that’s a dollar more demand, but you have a dollar less demand. Barro’s theorem is about tax vs. debt financing having no effect whatsoever. This is a deeper point. If you were going go buy a car, and I, the government, go and build a road, we have one less car and one more road, so there is an effect. But we have one less car. That money has to come from somewhere. That’s what people miss out when they think about the stimulus. What about if foreign investors are buying the government bonds, as they are in the U.S. case? Surely, they are not crowding out domestic demand? Well, that makes it harder to explain. We have to go through the fact that trade is balanced. If they were not buying the bonds, they were going to do something with that money, and blah, blah, blah. You can shuffle resources around, but you can’t create anything out of thin air. The other reason I’ve been against the stimulus: it’s pretty clear what the problem with the economy was. For once, we know why stock prices went down, we know why we had a recession. We had a panic. We had a freeze of short-term debt. If somebody falls down with a heart attack, you know he has a clogged
118 artery. A shot of cappuccino is not what he needs right now. What he needs is to unclog the artery. And the Fed was doing some remarkably interesting things about unclogging arteries. Even if (the stimulus) was the solution, it’s the solution to the wrong problem. If I were Keynes, I would say we are in a recession; we are not the potential output level. There are unemployed resources out there. You’re argument may be correct at full-employment, but when there are unemployed resources out there we can make something out of nothing. Possibly, but it’s not obvious how “stimulus” is going to help this recession. Think about an unemployed accountant in New Jersey, fired from a big bank. How is going to build a road in Montana going to help him? Keynes thought of a world in the nineteen-thirties where labor was more amorphous labor. If you hired people to dig ditches, that would solve the unemployment line in the car industry. We have very specialized labor, and just hiring people doesn’t resolve the problem. Somebody who lost their job in a bank—building more roads is not going to help them. It’s a long logical leap from the fact of unemployed resources to the proposition that the federal government borrowing another trillion dollars and spending on pork is going to make those resources employed again. So what should the government response have been? Not making so many mistakes. First rule: do no harm. What we experienced was a fairly classic bank run, panic, whatever. There were good things the government did. The Fed intervened very creatively, in sort of a classic lender of the last resort way. We also did a lot of stuff—lots of bailouts—that didn’t need to be done. I think the TARP was silly. The equity injections were silly. Lender of the last resort—get frozen markets going again, and get out of the way—is probably plenty. And don’t cause more panic. There was lots of confusion and uncertainty about: What’s the government going to do? When is it going to do it? Who is going to get bailed out? Who isn’t going to get bailed out? That doesn’t help. Where should we go from here? If you were hired as head of the White House Council of Economic Advisers, what would you tell the President? I’d get fired in about five minutes. I’d start with a broad deregulatory approach to health care reform. There, I just got fired. Financial deregulation, yes, but going in the opposite direction to where they are going. Financial regulation based on getting out of this too-big-to-fail cycle. Setting it up so that those things that have to be protected are, but in as limited a way as possible. Simple, transparent reform. And I think the government needs to encourage Wall Street to solve its own problems. Let’s go back to Bear Stearns. Here we had a proprietary trading group married to a brokerage. We discovered you could have runs on brokerage accounts—that was the systemic thing. So what I thought would happen after that is that Wall Street would say, “Oh wow, we’ve got a problem!” Marrying proprietary trading to brokerage is like managing gambling to bank deposits. What I thought Wall Street would say is: “We’ve got to separate these things. Customers want to know that their brokerage isn’t going to get dragged down by the proprietary trading desk, and we want to separate them fast so that Washington doesn’t come in and regulate us.” Unfortunately, that’s not what happened. What happened is that everybody said, “Aha, the Fed is going to bail us all out. We can keep this game going forever.” So what I would like to see is a strong (statement): “You guys have got to set this us so it can go bankrupt next time around. And we are going to set it up so we don’t even have the legal authority to bail you out, so you’d better get cracking.” You mean a new Glass-Steagall act for Wall Street? Or some version thereof? Yeah...Glass Steagall itself had a lot of problems, but some of the basic ideas are good. But the same principle—separating the casino from the utility? Separating the casino from the dangerous contracts—yes. We all understand that you can’t run an institution that offers bank accounts and gambling in the same place. We are trying to do that now in the hope that the regulators will watch the gamblers. That’s not going to work.
119 It appears that there is liberal and conservative agreement on this issue. Yes. Which brings me back to where you started. It’s not about liberal or conservative, and analysis of these things doesn’t have to be ideological. Let’s just think through what works and look hard at the evidence. http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-john-cochrane.html
January 13, 2010 Interview with Richard Posner Posted by John Cassidy This is the first in a series of interviews with Chicago School economists. Read “After the Blowup,” John Cassidy’s story on Chicago economists and the financial crisis. (Subscribers only.) I spoke to Posner in his chambers at the Federal courthouse in downtown Chicago, where he sits on the United States Court of Appeals for the Seventh Circuit. I began by telling him that I was researching an article about how the financial crisis had affected Chicago economics, and, indeed, economics as a whole. At this distance from the financial blow up, what was the nature of the intellectual challenge it presented? I think the challenge is to the economics profession as a whole, but to Chicago most of all. Has there been much self-analysis, or critical reassessment of long held positions, here in Chicago? I don’t think so. There are people here who are not part of the orthodox Chicago School—the Bob Lucas/Gene Fama crowd—people like Raghu Rajan, Luigi Zingales, and Dick Thaler. But I don’t think there has been much in the way of re-examination. What about your critique of some aspects of Chicago economics, which you detailed in your recent book, “A Failure of Capitalism?” Have you received much of a reaction to that? I’ve had an exchange with Lucas and Fama—some of it on my blog at The Atlantic. It’s all very civil: not angry. But I think they are pretty much sticking to their guns. (Laughs.) Even before this, macro was seen as quite a weak field, and the efficient markets theory had taken a lot of hits: the behavioral finance school—Andrei Shleifer, Bob Shiller. Already, the orthodox Chicago position had been under criticism. But last September’s financial collapse came as a big shock to the profession. What is Chicago macroeconomics? And what went wrong with it? Going back to Milton Friedman, there was the idea that the Great Depression was a product of inept monetary policy and could have been avoided if only the Fed had not tightened the money supply. That remains very controversial, but also it didn’t prepare anybody for what has happened recently. The concern then was that the Fed had raised rates prematurely during the Depression. But now the concern is that the interest rates were too low during the early 2000s, and that is what precipitated all the trouble. For that, the monetarists were unprepared. When the crisis began Bernanke reduced the federal funds rate essentially to zero and nothing happened.
120 That was the point at which Friedman’s macro theory, along with Lucas’s macro theory, did not have a clue as to what had happened. That was pretty bad. Also, and more interesting to me, it called into question a whole approach to economics—one that is very formal, making very austere assumptions about human rationality: people have a lot of information, a lot of foresight. They look ahead. It is very difficult for the government to affect behavior, because the market will offset what it does. The more informal economics of Keynes has made a big comeback because people realize that even though it is kind of loose and it doesn’t cross all the “t”s and dot all the “i”s, it seems to have more of a grasp of what is going on in the economy. In the fall, you wrote a big piece in The New Republic in which you declared yourself to be a Keynesian. What was the reaction to that article? I haven’t got much of a reaction from my colleagues. Bob Barro (a conservative economist at Harvard) sent me an email in which he referred me to an early article of his. It was a good article. I think there is a question of whether modern economics, including Chicago economics, is too formal and too abstract. Another question is whether modern economists have lost interest in or feel for institutional detail that might be very important. I don’t know how many of these economists really knew anything about how modern banking operates, how the new financial investments operate—collateralized debt obligations, credit default swaps, and so on. So modern economics is too formal, and it has lost interest in institutional reality: is that what you are saying? You don’t want to characterize all of economics in that way. What we tend to think of as the Chicago approach is great skepticism about government and faith in the self-regulating characteristics of markets: that’s the essential outlook of Chicago. In addition, there is the increasing mathematization of economics. That is not necessarily Chicago-led. Chicago once resisted that—people like Ronald Coase and George Stigler. Even Gary Becker—he’s more mathematical than they are, but he’s not as mathematical as, say, M.I.T. and Berkeley economists. Modern economics is, on the one hand, very mathematical, and, on the other, very skeptical about government and very credulous about the self-regulating properties of markets. That combination is dangerous. Because it means you don’t have much knowledge of institutional detail, particular practices and financial instruments and so on. On the other hand, you have an exaggerated faith in the market. That was a dangerous combination. But that is not all there is in economics. There is also behavioral economics, which has made a lot of progress. It’s about challenging the assumptions about markets because of human irrationality. I don’t much like it myself, because I think they are very vague about what they mean by rationality. They use terms like “fairness,” which are really contentless. But some of their skepticism is warranted. And behavioral finance, I find very convincing. It’s obvious if you look at how people trade in markets: they are not calculating machines that flawlessly discount future corporate profits. I put a lot of emphasis on the Frank Knight (a famous Chicago economist who taught at Chicago from the nineteen-twenties to the nineteen-sixties) and Keynes view of uncertainty. That makes economists very uncomfortable, because it is very hard to model. Once you introduce uncertainty, it means that a lot of consumer behavior is not going to be easily modeled as cost- benefit analysis.
121 In that sense, then, your version of Keynesianism is what some professional economists would refer to as “Post-Keynesianism”? Yes. I’ve read Davidson. (Paul Davidson, a professor at University of Tennessee is a leading post-Keynesian.) I’ve read some of those people. But I don’t really get much out of it that isn’t in Keynes. I’m kind of stalled in the General Theory and his essay in the Q.J.E. (In 1937, a year after the publication of The General Theory of Employment, Interest, and Money, Keynes wrote an expository article in the Quarterly Journal of Economics.) So, in sense, you see yourself reviving an older Chicago tradition—Knightian economics—which in some ways is closer to Keynes? Not only that, but there is a curious link between Keynes and Coase, even though they are at opposite ends of the political spectrum. I never heard Coase mention Keynes, but I am sure he would have regarded him as a dubious left-wing character Coase is very, very conservative. But they are very similar in their informality. Coase was always saying that he didn’t believe in utility maximization. He didn’t believe in equilibrium. Both of them, they are not concerned with the kind of axiomatic reasoning where you start with human beings assumed to have rational calculators inside them. They are much more likely to take people as they are. And Knight was not at all a formal economist. His book “Risk, Uncertainty, and Profit,” I read it for the first time. It really was excellent. There’s no math. Coase in his later work: no math. Keynes in the General Theory: some math, but it’s not central to his argument. Do you regard yourself as an economist? No. (Smiles) I’m not a professional economist. I don’t have any economics training. But I’m interested in it. I’m not bashful about writing about it. You’ve received some criticisms from professional economists—from Brad De Long, of Berkeley, and from others. Yes. These people are impossible. I haven’t read (DeLong’s) academic work, just his blog. His criticism of me was crazy. He had me fighting a last-ditch stand for Chicago—the exact opposite of what I wrote. It does bother me about economists—not just (Paul) Krugman and De Long; it’s not just a liberal versus conservative thing. Some conservative writing bothers me also. They are not at all reluctant about taking extreme positions in an Op-Ed, or in blogs, and so on. It really demeans the profession. Krugman is obviously a good economist. He’s got this book, “The Return of Depression Economics.” It’s very good...But his column for The New York Times is really irresponsible, nasty. Sometimes on his blog he makes accusations. In one of his columns, he suggested that conservatives were traitorous. He used the word “treason.” I’m bothered by that. If you have a very politicized academic profession, you lose your confidence in their objectivity Well, some Chicago economists also express very strong views. John Cochrane (a professor at Chicago’s Booth School of Business) for example, says that government stimulus programs don’t have any impact at all on unemployment and G.D.P. That’s another reason to be distrustful of the profession. You have irresponsible positions about the stimulus on both sides. What are people supposed to believe? Has your critique of the efficient markets hypothesis made you rethink your view of markets outside of finance? Even before this, I had become less doctrinaire about markets. For example, one of the topics Gary Becker and I debated on our blog was New York City’s ban on transfats. I supported that. The country has an obesity problem. I didn’t think that just listing the amount of transfats on a
122 menu would deal with it—people don’t know this stuff. I thought a ban, even though it violated freedom of contract, made sense. What has been Becker’s reaction to your views? You mean about the economy, about Keynes. I think he disagrees. We had a debate before the university women’s board some months ago. He’s very down on the stimulus. Some of the things we agree about. I thought the cash-for-clunkers program was quite pointless. Now that we appear to be coming out of the recession, the right is saying things aren’t too bad after all, and that markets are resilient. The left is saying without government intervention we would be back in the nineteen-thirties. What do you think? It depends what you mean by government intervention. If the government had limited itself to reducing the federal funds rate and had not bailed out the banks, we could easily have gone down the route of the nineteen-thirties. On the other hand, if there had just been a bank bailout and no stimulus, then, no, we would not have gone down as far as the nineteen-thirties, because the economy is different now. In particular, (there’s been) the shrinkage of the construction and manufacturing industries. That is where unemployment was highest in the Depression. And we have the automatic stabilizers—unemployment insurance, and so on. It wouldn’t have been as bad, but it could have been considerably worse without the stimulus. You can never be certain how far down an economy will spiral. After all the federal government has done, does the amount of public intervention in the economy not worry you? I think it is worrisome. A lot of things they have done, I don’t approve of. I don’t like the idea of taking an ownership stake in General Motors: I think that’s very bad. I don’t like this messing with compensation: that’s unhealthy. And I’m particularly concerned about the deficits, and what health reform will do to what are already massive deficits. So I don’t think the government’s handling of this has been flawless, by any means. But I think the stimulus probably was essential. As a result of all that has happened, what has the economics profession learned? Well, one possibility is that they have learned nothing. Because—how should I put—it market correctives work very slowly in dealing with academic markets. Professors have tenure. They have a lot of graduate students in the pipeline who need to get their Ph.Ds. They have techniques that they know and are comfortable with. It takes a great deal to drive them out of their accustomed way of doing business. Robert Lucas takes a very hard line on this. He says the theory of depressions is something economics isn’t good at. He hasn’t been doing depression economics, so he’ll stick with what he’s doing and unapologetically. But isn’t Lucas still offering policy advice on the basis of his theories? Yes, he is occasionally. But he’s a real academic. He’s content with his academic career and his models and so on. And it isn’t very clear what replaces his modern vision. It isn’t as if there is a school of economics that has great ideas and techniques for dealing with our economic situation. What about Chicago economics in particular? At this stage, what is left of the Chicago School? Well, the Chicago School had already lost its distinctiveness. When I started in academia—in those days Chicago was very distinctive. It was distinctive for its conservatism, for its 1968 fidelity to price theory, for its interest in empirical studies, but not so much in formal modeling. We used to say the difference between Chicago and Berkeley was Chicago was economics without models, and Berkeley was models without economics. But over the years, Chicago
123 became more formal, and the other schools became more oriented towards price theory, towards micro. So, now there really isn’t a great deal of difference. Ronald (Coase) is alive, but he’s very, very old. He’s not active. Stigler is dead. Friedman is dead. There’s Gary (Becker) of course. But I’m not sure there’s a distinctive Chicago School anymore. Except there are probably a higher percentage of conservative people here, but not all. Jim Heckman—not particularly conservative at all. He’s very distinguished. Steve Levitt—he’s very famous. I don’t think he’s conservative. You’ve got people like (Richard) Thaler. So probably the term “Chicago School” should be retired. There were people—people like Stigler and Coase, Harold Demsetz, Reuben Kessel, and people at other schools like Armen Alchian. They were people rebelling against the very liberal economics of the nineteen-fifties—very Keynesian, very regulatory, very aggressive anti-trust, little faith in the self-regulating nature of markets. Francis Bator, who’s a very distinguished Harvard economist, he wrote a famous essay entitled “The Anatomy of Market Failure.” And he gave so many examples of market failure that you couldn’t believe a market could exist. You have to have an infinite number of competitors, full information, you can’t have any economies of scale, and so on. It was too austere. That was what the Chicago people, with their more informal approach, rebelled against. So we had our moment in the sun, but by the nineteen- eighties the basic insights of the Chicago School had been accepted pretty much worldwide. Where the divide continues is in macro—in business cycle economics. That’s where you have these very liberal people at Berkeley, Harvard, M.I.T., and so on, and very conservative people like Lucas, Fama, and so on, in Chicago. You are famous for extending economic analysis, and a free-markets approach, to the law. Has the financial crisis undermined your faith in markets and the price system outside of the financial sector? No. But of course one of the more significant Chicago (positions) was in favor of deregulation, based on the notion that markets are basically self-regulating. That’s fine. The mistake was to ignore externalities in banking. Everyone knew there were pollution externalities. That was fine. I don’t think we realized there were banking externalities, and that the riskiness of banking could facilitate a global financial crisis. That was a big oversight. It doesn’t make me feel any different about the deregulation of telecommunications, or oil pipelines, or what have you. Talking of banking externalities, isn’t that an application of traditional price theory? Going back as far as Pigou, economists have talked about externalities in many parts of the economy. There’s nothing inconsistent with basic economic theory in externalities. Of course, you have to know a lot about banking, and that was not the case with economists. Odd in a way, because macroeconomists and finance theorists have always been interested in banking, but I don’t think they really understood a lot about it. http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-richard- posner.html
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January 14, 2010 Interview with Gary Becker Posted by John Cassidy This is the fourth in a series of interviews with Chicago School economists. Read “After the Blowup,” John Cassidy’s story on Chicago economists and the financial crisis. (Subscribers only.) I met Becker in his office at the economics department. I began by telling him I had been speaking with his friend and co-blogger Richard Posner, and I asked whether he agreed with Posner that the events of the past two years had called Chicago School economics into question. Gary Becker: No. I think the last twelve months have shown that free markets sometimes don’t do a very good job. There’s no question, financial markets in the United States and elsewhere didn’t do a good job over this period of time, but if I take the first proposition of Chicago economics—that free markets generally do a good job—I think that still holds. If I were running an economy, and I was looking for the best way to run it, I would do what India and China did—move much more to a free-market economy. The second proposition of Chicago economics— that governments don’t do a good job. I really don’t understand how, if Posner said that had been undermined, he can infer that. I don’t think the government did a good job in the run-up to the crisis. Posner has himself criticized Alan Greenspan’s low-interest-rate policy. The S.E.C. should have done a lot of things it didn’t do. It’s hard to sustain the belief that governments do well. What I have always learned to be the Chicago view, and taught to be the Chicago view, is that free markets do a good job. They are not perfect, but governments do a worse job. Again, in some cases we need government. It is not an anarchistic position. But in general governments do a worse job. I haven’t seen any reason to change that other than, yes, we’ve seen another example where free markets didn’t do a good job: they did a bad job. But to me there is no evidence the government did a good job either, leading up to or during the process. Posner says that the government’s interventions have staved off another Great Depression. Well, that’s a separate argument. Market economists—take my teacher and close friend Milton Friedman: [he was] a big advocate that the government should have done more during the Depression. The Fed should have done more. It was too passive and the money supply dropped, and so on. So it’s been long recognized that there are situations when you need very strong, temporary government interventions. [Policymakers] did come in here, and they did help. It was a very mixed bag of different policies. I don’t blame them too much for that. It was a novel situation and they were experimenting a lot. I definitely think they helped, though, overall in averting a much more serious recession. A lot of people, including Posner, thought that things were going to turn out a lot worse. We had a bunch of arguments about that on our blog. Two of the big theories associated with Chicago are the efficient-markets hypothesis and the rational- expectations hypothesis, both of which, some say, have been called into question. How do you react to that? Well, these are not areas that I have particularly specialized in, but let me give you my reaction. The people who argue that markets were always efficient and there was no problem, that was an extreme position—something a lot of people at Chicago had recognized before. The weaker notion that markets, particularly financial markets, usually work pretty well, and it’s very hard to beat them by investing against them, that I think is still very powerful. What I think we experienced, and where I think we went wrong, is that we’d developed a lot of new financial instruments, derivatives, and the like. Neither some of the people that developed them nor the practitioners really understood how these derivatives worked in different situations. Like mortgage-
125 backed securities—I don’t think you are going to see them being very popular in the future. So, there were innovations. They had good aspects, but they had aspects that didn’t work out very well, and so the markets weren’t very efficient in these cases. Yeah, markets aren’t fully efficient. Expectations go wrong. We’ve seen many other episodes in the past where expectations have gone wrong, where it looks like there were bubbles that happened. Certainly, in the housing market it did look like there was a bubble going on, and people were anticipating prices still going up. Nevertheless, the notion that people are forward looking and try to get things right, and often they do get things right—I still think that comes through O.K. You just have to be more qualified and more careful in how you state it. That would be my interpretation. Yes, weakened in terms of simple mechanical application, but the general thrust that markets are more efficient than any alternative—that aspect I don’t think is going to be changed. I don’t think you are going to see the world moving away from markets, including financial markets…. I don’t see China or Brazil, or a lot of other developing countries, making any radical changes in their movements towards the market, and I think for good reason. If you take the last twenty or thirty years—take the good and the bad, including this big recession— growth rates are pretty good…. That’s not only due to markets, but, certainly, market orientation and trade were the major factors responsible for that. But what about speculative bubbles? I recall interviewing Milton Friedman, in 1998, I think, and he said he thought the stock market was in a bubble. The idea that Chicago economists don’t believe in bubbles— was that more Greenspan? Absolutely. I think bubbles have been recognized. Certainly, Friedman and others, including myself, said there are phenomena that are hard to explain without thinking it’s a bubble. The people working in macro theory have had difficulty deriving these bubbles from any reasonably rational set of actors that are somewhat forward looking, although there are models that can do it now. That’s an analytical challenge. But the fact that there have been episodes throughout history that were clearly bubbles, that foreign- exchange rates overshoot and undershoot their real values—yes, I don’t think there’s any question about that. I don’t think that most Chicago School economists thought that these things didn’t happen. I think most Chicago economists recognized that, and, certainly, Milton Friedman did. Lots has changed at Chicago in recent years. What if anything is distinctive about Chicago economics these days? It’s not as distinctive as it was when I graduated with my Ph.D. from Chicago. In those days, there was a great belief in the price system, in people’s incentives, and in linking theoretical research to empirical research. That wasn’t common at most of our competitors. Both in micro and in macro, there were major differences. Chicago was hostile to Keynesian economics when I was in graduate school. Now there’s been a lot of convergence, particularly in the micro side of things. Chicago is less unique than it used to be. But I do think there is still a considerable distinctiveness about what might be called Chicago economics. One is skepticism about governments—that governments can organize activities well…. I think that is still a much stronger view in Chicago than in most other places. Two, more from the micro economists who analyze markets and how people respond to incentives, I think Chicago economists still consider that more important than most other places and don’t believe you can begin to understand how economies work, either empirically or theoretically, without giving that a major role. That’s not as sharp a difference as it was, but I still think it is significant enough to say there is a difference between Chicago and other places. Are these differences reflected in teaching? It’s certainly reflected in our course. [Becker and his colleague, Kevin Murphy, teach a graduate course in price theory.] Students tell us they haven’t had a micro course like this before. It would be reflected in a number of courses taught in both the business school and the economics department, and also in the law school courses, including some of Posner’s.
126 So the rest of the world has moved closer to Chicago? No question. Quantitative work linked to theory and incentives—that’s much more commonly found at our competitors. When I went out on the job market, there were some places that wouldn’t hire a Chicago economist, like Berkeley, for example. For decades they didn’t hire a graduate of Chicago. Harvard wasn’t too thrilled with the idea either. Do Chicago economists now get hired more widely? Well, much more so than they did. Harvard has a number of Chicago people, liked Ed Glaeser and others. M.I.T. has several Chicago people. Princeton has several. Even Berkeley has one or two. I’m not sure. Stanford certainly does. What about the notion of rationality and economics, which you yourself are closely associated with. How much of that is still valid? I think most of it is still valid. It depends on what you mean by rationality. But if you take the view that consumers, on the whole, react to incentives in the way you would predict they would respond—you get very misled in the world if you don’t put a lot of emphasis on that. Now there’s behavioral economics, which has two strands. One is extending the motives of people, which I worked a lot on from my dissertation on. Chicago was a pioneer in that. It’s gone further, but Chicago was a pioneer. The other aspect is that consumers make a lot of mistakes. I think there is no question that consumers make mistakes, and I think some of the behavioral-economics literature has made useful contributions in pointing out some of the types of mistakes…. That has been very useful but it certainly doesn’t overthrow the notion … one, that consumers most of the time make pretty good choices for themselves; and two— now I come back to the government—they generally make better choices than a government body would make for them. That thing we started our discussion with, I think has to be brought into play in evaluating the implications of, say, behavioral economics or books like “Nudge.” A lot of behavioral economics has been devoted to finance. What about investors—are they rational? Well, in the following sense. Not all investors are—surely not. But I think it’s not very easy to do better than the market. If you look at the behavioral economists who run hedge funds, I don’t think, on the whole, they have done much better than others. It’s not easy. Yes, there are a lot of mistakes made, but to take these mistakes and make money from them…. Some trends have been found—the small stock bias, and so on. It shows there are trends that can persist. But on the whole, if you look at financial markets they do a pretty good job—not a perfect job. And I think pointing that out has been a useful contribution. There was some theology built into the efficient-markets literature—some of it in Chicago. It became more theological than based on empirical evidence. So I think the attacks on it didn’t eliminate the real heart of it—these markets work pretty well—but there have been things that are puzzling to explain in a simple efficient-markets hypothesis. What about the revival of Keynesianism, which, again, Posner is associated with? That goes directly against the Chicago School. What is your response to that? Well, firstly, as a factual matter, there certainly has been a strong resurrection. That led me to believe that ninety per cent or so of economists were closet Keynesians all along, but they were afraid to admit it. How much it has been resurrected? I have a bit of an open mind on that…. A lot of the more explicit Keynesian remedies, like stimulus spending and the like, will need an evaluation of what they did in stemming the tide…. I’m not yet convinced that fiscal policy was very effective in containing this recession. Take the fiscal stimulus package—eight hundred billion dollars. They’ve hardly spent any of it yet. The traditional argument against fiscal stimulus spending, even from those that believed in it, was that by the time Congress got around to deciding how to spend it the recession was pretty much over, so you were spending it at the wrong time. Some of that is going to be happening now…. I think history will say, once we understand it, that it wasn’t very effective. The flexibility in financial response—it was understate in a lot of the previous literature, Keynesian and unKeynesian. That turned out to be important, I think. That’s why I think the Fed, despite some mistakes, did a pretty good job.
127 What about the area of macro-economic theory. I know it’s not your field… It’s not Posner’s field either. (Laughs) The models that Bob Lucas is associated with—rational expectations, dynamic general equilibrium models, and so on. Some people now say that they omitted so much—the entire financial sector was excluded—that they left the economics profession unprepared for this type of eventuality. Well, I think [Lucas] made a major contribution. I think there is no doubt about it. On the other hand, I think some of the dynamic general equilibrium models that were being promoted in macro didn’t turn out to be that helpful in helping us to understand what to do to combat a major recessionary event. If you look at the policies that were being advocated, both here and elsewhere, they were based on more traditional, I would say Friedmanite, type arguments. So I think there is some validity to that conclusion. Obviously, other people took that approach even further than Lucas. Yes, they did. And now we know that you’ve got to add more things into it. And I think we are going to improve macros, but I think some of the models were too simplistic. They captured important parts of the economy, but they weren’t really preparing us for how to handle a crisis, I think that is pretty clear, particularly financial crises. Surely, the models weren’t merely designed not to handle crises. These models and their builders ruled crises out by assumption, did they not? Well, some [did]. I don’t think Bob would be one, because I think Bob always thought that money was important. Maybe some of his disciples, or others in the field, did, but I think you’ve got to make a distinction. I don’t think everybody was on the same page on that. Some people did rule out the whole financial sector, seeing money as being unimportant. I think that stuff just turned out to be wrong. The whole argument of money as a “veil”? Right. How do you think that the financial crisis will change economics? The nineteen-thirties revolutionized economics. Do you see that sort of change? No, not of that magnitude. If this recession had got a lot worse, we would have seen two major changes: much more government intervention in the economy and a lot more concentration in economics in trying to understand what went wrong. Assuming I’m right and, fundamentally, the recession is over—a severe recession but maybe not much greater than the 1981 recession, or those in the nineteen-seventies—I think you are not going to see a huge increase in the role of government in the economy. I’m more and more confident of that. And economists will be struggling to understand how this crisis happened and what you can do to head another one off in the future, but it will be nothing like the revolution in the role of government and in thinking that dominated the economics profession for decades after the Great Depression. The Great Depression was a great depression by any measure you want to take— unemployment, decline in output, and so on. This recession pales in comparison. As a result, I think we are not going to have anything like the reaction we had at that point. You already see it. There’s been a backing away from some of the things that were being talked about. Pay controls—we are getting some, but less severe ones than people were talking about at the height of the recession. Do you think that Wall Street needs re-regulating? Well, I do. I think some additional regulation is needed, and I’ve called for some. But I don’t think you can rely on regulators, because they fail along with the market. If we install rules for capital requirement that would work more or less automatically—I think there is a good case for that, particularly for larger institutions which we know we are going to bail out if they get into trouble. Some people at Chicago don’t accept the too-big-to-fail doctrine. They say, “Let them go.” There are two questions. What we should be doing and what we actually will be doing. I don’t think we are going to let them go. We didn’t let them go. We never let them go. Continental Illinois bank we bailed
128 out at a time when it wasn’t such a crisis situation. We bailed out Chrysler. So if you accept that we are going to bail them out you’ve got to do something to reduce the probability that we are going to have to bail them out. Number two, should we bail them out? I think in this crisis we had to do it. I don’t accept the view that in this crisis we should just have let everything fall where it may. Yeah—the economy would have picked itself up, but I think it would have been a much more severe recession. So, you are in favor higher capital requirements on banks. Anything else? Increase capital requirements. I would have a differential requirement for bigger institutions, so they can’t get as big a multiple on their assets. Maybe derivatives markets—those are things I don’t feel very expert on, but I follow the literature a little bit, and I think some changes are needed. There are a number of things we should be thinking about. But one thing I should stress: I don’t think the regulators did very well during this period, and we don’t want policies that depend on a group of people living in Washington deciding on whether we should be doing something now or not. They didn’t do it well this time. There is no reason to believe they are going to be any smarter the next time, because it’s not going to be exactly the same situation that arises next time. Do you favor a return to some sort of Glass-Steagall framework? Should we try to separate deposit taking from speculation? I don’t believe so. I think there are some advantages to combining them. But you may want to force derivatives to go through an organized market. Capital requirements. Swaps—you may want to have some controls on. I hesitate to say more. There are a lot of people out there who know a lot more than I do. But those are the directions I would go in. A historical question. Chicago was always known for advocating deregulation of various industries— trucks, airlines, and so on. At the time, did people here talk much about deregulating the financial markets as well? Absolutely. We got rid of Regulation Q—interest rate controls. Milton Friedman and most of us were big advocates of that. Glass-Steagall, there was a lot of opposition to. Derivatives—they came in during the nineteen-seventies, and they weren’t fully understood…. But on the whole, in the nineteen-seventies, there is no doubt that there was support for deregulation of many aspects of the financial markets. In retrospect, was that position right? Isn’t finance different from other industries? It depends. We’ve always had regulations on bank reserves and so on. So, clearly, yes, there are differences. You don’t want to think in terms of free banking. I don’t think people at Chicago ever thought… I’ll speak for myself. I never thought, even outside the financial sector, that there should be no regulation. There are externalities. There’s pollution. There are a lot of things you can do. In the education area, the government financing students, and all that. Those things go back a long time. So it was never zero regulation. It was just an observation that in many sectors regulation seemed to be throttling industry—like the airline industry, the trucking industry, all the stock-market regulations: prices were kept up. Nobody wants to go back to the time when you had a cartel and price-setting. So people at Chicago did accept the need for dealing with externalities? What about Ronald Coase? [Coase, an English transplant who won the Nobel Prize in 1991, is famous for arguing that, under some circumstances, bargaining in the market will take care of externalities.] Chicago didn’t deny that there were externalities in the world. Chicago people were not anarchists. They always believed there was a significant role for government, and not simply in the obvious areas, like law and the military, and so on. In the educational area, take the vouchers system. It is government financed. There may be competition among providers, but it is government financed. Some help at the college level for people from poor backgrounds—there were many policy areas where Chicago economics tried to analyze what was wrong, and how you should go about fixing it, finding a better way to do it. Was there anything, looking back, that Chicago got wrong?
129 (Laughs) There are a lot of things that people got wrong, that I got wrong, and Chicago got wrong. You take derivatives and not fully understanding how the aggregate risk of derivatives operated. Systemic risk. I don’t think we understood that fully, either at Chicago or anywhere else…. Maybe some of the calls for deregulation of the financial sector went a little too far, and we should have required higher capital standards, but that was not just Chicago. Larry Summers, when he was at the Treasury, was opposed to that. It wasn’t only a Chicago view. You can go on. Global warming. Maybe initially at Chicago there was skepticism towards that. But the evidence got stronger and people accepted it was an important issue. But it hasn’t changed my fundamental view, and I think [the view of] a lot of people around here, that, on the whole, governments don’t manage things very well, and you have to be consistent about that. So I supported, say, the invasion of Iraq. In retrospect, I think that was a mistake, not only because things didn’t go that well, but because I didn’t really take into account enough that governments don’t manage things very well. You really have to have strong reasons for going in.
January 14, 2010 Interview with James Heckman Posted by John Cassidy This is the fifth in a series of interviews with Chicago School economists. Read “After the Blowup,” John Cassidy’s story on Chicago economists and the financial crisis. (Subscribers only.) I interviewed Heckman by telephone in late October. I began by referring to a piece in the University of Chicago Magazine in which he appeared to absolve Chicago economics of any blame in causing the financial crisis. How did he react, then, to the recent criticisms of Chicago School economics from Joseph Stiglitz, Paul Krugman, and others? James Heckman: Well, I want to distinguish between two different ideas. The Chicago School incorporates many different ideas. I think the part of the Chicago School that has been justified is the claim that people react to incentives, and that incentives are important. Nothing in what has happened invalidates that idea. People did react to incentives—clearly they did. It turned out that the incentives they were reacting to weren’t socially beneficial, but they definitely reacted to them. The other part of the Chicago School, which Stiglitz and Krugman have criticized, is the efficient-market hypothesis. That is something completely different. I think it is important to put it into historical perspective. In the late nineteen-forties and nineteen-fifties, when Keynesianism was really dominant, that sort of Keynesianism—so-called hydraulic Keynesianism—completely ignored incentives and the way people reacted to them. What Chicago did— Milton Friedman, George Stigler, and others—was to redress that balance. They did a whole lot of empirical studies that showed how people did react to incentives, such as changes in taxes or prices. That was incredibly influential, and it is still is. In the early nineteen-seventies, Martin Feldstein, of Harvard, showed how changes in unemployment benefits had a big impact on labor supply. That had an enormous impact on policy, and it was an application of Chicago economics. Feldstein said he read [Friedman’s] “Capitalism and Freedom” when he was at graduate school in Oxford, and it had an enormous influence on his thinking. That was the Chicago influence, and it still stands up. Linking empirical work to theory, and showing how things like taxes and government programs impact behavior. O.K. People were reacting to incentives—the mortgage lenders, the Wall Street bankers, the homebuyers—I agree. But weren’t market prices sending them the wrong signals, and isn’t that an indictment of Chicago economics, which, going back to Hayek, at least, has stressed the role of prices in coordinating behavior?
130 I tend to think of it more in terms of the market reacting too slowly. Certainly, from the end of 2007 onwards, when it was clear that problems were emerging, many Wall Street professionals steered away from mortgage securities. For a long time, though, the market was sending the right signals. People made a lot of money—the traders, and so on. It turned out not to be socially optimal, but that is a different issue. [Heckman then criticized behavioral economists, such as Berkeley’s George Akerlor and Yale’s Robert Shiller, for suggesting that the roots of the crisis lay in irrational behavior: overconfidence, animal spirits, and so on. For the most part, individuals responded to market incentives and reacted rationally, he insisted.] Look, I could subsidize people to murder children, and if I offered enough money I don’t think I would find much trouble finding a ready supply of murderers. Also, I think you could fault the regulators as much as the market. From about 2000 on, there was a decision made in Washington not to regulate these markets. People like Greenspan were taking a very crude and extreme form of the efficient-markets hypothesis and saying this justified not regulating the markets. It was a rhetorical use of the efficient-markets hypothesis to justify policies. What about the rational-expectations hypothesis, the other big theory associated with modern Chicago? How does that stack up now? I could tell you a story about my friend and colleague Milton Friedman. In the nineteen-seventies, we were sitting in the Ph.D. oral examination of a Chicago economist who has gone on to make his mark in the world. His thesis was on rational expectations. After he’d left, Friedman turned to me and said, “Look, I think it is a good idea, but these guys have taken it way too far.” It became a kind of tautology that had enormously powerful policy implications, in theory. But the fact is, it didn’t have any empirical content. When Tom Sargent, Lard Hansen, and others tried to test it using cross equation restrictions, and so on, the data rejected the theories. There were a certain section of people that really got carried away. It became quite stifling. What about Robert Lucas? He came up with a lot of these theories. Does he bear responsibility? Well, Lucas is a very subtle person, and he is mainly concerned with theory. He doesn’t make a lot of empirical statements. I don’t think Bob got carried away, but some of his disciples did. It often happens. The further down the food chain you go, the more the zealots take over. What about you? When rational expectations was sweeping economics, what was your reaction to it? I know you are primarily a micro guy, but what did you think? What struck me was that we knew Keynesian theory was still alive in the banks and on Wall Street. Economists in those areas relied on Keynesian models to make short-run forecasts. It seemed strange to me that they would continue to do this if it had been theoretically proven that these models didn’t work. What about the efficient-markets hypothesis? Did Chicago economists go too far in promoting that theory, too? Some did. But there is a lot of diversity here. You can go office to office and get a different view. [Heckman brought up the memoir of the late Fischer Black, one of the founders of the Black-Scholes option-pricing model, in which he says that financial markets tend to wander around, and don’t stick closely to economics fundamentals.] [Black] was very close to the markets, and he had a feel for them, and he was very skeptical. And he was a Chicago economist. But there was an element of dogma in support of the efficient-market hypothesis. People like Raghu [Rajan] and Ned Gramlich [a former governor of the Federal Reserve, who died in 2007] were warning something was wrong, and they were ignored. There was sort of a culture of efficient markets—on Wall Street, in Washington, and in parts of academia, including Chicago. What was the reaction here when the crisis struck?
131 Everybody was blindsided by the magnitude of what happened. But it wasn’t just here. The whole profession was blindsided. I don’t think Joe Stiglitz was forecasting a collapse in the mortgage market and large-scale banking collapses. So, today, what survives of the Chicago School? What is left? I think the tradition of incorporating theory into your economic thinking and confronting it with data— that is still very much alive. It might be in the study of wage inequality, or labor supply responses to taxes, or whatever. And the idea that people respond rationally to incentives is also still central. Nothing has invalidated that—on the contrary. So, I think the underlying ideas of the Chicago School are still very powerful. The basis of the rocket is still intact. It is what I see as the booster stage—the rational-expectation hypothesis and the vulgar versions of the efficient-markets hypothesis that have run into trouble. They have taken a beating—no doubt about that. I think that what happened is that people got too far away from the data, and confronting ideas with data. That part of the Chicago tradition was neglected, and it was a strong part of the tradition. When Bob Lucas was writing that the Great Depression was people taking extended vacations—refusing to take available jobs at low wages—there was another Chicago economist, Albert Rees, who was writing in the Chicago Journal saying, No, wait a minute. There is a lot of evidence that this is not true. Milton Friedman—he was a macro theorist, but he was less driven by theory and by the desire to construct a single overarching theory than by attempting to answer empirical questions. Again, if you read his empirical books they are full of empirical data. That side of his legacy was neglected, I think. When Friedman died, a couple of years ago, we had a symposium for the alumni devoted to the Friedman legacy. I was talking about the permanent income hypothesis; Lucas was talking about rational expectations. We have some bright alums. One woman got up and said, “Look at the evidence on 401k plans and how people misuse them, or don’t use them. Are you really saying that people look ahead and plan ahead rationally?” And Lucas said, “Yes, that’s what the theory of rational expectations says, and that’s part of Friedman’s legacy.” I said, “No, it isn’t. He was much more empirically minded than that.” People took one part of his legacy and forgot the rest. They moved too far away from the data. http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-james-heckman.html
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December 14, 2009 Postscript: Paul Samuelson Posted by John Cassidy In the fall of 1996, I arranged to interview Paul Samuelson in his office at M.I.T. for an article I was writing on the state of economics, which is available online to subscribers. At the allotted time, 12:00 if I remember rightly, there was no sign of Samuelson, who was then eighty-one. A few minutes went by. Then he bounced in on the soles of his feet, a diminutive man dressed in a light gray suit, a red-and-white- striped shirt, and a snazzy bow tie. He had gray, frizzy hair, shaggy eyebrows, and a wicked smile. His usual parking space had been occupied, he shouted to his secretary, so he had been forced to park in somebody else’s. “I hope it’s Franco’s. He’s out of town.” (Franco was Franco Modigliani, a fellow M.I.T. Nobel Laureate, who died in 2003.) Befitting a scholar of his stature, Samuelson had a big airy office that overlooked the Charles River. Books and journals lined the walls and floors, but Samuelson’s desk was neat. On the blackboard, there was a note of congratulations from his colleagues for winning the “National Medal of Science,” which he had received at the White House earlier that year. Samuelson joined M.I.T.’s faculty in 1940. He wrote more than four hundred journal articles, numerous monographs and a famous undergraduate textbook, which, he proudly informed me, had sold “three million or four million copies—I can’t remember which.” When he was awarded the Nobel Prize, in 1970, the citation read: “By his contributions, Samuelson has done more than any other contemporary economist to raise the level of scientific analysis in economic theory.” Almost forty years later, few would quibble with that description. I began by asking Samuelson whether he was still a Keynesian. Early in his career, he helped to formulate the income-expenditure framework that John Maynard Keynes put forward in his 1936 book, “The General Theory of Employment, Interest, and Money,” capturing its essential elements in a simple diagram that is still used in elementary economics classes. “I call myself a post-Keynesian,” Samuelson replied. “The 1936 Model A Keynesianism is passé. Of course, it doesn’t meant that it wasn’t right for its time.” He recalled attending an event that was held in Cambridge, England, in 1986 to mark the one-hundred-and-fiftieth anniversary of Keynes’s birth. “Everybody was there. And they all stood up and said, ‘I am still a faithful Keynesian. I am still a true believer.’ I was a bit rude. I said, ‘You remind me of a bunch of Nazis saying, I’m still a good Nazi.’ It’s not a theology: it’s a mode of analysis. I think I am a different Keynesian than I was ten years ago.” Samuelson then quoted Keynes himself. “When my information changes, I change my views. Don’t you, Sir?” Q: At this stage, how would you rank Keynes? A: “I still think he was the greatest economist of the twentieth century and one of the three greatest of all time.” Q: “Who are number one and number two?” A: “Adam Smith and Leon Walras.” Walras was a nineteenth century French economist who taught at the University of Lausanne. He was the first economist to write down the equations for a ‘general equilibrium’ of the entire economy, incorporating the markets of everything from sugar to iPods. He is widely regarded as the founder of mathematical economics. “We all march in his footsteps,” Samuelson said of Walras. Q: “Why did you become a Keynesian?”
133 A: “I was taught by the best neoclassical economists in the world at the University of Chicago”— Samuelson went to Chicago at sixteen in 1931, two years into the Great Depression and did his B.A. there. He then went to Harvard for his Ph.D.—“I did not throw out my education lightly, but what I was being taught was of no use in explaining what I saw around me. It was the Great Depression. In one year, there were virtually no housing sales in all of Chicago. Model A Keynesianism really fitted what was going on pretty well. It was the best wheel in town, so you used it to explain what was happening.” “Keynes’s contribution was not just to advocate spending government money in the middle of a recession. Every government had done that going back to the days of the Irish potato famine. What he gave to us was a way of thinking about the magnitude and the dimensions, and so forth.” Although Samuelson quickly accepted Keynes’s new teachings, many others didn’t. “Inexact sciences like economics advance funeral by funeral,” Samuelson said, and he brought up one of his teachers at Chicago, Frank Knight, a brilliant scholar who is today remembered primarily for the distinction he drew between risk, which can be assessed in probabilistic terms, and uncertainty, which can’t be represented mathematically. “He”—Knight—“really thought that Keynes was the devil,” Samuelson recalled. “He didn’t believe in God, but he knew a devil when he saw one. He insisted that the old economic system—the neoclassical one worked pretty well, except in the Great Depression.” Samuelson shot me an impish grin. “That’s a pretty good science,” he went on. “One that is true except for its exceptions.” Q: “Why did Keynesianism go into decline?” Samuelson answered my question in three parts. Firstly, he said, Keynesian economists and policymakers made the mistake of projecting the experience of the Great Depression onto the post-war era. When the military conflict ended, and defense spending started falling, they expected the economy to go into another slump. “That isn’t what happened at all,” Samuelson said. “People came back (from the war) and they were eager to consume. What is more, they had the wherewithal to consume.” Secondly, it turned out that, contrary to what Keynes had said in “The General Theory,” monetary policy mattered a lot. “In 1936, money had no important role,” Samuelson recalled. “Interest rates were one- eighth of one-eighth of one per cent. I did some research, and I found that the interest on one million dollars of ninety-day Treasuries was $37. People didn’t even bother to collect it. The Fed wasn’t important. During the war, the rumor went around that it’s authority would be stripped out and given to one of the wartime agencies. Post-war, money did matter. Milton Friedman et al turned out to be right. Where I fault my English colleagues is that they didn’t change when the situation changed. The English Keynesians got stuck too close to Model A Keynesianism.” The final blow to Keynesianism was stagflation: the combination of rising inflation and unemployment, which emerged in the early nineteen-seventies. In any democracy, Samuelson noted, there is a temptation for the government to try and stimulate the economy, even if that leads to a modest rise in inflation. “You bite the apple,” Samuelson said. “You know you can do it, so you are damn well going to do it. The temptation was to over-use it. It was a disease that Lord Beveridge (an early English Keynesian), Alvin Hansen (an early American Keynesian) and, indeed, Keynes, in some moods, were aware of. They suspected that at really full-employment you would have an incipient inflation problem.” It was this fear, Samuelson recalled, that led to direct restrictions on wages and prices—so called prices and incomes policies—but these measures didn’t have much success. “There’s nothing in Keynesian economics that would allow you to solve stagflation. But there’s nothing in neoclassical economics that would allow you to solve stagflation, either. Except, if you don’t allow unions to exist, or you don’t allow the poorest fifty- one per cent of the population to use the levers of politics in order to shift the income distribution in their way.” Nevertheless, Samuelson went on, “the failure to solve the ongoing problem of stagflation was the most important nail in the coffin of Keynesianism.” Q: “What is left today of Keynesianism?” Quite a lot, Samuelson replied. “Fairly simple Keynesianism has worked pretty well in explaining what has happened to the U.S. economy since 1980—certainly much better than it worked in the nineteen- seventies, with the supply shocks.”
134 Q: “What do you think of Robert Lucas? (Lucas, a professor at Chicago, helped to found the rational expectations approach to macroeconomics, which sees the economy as self-correcting and views attempts to stabilize the economy, by, for example, raising and cutting interest rates, as futile. The previous December, Lucas had picked up a Nobel Prize.) “I applaud the fact that Robert Lucas received the Nobel Prize last year. I thought it was overdue,” Samuelson said. In terms of economic theory, he went on, the rational expectations approach was very significant, but its practical importance was negligible. “The rational expectations paradigm of analysis had nothing to contribute to the Reagan administration, where it would have been welcome, or, indeed, to the Federal Reserve Board’s outside committee of academic consultants, which I used to attend. There was usually one rational expectations man at each meeting, but it was rarely the same one twice. In terms of practical analysis, they had nothing to teach us.” “What is real”—of the rational expectations approach—“is that you can’t fool all of the people all of the time,” Samuelson said, but the suggestion that changes in monetary policy don’t impact the economy, at least in the short-term, was plainly wrong. “That is the Achilles heel of the Lucas vision.” Equally troubling, Samuelson went on, were later elaborations of the rational expectations approach, particularly the “real business cycle” theory, which posited that the economy at large was in a continuous state of equilibrium, and that economic outcomes, including mass joblessness, were a product of voluntary choices. “If somebody says, as Friedrich Hayek said when one in four Germans were unemployed, that people are out of work because they are choosing to consume leisure, that, to my mind, is a ridiculous real-business cycle theory.” The rational expectations approach isn’t just an economic theory: it is an austere theory of human behavior. It assumes that consumers and businessmen are ultra-rational, and that they are endowed with complete knowledge of how the world operates. In one famous adaptation of this idea, Robert Barro, who is now at Harvard, argued that increases in government spending had little or no impact on GDP: they merely prompted people to save more because they know that, ultimately, the increases in spending would have to be financed by higher taxes. Samuelson expressed skepticism about this idea, noting that during the Reagan era there had been enormous budget deficits but no concomitant rise in private saving. “I’m about as rational a person as you could get, but did I set up a sinking fund to pay off my taxes? No. Was I lazy and irrational? No...At bottom, I’m in the Herbert Simon camp of limited rationality. People are rational, but you are always doing things in a hurry and with limited information. The last thing you can do is a big optimization problem down to five decimal places.” Samuelson’s role in the evolution of economic methodology is somewhat ambiguous. On the one hand, he was skeptical of the formal methods that Lucas and Barro employed. But it was he, more than anybody else, who helped to turn economics into a branch of applied mathematics. In his 1947 treatise “Foundations of Economics Analysis,” Samuelson showed how many types of economic decisions, such as what good a consumer should purchase, or how many employees a firm should hire, can be viewed as mathematical optimization problems. The framework he elucidated, which employed multivariate calculus, still dominates graduate textbooks. By the mid nineteen-nineties, many economists, including some very eminent ones, were concerned that the formalization of economics had been taken too far: that it had come to dominate the subject at the expense of economic intuition. I asked Samuelson whether mathematics was now too important in economics. Rather than answering the question directly, he talked about a lecture he attended in the nineteen-thirties by Lionel Robbins, a well-known professor at the London School of Economics. “Lionel Robbins gave an address saying this math stuff is just a passing fad. I was all of twenty-eight, but I thought, ‘Poor fellow, he just doesn’t realize that he’s missing the train.’ That was just a bad understanding of the dynamics of the profession. Math is a problem for everybody in the profession and it has been for years. We all say, math should be used just up to the point that I have used it, and no more...I always say to our graduate students when they are leaving: ‘As a graduate student at a top-notch university, you tend to lose touch with reality. You have been engaged in puzzle solving and learning a new language. When you emerge, you may tend to think you have been asleep for several years.’ The paradox is that the best people in practical terms are the Jim Tobins, the Bob Solows—the guys who are awfully good at the technical stuff as well.” Samuelson also brought up his colleague Modigliani, whose parking space he may have been
135 occupying, noting “he has done more for Italy than pizza,” and the prevalence of technically adept M.I.T. graduates in the Clinton administration. (They included Lawrence Summers, Joseph Stiglitz, and Laura Tyson.) “Like herpes, math is here to stay,” he said. “It takes strong math to defeat misleading math. For example, ordinary least squares”—a standard statistical method—“is misleading. It takes more mathematics than ordinary least squares to understand three-stage least squares, co-integration, or unit roots, all of which are improvements on ordinary least squares. But it does lead to a communication problem. The number of people who can communicate effectively, like Paul Krugman, is very small. I will say something. It won’t be a new John Kenneth Galbraith who cleans of the Augean stables of economics. I think that the big changes in economic doctrines which will be used in the twenty-first century will come from inside the profession.” Q: “But what about the state of macroeconomics? Is it not troubling?” A: “A lot of people think that macroeconomics is in a mess, and it is true. But the mess in macro is not that there are now inferior people going into the subject. The problem is that you are dealing with complex, intractable, and imponderable problems. I can, in three afternoons, think up a new puzzle in portfolio theory and work out its implications. But that doesn’t enable me to translate that knowledge into cleaning up the mess in macroeconomics. Macroeconomics is in a mess because we have made so much progress in the control of the old-fashioned business cycle. When macroeconomics was crucial, during the Great Depression, things were by no means as clear as they are now.” At this point, Samuelson again gave credit to Keynes, for enabling economists to think through the causes and solutions to economic slumps. He brought up the economic situation in Japan, which was enduring a lengthy period of stagnation following the bursting of a stock market and property bubble. “The Japanese government doesn’t have the power to expand the economy through monetary policy because interest rates are at half a per cent. That’s pure Keynes. That’s the liquidity trap. That’s a little bit of 1936 Model A Keynesian economics.” Moreover, he said, it wasn’t just the Keynes of “The General Theory” that remained valuable. He cited one of Keynes’s earlier books, “A Tract on Monetary Reform,” in which he put much more emphasis on money and interest rates. “I think nineteen-twenties Keynesianism—the Keynes of the Tract on Monetary Reform—that is what is needed in a well-run market economy. You lean against the wind and you try to do it intelligently.” By this, Samuelson meant that during an economic downturn the Fed should reduce interest rates to stimulate the economy; when the economy has recovered, the Fed should raise interest rates to head off a speculative boom. At the time of the interview, Alan Greenspan and his colleagues were holding off from raising interest rates despite the fact that the economy was chugging along. The previous day they had again held rates steady. “I think the Federal Reserve made a mistake in not raising interest rates yesterday,” Samuelson said. Samuelson’s comments proved prescient. The Fed’s reluctance to raise interest rates eventually resulted in the stock market bubble of 1998-2000 and the real estate bubble of 2003-2007. When I had finished asking my questions, Samuelson inquired about the article I was writing. “Is it going to be one of those interminable New Yorker pieces?” he asked. I assured him that these days we tried to keep things at more manageable lengths—perhaps five thousand words, or so. “Nice work if you can get it,” he said, looking at his watch and leaping up for his chair. The weekly faculty lunch was about to begin. “I’ve gotta go,” Samuelson said. And with that, he marched out of the office. http://www.newyorker.com/online/blogs/johncassidy/2009/12/postscript-paul-samuelson.html
136 Grasping Reality with Opposable Thumbs
The Semi-Daily Journal of Economist J. Bradford DeLong: A Fair, Balanced, and Reality-Based Look at the World
Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; [email protected].
Krugman, Fox, McCain, Prescott, and Company
September 05, 2009 Justin Fox: Paul Krugman tells how economists got it all wrong: the one big issue I have with the piece is that, while economists certainly got lots of things wrong before the crisis (as did almost all of us), many members of the profession have acquitted themselves pretty well since things turned really ugly last year. Krugman goes on and on about the "freshwater" economists (at the Universities of Chicago, Rochester and Minnesota) and their crazy ideas about perfect markets. But what's telling is that the hardcore freshwaterites have had almost no impact on economic policy for the past year—neither in the Bush months or the Obama ones. Sure, Nobelist Ed Prescott, a former freshwater economist who now teaches in Phoenix and thus should probably be described as a no-water economist, made the statement that: "I don't know why Obama said all economists agree on [the need for a stimulus bill]," Prescott said. "They don't. If you go down to the third-tier schools, yes, but they're not the people advancing the science." Unless you believe that pretty much anyplace other than Arizona State University is a third-tier school, this is patently untrue, evidence of the extreme isolation of the remaining true believers in rational expectations and real business cycles and other such elegant but profoundly unhelpful macroeconomic theories developed since the 1960s. Even some of the true believers seem far more aware than Prescott that the past year's events have challenged their theories—as the University of Chicago's Robert Lucas told me last fall, "everyone is a Keynesian in a foxhole." Among economists with actual influence on policy over the past year—Philip Swagel in the Paulson Treasury, Larry Summers and Christina Romer and Austan Goolsbee and etc. in the current White House—there's been a great willingness to experiment and accept that markets don't always deliver optimal results. The result: an economic recovery that seems to be gaining strength. So don't totally count the economists out... Four remarks:
137 (1) In context Lucas's "everyone is a Keynesian in a foxhole" is not an endorsement of the position and an admission that he holds it, but instead much closer to a denunciation of economists for their intellectual weakness in reaching for Keynesian remedies: Well I guess everyone is a Keynesian in a foxhole, but I don't think we are there yet. Explicitly temporary tax cuts do nothing: people just bank them. Supply side tax cuts are fine with me, but they take time to work and at some point we need the revenue to run the government. I feel the current situation requires a lender of last resort but not a fine tuner. As, indeed, was clear when Lucas made his big denunciation of Christy Romer (and by implication Summers, and Orszag, and Elmendorf, and Bernanke, and Swagel, and so on) for what I can only characterize as "corruption": Why a Second Look Matters: The Moody's model that Christina Romer -- here's what I think happened. It's her first day on the job and somebody says, you've got to come up with a solution to this -- in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning. So she scrambled and came up with these multipliers and now they're kind of -- I don't know. So I don't think anyone really believes. These models have never been discussed or debated in a way that that say -- Ellen McGrattan was talking about the way economists use models this morning. These are kind of schlock economics. Maybe there is some multiplier out there that we could measure well but that's not what that paper does. I think it's a very naked rationalization for policies that were already, you know, decided on for other reasons... Note what Lucas does not say: He does not say that Christy Romer has a different reading of the evidence than he has. He does not say that Christy Romer has a different assessment of policy risks than he has. He does not say that Christy Romer has a different tolerance of policy risks than he has. He says that she is providing a "very naked rationalization" for economic policies that Obama decided upon for completely non-technocratic political reasons. Now this is complete garbage. Christy Romer does have a very different view--she would call her view an evidence-based view--of what fiscal policy does in conditions of extremely low interest rates than Robert Lucas does. (2) Unfortunately for us these are not fringe figures. To an outsider to academic economics like Justin Fox they may appear to be embarrassing madmen in the attic--and to the extent that that becomes the conventional wisdom then I think the good guys will have won this one. But inside the profession that is not the case. Robert Lucas is a Nobel Prize winner and the head of the still-dominant school of business-cycle analysis when he claims that Christy Romer (and by implication Ben Bernanke, and Doug Elmendorf, etc.) is providing "very naked rationalization[s]" for politically motivated policies. John Taylor is a former Undersecretary of the Treasury for International Affairs when he claims that forecasters like Mark Zandi and Larry Meyer who find the stimulus to be being somewhat effective are just "repeating what they said in January" because they "haven't looked at the numbers." Edward Prescott is a Nobel Prize winner and head of the second-plae school of business-cycle analysis when he claims that supporters of current economic policies "are not the people advancing the science." Eugene Fama is the head of the dominant school in finance and perennially on the Nobel Prize short list and he claims that the existence of the savings-investment identity makes it logically impossible for the government to boost the economy via spending--an analytical error that we here at Berkeley teach our freshman not to do for it is, as Paul Krugman calls it, "the most basic
138 fallac[y] in economics--interpreting an accounting identity as a behavioral relationship." John Cochrane is the smartest analyst of aggregate asset prices I know, and yet he too commits fallacies that I had thought were dead since the 1920s when he writes that "every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out.” Luigi Zingales is one of the smartest young Chicago economists I know of, and yet demonstrates that he has not thought about general equilibrium in even the most cursory sense--has not thought how you analyze a system in which you have to keep straight the three commodities of cash, financial assets, and goods--when he writes that "if a nuclear bomb had destroyed all roads... [would] we [then claim] that to alleviate the economic impact... we should invest in banks[?]... [I]f the problem is the roads, you want to rebuild roads.... And if the problem is the financial sector, you want to fix this and not build roads." (3) These are not dumb people. But these are people for whom whole blocks of what used to be called "economics"--the monetary history of the nineteenth and the first half of the twentieth centuries, the "lowbrow" theories of 1920-1980 from Fisher, Wicksell, Keynes, and Hicks through Metzler, Tobin, and Friedman--are taboo. They would be demonstrating to their peers that they were not serious highbrow economists if they consulted them, and so when they have to deal as they have in the past two years with Fisher-Wicksell-Hicks issues they approach them with great ignorance and get them wrong. (4) Were it not for the Republican Party, this would not matter very much. The failure of high brow macro to have anything to say about our current situation--where is the misperception of relative prices that has given us 10% unemployment with both firms and workers being happy with the situation? Where is the technology shock that has pushed aggregate production relative to trend down by 8%--would lead their colleagues in other subdisciplines to draw the natural conclusions, cut back on hiring domestic macroeconomists, and hire more international finance specialists (where the analytical culture is, I think, healthy), microeconomists, historians, and institutionalists instead. The big problem is the interaction of the guys in the attic on the one hand and the Repubican Party on the other. Had John McCain won the presidential election of 2008, at the start of 2009 he would have in all likelihood proposed a trillion dollar fiscal stimulus bill--3/4 tax cuts and 1/4 aid to states--and he might have picked Tim Geithner for his Treasury Secretary. Democrats would have called for fewer tax cuts, more state aid, and some government infrastructure spending initiatives in the fiscal policy mix, but the need for the government to cushion the recession would have brought them into line. When Obama took office he bid $800 billion for his fiscal stimulus bill--about 1/3 spending, about 1/3 aid to states, about 1/3 tax cuts--thinking that would be a plan that would win broad bipartisan assent. And he was wrong. The Republicans decided to follow the Gingrich strategy: try as hard as they could to make the Democratic president appear a failure by blocking all his initiatives. But you can't block an initiative without a story for why it is bad for the country. And that, all of a sudden, makes the madmen in the attic the favored economic advisors of the Republican Party. This is, I think, very dangerous. The Republicans will win elections in the future. And when they do will we want Ed Prescott to be running economic policy? January 14, 2010 Yet More Corruption at the University of Chicago...
139 John Cassidy asks Eugene Fama what he thinks of Paul Krugman's and Larry Summers's arguments that government intervention in finance at the end of 2008 prevented a very deep depression indeed. And Fama says that he does not think about them at all: Interview with Eugene Fama: Rational Irrationality : The New Yorker: Cassidy: So you don’t accept the view... [of] Paul Krugman, Larry Summers, and others... that the government prevented a catastrophe? Fama:Krugman wants to be the czar of the world. There are no economists that he likes. (Laughs) Cassidy: And Larry Summers? Fama: What other position could he take and still have a job? And he likes the job... This I-don't-have-to-deal-with-their-arguments-because-they-are-corrupt-and-do-not-believe- what-they-are-saying is remarkably common among University of Chicago economists. We also see it in Richard Posner's claim that Larry Summers and Paul Krugman and Christina Romer are corrupt--are saying things they do not believe: Richard A. Posner's Ethical Lapses: this raises the question of the ethical responsibility of academic economists... Romer (and Krugman, and Lawrence Summers, and many others)... either to adhere to academic standards... or to make clear to the public that they are on holiday from those standards... [in] what they say in their public-intellectual or governmental careers...: We see it in Robert Lucas's claim that Christina Romer is corrupt--is saying things that she does not believe: Krugman, Fox, McCain, Prescott, and Company: Lucas: The Moody's model that Christina Romer -- here's what I think happened. It's her first day on the job and somebody says, you've got to come up with a solution to this -- in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning. So she scrambled and came up with these multipliers and now they're kind of -- I don't know. So I don't think anyone really believes. These models have never been discussed or debated in a way that that say -- Ellen McGrattan was talking about the way economists use models this morning. These are kind of schlock economics. Maybe there is some multiplier out there that we could measure well but that's not what that paper does. I think it's a very naked rationalization for policies that were already, you know, decided on for other reasons... Fama or Lucas or Posner could never have said any of those things if they had bothered to spend fifteen minutes talking to any one of Romer or Krugman or Summers about the issues. They would have learned that Krugman and Romer and Summers say what they believe and believe what they say. Stupidest men alive... http://www.j-bradford-delong.net/
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Leaders of SEC and FDIC say agencies' failings contributed to financial crisis By Brady Dennis Washington Post Staff Writer Friday, January 15, 2010; A18 Two top federal regulators said Thursday that their agencies had fallen short in the run-up to the financial crisis, in part because thriving mortgage markets and soaring Wall Street profits created a false sense of security. The heads of the Securities and Exchange Commission and the Federal Deposit Insurance Corp. said that shortcomings in their agencies, coupled with flaws in the larger regulatory system, contributed to the period of great boom and even greater bust. "Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities," FDIC Chairman Sheila C. Bair said in written testimony to members of the bipartisan Financial Crisis Inquiry Commission, which is investigating the causes of the financial meltdown. "Record profitability within the financial services industry also served to shield it from some forms of regulatory second-guessing." Bair told commissioners that with firms raking in monumental profits, it was difficult for regulators "to take away the punch bowl." Bair asserted that the "stovepiped financial regulatory framework" prevented any individual regulator from recognizing risks that had begun to pervade the entire financial system, but she said that even with the information available, "none of us, I think, did as good a job as we might have in analyzing it." Bair and SEC Chairman Mary Schapiro spoke strongly Thursday in favor of a broad range of regulatory reforms, including transparency in the shadowy market for financial derivatives, elimination of the designation of firms as "too big to fail," tougher consumer-protection measures, more oversight of credit-ratings agencies, and changes in executive compensation structures to discourage excessive risk-taking. Bair said that as lawmakers consider overhauling financial regulation, their approach "must be holistic and give regulators the tools to address risks through[out] the system." Schapiro also acknowledged regulatory lapses at the SEC and encouraged strong new reforms. "No one should hesitate to admit mistakes, learn from them, and make the changes needed to address and identify shortcomings," Schapiro, who took over the agency a year ago, told commissioners. She said that in recent months, "the SEC has worked to review its policies, improve its operations, and address the legal and regulatory gaps that the crisis has laid bare" and that the agency also is "investigating a significant number of matters growing out of the financial crisis." Appearing before Bair and Schapiro testified, Attorney General Eric H. Holder Jr. told the panel that authorities are using "every tool at our disposal" to root out financial crimes that contributed to the meltdown and to deter similar conduct in the future. Holder said the FBI is investigating more than 2,800 cases of mortgage fraud, in addition to federal probes involving securities fraud and corporate malfeasance. He said this year's federal budget will allow the hiring of 50 new FBI agents and more than 150 new lawyers to focus on such cases.
141 Later in the day, commission members heard from state and local authorities, including Illinois Attorney General Lisa Madigan. She argued that state officials are often the "first responders" to abuses in the marketplace and should retain authority to investigate and prosecute harmful financial practices. "In the years preceding the crisis, federal regulators often showed no interest in exercising their regulatory authority or, worse, actively hampered state authority," Madigan said. The 10-member commission, consisting of six Democrats and four Republicans appointed by congressional leaders, was allocated $8 million for its work. Members have until Dec. 15 to produce a final report. The panel's Democratic chairman, former California treasurer Philip Angelides, has said he hopes the commission can act as a "proxy for the American people" in answering fundamental questions about the causes of the financial crisis. On Wednesday, the commission held its initial public hearing, in which members pressed four of the nation's most powerful bankers -- Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of J.P. Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America -- about the role their firms played in the near-collapse of the global financial system. http://www.washingtonpost.com/wp-dyn/content/article/2010/01/14/AR2010011404478_pf.html
142 Money & Policy
January 15, 2010 Accord Reached on Insurance Tax for Costly Plans By ROBERT PEAR and STEVEN GREENHOUSE WASHINGTON — The White House, Congressional leaders and labor unions said Thursday that they had reached agreement on a proposal to tax high-cost health insurance policies, resolving one of the major differences between the House and the Senate over far-reaching health legislation. Their negotiations produced changes to a tax included in the bill passed by the Senate last month. The changes would lessen and delay the impact of the tax on workers and would reduce the amount of revenue collected. The revenue would help finance coverage for millions of people who are uninsured. Labor leaders hailed the deal and said they were prepared to fight for passage of the legislation. “We have seen tremendous progress over the last couple of days,” said Richard L. Trumka, president of the A.F.L.-C.I.O. Under the bill passed last month by the Senate, the federal government would have imposed a 40 percent tax on the value of employer-sponsored health coverage exceeding $8,500 a year for an individual and $23,000 for a family. The tax would have taken effect in 2013. White House officials, Democratic Congressional leaders and labor unions said Thursday that they had agreed to an increase in those thresholds to $8,900 for an individual and $24,000 for a family. Moreover, they said, starting in 2015, the cost of separate coverage for dental and vision care would be excluded from the calculations. In addition, they said, health plans covering state and local government employees and collectively bargained health plans would be exempt from the tax until 2018. This transition period addresses the concerns of schoolteachers and other public employees who have denounced the tax. For people in certain high-risk occupations, including police officers and construction workers, thresholds would be higher: as high as $27,000 for a family. In addition, Mr. Trumka, who led a team of labor leaders negotiating with the White House, said the thresholds would be increased for “age and gender,” to reflect the higher premiums often charged for health plans with large numbers of women, older workers and retirees. He said the changes would reduce the amount of revenue from the tax by about 40 percent, to $90 billion over 10 years. The tax in the Senate bill would have generated $149 billion over 10 years. A White House official, speaking to journalists on condition of anonymity, said he did not know how much revenue would be lost as a result of the changes. The White House said that the tax would still tend to slow the growth of health spending, and that the overall bill would not add to the federal budget deficit. President Obama and Congress will find ways to offset the loss of revenue from the tax, the White House said. Republicans said the agreement was another special deal to win votes for the legislation by mollifying some of the Democrats’ most loyal supporters.
143 Progress in the negotiations came as Mr. Obama addressed House Democrats on Capitol Hill. He exhorted them to finish the job on health care despite fierce criticism from Republicans and fears among some Democrats that they could pay a political price for passing the legislation. “Let me tell you something,” Mr. Obama said, pointing to elements of the legislation he said would increase access to health care. “If Republicans want to campaign against what we’ve done by standing up for the status quo and for insurance companies over American families and businesses, that is a fight I want to have.” The agreement has not been vetted by rank-and-file members of the Democratic caucus in either house of Congress. Nor has the Congressional Budget Office reviewed it. The proposed tax could be further modified based on feedback from lawmakers and the budget office. Mr. Obama and some economists contend that the tax could help rein in health spending by encouraging employers to reconfigure health benefits. While insurers would be responsible for paying the tax, the Congressional Budget Office and private economists say the cost would be passed on to workers and retirees. Representative Joe Courtney, Democrat of Connecticut, who has led opposition to the tax, said the agreement indicated that “a lot more intelligence is being applied to this issue.” But he added: “I am reserving judgment. I would like to see more detail.” The tax could affect a significant number of health plans in the future because the thresholds would probably rise less than health costs and insurance premiums. Under the deal, as in the Senate bill, the thresholds would rise with the Consumer Price Index, plus one percentage point. The thresholds would be further increased if insurance costs grow faster than expected from 2010 to 2013. Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees, said he spoke to members of the House Democratic Caucus at their conclave on Thursday. “They were quite receptive, although there were some people who wanted to fight for no excise tax at all,” Mr. McEntee said. Republicans said the special treatment of collectively bargained health plans was a favor to union members, who have supported Democrats with campaign contributions and votes. Representative John Kline of Minnesota, the senior Republican on the House Education and Labor Committee, said that while union members might avoid the tax on high-cost health plans for five years, nonunion workers would have to pay it. “This latest back-room maneuver is another example of how administration officials and their enablers in Congress will cut deals with their special-interest allies to impose a government takeover of health care,” Mr. Kline said. White House officials defended the provision, saying it would allow employers, employees and insurance companies to prepare for the new tax. Under the agreement, Mr. Trumka and White House officials said, people in collectively bargained health plans could buy coverage through new government-regulated markets, known as insurance exchanges, starting in 2017. The officials said they were still working with Congress on details of this arrangement. Robert Pear reported from Washington and Steven Greenhouse from New York. Carl Hulse and David M. Herszenhorn contributed reporting. http://www.nytimes.com/2010/01/15/health/policy/15health.html?th&emc=th
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Developed markets are more at risk of default By Charles Robertson Published: January 14 2010 15:43 | Last updated: January 14 2010 15:43 The growing uncertainty about Greece’s fiscal woes illustrates just how much better emerging market public finances are in this crisis – and concerns about default should be focused more on developed markets, says Charles Robertson, head of EMEA research at ING. “Markets have tended to sell central European countries during the jitters over Greece,” he says.“They should actually be selling other developed markets.” Emerging market bonds shed junk status - Jan-13 Argentina woes will prove costly for comeback - Jan-13 Indonesia bond sale short of target - Jan-14 Lex: Sovereign CDS - Jan-13 Sovereign default risks loom - Jan-13 Sovereign bonds seen as riskier than corporates - Jan-12 Mr Robertson says EM countries entered the fiscal crisis with their economies in far better shape than developed markets, with public debt ratios of around 10-50 per cent of gross domestic product and budget deficits of between 3 and 6 per cent of GDP. “Going into 2010, we see most emerging markets still in a 2-7 per cent of GDP budget deficit range, with public debt ratios around 40 per cent of GDP.” And he says the number of developed markets with budget deficits and debt ratios that are, on average, double that of emerging markets, suggests that this is where sovereign risk lies in coming years. “It is neatly coincidental that this year Israel will be joining the developed markets MSCI index – which is where its high debt and budget deficit ratios suggest it should be. “Among other EMs, India looks in the worst position, but its high growth could help improve the budget deficit and public debt ratio figures. Hungary and Egypt could also be said to be approaching developed market levels – which is not a good thing.” http://www.ft.com/cms/s/0/b757294c-011c-11df-a4cb-00144feabdc0.html
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Obama attacks 'obscene' bonuses By Krishna Guha in Washington Published: January 15 2010 02:00 | Last updated: January 15 2010 02:00 Barack Obama slammed "obscene" bank bonuses yesterday, as the US president formally unveiled plans to impose a levy on big financial institutions to recoup some of the costs of the financial crisis. "We want our money back and we're going to get it," Mr Obama said, pledging to "recover every single dime the American people are owed" for the troubled asset relief programme bail-out fund. Appearing keen to pick a political fight with the big banks, Mr Obama faulted them for trying to "return to business as usual" with "risky bets to reap quick rewards" and compensation practices that did not reflect the state of the nation. "I'd urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or your citizens but by rolling back bonuses," he said. Aides said the levy would recover at least $90bn (£55bn) from 50 of the largest institutions, including US subsidiaries of foreign banks and insurance companies as well as US banks. The US will urge other countries to adopt a similar approach of forcing the financial sector to pay for bail-out costs rather than adopt permanent additional levies on banks to fund any future rescues, officials told the FT. The US Treasury argues this would establish a level playing field. Governments outside the US generally welcomed the move. "I really celebrate this proposal by the US government because it shows that the political momentum to move in this direction is still there," Dominique Strauss-Kahn, the managing director of the International Monetary Fund, told reporters. But officials said other nations were developing their own plans for future taxation of banks and may not adopt the US model. "We've already charged appropriately, so it would be difficult to go to the banks and charge them again," said a British official. Moreover, many non-US governments favour ongoing bank surtaxes rather than US-style temporary levies linked to costs from the last crisis. The US levy will be set at a rate of 15 basis points on debt liabilities other than insured deposits. The Treasury estimates that 60 per cent of the fee will be borne by the top 10 institutions, with the burden falling disproportionately on investment banks, such as Goldman Sachs, and others with small US deposit bases. Analysts said the levy would have a significant impact on large banks. Executives at the US subsidiaries of foreign banks reacted with surprise and anger at news they would have to pay the levy. http://www.ft.com/cms/s/0/967b771a-0175-11df-8c54-00144feabdc0.html
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Overseas unlikely to follow levy move By Chris Giles in London Published: January 14 2010 18:44 | Last updated: January 14 2010 18:44 While responding positively to the proposed US levy on banks, which brings the Obama administration closer to European thinking, the international community is unlikely to follow suit, officials in London predicted on Thursday. The main international reaction this week to the US move has been surprise. This is because the administration has opposed financial transaction and bonus taxes when other countries have proposed them, to the embarrassment of figures such as Gordon Brown, Britain’s prime minister. US leads crusade to tax banks over crisis - Jan-14 Lex: Obama’s levy - Jan-14 Obama demands Wall St payback - Jan-14 Speech: Obama on bank levy - Jan-14 US levy expected to raise $90bn - Jan-14 FT Alphaville: Back-of-the-envelope levy - Jan-14 While welcoming opportunities for a discussion, British officials also predicted that the US desire for international backing for its levy would not be met quickly, since it will now have to join others to form the basis of an International Monetary Fund report, due to be published in April. The IMF was given the task to prepare a “range of options” for “how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions” to counteract financial sector crises. Similar work is also being undertaken at the European Union level. One international sticking point will be whether banks should be asked to pay retrospectively for the costs of government interventions, as under the US “financial crisis responsibility fee”, or should contribute towards funds that will help prevent a recurrence and finance future bail-outs. London wants a pre-funded scheme and already charges banks higher prices for capital and funding than the US does. http://www.ft.com/cms/s/0/277c5cd8-013b-11df-8c54-00144feabdc0.html
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Argentina woes will prove costly for comeback By Jude Webber in Buenos Aires Published: January 13 2010 16:37 | Last updated: January 13 2010 16:37 Further woes were piled on to Argentina’s ambitions to re-introduce itself on to global capital markets this week after a New York judge, at the request of two vulture funds, froze assets of the country’s central bank held at the US Federal Reserve. The amounts frozen – at just $1.75m – are small compared to the $20bn of outstanding debt still unpaid since the country’s $100bn default in 2001. But the judgment is yet more bad news for the country’s president, Cristina Fernández, after a week of crisis where Martín Redrado, the central bank president, refused her demands to quit after failing to hand over $6.5bn of the bank’s reserves to a government fund to pay off debt. Emerging market bonds shed junk status - Jan-13 Indonesia bond sale short of target - Jan-14 Lex: Sovereign CDS - Jan-13 Sovereign default risks loom - Jan-13 Sovereign bonds seen as riskier than corporates - Jan-12 Short view: Corporate bonds - Jan-13 Closing the door on what was the largest sovereign default in history has become a top priority for the government in South America’s second-biggest economy. Ms Fernández says it has become “imperative” after eight years shut out of capital markets. But the latest developments, sparked by her decision to use central bank funds to pay off debt, has suddenly made that goal costlier. Argentina had been hoping for a high single digit interest rate – about 9.5 or 9.75 per cent – in its long-awaited return to capital markets. Yet economists and analysts are sceptical that can still be achieved following developments over the last week. “That isn’t going to happen now,” says Alberto Ramos, an economist at Goldman Sachs. Argentina is widely seen as a risky investment bet not just because of its continued default but because of unexpected policy moves, such as Ms Fernández’s nationalisation of pension funds in 2008, and its alleged manipulation of economic data for the past three years to conceal inflation. Argentina is a major world producer of food commodities like soya, vegetable oils, corn and wheat and although exports rose by a third to nearly $16bn in the first 11 months of last year compared with 2008, high spending by the centre-left government has left it with a potential gap of some $7bn in meeting its debt obligations of about $13bn this year. Unable to tap markets and apparently unwilling to rein in spending, the government has had to resort to costlier options – like selling a bond to ally Venezuela in 2008 at an interest rate of nearly 15 per cent.
148 The government had been hoping to launch an offer to the holders of the remaining $20bn in debt as soon as it gets approval from regulators, expected later this month, as a key step in its return to capital markets. But an unprecedented scandal – sparked, ironically, by Argentina’s need for financing – blew up last week after Martín Redrado, the central bank president, refused the president’s demand for him to quit after failing to hand over $6.5bn of the bank’s reserves to a government fund to pay off debt. Ms Fernández then fired him, only to find both her order to oust him and a presidential decree authorising the use of reserves to pay off debt overturned by injunctions that has left the government in limbo and put Mr Redrado back in his job – at least for now. The government has vowed not to back down and legal wrangling could go right to the Supreme Court. “We don’t expect the timetable of the offer to be altered,” says one market source familiar with the situation. “There are no benefits in any delay.” The new offer to the holders of defaulted bonds, dubbed “holdouts” because they spurned a debt restructuring in 2005 and have been holding out for a better deal ever since, involves institutional investors from vulture funds to US pension funds and investors spanning Italy, Japan and Germany, signing up for a new $1bn bond. The government has been tight-lipped on details of the plan, but media leaks have suggested a deal generous to holdouts. Although it will contain a similar “haircut” to the 2005 offer, in which bondholders were paid some 30 cents on the dollar, “they are getting a better deal in present value terms,” says Daniel Kerner, an analyst at consultancy Eurasia. “Now because of market sentiment, they can’t be too cute and make an offer that is not sufficiently generous,” Mr Ramos says, describing the terms of the deal reported so far as “the threshold they cannot go below”. But economist Miguel Kiguel notes that Argentine bond prices have fallen by an average of 10 per cent as a result of the central bank crisis. “With this political noise and bond prices heading south, it’s very difficult to imagine doing a debt swap with large participation from the holdouts, and still less to get fresh money in the markets,” he says. The government says it is confident of a 60 per cent take-up, but if investor jitters slash that, Argentina would probably just have to keep the offer open for months, the market source said. Some investors are clearly not going to do a deal at any price. Enrique Nolting, an independent investor now retired who lost $2.5m in the default, says the new offer looked like being as much a slap in the face as the 2005 one. “I’ve fought and I’ll continue to fight,” he vows. http://www.ft.com/cms/s/0/e35a943e-005e-11df-b50b-00144feabdc0.html
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Direct bids set to spark Treasury volatility By Michael Mackenzie in New York Published: January 14 2010 20:32 | Last updated: January 14 2010 20:32 Investors and dealers are bracing themselves for greater volatility around the sales of US Treasuries following a marked increase this week in direct buying of debt from the Federal Reserve, bypassing the big Wall Street banks that underwrite bond issuance. The rise has sparked talk that a large investor or several institutions are seeking to buy a large position in US Treasuries. Short View: Mystery Treasury bids - Jan-14 Lex: Obama’s levy - Jan-14 Direct bids for US Treasuries spark speculation - Jan-14 Nervous investors sell government bonds - Dec-11 So-called “direct bids” are normally fairly low as most investors place their orders with primary dealers before an auction. This enables dealers to build up a book of orders from customers and, together with the dealer’s own bids, they are submitted just before the auction sale deadline. This week, the direct bid for the sale of $21bn in 10-year Treasury notes was 17 per cent, far higher than the recent average of 7.4 per cent, and was the highest percentage of direct bids in a 10-year Treasury auction since May 2005. That came after a record direct bid of 23.4 per cent for the sale of $40bn three-year notes on Tuesday, up from an average direct bid of 6 per cent for recent auctions. Dealers were on Thursday awaiting a sale of $13bn 30-year bonds in the afternoon in New York. Analysts said one reason for the recent rise in direct bids may be a reluctance among some investors to let the dealer community know what they are doing. As the direct bid is outside the dealer network, it is difficult for the market to ascertain who the buyer is. Typically in an auction, if a dealer sees strong demand, they might join the bidding, which can push prices for the sale higher, meaning investors pay more to own part of the sale. “Investors would rather avoid showing their hand,” said Tony Crescenzi, portfolio manager at Pimco. Bypassing the primary dealer network, however, makes the dealer’s task of gauging demand for an auction much more difficult and could well lead to more volatile debt sales if the trend continues. “The end result is that dealers don’t see flow entered in this method and may not be able to handicap an auction accurately,” says Bill O’Donnell, strategist at RBS Securities. Mr Crescenzi said: “The Treasury is not a winner in this case, because uncertainties and volatility breed concessions, or higher yields than otherwise.” Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/6d82d148-0146-11df-8c54-00144feabdc0.html
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The Short View By Jennifer Hughes Published: January 15 2010 02:00 | Last updated: January 15 2010 02:00 Somebody likes US Treasuries. One or a perhaps a handful of mystery investors appear to have made a big contrarian bet backing US government paper. The Treasury market is buzzing with speculation after data from this week's sale of 10-year notes showed more than 17 per cent of the $21bn on offer went to direct bidders - far higher than the average. And this followed direct bidders taking almost a quarter of Tuesday's three-year note sale. Most investors still prefer to bid indirectly, through large banks, which makes it more likely that a lot of the direct bid came from one investor unwilling even to let a dealer bank know its plans. In yesterday's 30-year sale a more normal pattern was seen, with direct bidders taking just 4.9 per cent. But this does not detract from the other direct bids. It is likely that individual investors prefer the liquidity of shorter-dated paper to trading in the long bond, which is usually lumpy. Whether it is a group or a contrarian individual, the direct bidding has implications if it continues. Cutting banks out of the loop could increase volatility if it makes trading more nervous because dealers have less information. Yields could rise to compensate traders for the uncertainty. What makes the idea of a big direct bid by an individual investor interesting is that Treasuries are widely expected to fall, and yields rise, as the economy strengthens. This has begun for longer- dated notes: both 10 and 30-year yields are well above their levels at the last sales in December. The chances are we'll never know who the mystery direct bidder is - unless they get their bet spectacularly right and make their name, Soros-style. But for them to be right and Treasury yields to stay this low, it would imply that the economic outlook is going to get far worse, not better, from here. John Authers is away www.ft.com/shortview Markets, Page 35 http://www.ft.com/cms/s/0/dff29eaa-0175-11df-8c54-00144feabdc0.html
COMPANIES Bankers’ fury at levy on US subsidiaries By Francesco Guerrera in New York and Patrick Jenkins in London Published: January 14 2010 20:59 | Last updated: January 14 2010 20:59
151 “Taxation without representation.” A senior banker invoked the rallying cry of the American revolution to condemn the Obama administration’s decision to charge a proposed new bank levy on the US subsidiaries of foreign financial groups. None of the many overseas banks with offices in New York, which include big names in global finance such as Credit Suisse, Deutsche Bank, UBS and BNP Paribas, wanted to publicly criticise the move. But in private many executives were seething. US leads crusade to tax banks over crisis - Jan-14 Overseas unlikely to follow levy move - Jan-14 Lex: Obama’s levy - Jan-14 Obama demands Wall St payback - Jan-14 Rescuer presents rescued with the first bill - Jan-14 US levy expected to raise $90bn - Jan-14 In their view, asking foreign banks, which did not directly benefit from US government assistance, to pay a levy that is set to raise at least $90bn over the next decade, was fundamentally unfair. “No one in the list of 50 banks that are affected by this could argue that they did not benefit from government assistance, either directly or indirectly,” admitted one big European bank. “But the way the levy is structured is not equitable. There is no distinction between a Citigroup or Bank of America, which took serious amounts of government money, and others like us, which only benefited indirectly.” To add insult to injury – at least in the eyes of foreign bankers – the proposed fee would partly go to pay for losses the US government will incur after bailing out companies such as the Detroit carmakers and mortgage financiers Fannie Mae and Freddie Mac. Administration officials countered that foreign banks based in the US benefited from the rebound in capital markets and economic recovery that followed the disbursement of hundreds of billions of dollars in taxpayers’ funds. In fact, some analysts welcomed the inclusion of the foreign banks in the list of 50 or so companies that will be charged with the “Financial Crisis Responsibility Fee” because it will reduce the burden on domestic institutions. “US firms will not be at a competitive disadvantage to the US units of foreign banks,” wrote Jaret Seiberg at Concept Capital, a Washington-based research group. Such arguments found little sympathy with executives of foreign banks. One noted that the overall benefits of the US government intervention in the markets had also been felt by hedge funds and private equity groups that have not been asked to pay for the levy. According to analysis by researchers at Morgan Stanley, Barclays Capital will be among the hardest hit foreign banks with a projected levy of $560m a year. Other banks expected to be hit with charges of a similar scale include HSBC, Deutsche Bank, Credit Suisse and UBS. French banks BNP and Société Générale have smaller operations. Some foreign banks that are towards the lower end of those caught by the $50bn balance sheet threshold for the levy say they could well seek to shrink and duck out of qualifying. All banks are convinced that the wider economy will be hit as a consequence. Additional reporting by Brooke Masters http://www.ft.com/cms/s/0/5500548a-014e-11df-8c54-00144feabdc0.html
152 COMPANIES Citigroup plans to cap cash bonuses By Francesco Guerrera in New York Published: January 15 2010 02:29 | Last updated: January 15 2010 02:29 Citigroup is to cap cash bonuses for bankers at below $100,000, according to people close to the situation. The move is aimed at defusing the public ire at Wall Street pay but could make it difficult for the US bank to retain its top talent. Citi declined to comment but people close to the situation said the 2009 bonus pool at the bank, in which the US government has a 27 per cent stake, would be in line with the one in 2008 – a relatively low level compared with other years. In depth: US banks - Jan-07 Bonus security - Jan-14 Interactive graphic: Bonus breakdown - Jul-31 In depth: Citigroup - Jan-07 Obama vows to recover crisis cash - Jan-15 Like other banks, Citi will also pay a large part of bankers’ and traders’ bonuses in stock that cannot be sold for a number of years, limiting the cash portion to below $100,000, these people added. The move reflects the political storm over compensation at banks that have benefited from hundreds of billions of dollars in taxpayers’ funds. Citi’s bonuses are expected to come under extra scrutiny because of the government stake. The bank did manage to repay $20bn in federal aid from the Troubled Asset Relief Programme late last year, thus freeing itself from government restrictions on the pay of top bankers for next year. Citi executives have said the Tarp repayment was crucial in avoiding an exodus of bankers because the lifting of the pay restrictions meant top talent could look forward to a larger payday in 2010. Insiders said that Citi had little trouble hiring staff, even during the crisis, but had problems retaining some of its best people because of the government oversight of its pay. Though it is possible that Citi’s decision to cap the cash portion of the bonus to below $100,000 would prompt some employees to leave, many Citi bankers and traders were already expecting a reduced pay-out due to the government’s stake and the undeperformance of some of Citi’s businesses. http://www.ft.com/cms/s/0/97ce1764-017d-11df-8c54-00144feabdc0.html
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Obama vows to recover crisis cash By Krishna Guha in Washington Published: January 14 2010 19:11 | Last updated: January 15 2010 02:12 Barack Obama slammed “obscene” bank bonuses on Thursday, as the US president formally revealed plans to impose a levy on big financial institutions to recoup some of the costs of the financial crisis. “We want our money back and we’re going to get it,” Mr Obama said, pledging to “recover every single dime the American people are owed” for the troubled asset relief programme bail-out fund. Appearing keen to pick a political fight with the big banks, Mr Obama faulted them for trying to “return to business as usual” with “risky bets to reap quick rewards” and compensation practices that did not reflect the state of the nation. Bankers’ fury at levy - Jan-14 Overseas unlikely to follow levy move - Jan-14 Lex: Obama’s levy - Jan-14 Geithner interview: ‘All costs must be recouped’ - Jan-14 Rescuer presents rescued with the first bill - Jan-14 US levy expected to raise $90bn - Jan-14 “I’d urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or your citizens but by rolling back bonuses,” he said. Aides said the levy would recover at least $90bn from 50 of the largest institutions, including US subsidiaries of foreign banks and insurance companies as well as US banks. Treasury secretary Tim Geithner told the Financial Times that the US would urge other countries to adopt a similar principle of recouping bailout costs from the financial sector. “We are going to see if we can encourage policymakers in other important financial centres to do something similar,” he said. Foreign governments generally praised the US action. Dominique Strauss-Kahn, managing director of the International Monetary Fund, told reporters: “I really celebrate this proposal by the US government because it shows the political momentum to move in this direction is still there.” But officials said other nations were developing their own plans for bank taxation and may not adopt the US model. “We’ve already charged appropriately, so it would be difficult to go to the banks and charge them again,” said a UK official. FT Alphaville Dear Wall Street: you can blame the media for that levy The back-of-the-envelope bank levy Many non-US governments favour ongoing bank surtaxes rather than US-style temporary levies linked to costs from the crisis. The US levy will be set at a rate of 15 basis points on debt liabilities other than insured deposits. The Treasury estimates that 60 per cent of the fees will be borne by the top 10 institutions, with the burden falling disproportionately on investment banks. Executives at the US subsidiaries of foreign banks reacted with anger at news they would have to pay. A European bank boss said it could prompt his bank to reduce its US operations to below the threshold of $50bn in assets to escape the fee. Additional reporting by Francesco Guerrera, Justin Baer and Chris Giles http://www.ft.com/cms/s/0/b11ad8ea-013e-11df-8c54-00144feabdc0.html
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ft.com/alphaville All times are London time Dear Wall Street: you can blame the media for that levy Posted by Stacy-Marie Ishmael on Jan 14 16:45. We hope this doesn’t prejudice any bankers against certain pink financial newspapers or websites, but according to Reuters on Thursday (emphasis ours): RTRS-OBAMA SAYS “FINANCIAL CRISIS RESPONSIBILITY FEE” ON FINANCIAL FIRMS TO RECOVER “EVERY DIME” FROM WALL ST BAILOUT 15:46 14Jan10 RTRS-WHITE HOUSE SAYS BANK FEE WILL BE IN PLACE 10 YEARS OR LONGER IF NEEDED TO FULLY REPAY TARP 15:47 14Jan10 RTRS-WHITE HOUSE SAYS BANK FEE IS AIMED AT LARGEST AND MOST HIGHLY LEVERAGED FINANCIAL FIRMS 15:48 14Jan10 RTRS-OBAMA SAYS DETERMINED TO COLLECT FEE AFTER REPORTS OF “MASSIVE PROFITS AND OBSCENE BONUSES” AT FINANCIAL FIRMS 15:49 14Jan10 RTRS-WHITE HOUSE SAYS IMPORTANT THAT FINANCIAL FIRMS REIMBURSE TAXPAYER DOLLARS SO DEFICIT IS NOT INCREASED As an aside: can the Obama administration decide once and for all what the official name for the Great Wall Street Levy of 2010 will be? So far, we’ve seen two acronyms, equally unattractive: FCRT (Financial Crisis Recovery Tax) and FCRF (Financial Crisis Recovery Fee). FT Alphaville readers have also weighed in. Not all of their suggestions are fit for publishing here… Meanwhile, more carrot and stick from President Obama: RTRS-OBAMA SAYS FINANCIAL FIRMS TOOK RECKLESS RISKS 16:46 14Jan10 RTRS-OBAMA SAYS GOVT HAS RECOVERED MAJORITY OF BAILOUT FUNDS BUT THAT’S NOT ENOUGH H 16:46 14Jan10 RTRS-OBAMA SAYS ‘WE WANT OUR MONEY BACK AND WE’RE GOING TO GET IT’ 16:47 14Jan10 RTRS-OBAMA SAYS IF FINANCIAL FIRMS IN GOOD ENOUGH SHAPE TO PAY BONUSES, THEY’RE IN GOOD ENOUGH SHAPE TO PAY BACK TAXPAYERS 16:48 14Jan10 RTRS-OBAMA SAYS RECOGNIZES THAT FINANCIAL FIRMS ESSENTIAL TO ECONOMY 16:48 14Jan10 RTRS-OBAMA SAYS GOAL IS NOT TO PUNISH WALL ST FIRMS, BUT TO PREVENT ABUSES AND EXCESS FROM HAPPENING AGAIN http://ftalphaville.ft.com/blog/2010/01/14/126551/dear-wall-street-you-can-blame-the-media-for- that-levy/
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13 Ene - 26 Ene La “nueva recuperación” de Latinoamérica Además de pertenecer a la misma región, ¿qué tienen en común Brasil, Panamá y Colombia? En lo que respecta a la recuperación económica, estos países –junto con Chile, Uruguay y Perú-, se han convertido en las estrellas de Latinoamérica. Cada uno de ellos ha salido de la crisis con algo que la OCDE (Organización para la Cooperación y el Desarrollo Económico) denomina “nueva recuperación”, allanando el terreno para la aplicación de políticas contra-cíclicas sin afectar los fundamentos económicos. Según el Latin American Economic Oulook 2010 de la OCDE, en estos países el control de la inflación ha sido particularmente efectivo para generar confianza en las instituciones. Por el contrario, la recesión y la caída en los precios de las materias primas, a principios de 2009, pusieron de manifiesto las debilidades de un grupo de países gobernados por partidos políticos de izquierdas, principalmente Argentina, Venezuela y Ecuador. Todos y cada uno de ellos ha puesto en marcha políticas económicas no ortodoxas y experimentado cierta debilidad institucional. No obstante, aquellos países más azotados por la recesión en Latinoamérica han sido aquellos que tienen fuertes vínculos con Estados Unidos, principalmente México y muchos de sus vecinos de Centroamérica y el Caribe. Para estos países, Estados Unidos es un mercado clave para sus bienes y servicios, pero también un país desde el que se ha visto mermada la llegada de remesas procedentes de los trabajadores inmigrantes. ¿En qué situación quedan los países Latinoamericanos en su conjunto? Después de contraerse un 2% en 2009, según la Comisión Económica para Latinoamérica y el Caribe de Naciones Unidas, en 2010 se espera que crezcan alrededor del 4%, esto es, más que los mercados desarrollados, pero menos que Asia. Aunque se trate de una cifra inferior a los niveles del 5% a los que se habían acostumbrado en los últimos cuatro años, existen muchos motivos para ser optimista. “Términos muy positivos” Muchos observadores creen que, dadas las favorables predicciones económicas globales para 2010, este año el crecimiento económico podría correr el riesgo de ser incluso mayor. De nuevo para 2011 podrían aparecer riesgos a la baja, y por tanto una nueva recesión o ralentización económica. La demanda y los precios de las materias primas de la región contarán con el apoyo de las cifras de crecimiento de China (entre 8 y 9%) y otras exportaciones experimentarán cierta recuperación, gracias a una demanda más firme de los países desarrollados, como consecuencia de las medidas de estímulo. Tras una caída de más del 25% en 2009, según Bladex –un banco supranacional especializado en el comercio exterior de la región-, el comercio se recuperará, creciendo entre un 10 y un 15%. La liquidez global aumentará a medida que los responsables de las políticas económicas en países desarrollados se introduzcan lentamente en la “estrategia de salida” de unas políticas monetarias muy expansivas. Según los analistas, esto será favorable para la soberanía latinoamericana y las finanzas corporativas, aunque seguirá observándose acceso restringido a ciertos créditos.
156 A pesar de la persistencia de restricciones estructurales y altas tasas de pobreza, el profesor de Gestión de Wharton Mauro Guillen ve las previsiones de 2010, tanto para la economía como para las empresas, de la mayoría de los países de dicha región “en términos muy positivos”. Otros expertos están de acuerdo. Felipe Monteiro, también profesor de Gestión de Wharton, es “optimista” acerca de las perspectivas de futuro de Brasil (que supone el 40% del PIB de la región), señalando que el resto de países de la zona esperan que sea “conductor de crecimiento” para sus propias economías. En la región también hay optimismo. Una encuesta reciente a 573 empresas brasileñas realizada por la firma de consultoría Deloitte revelaba que el 95% de las entrevistadas esperaban mayores beneficios que en 2009, y cerca de dos tercios tenía pensado sacar al mercado nuevos productos y servicios en 2010. Mientras, el 41% estaban considerando adquirir a otra u otras empresas, cifra que en 2009 apenas llegaba al 13%. Diferencias “como el día y la noche” El entorno operativo para las empresas de la región es, en comparación con la generación previa, “como el día y la noche”, dice Guillén señalando, entre otras cosas, la existencia de regímenes políticos más estables, una mayor estabilidad macroeconómica y menos proteccionismo. Según un informe del equipo de investigaciones de capital del Banco Santander, las empresas latinoamericanas están “en muy buena forma para recuperar sus ingresos y reanudar sus planes de inversión” en 2010, y las empresas de la región están “metiéndose en terreno de altos vuelos”. Un caso: Petroleo Brasileiro (Petrobas), la empresa petrolífera brasileña controlada por el Estado, tiene planeado ampliar su programa de inversión quinquenal de 174.000 millones de dólares que finalizará en 2013. Además de construir nuevos campos en el extranjero, según José Sergio Gabrielli, la empresa también está considerando ampliar sus inversiones e introducirse en nuevas áreas, como por ejemplo la exploración, producción y refinamiento de petróleo, los fertilizantes o proyectos de electricidad. En cuanto a los sectores a considerar, se supone que para este año la energía será uno de los primeros en la lista, gracias en parte a los elevados precios internacionales. Guillén señala mayores inversiones en energías renovables –lideradas por Brasil-, que han contribuido a desarrollar todo un sector basado en el etanol gracias al éxito de los acuerdos entre el sector público y privado. En general, Guillén predice que las políticas dirigidas a la lucha contra el cambio climático se dejarán sentir en el entorno empresarial de 2010. De hecho, tras la Conferencia de Naciones Unidas sobre Cambio Climático del pasado mes de diciembre, el gobierno de Brasil ha aprobado una legislación específica; también ha establecido ciertos objetivos restrictivos para varios sectores y otras medidas medioambientales. La alimentación es otro sector que brillará con luz propia en 2010. Guillén espera que las principales empresas alimenticias latinoamericanas, como Grupo Bimbo de México o Grupo Arcor de Argentina, incrementen su presencia exterior, en particular en Asia, donde la competencia no es tan dura como en Estados Unidos o Europa. Empresas como Bimbo y Arcor han capeado el temporal mejor que otras, y ahora están bien posicionadas para aprovechar los elevados precios globales de los productos alimenticios. Suponiendo que se mantiene la disposición a asumir ciertos riesgos –que de hecho depende de la materialización este año de las benévolas predicciones para los mercados de los países OCDE y China-, los inversores buscarán mayores rendimientos en mercados emergentes de rápido crecimiento. Los mercados bursátiles latinoamericanos –
157 después de haber finalizado el año 2009 cerca de sus récords previos a las crisis-, posiblemente sigan experimentando notables mejorías. Geoffrey Dennis, estratega de mercados emergentes globales en Citigroup, predice que el índice brasileño Bovespa llegará a 80.000 a finales de este año; en la actualidad se sitúa en 68.000; en primavera de 2008 estaba en 73.000. Volviendo del frío En cuanto a los países con menor crecimiento, aún existe esperanza para ellos. Por ejemplo, según Daniel Marx (ex viceministro de Finanzas), en Argentina las buenas cosechas y los altos precios internacionales mejorarán el sector agrícola del país, contribuyendo directamente con más de dos puntos porcentuales a su PIB e indirectamente con una cuantía similar (a través de la renta). No obstante, los responsables de las políticas económicas en Argentina tendrán que enfrentarse a diversos retos. Intentarán reducir el coste del capital y desanimar la salida de capitales, que desde mediados de 2008 a finales de 2009 fue por término medio 2.000 millones de dólares mensuales; las cifras han disminuido a medida que ha ido desapareciendo el nerviosismo asociado con la sostenibilidad de la deuda. Además, según Marx, el gobierno dedicará la primera mitad de 2010 a intentar resolver los 30.000 millones de dólares en bonos impagados acumulados durante la reestructuración de la deuda de 2005. Las buenas noticias son que las condiciones globales actuales incrementan las posibilidades de una resolución positiva, lo cual, junto con el acuerdo con los acreedores de Paris Clubs (vencidos y por valor de 6.000 millones de dólares) probablemente mejore el acceso de Argentina a las finanzas internacionales. Para reafirmar la confianza en su capacidad para cumplir sus obligaciones financieras externas –valoradas en unos 8.000 millones de dólares-, el Gobierno quiere emplear unos 6.000 millones de las reservas del banco central (en la actualidad 48.000 millones de dólares), una decisión no exenta de controversia que ha supuesto un enfrentamiento entre ambas instituciones – incluyendo la destitución y restitución del presidente del banco central- y que está todavía por resolver. Incluso si estos esfuerzos rehabilitadores tienen éxito, los analistas creen que será necesario un marco político mucho más pragmático y unos cuantos años más hasta recuperar la credibilidad, algo que Brasil ha conseguido recientemente. Otro país que tiene mucho trabajo por delante es México, que supone el 25% del PIB de la región. Además de su dependencia en la fortaleza de la recuperación estadounidense, existen otros factores determinantes que tendrán que despejar en 2010, incluyendo la falta de voluntad política de abrir al sector privado su monopolio petrolífero estatal, falto de inversiones, o en general un entorno asfixiante para la empresa privada y la competencia. En 2009, y después de varios años de retraso, el Congreso mexicano aprobaba una reforma fiscal que, aunque finalmente más laxa, constituye un pequeño paso en la dirección adecuada. Con ingresos fiscales no derivados del petróleo de únicamente el 12% de su PIB, en opinión de Guillén la debilidad estructural de México pone de manifiesto que, a excepción de Chile (cuyo marco política es ejemplar bajo los estándares globales), los países de la región carecen de sistemas fiscales modernos y racionales. Asimismo, las perspectivas de mejora bajan para 2010, añade. Incluso los países estrella de la región tienen problemas. En particular, se cuestiona si el crecimiento económico de Brasil es equilibrado y si representa riesgos a medio plazo. La recuperación de 2010 –las predicciones son de alrededor del 5%-, estará liderada por el
158 consumo, repitiendo el patrón previo al colapso de Lehman en 2008. Pero para que Brasil alcance o supere dichas tasas de crecimiento de forma sostenible necesita que sus tasas de inversión crezcan, señala Márcio García, profesor de Economía en la Universidad Católica de Rio de Janeiro (PUC-Rio). Antes de la crisis habían aumentado hasta el 18% del PIB –el año anterior apenas superaban el 10%-, pero ahora necesitan crecer más, al menos llegar al 22%. Grey Newman, estratega para Latinoamérica de Morgan Stanley, señala que en 2010existe también el riesgo creciente de cometer errores políticos. Efectivamente, los responsables de diseñar las políticas económicas en Brasil no podrán evitar un intenso escrutinio este año. Las reducciones fiscales, las medidas poco ortodoxas y una mayor intervención estatal en los últimos meses han sorprendido a algunos expertos como Paulo Leme, economista jefe para Latinoamérica en Goldman Sachs, el cual advierte que en Brasil dicho marco político está “empezando a corroerse”. También existen diversos cuellos de botella que deben ser resueltos para aumentar la productividad y los rendimientos de las inversiones. En opinión de García, aún se debe trabajar mucho para mejorar el sistema legislativo y fiscal de Brasil, su mercado de trabajo, sus infraestructuras y sobre todo su educación. Y lo que es más importante, dadas las bajas tasas de ahorro del país, inevitablemente Brasil necesitará acudir al ahorro exterior para financiar más inversiones en el corto y medio plazo. Pero según los expertos, eso no debería ser un gran problema ya que los inversores están deseosos de invertir en Brasil. Dado que Brasil tendrá que soportar un mayor déficit por cuenta corriente (3% o más de su PIB), y en contrapartida tener una moneda fuerte, son muchas cosas lo que están en juego; no hay lugar a error en las políticas económicas y aumenta el riesgo de padecer ciclos de expansión y contracción. “Es preocupante”, dice Luciano Coutinho, director del banco de desarrollo estatal BNDES. “Un déficit por encima del 1,5% del PIB no es muy saludable”. En campaña Hay algo que también atraerá mucha atención en 2010. El ciclo económico de la región estará en plena ebullición este año, con no menos de 16 elecciones presidenciales a celebrarse entre noviembre de 2009 y diciembre de 2012. Los observadores estarán calibrando si el péndulo político se mueve desde la izquierda al centro o al centro- derecha. Éste posiblemente acabe siendo el caso de Chile, donde Sebastián Piñera –del partido de centroderecha, Alianza-, parece ser que vencerá al candidato del partido de centro izquierda de la Concertación en una segunda vuelta electoral que se celebrará el 17 de este mes. Tal vez lo más apasionante sean las elecciones al Congreso de Venezuela, que tendrán lugar en septiembre de este año. La oposición boicoteó las últimas elecciones de 2005, dando al presidente radical Hugo Chávez carta blanca para avanzar en su llamada “Revolución Socialista del Siglo XXI”. La estanflación que hay en Venezuela erosiona en cierto modo la credibilidad de Chávez, que lleva más de 10 años en el poder. Las elecciones de este año revelarán si la oposición tiene posibilidades en las elecciones presidenciales de diciembre de 2010. No obstante, algunos observadores creen que Chávez podría responder ante una amenaza a su control retirando toda reminiscencia de democracia que aún existe en el país. La otra elección presidencial que ya está generando cierto nerviosismo es la brasileña. El superpopular Luiz Inácio Lula da Silva –presidente desde 2002-, no podrá presentarse
159 para otro mandato, y las elecciones presidenciales de octubre serán acaloradamente disputadas. José Serra, del PSDB, es en la actualidad líder en los sondeos gracias a su perfil altamente público, y su victoria supondría un desplazamiento político hacia el centro. El gasto pre-electoral para apoyar al candidato titular impedirá que con el ciclo económico también se produzcan mejoras en la posición fiscal del país. Este hecho, junto con la probabilidad de que aparezcan ruidos populistas y nacionalistas durante la campaña del candidato favorito de Lula, Dilma Rouseff, bien podrían atenuar el voraz apetito de los inversores por cualquier cosa brasileña. También subrayaría el riesgo de volatilidad de la moneda y los mercados de activos, pero suponiendo que el próximo Gobierno pone en marcha los ajustes necesarios, es poco probable que los excesos sean sostenibles, tal y como esperan muchos observadores. En medio de este ciclo electoral, y con la mayoría de los responsables de las políticas económicas en Latinoamérica aún centrados en prestar apoyo a la economía en 2010, pocas serán -según los analistas- las medidas para mejorar la competitividad a largo plazo de la región, como por ejemplo reformas estructurales, mejoras en la innovación o reducción del proteccionismo. Pero en 2010, en lo más profundo de sus mentes, muchas personas no podrán evitar preocuparse por qué ocurrirá con el crecimiento global cuando los excepcionales estímulos fiscales y monetarios puestos en marcha en el último año lleguen a su fin, algo que afectará gravemente la posición de Latinoamérica para 2011.
La “nueva recuperación” de Latinoamérica Universia 13 Ene - 26 Ene http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1828
13 Ene - 26 Ene España en 2010: ¿Prolongará el paro la salida de la crisis? La causalidad ha querido que sea España, en la presidencia de la Unión Europea (UE) durante el primer semestre del año, la encargada de liderar la salida de la crisis del bloque comercial. Pero el escenario, en 2010, es sombrío: el país se ha convertido “en el enfermo de Europa”, tras seis o siete trimestres consecutivos de crecimiento negativo del PIB (Producto Interior Bruto) y un desempleo galopante que prácticamente duplica al de la media europea. En 2007, la tasa de paro española se situaba en el 8,3% de la población activa, dos años después, los datos de la agencia europea de estadísticas Eurostat lo situaban, al cierre de noviembre, en el 19,4%, frente al 10% de los 16 países que comparten el euro. Y es que la crisis económica ha arrasado con el mercado laboral, convirtiéndose en la principal china en el zapato del Gobierno de José Luis Rodríguez Zapatero y en una de las mayores preocupaciones de los españoles. Es el mayor desequilibrio de la economía española y, en opinión de Rafael Pampillón, Profesor de Entorno Económico y Análisis de Países del Instituto de Empresa, no tiene visos de mejorar. “El gran desempleo que genera la crisis -1,6 millones de nuevos parados- junto con la rigidez del mercado laboral nos va a situar a lo largo del año en una tasa de paro que, como media, estará por encima del 20% de la población activa, lo que significa unos 4,5 millones de parados”. Un dato que coincide con las previsiones de la OCDE (Organización para la Cooperación y el Desarrollo Económico) y de la Comisión Europea. La mayoría de los expertos señala que la destrucción de puestos de trabajo no habría llegado a su
160 fin y que sólo se mejorará la tasa de paro si sigue disminuyendo la población activa, como consecuencia de la reducción del número de demandantes ante la imposibilidad de encontrar trabajo. Para generar empleo, España debe crecer en torno al 2% o 2,5%, algo que, por ahora, no parece factible. “Y es que el desequilibrio del mercado laboral, como el resto de los que afectan a la economía española dependerán, en gran medida, del crecimiento económico”, puntualiza Pampillón. Este crecimiento, sin embargo, será extremadamente débil. Las estimaciones preveen desde un decrecimiento del PIB de tres décimas en 2010, por parte del Gobierno, hasta una contracción del 0,7%, según el FMI (Fondo Monetario Internacional). Esto significa que la pérdida de riqueza de la economía el año que viene reducirá su ritmo y los expertos no esperan crecimientos positivos interanuales hasta finales de 2010. Pero Pampillón advierte que “aunque veamos crecimientos positivos, serán muy pequeños. Es posible que hacia la mitad de año se crezca en torno a un 1% respecto a trimestres anteriores. Crecimientos del 2% o del 2,5% no los veremos hasta 2013 o 2014”. El déficit público Hay otros de desequilibrios que, en 2010, seguirán amenazando la salud de la economía española. Uno de los más importantes es la profundización del agujero de las cuentas públicas a lo largo del año. Pampillón señala que “el déficit público se produce, por un lado, por la caída de la recaudación fiscal y, por otro, por la desastrosa política del incremento del gasto público improductivo. El gasto público debería crecer en aquellas actividades que mejoran la competitividad de la economía y mejoran la productividad de las empresas”. En su opinión, el Plan E, como se denomina al paquete de medidas puestas en marcha por el Gobierno para incentivar la economía (ayudas a la compra de automóviles, construcción civil, etc.), y el gasto que se ha generado “no mejoran la situación. Este desequilibrio fiscal esta produciendo un rápido endeudamiento de las administraciones públicas y la reducción de la solvencia del Reino de España, cuya consecuencia es un aumento de la prima de riesgo y los tipos de interés que hay que pagar por la financiación exterior”. La recesión está permitiendo reducir la apelación al ahorro externo desde niveles máximos cercanos al 10% del PIB, hasta el 3,6% del tercer trimestre de 2009, según datos del INE (Instituto Nacional de Estadística). “Esta tendencia continuará en los próximos trimestres, pues el aumento del gasto e inversión pública será incapaz de compensar el fuerte retroceso de la demanda privada. De manera que en 2010 las necesidades de financiación podrían situarse por debajo del 3% del PIB”. Esto, dice Pampillón, “está permitiendo reducir la posición deudora neta de España frente al resto del mundo”. La calificación de la deuda, ¿en peligro? Robert Tornabell, profesor de Finanzas de Esade, señala que el déficit público es uno de los mayores desafíos a los que España se enfrenta. “No existe nada peor que tener tres factores negativos encabezados por un elevado déficit, crecimiento negativo del PIB y niveles de paro en aumento, que empeoran las tasas de morosidad de bancos y cajas, y encarecen el coste de la financiación de las empresas y, en otro círculo pernicioso, impiden que la actividad económica se recupere”. Estos tres factores, dice, han propiciado la advertencia de la agencia de calificación, Standard & Poor´s, al rebajar la calificación de España de estable a negativa. “En este aspecto, tenemos algún elemento positivo, como el bajo endeudamiento público sobre el PIB con el que entramos en la crisis, pero en 2010 podemos alcanzar el 67%, frente al 55% con el que posiblemente
161 cerraremos 2009”. La parte negativa es que el entorno más vulnerable de la Zona euro -Grecia, Irlanda y España- ahora tiene que pagar costes crecientes por la deuda pública. “Bastó la degradación de la deuda de Grecia (en Diciembre) para que tuviera que pagar 200 puntos básicos (un dos por ciento) por encima del coste de la deuda de Alemania (que sirve de referencia). Para España, el impacto evidentemente fue inferior, pero pasó de un sobre coste de 50 puntos básicos a 70”. En su opinión, lo más probable es que empeoren los tres factores que pueden llevar a una pérdida de calificación de la deuda del Reino de España. “Eso supondría añadir a los 20 puntos básicos de diciembre 80 puntos más. Y un encarecimiento del uno por ciento de nuestra financiación exterior nos llevaría a una carga adicional sobre el déficit de no menos de casi 70 puntos básicos sobre el PIB”. Los expertos señalan que es muy poco probable la reducción del gasto público ante el previsible aumento del paro y el aumento de las prestaciones por desempleo. Si a esto sumamos los gastos en pensiones, sanidad pública (ya que la cobertura en España llega a toda la población), etc., así como el pago de intereses de la deuda pública viva, “al cierre de 2010 podemos llegar a un déficit público que sobrepase el diez por ciento del PIB”, añade Tornabell. Previsiblemente, el desplome de los ingresos públicos, retrasará el crecimiento del consumo, más cuando el ejecutivo planea subir los impuestos del IRPF y el IVA. Pero el consumo no se recompondrá hasta que se pierda el miedo a perder el empleo o a la posibilidad de recuperarlo. Por eso, existe un amplio consenso en la absoluta prioridad y relevancia de acometer una reforma del mercado laboral. Las reformas prioritarias De momento, el Gobierno español ha planteado una reforma light basada en la empleada por el Gobierno alemán. Este plan busca evitar el despido de trabajadores en la industria y consiste en la reducción de horas de trabajo, pagando el Estado un subsidio compensatorio. Los expertos señalan que su eficacia en el modelo de crecimiento español será muy limitada, ya que éste se ha basado en el ladrillo y los servicios, sectores que todavía están sufriendo el ajuste de la crisis. En países como Francia y Alemania, dice Pampillón, “que ya tuvieron crecimientos positivos en el segundo y tercer trimestre, están poniendo a trabajar a sus parados en los mismos sectores que antes de la crisis, pero en España, no. Necesitamos un cambio en el modelo productivo”. En eso está trabajando el Gobierno con la Ley de Economía Sostenible (LES), que no verá la luz hasta mediados de 2010, y cuyo principal objetivo es alcanzar un modelo económico basado en la eficiencia energética y las nuevas tecnologías. El proyecto, que ya ha sido aprobado por el Parlamento español, ha recibido críticas por no incluir reformas estructurales, como la del mercado laboral. Pero, independientemente de su eficacia, sus efectos no serán inmediatos. Hasta ahora, el elevado grado de internacionalización de muchas empresas las ha ayudado a resistir bien ante la recesión, señala José Ignacio Galán Zazo, Director de la Cátedra Iberoamericana en Dirección de Empresas y RSC de la Universidad de Salamanca. “El punto fuerte de la economía española está en la demostrada solidez de la gran banca (con entidades financieras como Santander y BBVA, que se encuentran entre las más saneadas de la esfera internacional) y también de otros sectores como, por ejemplo, el de la energía (donde el grupo Iberdrola, con su filial Iberdrola Renovables, es el líder mundial), el textil (con el grupo Inditex, propietario de las firmas de moda Zara, Berskha, Máximo Dutty) y el de telecomunicaciones (la compañía de telefonía Telefónica, que tiene presencia en la mayoría de los países iberoamericanos)”, añade. “La debilidad se encuentra en las empresas pequeñas y medianas de alcance más local”.
162 Por eso, Galán añade que a la reforma laboral sería prioritario sumar la del sistema educativo. “Los puntos débiles de nuestra economía son el elevado desempleo y la baja productividad, ambos interconectados”, dice. Y añade que “un país que desee estar a la vanguardia del desarrollo y competir en el plano internacional necesita disponer de mercados y de un sistema educativo acorde a los países de referencia. Por ello, se necesita un sistema educativo más evolucionado que promueva la excelencia académica y la interacción con la empresa y la sociedad. Esta reforma, además de urgente, es la variable estructural más relevante en el SXXI para generar competitividad y desarrollo social y económico”. El sector inmobiliario y la banca Pampillón destaca, además, el desequilibrio de “la diferencia entre la capacidad productiva instalada y la que está siendo utilizada, lo que genera un exceso de capacidad ociosa”. En su opinión, este desequilibrio tiene múltiples efectos. Por ejemplo, dice, “las oficinas bancarias tienen un exceso de capacidad, ya que muchas se crearon para dar créditos hipotecarios, etc. pero ahora que ese crédito se ha reducido, sobran oficinas. Lo mismo ocurre con el comercio minorista, ese desequilibrio se corrige cerrando tiendas. El ajuste entre ese desequilibrio se hará a costa de ir cerrando empresas que son las que producen esos bienes y servicios”. Por otro lado, actualmente existe un desequilibrio entre la oferta y la demanda de inmuebles, “que se manifiesta en el más de un millón de viviendas nuevas sin vender y de segunda mano que rondarían las 300.000, y en unos precios que no se ajustan”, añade. Los expertos coinciden en señalar que el ajuste del sector está siendo demasiado lento, lo mismo que el del sector financiero. El sistema financiero español está inmerso en un proceso de reestructuración, protagonizado principalmente por cajas de ahorros, que no ha hecho más que comenzar y afronta un ejercicio 2010 muy complicado. En primer lugar, Pampillón relata cómo “muchos bancos y cajas de ahorros tienen activos ligados a inmuebles, créditos que tienen concedidos que no se van a poder pagar porque hay una conexión muy estrecha entre el aumento del paro y la morosidad”. En su opinión, esta morosidad se va a traducir en que, al final, los bancos se van a quedar con las viviendas hipotecadas. “Éstos van a poner en sus activos menos créditos y más inmuebles. El valor de mercado de dichos activos puede llegar a ser, hoy en día, entre un 30% y un 40% menor, aunque The Economist, en un reciente artículo, los situaba en un 50% menos del precio de mercado del que está en los libros”, comenta. Pampillón dice que esta diferencia va a generar pérdidas que afectará a la concesión de créditos. “Tanto si los bancos venden esas casas o las ponen a precio de mercado (Mark to market) serán unas perdidas importantes en sus cuentas de resultados. Por tanto, las instituciones financieras van a reducir el capital, los fondos propios, etc. la única salida es a través de un FROB (Fondo de Reestructuración Ordenada Bancaria), una capitalización de esas instituciones con dinero público”. Al final, añade, “el Estado se tendrá que hacer cargo de esas cajas o bancos, lo que en definitiva sería una nacionalización”. Para complicar aún más las cosas, la progresiva retirada de las líneas de financiación del Banco Central Europeo y la previsible subida de los tipos de interés encarecerán la financiación de las entidades. El retraso en la reestructuración del nuevo mapa financiero español, como consecuencia de la divergencia entre los criterios de carácter económico y político (que domina las Cajas, muy ligadas a los gobiernos autonómicos), tampoco ayuda al sector y al flujo del crédito al sector privado. El deterioro de los servicios sociales Y si a corto plazo el horizonte pinta negro, a medio plazo Pampillón señala que “tendremos que
163 conformamos con crecimientos muy bajos y, por tanto, con recaudaciones fiscales muy bajas”. Y añade que “aunque la recaudación empezará a crecer un poco por el crecimiento de la economía, aun así estaríamos a niveles muy inferiores a los de 2007. Por tanto, el endeudamiento seguirá aumentando y antes o después habrá que reducir el gasto social que significa un deterioro de los servicios sociales y un peor servicio público de docencia o sanidad. La situación es lamentable a medio plazo”. María Jesús Valdemoros, directora del Departamento de Economía del Círculo de Empresarios, coincide con el diagnóstico y advierte que “costará unos años (al menos 3 ó 4) recuperar los niveles de bienestar existentes antes del comienzo de la crisis”. Y Galán señala que auque las perspectivas económicas internas no son muy buenas, sin embargo, “los países de referencia tirarán de la producción mundial y ello nos afectará positivamente en un mundo interconectado y globalizado”. De fuera vendrá también el gran reto de la recién inaugurada presidencia española de la UE. A la vista de los datos, que España sea la encarga de solucionar la crisis del continente ha levantado ciertas críticas por parte de medios internacionales, como Financial Times, que publicaba “Una España torpe guiará a Europa”. Pero este gran reto también es, según Galán, una gran oportunidad que consiste “en sentar las bases de unas políticas económicas, educativas y de investigación sólidas, que permitan la competitividad, el progreso y el desarrollo social y económico de la UE, de modo que nos permitan competir con EEUU, China y otras potencias emergentes. Así, cuando hablemos de crisis, hablaremos del pasado”. http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1830&language=Spanish
13 Ene - 26 Ene Interdependencia global: ¿Están Estados Unidos y otros mercados ‘sembrando las semillas’ de la próxima crisis? A pesar del renovado crecimiento de su PIB y otras señales positivas, según el profesor de Finanzas de Wharton Franklin Allen, Estados Unidos aún no ha salido de la crisis. De hecho, el país podría estar aproximándose a un escenario “en forma de W”, esto es, podría caer en breve de nuevo en una recesión. Esto depende de cómo se comporten en los próximos meses –o incluso años- una serie de factores, no sólo en Estados Unidos, sino también en el resto del mundo. Tal y como señala Allen en una entrevista reciente con Knowledge@Wharton, tanto las políticas globales sobre tipos de interés, los mercados inmobiliarios o los déficit públicos serán factores a tener en cuenta. A continuación ofrecemos una transcripción editada de dicha entrevista. Knowledge@Wharton: Muchos expertos parecen creer que en Estados Unidos la recesión ha llegado a su fin hace unos meses. ¿Qué cree usted? Franklin Allen: Probablemente tienen razón. La cuestión es si vamos a experimentar “una W” (o double dip) y Estados Unidos va a volver a entrar en recesión. Knowledge@Wharton: ¿Cuáles son las señales de que hemos salido de la crisis? Allen: El PIB está creciendo, que es lo principal, y a los mercados financieros les va mucho mejor. Aunque existen serias dudas sobre qué parte del crecimiento del PIB se debe a la política monetaria expansiva y la mera impresión de gran cantidad de dinero por parte de la
164 Reserva Federal. Pero potencialmente ésta es una buena noticia, señala. También hay otras cuantas cosas buenas. Los mercados inmobiliarios parecen estar estabilizándose y el desempleo al menos parece no estar cayendo tan rápido como en los últimos meses, lo cual es una señal muy positiva. Knowledge@Wharton: Antes mencionaba el riesgo de sufrir “una W”. ¿Qué factores podrían hacer que volviésemos a caer en una recesión? Allen: Vivimos en un mundo tan interdependiente que lo que ocurra en el resto del mundo será también importante para Estados Unidos. En Asia hay buenas y también malas noticias. Las buenas noticias son que parece estar creciendo. Las malas noticias son que está teniendo problemas con las burbujas. Por ejemplo, en Singapur en el tercer trimestre los precios de la vivienda aumentaron un 16%, una cifra sorprendente dado el estado de la economía mundial y lo afectada que quedó la economía de Singapur por la crisis financiera. Los observadores han subrayado la llegada de maletines llenos de dinero desde China o Indonesia. Ésta es tan sólo una señal de parte del problema al que nos enfrentamos. Los bancos centrales se han vuelto locos ofreciendo créditos y liquidez, lo cual ha frenado la crisis, tal y como ocurría también en 2003 y 2004. Pero esto también está plantando las semillas para una futura crisis, que es lo verdaderamente preocupante. Knowledge@Wharton: La Reserva Federal ahora parece estar retirando algunos de los programas que puso en marcha, comprando bonos y ese tipo de cosas. ¿Es el momento adecuado para hacerlo? ¿Demasiado pronto? ¿Demasiado tarde? Allen: En mi opinión eso es lo que debía haber hecho desde un principio. Básicamente es demasiado tarde. Pero será un problema cuando empiece a retirar los programas y presumiblemente, en algún momento, suba los tipos de interés. Esto pondrá de manifiesto la fortaleza del sistema financiero. Al igual que hicieron durante la crisis, ahora mismo los burócratas de la Reserva Federal apoyan de manera efectiva el sistema, pero con tipos de interés tan bajos también están de manera efectiva proporcionando subvenciones, en particular a los bancos. A los bancos les está yendo muy bien, y uno de los motivos es que los tipos de interés a los que están prestando dinero no han bajado tanto como los tipos a corto plazo. Cuando los tipos de interés empiecen a subir de nuevo se producirán cambios y será interesante ver si los bancos son realmente fuertes. Knowledge@Wharton: Con tanto apoyo por parte de los bancos, ¿por qué sigue la gente quejándose de las dificultades para pedir dinero prestado? Allen: En toda crisis de crédito siempre se plantea la misma cuestión: ¿en qué lado del mercado surgen los problemas? ¿Es que la gente no quiere pedir prestado dinero o es que la gente no quiere prestarlo? Normalmente es un poco de todo. Pero siempre hay un grupo que quiere endeudarse y ese es el grupo al que los bancos no quieren dejar dinero porque son precisamente los que atraviesan dificultades. Este es el motivo por el que necesitan pedir dinero prestado y ese es el motivo por el que a nosotros nos llegan historias de personas que no pueden acceder al crédito. Estoy seguro de que muchas empresas quieren endeudarse, pero no pueden. No obstante, en el actual entorno económico es cuestionable cuantas empresas quieren invertir y pedir prestadas grandes cantidades de dinero. Simplemente no es un buen momento para invertir o endeudarse para la mayoría de las empresas. Knowledge@Wharton: Otro efecto derivado de los bajos tipos de interés es que los tipos hipotecarios son extraordinariamente bajos; se sitúan cerca de los récords históricos y llevan así durante varios meses. ¿Es el mercado de la vivienda una pieza clave para la recuperación de
165 Estados Unidos? Allen: De nuevo esto es parte del tema de las burbujas. La Reserva Federal bajó mucho los tipos de interés, algo que ayudó mucho al mercado inmobiliario; los precios han dejado de bajar y en algunos casos incluso han empezado a subir. Pero la cuestión es si esto es sostenible. Cuando los tipos vuelvan a subir, ¿qué va a ocurrir? Este es el motivo por el que tal vez experimentemos “la W”. Knowledge@Wharton: Uno de los grandes problemas al que apenas se ha prestado importancia recientemente, aunque aún está pendiente de resolver, es el déficit. Es enorme. ¿Es realmente importante luchar para reducir el déficit? Allen: El punto de vista convencional es que necesitamos hacer algo con el déficit, pero todavía no; tal vez dentro de un par de años. Hay algo de cierto en esto, pero no deja de ser preocupante en el medio y largo plazo. Aún tenemos los problemas de largo plazo de la generación del baby boom, incluyendo los gastos médicos y la Seguridad Social. La Seguridad Social probablemente pueda curarse con unas cuantas operaciones. Los gastos médicos van a ser un grave problema al que ahora además se añaden los problemas de la recesión, los bajos ingresos por impuestos y demás. Debemos empezar a preocuparnos por todo esto. A medida que suban los tipos de interés será mucho más costoso para el gobierno financiar todo esto. Y como nuestra deuda alcanzará niveles cercanos al 100% del PIB en un relativamente corto periodo de tiempo, cada punto porcentual de los tipos de interés significa otro punto porcentual del PIB que tenemos de devolver en forma de intereses. Knowledge@Wharton: ¿Podría brevemente explicarnos la importancia del déficit y cómo afecta a nuestras vidas? Allen: Importa porque las generaciones futuras tendrán que soportar la carga de esta deuda. Si piensas que los tipos reales de interés van a ser en el largo plazo del 2,5%, incluso si pides prestado el 100% del PIB, en términos reales únicamente pagarás el 2,5%. ¿Es esa una carga tan pesada? Está bien siempre y cuando tu capitalización sea relativamente baja. Pero si pones en marcha programas de gasto, normalmente no suelen ser temporales. En cuanto tienes un déficit del 5 ó 10% del PIB o más, empieza a ser muy difícil reducirlo. En unos pocos años superas con creces el 100% del PIB y luego empiezas a tener los problemas que estamos empezando a ver en Grecia; en otras palabras, en cuanto alcanzas el 120-130% del PIB la cuestión es: a largo plazo ¿las autoridades lo estabilizarán y pagarán –esperemos que gracias al crecimiento-, para reducir su tamaño? Es terreno resbaladizo. Si a la gente le preocupa que hagas desaparecer el déficit a través de la inflación, los tipos de interés de los bonos empezarán a subir. Luego se convierten en una pesada carga porque tienes que seguir pidiendo prestado para pagar intereses. De repente toda la situación pasa a ser ingobernable y no se conceden más préstamos. Esto es lo que ocurrió históricamente en muchos países. Afortunadamente aún no hemos llegado a esta situación. Grecia está al borde de este precipicio. Moody’s no degradó demasiado su calificación, cosa que sí hicieron S&P y Fitch. Moody’s quería esperar a ver que hacía. Se trata de presentar un plan para recortar el déficit ante la UE, pero si la gente en los mercados de bonos cree que su propuesta no es creíble, entonces veremos un incremento de los diferenciales en los bonos. Grecia bien podría caer al precipicio en los próximos meses o en un par de años. Luego veremos lo difícil –o fácil- que resulta para un país soberano entrar en situación de impago. El Reino Unido también tiene problemas. Tiene un enorme déficit y ya ha aumentado sus impuestos. En un futuro próximo veremos si los puede subir aún más. Pero como consecuencia
166 de todo esto podría producirse una huía de la libra. Knowledge@Wharton: Dubai y Grecia no son casos aislados. ¿Hay algún indicador de la existencia de grandes problemas ahí fuera? Allen: El problema en Dubai fue una llamada de atención: las entidades soberanas también pueden dejar de pagar sus deudas. Tras Dubai la gente volvió la vista hacia Grecia. Los diferenciales volvieron a dónde estaban a principios de 2009. Luego bajaron porque el ministro alemán de finanzas declaró que Alemania no permitiría una situación de impago. Ahora tengo dudas de que el resto de países europeos acudiesen a salvar a Grecia, en particular los alemanes. Este es el motivo por el que vuelve a estar en la agenda. Knowledge@Wharton: ¿Aún nos queda por ver lo peor de la historia de Dubai World o ya lo hemos visto? Allen: En mi clase alguien de la zona dijo que otros emiratos están intentando dar una lección a Dubai. Creo que en gran parte eso está pasando. Pero siempre y cuando el precio del petróleo siga en los niveles actuales no habrá ningún problema a largo plazo. Tal vez existan algunos problemas entre Dubai y Abu Dhabi y los otros emiratos, pero no se trata de problemas importantes. Knowledge@Wharton: ¿No acabará afectando todo esto al resto del planeta? Allen: No al menos que el precio del petróleo baje. Si baja se hará sentir rápidamente. Pero hemos visto las consecuencias para Grecia y ahora tenemos puestos allí todos nuestros sentidos. Knowledge@Wharton: Volviendo al caso de Estados Unidos, el Presidente de la Reserva Federal Ben Bernanke declaraba hace unos días que al observar la crisis actual en retrospectiva, las causas guardaban más relación con la laxitud de las regulaciones –que permitían a la gente pobre contraer deudas hipotecarias y cosas similares-, que con la persistente política federal de bajos tipos de interés aplicada a principios de la pasada década. ¿Está usted de acuerdo? Allen: No estoy de acuerdo con Bernanke. La Reserva Federal evita por todos los medios asumir culpa por la crisis; están ocurriendo muchas cosas en el Congreso que le dejarían sin poderes –y sin responsabilidades-. Es culpable doblemente, ya que estaba supervisando y vigilando muchos de los bancos que concedían hipotecas. Tiene muy difícil su defensa. En mi opinión, los bajos tipos de interés eran el principal problema. Y la prueba está en que no sólo Estados Unidos ha tenido problemas. España tenía una regulación bancaria muy buena y no concedió hipotecas irresponsables a individuos que no cumplían los requisitos estándar. No obstante se enfrentó al mismo tipo de problemas, e incluso peores, porque allí la burbuja fue mayor. Aunque el Banco Central Europeo no fijó bajos tipos de interés en términos absolutos, sí lo hizo en términos relativos. Los tipos de interés eran para la zona euro demasiado bajos para un contexto de boom económico. Si estudias otras partes del mundo o buceas en los archivos históricos puedes comprobar que los bajos tipos de interés suelen formar parte de las burbujas. Knowledge@Wharton: Hemos asistido a un notable renacimiento del mercado bursátil en Estados Unidos y otras partes del mundo. ¿Continuará? Allen: Esta es, de nuevo, parte del problema de la existencia de políticas monetarias expansivas. Suelen inflar el mercado de valores y crear burbujas. Esto es lo que está ocurriendo ahora mismo. Simplemente hay demasiado dinero fácil. Cuando la Reserva Federal empiece a restringir la oferta monetaria descubriremos si la bolsa ha sido impulsada … por un fenómeno monetario. La mayoría de los economistas niegan que exista vínculo alguno entre las políticas
167 monetarias y el precio de los activos. Pero esa va a ser la gran cuestión. Knowledge@Wharton: Pero algunos indicadores como el ratio precio-beneficios no se encuentran muy alejados de los estándares históricos. Allen: Esto es verdad. Los beneficios se están comportando bien. Pero de nuevo se debe tener presente el fenómeno monetario. ¿Qué va a ocurrir en la economía? ¿Son los beneficios sostenibles? Pronto tendremos respuestas. Knowledge@Wharton: En cuanto a China, recientemente se han oído muchas historias sobre la recuperación de China. Parece haber salido de la recesión mucho más rápido –y gozando de mejor salud- que muchos otros países. ¿Cree que ha sido así y por qué? Allen: China tiene dos enormes ventajas. La primera es que disfruta de una fuerte posición fiscal. Tiene una deuda relativamente baja en comparación con la mayoría de las grandes economías. Esto le da capacidad para prestar y gastar grandes cantidades de dinero. La segunda es que aún tiene un elevado control de su economía. Posee una gran parte del sector industrial, bancario y muchos otros. Esto significa que puede estimular la economía fácilmente. Sin embargo, uno de los problemas es el creciente precio de la vivienda en Pekín y Shanghai. ¿Están causando una burbuja? Y si estalla, ¿el país va a tener problemas? Debe empezar a construir algo más que meras infraestructuras –como carreteras, puentes y otras cosas necesarias en muchas partes del país- para empezar a crear infraestructura humana en términos de educación, salud y ese tipo de cosas, por debajo de la media en muchas partes de China. Knowledge@Wharton: Si gran parte del renacimiento de China se debe a su sistema centralizado, ¿hay alguna lección que Occidente pueda aprender del modo en que China está respondiendo a la crisis? Allen: Estaría bien que, por ejemplo, tuviésemos bancos propiedad del Estado que pudiesen competir con el sector privado. Muchos países que sufren crisis frecuentes disponen de este tipo de bancos, de forma que cuando las cosas se ponen feas no tienen que depender del banco central para convertirse en un banco comercial y tomar decisiones de crédito. Un motivo por el que China se comportó tan bien fue que posee grandes bancos y que supo dirigirlos, algo que no se puede hacer en un sistema financiero privado. No creo que debamos replicar el sistema chino, pero tal vez podríamos parecernos un poco más a él. Knowledge@Wharton: Entonces, ¿existe una especie de sistema de seguridad? Allen: Sí, existe una especie de sistema de seguridad. Knowledge@Wharton: Echemos un vistazo a Japón. No parece estar recuperándose del mismo modo. ¿Cuál es en este caso el problema? Allen: Japón tiene muchas fortalezas y muchas debilidades. Tiene una enorme cantidad de deuda pendiente de pago acumulada en las dos últimas décadas. Esto va a ser un lastre importante. Si los tipos de interés suben tendrá que destinar mucho dinero al pago de las primas. En la actualidad la cuantía es muy baja porque los tipos de interés están próximos al 0%. El motivo por el que Japón crecía estos últimos años era la buena marcha de la economía china. Así, cuando China se vio afectada por la crisis, Japón sufrió duras consecuencias. Y con el actual resurgir de China tampoco ha logrado recuperarse. Asimismo, si observar empresas como Sony verás que tienen un problema de largo plazo… En la actualidad empresas coreanas como Samsung y LG están obteniendo mejores resultados.
168 Japón también tiene problemas políticos. La transferencia de poderes el pasado agosto desde el Partido Democrático Liberal al nuevo gobierno no es algo a lo que los japoneses estén acostumbrados. Esto está provocando mucha incertidumbre. En breve veremos como acaba todo esto. Ni siquiera está claro donde reside el poder en estos momentos en Japón, si en el líder del Partido Demócrata o en el Primer Ministro Yukio Hatoyama. Todas estas incertidumbres complican las cosas para la economía japonesa. Knowledge@Wharton: Observando el resto de países asiáticos, ¿cree que las cosas empeorarán o mejorarán? Allen: Depende. En Corea las cosas van muy bien. Era uno de los países candidatos a sobrevivir a la crisis; a pesar de contar con un marcado perfil exportador –como Japón o Alemania-, no se ha visto tan afectado por la crisis. Australia está creciendo. Ya ha aumentado los tipos de interés. Está aprovechando muy bien la buena marcha de la economía china y sus grandes proyectos de infraestructuras. Otros países asiáticos tienen problemas desde hace mucho tiempo. En Filipinas hay problemas. Pero en general Asia está recuperándose y esperemos que siga así. Knowledge@Wharton: En su opinión son muchas las señales positivas, pero aún le preocupa lo que ocurra el próximo año. Allen: Sí, aún me preocupa. Hay señales negativas en Estados Unidos y en Europa. En Asia la mayoría de las señales son positivas. Nuestra visión del mundo ha cambiado; Estados Unidos no había tenido crisis económicas en los últimos 40 años. Ahora ese mundo ha dejado de existir. ¿Cuándo tendrá lugar la próxima crisis? ¿Dentro de cinco años? ¿Diez? ¿Tenemos ahora un mundo en el que nadie es inmune a las crisis? No creo que la gente aún lo haya asimilado. La gente piensa que algunos problemas en el sector hipotecario han sido los causantes de la crisis. Pero si hay algo que debiéramos aprender es que las crisis llevan siglos existiendo y que seguirán existiendo. Simplemente han vuelto con nosotros de un modo que hacía tiempo que no habíamos visto. Me gustaría recomendar un libro de Carmen Reinhart y Kenneth Rogoff titulado This Time is Different: Eight Centuries of Financial Folly. En él los autores documentan las frecuencias de las crisis a lo largo de varios siglos. Cada vez que una crisis ocurre la gente se dice “Oh, ahora es diferente”. De ahí procede el título. Pero las crisis siempre vuelven. Esta vez tampoco ha sido diferente. Franklin AllenInterdependencia global: ¿Están Estados Unidos y otros mercados ‘sembrando las semillas’ de la próxima crisis? 13 Ene - 26 Enehttp://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1826&language=Spanish
13 Ene - 26 Ene El dilema europeo: Aumentar la regulación sin sofocar el crecimiento Wall Street tal vez haya sido el epicentro del terremoto financiero que sacudió el mundo, pero Europa —junto con otros mercados globales— ha pasado por un periodo posterior de profunda depresión en 2009. Como consecuencia de ello, los países europeos esperan un crecimiento
169 débil en 2010, según explican profesores de Wharton y otros especialistas. “La preocupación más inmediata de 2010 todavía es la crisis, que afectó a algunos países más que a otros. Pero casi todos se han visto afectados”, señala Mauro Guillen, profesor de Gestión de Wharton. “Creo que todos esperan que las cosas mejoren. El problema es que no es evidente de qué manera va a tener lugar”. Además de una recuperación débil, Europa tendrá ante sí desafíos importantes que marcarán el ambiente económico y empresarial en 2010 como, por ejemplo, la integración económica, el impago de la deuda soberana, los cambios regulatorios y el lugar de la Unión Europea (UE) en la economía global. La Comisión Europea prevé un crecimiento generalizado de sólo un 0,75% en 2010, y del 1,5% en 2011, frente a un 2,6% en 2007, antes del estallido de la crisis. A finales de 2009, la economía europea estaba recuperándose, sin embargo la Comisión advirtió que eso se debía, en gran medida, a una política fiscal y monetaria sin precedentes que estimuló la confianza del consumidor. En 2010, de acuerdo con previsiones de la Comisión, el crecimiento será más tímido que de costumbre debido al deterioro de los mercados de trabajo, el fuerte desapalancamiento financiero, una demanda débil, ingresos débiles y un crecimiento modesto del crédito. Guillen destaca que el desempleo es una gran carga para las economías europeas. La UE estima que el número de desempleados será de 7,5 millones entre 2009 y el final de 2010, llegando a una tasa del 10% en 2011, cuando el crecimiento del desempleo volverá a alcanzar niveles positivos. A pesar de tales obstáculos, añade, Europa tiene potencial para aumentar su fuerte posición en la economía global, con tal de que los procedimientos de unificación se pongan en práctica y amplíen la importancia económica de la UE. De momento, sin embargo, Europa continúa comportándose como una “entidad fragmentada”, explica Guillen, para quien los países europeos “no usan el peso que tienen de” forma unificada. “Europa necesita tener voz propia en los negocios mundiales. Es lo que ha estado intentando hacer con empeño en los últimos 20 o 30 años”. Por ejemplo, ante la creciente competencia entre los países occidentales para ganar la atención de China, será “interesante [..] observar cómo Europa se relaciona con China y con EEUU, ya que los europeos tienen numerosos acuerdos comerciales con EEUU y un excelente diálogo con China”. La quiebra de los PIGS John Kimberly, profesor de Gestión de Wharton y director ejecutivo de la Alianza Wharton/INSEAD en Francia, dice que Alemania y Francia — donde el mayor volumen de préstamos de perfil conservador antes de la crisis atenuó el impacto del choque— son las naciones europeas mejor posicionadas para crecer en 2010, siendo Alemania la más fuerte de las dos. En Portugal, España y Grecia, donde la posibilidad de impago de la deuda soberana es el asunto del momento, los problemas económicos fueron alimentados, en parte, por las inversiones especulativas en el sector inmobiliario. Italia, con una elevada tasa de desempleo y alguna inestabilidad política, puede volverse más volátil, añade. “Será interesante observar de qué forma la UE responderá a la situación en Grecia. ¿Los griegos darán los pasos necesarios para recortar el déficit del país? y si no lo hicieran, ¿que hará la UE? Ése es un juego de apuestas arriesgadas y establecerá precedentes”. De acuerdo con las normas de la UE, los estados miembros con riesgo de impago de su deuda pública deberán obtener apoyo en el Fondo Monetario Internacional. De momento, según un
170 reportaje del Wall Street Journal, Grecia se propuso, esta semana, reducir su déficit presupuestario del 12,7% del PIB, en 2009, hasta un 3% en 2012, un año antes de lo que había prometido inicialmente. Con eso, el país toma en cuenta la decisión de hace dos semanas de Moody’s Investors Service de bajar la nota calificación de la deuda soberana de Grecia, que Standard & Poor’s y Fitch Ratings ya habían hecho anteriormente, según el periódico. El tema llamaba la atención también sobre la inminente llegada a Atenas de funcionarios de la UE y del Banco Central Europeo en preparación para la revisión del presupuesto griego. Según Greg Salvaggio, vicepresidente senior de mercados de capitales de Tempus Consulting, de Washington D.C., la posibilidad de crisis en la deuda soberana de los países a los que actualmente se llama PIGS —Portugal, Irlanda, Grecia y España, según sus siglas en inglés— es una preocupación cada vez mayor. “Según algunos analistas europeos, existe la posibilidad de que uno o más de esos países se vea forzado a dejar temporalmente la UE para poner las finanzas en orden”. Salvaggio observa, sin embargo, que prácticamente todos los países europeos infringen algún elemento estipulado por la UE en la parte de exigencias fiscales, como niveles de déficit y requisitos de garantía como consecuencia de la recesión mundial. Philip Nichols, profesor de Estudios jurídicos y de Ética en los negocios de Wharton, destaca que la crisis ha ayudado también a calentar el debate político sobre cuánto apoyo deben prestar los países más ricos a los más pobres que se enfrentan a altos niveles de desempleo. En algunos países, el movimiento nacionalista contrario a una mayor integración puede ganar fuerza. “Los euro escépticos están muy satisfechos con lo que interpretan como una pérdida de fuerza del crecimiento de la UE. Otros, sin embargo, citando el pragmatismo europeo, prevén un crecimiento más lento, sin embargo continuo, de la Unión Europea”. Para algunos, de acuerdo con Salvaggio, si Grecia recurre al impago, otros países podrán convertirse en “piezas de dominó” vulnerables al ataque de especuladores que se volverán, de entrada, contra la deuda de España; después, tal vez, contra la de Irlanda e incluso la de Reino Unido. La quiebra, o incluso la posibilidad del colapso de la deuda soberana, impedirá el Banco Central Europeo (BCE) elevar los tipos de interés y, muy probablemente, estimulará la adopción de tipos más bajos, dice. “La desventaja es que las tasas menores de interés de la zona del euro pueden acabar elevando la inflación”. El presidente del BCE, Jean-Claude Trichet, es “duro” cuando se trata de inflación, dice Salvaggio. “Él razona como el antiguo Bundesbank [banco central alemán]: la inflación se debe controlar por encima de todo. Creemos que la inflación volverá a medida que los niveles de consumo aumenten. El BCE debe reaccionar con aumentos, pero con la posibilidad del quiebre de la deuda soberana en la zona del euro será una decisión difícil. Se trata de una historia interesante que merece nuestra atención en los próximos meses”. Desafiando el punto de vista anglosajón De acuerdo con Janice Bellace, profesora de Estudios jurídicos y de Ética Empresarial de Wharton, la crisis económica ha sorprendido a los líderes de algunos países porque no evaluaron como debían lo mucho que estaban interconectados los mercados financieros de todo el mundo. Los ideales de libre mercado avanzaron en toda Europa —principalmente Reino Unido— en los años 90 y principios de 2000. Conocido actualmente como “punto de vista anglosajón”, muchos países abrazaron la ideología y tomaron medidas para desregular o introducir regímenes regulatorios más flexibles en la economía. Bellace cita, por ejemplo, el caso de España, que se benefició enormemente de las regulaciones financieras laxas que animaron a los extranjeros a invertir en una segunda vivienda, alimentando así el boom en el sector de la construcción inmobiliaria y en otros servicios. Ahora, lo que era un boom se convirtió en una bomba. El desempleo en España está entre los
171 más elevados de Europa y es cada vez mayor la preocupación por la calidad de la deuda en el país. En Islandia, los grandes bancos hicieron malas inversiones y la economía de todo el país colapsó a principios de la crisis financiera global, llevando a los ciudadanos a cuestionarse el modelo de libre mercado defendido por Reino Unido y por EEUU. “Hay una gran incertidumbre en relación al rumbo que hay que seguir. La actitud más cautelosa la están demostrando Alemania y Francia, países de libre mercado menos pronunciado” y con mayor volumen de regulación que los demás países europeos, dice Bellace. “Todo el mundo cree que el modelo marxista/leninista está muerto y enterrado, sin embargo, existe una diferencia entre la creencia en los mercados y la forma más flexible o más rígida por la cuál deben ser regulados”. Según Bellace, la crisis global debería despertar el deseo de las naciones europeas de integrase de forma aún más profunda para hacer frente al poderío económico de EEUU, responsable de buena parte de la confusión actual. “Los países solos no pueden hacerlo. De cierta manera, eso tal vez explique por qué Francia y Alemania están creciendo juntas”. Bellace cita también el nombramiento del ex-ministro de Agricultura francés, Michel Barnier, al frente de la comisión de mercado internos de la UE —una posición semejante a la del secretario del Tesoro americano— como otro indicador de lo que puede suceder en 2010. El nombramiento fue interpretado por algunos como una señal de que las políticas regulatorias económicas de Francia, más rígidas, han derrotado al modelo anglosajón. “Los periódicos británicos publicaron varios comentarios a ese respeto, clasificándolo como un serio golpe a la City londinense, ya que Barnier es favorable a una mayor regulación de los mercados, lo que hará que empresas en condiciones de instalarse en otros lugares salgan del país”. Reforma regulatoria La reforma regulatoria será un asunto de gran interés para Londres, donde los servicios financieros se han convertido en un motor importante de la actividad económica, según explica Felipe Monteiro, profesor de Gestión de Wharton. “Londres siempre estuvo en la vanguardia de lo que sucede en el sector de servicios financieros, y yo no tengo duda de que todo lo que está siendo discutido actualmente respecto a la reestructuración de los mercados y de los servicios financieros tendrá un impacto significativo sobre Londres, inclusive con un efecto cascada en los mercados financieros de todo el mundo, para bien o para mal”, dice. En un informe titulado Ronda regulatoria 2009 y perspectivas para 2010, el Centro Internacional de Regulación Financiera (ICFR) considera que los proyectos regulatorios podrán ser enmarcados en tres categorías amplias: • Identificación precoz de riesgos sistémicos, un proceso generalmente conocido como “regulación macroprudencial”. • Mejora de la regulación y de la supervisión, de forma que las instituciones necesiten menos financiación pública en el futuro. • Reformas estructurales de la arquitectura regulatoria. El último elemento, reformas estructurales, implicaría la determinación de la responsabilidad del riesgo sistémico. Cabría también, en este caso, decidir si hay necesidad de cambio para la unión o separación entre la regulación y supervisión de bancos, compañías de seguros y mercados. Según el informe, Reino Unido aún no establece quién debe lidiar con la cuestión de la regulación: el Banco de Inglaterra o la Autoridad de Servicios Financieros. En Europa, continúa el informe, los planes relativos a la constitución de un nuevo Consejo Europeo de
172 Riesgos Sistémicos deberán concluir a finales de 2010. El ICFR añade que otros temas varios deberán constar en la agenda regulatoria, inclusive “dos cuestiones particularmente complicadas”. La primera de ellas consiste en saber cómo lidiar con el tamaño y la inestabilidad sistémica de instituciones financieras grandes y complejas, sobre todo desde que la crisis financiera redujo el número total de instituciones y reforzó a las que sobrevivieron a la consolidación. La segunda cuestión es reflejo de la primera en el sector regulatorio. “Por un lado, buscamos la convergencia y la armonización regulatoria, para que no haya arbitrajes”, informa el informe. “Existe, sin embargo, el riesgo de que sin diversidad, en una situación en que todos los supervisores recurren a los mismos métodos y herramientas, estén todos confundidos. Por lo tanto, ¿de qué manera debemos animar la diversidad en los modelos de negocios bancarios y regulatorios?” Las desventajas de la regulación Guillen observa que, además de estimular la adopción de una nueva regulación, la crisis debería provocar una nueva evaluación de las regulaciones y prácticas que impiden la competitividad. “Se sabe que Europa aún tiene problemas debido al exceso de regulación, y que no hay iniciativas que tengan en cuenta el éxito de los emprendedores”. Guillen observa, por ejemplo, que la industria de capital de riesgo no tuvo un desarrollo importante en Europa debido a la fragilidad que acecha a la protección intelectual y las leyes de patentes, aunque las regulaciones estatales continúen sofocando los negocios con una burocracia exagerada. “La crisis aumentó la necesidad de que los países europeos hagan algo al respeto. Su prosperidad futura depende de eso. Éste será un asunto candente en 2010”. Parte de la misma dinámica ideológica tiene lugar en Rusia, según explica Nichols. Él dice que 2010 será un año especial porque nos permitirá ver si Rusia permitirá que las personas y las empresas trabajen juntas y en libertad, o si el Gobierno aumentará cada vez más su presencia en los negocios y en las relaciones individuales. Rusia ha dejado caer que va a permitir la existencia de una mayor relación de ese tipo, aunque en los últimos 18 meses parezca haber caminado hacia una situación de letargo “e incluso de movimiento en la dirección contraria”. Si Rusia prosigue en esa dirección, la economía del país estará fuertemente influenciada por intereses especiales, una tendencia que, según Nichols, siempre tuvo como resultado un desempeño económico pobre. A pesar de la enorme atención prestada a China y a las economías emergentes en otras partes del mundo, Monteiro dice que muchas de las 10 principales multinacionales del mundo continúan siendo europeas. Aunque el crecimiento sea más lento en el continente y en el futuro inmediato, Europa continuará siendo una fuerza económica global durante los próximos años. “Sea lo que sea lo que esas empresas hagan, habrá un impacto global resultado de sus acciones”. La clave para continuar con la expansión en las empresas europeas, añade Monteiro, depende de que las multinacionales estructuren sus operaciones globales con el objetivo de sacar provecho de las innovaciones. La mayor parte de las empresas europeas tiene activos en todo el mundo, no sólo en el sector de producción, sino también en la generación de conocimiento y de innovación, dice. “Espero que esas empresas se vuelvan cada vez más globales, no sólo en términos de ventas, sino también en la integración de productos y en tecnologías de cambios [...] Para crear nuevos productos hoy día, dependemos de diferentes partes del mundo. Las multinacionales europeas, en virtud de la distribución geográfica de sus activos, están bien posicionadas en ese sentido”.
http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1827&language=Spanish
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14.01.2010 Financial markets are betting on a Greek default
Credit default swaps on Greek debt rose 49bp to 328, the biggest one-day rise ever, after Moody’s warned that the Greek economy faces a “slow death” from deteriorating finances, Bloomberg reports. Moody’s says that Greece and Portugal must implement politically difficult fiscal retrenchment, otherwise there credit capacities. Ironically, Portugal default swaps were little changed at 105bp. Meanwhile prime minister Papandreou on Wednesday fights off speculation the country could be forced out of the eurozone or made to seek assistance from the International Monetary Fund to rescue its battered economy. Germany shrinks 5% FT Deutschland quotes economists who expect that it will take between one and three years until the economy recovers to the pre-crisis position, after the fall in GDP by 5%. Germany will almost certainly experience a strong technical recovery – based on inventory restocking – but it would still take a long time to make up the lost ground. The paper calculates that if industry were to main the same pace of recovery as it did 2005-2008, it would take until 2013 until the pre- crisis level is reached. Barnier plans new financial regulation FT Deutschland has the story that Michel Barnier, designate EU comissioner for the internal market and finance, plans a whole string of legislation dealing with derivates, and another legislation on capital ratios and bonus payments. The paper says his announcement signals a more active stance on financial legislation (and an attempt to appease the European Parliament, which has been angered by the previous Commission’s financial service policies). During his confirmation hearing he also told MEPs that he wants to add a social dimension to his work programme, reports Le Monde. He promised that future legislation will be subject to a social impact study and there will be an investigation into social dumping. To appease the UK, Barnier also promised to make the financial industry more competitive under new and better rules. The new system should be conducive to more transparency, more responsibility and more
174 morality in the financial sector. Berlusconi’s U-turn on tax cuts Berlusconi changed his mind about tax cuts just days after he indicated in to La Repubblica that it is time to eliminated the highest brackets of income tax, writes the FT. Berlusconi said The cost of financing Italy’s large public debt meant that tax cuts were “out of the question”. This U- turn is a vindication for Giulio Tremonti, finance minister, who opposes cuts that would increase the budget deficit. Renault ordered to keep production in France The French government ordered Renault to keep its production of its new small car in France rather than shift it to Turkey, reports the FT. The government, which holds a 15% stake in Renault, is opposed to any plans to move production of the best-selling model to Turkey. Already last year Renault had promised to forego compulsory redundancies and plant closures in France in return for a €3bn loan from the government. Turkey will not like this, nor defenders of the Single market. Juncker to meet Sarkozy According to Les Echos, Jean Claude Junker is to visit Sarkozy two months after he lost out against Van Rompuy over the council presidency job, which Juncker blamed on Sarkozy lack of support. The official wording is that the two would discuss European issues. Juncker is expected to be confirmed as head of the eurogroup next week (and we expect that Sarkozy probably wants to know what his agenda will be). Magnus on sovereign default risks In the FT George Magnus lists five reasons why public sector de-leveraging may be particularly difficult in the next few years, and why, therefore, default risks loom large. First, sovereign debt service costs are set to soar. Second, OECD governments’ drop in tax revenues may be permanent, where they are related to financial services and housing. Third, a weak economic environment will make consolidation efforts even harder. Fourth, age related public spending is certain to rise. Fifth, high level of capital mobility complicate debt management.
http://www.eurointelligence.com/article.581+M5906c7e35c2.0.html
175 MARKETS
Sovereign default risks loom By George Magnus Published: January 13 2010 14:48 | Last updated: January 13 2010 14:48 The sustainability of sovereign debt hangs heavily over bond markets, and the prospects for economic and financial stability. Since 2007, OECD government deficits have risen by 7 per cent of GDP to just over 8 per cent, and debt, excluding contingent liabilities, has risen by about 25 per cent of GDP to just over 100 per cent. Emerging market bonds shed junk status - Jan-13 Argentina still struggling to recover - Jan-13 Indonesia bond sale short of target - Jan-14 Lex: Sovereign CDS - Jan-13 Sovereign bonds seen as riskier than corporates - Jan-12 Short view: Corporate bonds - Jan-13 The biggest increases have occurred in Iceland, Ireland, the US, Japan, the UK, and Spain. There is no peacetime precedent for the current speed and scale of public debt accumulation and it is difficult to assess the social tolerance for high debt levels, and for the pain of protracted fiscal restraint. In several EU member states, the threshold has already been breached. The spectre of sovereign default, therefore, has returned to the rich world. Default does not have to mean outright debt repudiation. It can mean some type of moratorium on interest payments, and the restructuring of loan terms. Richer nations are assumed to be above such measures, but not in extreme circumstances. The US abrogated the gold clause in government and private contracts in 1934, and in 1971, it abandoned the gold standard altogether. Default can also occur via inflation, currency debasement, the imposition of capital controls, and the imposition of special taxes that break private contracts. Seen in this light, a few countries in eastern and western Europe may already be technically at risk of default. At the moment, higher spreads on sovereign bonds and credit default swap rates do not provide convincing evidence of an imminent default crisis, per se. Japan’s public debt has already risen above 200 per cent of GDP, but the government can borrow for 10 years at 1.4 per cent, while Australia’s government debt is about 25 per cent of GDP, but it pays over 5.5 per cent. Other rich countries with varying debt ratios all pay roughly 3.5-4 per cent. However, the status quo is not sustainable. Concerted fiscal restraint could trigger another recession, but the lack of it could end up in bigger default risks. Even Japan, now into its third ageing decade, may be vulnerable, while some eurozone countries, though sheltered from currency turbulence, may yet falter in their deflation commitments and compromise the integrity of the single currency as we know it. The UK still lacks a credible debt management strategy, and the US cannot take investor goodwill for granted. There are five reasons why public sector de-leveraging may be particularly difficult in the next few years, and why, therefore, default risks loom large.
176 First, sovereign debt service costs are set to soar, overshadowing those for programmes, such as environmental protection and some social services, and, unlike past successful fiscal adjustments, no country can lower interest rates as a palliative. Perversely, the contrary may be the case. Second, OECD governments have experienced a threefold increase in their structural deficits, about a quarter of which is attributable to the drop in tax revenues, some of which may be permanent, for example, where they are related to financial services and housing. Third, a weak economic growth environment augurs poorly for effective fiscal adjustment, as will be evident as the bungee jump nature of economic recovery becomes clearer. Fourth, the financial crisis and the recession are the immediate cyclical reasons for the disarray in public finance, but these pale next to the structural costs of age-related public spending, which are starting to rise relentlessly. Fifth, high levels of capital mobility complicate debt management. Credit rating agencies have been quick to downgrade and opine about several sovereigns. The significance of their actions lies in the fact that most central banks, and some sovereign wealth funds, cannot hold securities rated below AA. Most ‘long-only’ asset managers have such restrictions too. Governments have to commit to credible details for fiscal stabilisation, and to structural reforms that address demographic issues, and the need for new growth drivers. The war on waste, raid on the rich, and other slogans will no longer do. They should raise the pensionable age, tackle public sector pension arrangements, and blaze a trail towards higher labour force participation and phased retirement patterns. They should end post-1945 middle class, homeowner, and corporate tax privileges, to finance jobs- and growth-oriented programmes that support the green economy, infrastructure, innovation, and education. Effective political leadership and imagination are essential if default risks are to remain at arm’s length. Otherwise, a spike in bond yields somewhere is all but assured and it may be impossible to prevent both contagion, and in the end, recourse to capital controls. George Magnus is Senior Economic Adviser at UBS Investment Bank and author of The Age of Aging (2008)
George Magnus Sovereign default risks loom January 13 2010 http://www.ft.com/cms/s/0/ea390b78-004a- 11df-8626-00144feabdc0.html
ft.com/alphaville All times are London time A European sovereign upgrade cometh? (surely some mistake, eh) Posted by Izabella Kaminska on Jan 14 10:41. BNP Paribas’s emerging markets team draws attention to Turkey on Thursday, suggesting the country might be in line, in contrast to most of Europe, for an S&P ratings upgrade. As they stated, this would follow upgrades already initiated by Moody’s and Fitch:
177 Turkish equities and bonds rose on market rumours that S&P was ready to move in line with Moody’s and Fitch and upgrade the country’s credit rating. We keep our long TRYZAR trade on going into the CBRT’s rate decision with the consensus expecting no change in the 6.5% base rate following the latest upside surprise on inflation. Stocks and bonds have both responded with strong gains:
The upgrades are said to reflect growing confidence in Turkey’s handling of the global financial crisis, as well as a positive opinion on the country’s outlook and its dealings with the IMF. Moody’s upgraded Turkey last week to Ba2, citing among other things resilience in the country’s public finances. Fitch, meanwhile, upped its rating on the country in December to BB+. S&P’s sovereign rating stands at BB-. Izabella Kaminska A European sovereign upgrade cometh? (surely some mistake, eh) Jan 14 http://ftalphaville.ft.com/blog/2010/01/14/126156/a-european-sovereign-upgrade-cometh- surely-some-mistake-eh/
178 Announcement: Moody's: 2010 likely to be challenging for European sovereign risk Governments' exit strategies from counter- cyclical policies are crucial London, 13 January 2010 -- In the first regular issue of its "European Sovereign Outlook" -- entitled "Diverging Conditions Heighten Significance of Exit Strategies" -- Moody's Investors Service says that 2010 may prove to be a difficult year for European sovereign debt issuers. The rating agency's view is based on the uncertainties surrounding the likely pace and intensity of exit strategies as governments start to unwind their fiscal stimulus and quantitative easing programs. Two factors look likely to dominate Moody's 2010 rating actions in Europe. First, will countries that have adopted counter-cyclical policies during the downturn be able to devise and implement successful exit strategies as their recoveries gain traction? The ratings of those countries that do will be more secure than those that do not, since their debt metrics should improve accordingly. Second, what happens if "adjustment fatigue" sets in? Will countries that face more deep-seated economic or fiscal problems overcome them -- or even be inclined to try to overcome them if the task is both painful and take an extended effort? Again, Moody's ratings of those countries that do stay the course of reform will be more secure than those that do not, since they should be able to restore any lost competitiveness and avoid a structurally higher debt burden. The region's ratings will likely be scrutinised even more closely than usual this year. In Moody's sovereign rating universe, European governments have seen some of the most dramatic deteriorations in their debt metrics. "Also, our assumptions about those countries that will be able to restore their economic and fiscal health and those that will not be able to will be tested, particularly in the Aa-A range," says Anthony Thomas, a Vice-President-Senior Analyst in Moody's Sovereign Risk Group. A key factor that has prevented complete economic and financial meltdown has been the collapse in interest rates. As a result, debt affordability has not deteriorated nearly as much as it would otherwise have done. However, if markets were to switch their concerns about weak economic activity to fears of inflation and market rates were to rise significantly, thereby revealing the true cost of the crisis in terms of making debt less affordable, Moody's cautions that more highly indebted countries could find their ratings tested. "In summary, expectations are low. No-one is under any illusions about the scale of the task facing European economies and policymakers, which is no bad thing," adds Mr. Thomas. The "European Sovereign Outlook" is a regular publication explaining our views and perspectives on sovereign ratings in Europe. It is one of three regional outlooks being published by Moody's Sovereign Risk Group this month, the other two will cover Latin America and Asia- Pacific. Two other regular reports further detail Moody's perspectives on sovereign ratings, the quarterly "Aaa Sovereign Monitor," which focuses on the highest-rated sovereigns, and the annual "Sovereign Risk Outlook," which provides a year-end review of global sovereign ratings activity and perspectives for the coming year. The latest editions of these reports were published in December 2009. The Special Comment "European Sovereign Outlook" is available on www.moodys.com.
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Grecia y Portugal se exponen a una «muerte lenta», advierte Moody's La agencia prevé un «año difícil» para los emisores de deuda soberana 14 Enero 10 - Madrid - R. E. Compártelo: Las economías de Grecia y Portugal se enfrentan a una «muerte lenta» por la baja competitividad estructural que tienen dentro de la zona euro y que les ha conducido a unos grandes déficits de cuenta corriente, según un informe de la agencia de calificación de riegos Moody’s que recoge la agencia Ep. Según el estudio «European Sovereign Outlook», este diferencial de competitividad es probable que provoque un «sangrado» del potencial económico de ambos países y su capacidad de aumentar impuestos si la situación no cambia. «El riesgo de una ‘muerte repentina’, una crisis en la balanza de pagos, es insignificante, pero la probabilidad de una ‘muerte lenta’, similar a la que experimentaron muchas regiones dentro de los países, es alta», asegura Moody’s. La agencia prevé «un año difícil» para los estados emisores de deuda soberana en Europa por «las incertidumbres que rodean el ritmo y la intensidad de las estrategias de salida». Moody’s asegura que los ratings de aquellos países que puedan «mantener el rumbo» de las reformas económicas serán más estables que los de aquellos que no lo consigan, puesto que deberían ser capaces de recuperar la competitividad perdida y evitar una carga de la deuda más alta. Respecto a España, Moody’s cree que su economía seguirá en recesión durante los dos primeros trimestres del presente ejercicio y calcula un «moderado» aumento del PIB, que cifra en el 0,2% para este año. Grecia y Portugal se exponen a una «muerte lenta», advierte Moody's14 Enero 10 http://www.larazon.es/noticia/8720-grecia-y-portugal-se-exponen-a-una-muerte-lenta-advierte- moody-s
Greek Default Risk Surges to Record Amid ‘Slow Death’ Concern By Lukanyo Mnyanda and Abigail Moses Jan. 13 (Bloomberg) -- The cost of insuring against default by the Greek government surged to a record after Moody’s Investors Service said the country’s economy faces a “slow death” from deteriorating finances. Credit-default swaps on the nation’s debt rose 49 basis points to 328, the biggest one-day rise ever, according to CMA DataVision prices at 4:20 p.m. in London. Greek government bonds dropped, pushing the premium that investors demand to hold the
180 nation’s debt instead of German equivalents to the highest since December. The European Central Bank said a proposed loan-relief program could have “a negative impact on market liquidity,” as the country struggles to rein in the largest budget deficit in the euro region, more than four times the European Union limit. “It’s a very volatile market, and people are scared of getting caught up in Greek bonds and then have the spreads turn against them,” said Glen Marci, a fixed-income strategist in Frankfurt at DZ Bank AG, Germany’s biggest cooperative lender. The yield on the 10-year Greek bond climbed 17 basis points to 5.83 percent as of 4:55 p.m. in Athens. It earlier rose to 5.84 percent, the highest since Dec. 22. The spread with German bonds of the same maturity widened to 250 basis points, the most since Dec. 21. While the risk of “sudden death” in the form of a balance-of-payments crisis was “negligible,” Greece and Portugal face “downward ratings pressure now that they must implement politically difficult fiscal retrenchment, if they are to avoid an inexorable decline in their debt metrics,” Moody’s said in its statement. Portugal default swaps were little changed at 105 basis points, according to CMA in London. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Lukanyo Mnyanda and Abigail Moses Greek Default Risk Surges to Record Amid ‘Slow Death’ Concern Jan. 13 http://www.bloomberg.com/apps/news?pid=20601085&sid=akAKAwqEfcN0#
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El bono español toca el 4%, pero gana terreno frente al alemán M. J. - Madrid - 08/01/2010 La prima de riesgo o rentabilidad extra que se exige a la deuda española frente a la alemana se ha ido reduciendo en las últimas semanas y ha vuelto a los niveles en que se encontraba el pasado 9 de diciembre, cuando la firma Standard & Poor's amenazó con rebajar la calificación de España. No obstante, el deterioro de los mercados de bonos en su conjunto ha provocado que la rentabilidad del bono español a 10 años llegase a superar ayer en el mercado secundario en algunos momentos de la sesión el 4%, un nivel que no alcanzaba desde hace casi seis meses. Cuando S&P puso la calificación de España en revisión con perspectivas negativas, el diferencial de rentabilidad del bono español con el alemán era de 60 puntos básicos (un punto básico es una centésima de punto porcentual). En las dos semanas posteriores, esa diferencia se ensanchó, hasta alcanzar los 73 puntos básicos el 21 de diciembre. Pero desde entonces la prima de riesgo española ha vuelto a reducirse y en el arranque de año se ha llegado a mover incluso por debajo de esos 60 puntos básicos que marcaba antes del informe de S&P. Ayer, el bono alemán cotizó a precios que implicaban una rentabilidad del 3,37%, mientras que el español acabó cerrando al 3,97%. El problema para España es que ese estrechamiento del diferencial no se ha producido por una mejora del bono español, sino por la caída de precios - inversos a la rentabilidad en los bonos- del alemán. Deuda más cara Aunque el diferencial vuelve a ser el mismo que antes de la tormenta desatada por S&P, el coste de financiación a largo plazo para el Tesoro español aumenta. Si ahora lanzase una emisión de bonos a 10 años tendría que ofrecer tipos en el entorno del 4%, frente al 3,89% de la última subasta. Con todo, los tipos de emisión siguen siendo muy bajos en términos históricos. La deuda griega, mientras, también ha recuperado parte del terreno perdido, aunque en su caso la prima de riesgo sigue siendo altísima. En diciembre pasó de 170 a un máximo de 277 puntos básicos. Ayer, el diferencial con Alemania era de 227 puntos, pues el bono alemán tenía una rentabilidad del 5,64%. Ayer mismo, la delegación de la Comisión Europea que visita Atenas pidió al Gobierno griego más información sobre sus planes de consolidación fiscal. http://www.elpais.com/articulo/economia/bono/espanol/toca/gana/terreno/frente/aleman/elpepue co/20100108elpepieco_1/Tes
182 Wall Street titans face the flak By Tom Braithwaite and Francesco Guerrera in Washington Published: January 13 2010 14:25 | Last updated: January 13 2010 17:15
Four of Wall Street’s biggest names offered both contrition and a defence of their actions on Wednesday as the Financial Crisis Inquiry Commission promised to use its subpoena power to probe the causes of the financial crisis. Lloyd Blankfein of Goldman Sachs, Jamie Dimon, chief executive of JPMorgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America entered a congressional hearing to a barrage of flash bulbs.
“Looks like a perp walk” muttered Thomas Krebs, assistant director of the FCIC, to a colleague before Mr Dimon became the first chief executive to walk the gauntlet of cameras and introduce himself to the committee members. Crisis inquiry: Live coverage - Jan-13 Opinion: Why Obama must take on Wall Street - Jan-12 In depth: Crisis inquiry - Jan-12 US bankers face cross-examination - Jan-13 Angelides prepares forensic grilling - Jan-12 Lex: Financial regulation - Jan-12 Adding to the courtroom tone, Phil Angelides, chairman of the commission set up by Congress last year to examine the causes of the crisis, made the four bankers swear to tell the truth.
“We’re after the truth,” he said. “The hard facts...We’ll use our subpoena power as needed. And if we find wrongdoing, we’ll refer it to the proper authorities.”
183 But as cross-examining of the witnesses got underway, Mr Blankfein offered a robust defence, talking over Mr Angelides to insist his points were heard. He noted that Goldman was a principal in transactions, dealing with other institutional investors – drawing sympathetic nods from Bill Thomas, the lead Republican-appointee on the FCIC and rejected Mr Angelides notion that he was selling a car with faulty brakes. However, he added: “Anyone who says ‘I wouldn’t change a thing’ I think is crazy.” There has been scepticism in Washington about the quality of some of the commission’s members, which were appointed by Democratic and Republican leaders in Congress. At one point Mr Angelides, the former state treasurer for California, noted that: “I do know what a market is.” Mr Thomas, meanwhile, decided not to ask questions at his first opportunity, instead offering the American people the chance to write in and pose their own. He would start, he said, by asking those questions suggested on page 27 of Wednesday’s New York Times. Other panelists include experienced financial experts, such as Brooksley Born, the former head of the Commodities Future Trading Commission. Mr Blankfein – who bore the brunt of the early questioning – addressed compensation in his testimony, arguing his firm had enshrined a “strong relationship between compensation and performance”. White House criticises Wall Street chiefs As the hearings got underway on Capitol Hill, the White House again strongly criticised Wall Street chiefs. ”It would seem to me that an apology should be the least of what anyone should expect,” Robert Gibbs, White House spokesman, said on Wednesday, adding that Americans should be able to expect ”common sense and rationality about how [bankers] are paid”. ”Is it common sense to say that things are so good in the economy that it’s time for billions of dollars in bonuses?” Mr Gibbs asked. ”I think that there are some on Wall Street who believe that nothing has changed and that American tax-payers provided financing in order to get them back to making risky decisions again.” Mr Obama will on Thursday announce a new levy on banks to try to recoup some of the stimulus funding they received, writes Anna Fifield All the banks – and the Obama administration – are under growing political pressure over billions of dollars in bonus payments due to be announced over the next few weeks. The administration has resisted pressure from Democrats in Congress to hit banks with a punitive bonus tax, which liberals and many mainstream economists say could be justified because of the government support extended to the financial sector since the crisis in 2008. Mr Blankfein said he had been insufficiently sceptical of loose credit standards. “We rationalised [it] because a firm’s interest in preserving and growing its market share, as a competitor, is sometime blinding – especially when exuberance is at its peak.” Like his peers, Mr Blankfein also identified economic factors, including global trade imbalances, as a factor in depressing long-term interest rates and feeding the supply of easy money that helped cause the crisis. He also referred to the AIG situation as a “failure of risk management of colossal proportions”. Mr Dimon gave a nod to the regulatory debate under way in Congress, agreeing that banks should not be considered “too big to fail” but arguing that the right way to avoid the phenomenon was via a mechanism that allowed a failure rather than a cap on size.
184 The principal idea in Congress is a resolution authority to wind down failing firms with arguments over whether a fund used in the bankruptcy-like-process should be pre-funded by the industry. But some lawmakers support a return to a version of Glass-Steagall, the Depression-era law, which forced a separation between investment and commercial banking. Brian Moynihan, the recently appointed chief executive of Bank of America, produced some of the more robust testimony, pointing out that “those arguing for a return of Glass-Steagall are effectively arguing that Bear Stearns was a more stable entity than JP Morgan Chase. I don’t see how that is tenable.” Tom Braithwaite and Francesco Guerrera Wall Street titans face the flak January 13 2010 http://www.ft.com/cms/s/0/005cce6e-0049-11df-8626-00144feabdc0.html
ft.com/gapperblog Financial Crisis Inquiry Commission: Live Coverage January 13, 2010 1:51pm Alan Rappeport (refresh screen for updates) 12:15pm Mr Angelides digs in further to find out what Mr Blankfein’s responsibility is when Goldman Sachs’ name is on a security. “You weren’t just a market maker, you were securitising mortgages,” Mr Angelides said. In response, Mr Blankfein stuck to his story that he was dealing with sophisticated investors who sought that exposure. “I know it’s become part of the narrative that people know what was going to happen at every minute,” Mr Blankfein said. ”We didn’t know what was going to happen.” 12:13pm With the few extra minutes remaining Mr Angelides lays into Mr Blankfein a little more. 12:08pm Commissioner Bill Thomas promises all the CEOs that all of the information they will be sending to the commission will be handled appropriately. He also promised to be “pushy” to get timely responses if needed. 11:59am Blankfein on AIG: “A failure of risk management of colossal proportions”. 11:53am Still facing heat for shorting products that Goldman sold, Mr Blankfein argued that the bank was purely following its risk management protocols. He said that as a syndicator of certain products, Goldman found themselves to be long on them and that they were trying to get “closer to home”. He also said that while the bank has been producing research that was downbeat on the housing market in 2006, he was first alerted to serious problems in the subprime market by reading them in the press. 11:48am Mr Blankfein said that Goldman had $10bn in exposure to AIG. As it began to pull back, it had $7.5bn in cash and took out $2.5bn in credit protection against AIG’s default. 11:45am Commissioner Peter Wallson, before digging into Goldman’s exposure to AIG, said he does not envy the fact that Mr Blankfein’s name begins with a “B”, forcing him to take each question first. 11:32am Commissioner Keith Hennessey peppers Mr Blankfein on the idea of “too big to fail”. He asks if he thinks that the government would rescue Goldman or any of the other banks being questioned if they were about to collapse. “At some level the government would intervene,” Mr Blankfein said, noting that shareholders would not feel any relief from this. “There would be something done because of the fragility of the system.” He went on to say that he was not sure if this would have been true a year and a half ago or a year from now.
185 11:29am Still on the hot seat, Mr Dimon faced a good question about what it means for the economy that bank compensation has drawn so much talent away from fields such as engineering. The CEO replied using his brother who has a PhD in physics as an example, claiming that he would never pretend to get into something as “mundane” as trading and that the trend might reverse at some point. “Different strokes for different folks,” he said. 11:26am Mr Dimon, putting the financial crisis in perspective, reminds the panel crises happen every five to 10 years. “It’s not a surprise or a mystery”, Mr Dimon said. He went on to make the point that there needs to be a regulator that can see the bigger picture and understand how emerging problems can boil over. 11:23am: Mr Mack contends that the US needs a consolidated regulator with more resources that is tied to other regulators across the world. This “super-regulator” would need to be able to keep up with the accelerating complexity of financial products and practices. The idea of a global regulator has been highly controversial because some argue it would mean outsourcing US lawmaking to other countries. 11:17am They’re back. Commissioner John Thompson is back on Mr Blankfein, who said it was “amazing” that post-Enron off-balance sheet risk remained a problem. “I think it’s quite a big lapse,” Mr Blankfein said. However, Mr Blankfein went on to argue that one of the biggest challenges to re-regulating the economy is to resist taking all the leverage, or risk, out of financial markets so that the “growth engine” of the economy stalls. 11:07am The panel is taking a 5 minute break. 11:03am Defending the intentions of himself and his colleagues, Mr Blankfein said that the mistakes of banks were due to failures of risk management. “Most of the problem wasn’t the cynicism of companies that held these products and knew they were toxic,” he said. “They didn’t know they were toxic.” 10:58am Mack on mortgages: “We did eat our own cooking and we choked on it”. 10:55am Mr Holtz-Eakin probed Mr Dimon on how it was possible that so many mortgages went bad in the US. JPMorgan’s chief blamed bad products (such as option arms), bad actors (shady mortgage salesmen) and speculation (people buying homes purely as investments). 10:52am On the rating agencies, Mr Blankfein acknowledged that higher ratings created a sense of complacency. “To some extent I also had been deferring to a rating agency,” Mr Blankfein said. 10:45am Commissioner Douglas Holz-Eakin, who advised John McCain’s presidential campaign, is hammering away at risk management practices. Mr Blankfein, who is probably starting to wish his name began with a Z, called for more internal stress testing. Jamie Dimon acknowledged that while his bank did stress test many areas, they did not have stress tests showing that US home prices would fall 40 per cent. Rationalising his mistakes, he said, “If you do everything right in business, you’re going to make mistakes”. 10:38am Mr Blankfein, back in the hot seat, is continuing to dance around the compensation question. 10:29am Keeping pressure on pay, which has been among the most politically sensitive subjects, Commissioner Robert Graham asked John Mack what Morgan Stanley means when he talks about performance in relation to pay. Mr Mack said that performance generally means profitability and how much risk is required to achieve that profitability. 10:20am Mr Blankfein, who has faced all of the questions so far, defended Goldman’s pay practices, arguing that compensation was down by 50 per cent last year and that he is paid mostly in stock. He also reminded the commission that he must hold 90 per cent of his shares until he retires. “Pay of senior people at Goldman Sachs has always correlated with the success of the firm,” he said. 10:15am Heather Murren hits Mr Blankfein on AIG, regulation and compensation.
186 10:05am Saying that he’s not trying to get Mr Blankfein to “cry uncle”, Mr Angelides continued to press the issue. In response to Mr Blankfein’s comparison to the financial crisis as being similar to an earthquake or hurricane, Mr Angelides retorted: “Acts of God will be exempt, these were acts of men and women”. Next question. 10:03am Goldman’s CEO, leaning halfway across the table, said that while the position that the bank was in was difficult, it was not planning on relying on government assistance. He reminded the commission that the bank still had access to the capital markets and that neither he nor anyone else can know what would have happened without government support. 9:56am Mr Angelides tore into Goldman’s vaunted risk management abilities. He listed a litany of ways that Goldman benefited from government assistance. He asked: “When you look at the amount of leverage that you had, do you really believe that your risk management was sufficient for you to survive were it not but for the government assistance that you received?” 9:52am Mr Blankfein, getting defensive, claims that Goldman is merely a market maker and can be a winner or a loser after such a transaction. Speaking over each other, Mr Angelides says that Mr Blankfein’s actions are like selling a car with faulty brakes and then buying an insurance policy on it. Voices raised, Mr Blankfein reminds him that the institutions Goldman is dealing with are “professional” investors dedicated to this business. 9:50am Mr Angelides asks Mr Blankfein about how Goldman can justify betting against securities, mostly subprime, that the bank was selling to institutions and investors. Mr Angelides called the action “cynical” and said that it appeared to undermine the market. 9:43am Prepared testimony is over. Asked what he would apologise for, Mr Blankfein said that his bank participated in elements that caused “froth” in the market, pointing to overuse of leverage. However, he refused to call it misbehaviour, noting that in the context of the world they were in, those were “typical” actions. 9:41am Echoing the populism that Congress is looking to hear, Mr Moynihan said, “Over the course of this crisis, we as an industry caused a lot of damage. Never has it been clearer how mistakes made by financial companies can affect Main Street, and we need to learn the lessons of the past few years.” 9:40am Up now is Brian Moynihan, BofA’s new boss. He breaks the crisis down into four parts: (1) a mortgage crisis in the US and abroad; (2) a capital markets crisis; (3) a global credit crisis; and (4) a severe global recession. 9:36am Mr Mack also hammered away at the idea of banks being too big to fail. He called for a systemic risk regulator and said that oversight and regulation have not kept pace with the complexity of financial products. “They were meant to spread risk, but they had the opposite effect,” he said. 9:33am John Mack, speaking more deliberately than Mr Dimon, called the last two years unlike anything he has seen in the last 40. 9:26am Jamie Dimon, speed-talking and peering over his spectacles, boasted about JPMorgan’s performance throughout the crisis, reminding the commission that the bank never suffered a quarterly loss, thanks to its strong loan loss reserves and high levels of liquidity. The CEO resisted placing any blame on regulators, but argued that no institution should be “too big to fail”. Instead, he said, shareholders and creditors, rather than taxpayers, should be the ones bearing risk. 9:19am Mr Blankfein acknowledged that Goldman Sachs benefited from the government support that was used to rescue the financial system and said that the support was “without question” needed for stabilising the economy. He argued that in the future, there should be more frequent public stress tests and a system that allows private capital to be deployed to cushion future collapses rather than government funds. Finally, he pointed to a lack of scepticism about the rating agencies that ultimately underestimated risk-taking. 9:07am
187 Phil Angelides, head of the FCIC commission, stared down Lloyd Blankfein, Jamie Dimon, John Mack and Brian Moynihan and reminded everyone of the anger being felt among the American people. “They have a right to be. This forum is the eyes, ears and voice of the American people”. Ten minute testimonies begin in alphabetical order with Lloyd B. -AR 8:30am ET Live coverage of the Financial Crisis Inquiry Commission begins here at at 9am. Congress will first probe chief executives of top US banks about the causes of the financial crisis, with free reign to question them on everything from their pay packets to the financial instruments that sparked the meltdown. Regulators will also be on the hot seat, with Sheila Bair, FDIC chairman and Mary Schapiro, SEC chairman, due to face questions. -Alan Rappeport Alan Rappeport http://blogs.ft.com/gapperblog/2010/01/financial-crisis-inquiry-commission-live- coverage/
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13.01.2010 Greece is still fiddling its data
Greek stocks and bonds tumbled after the European Commission said in a report that “severe irregularities” in the nation’s statistical data raises doubt about the accuracy of the Greek deficit, Bloomberg reports. The report was distributed yesterday when IMF officials arrived in Athens to assist the Greek government to cut their deficit. 10y Bond yields rose by 16pp, credit-default swaps went up 22.5pp to 278. Papandreou is to complete this week a new deficit-reduction plan. Finance minister Giorgos Papakonstantinou told the German newspaper Handelsblatt that Greece has nothing more to hide and that they remain committed to bring the deficit within 3% by the end of 2012. France expects €360m from bank bonus tax The French government expects to raise €360m from a levy on bonuses paid out in 2009 by banks in France, Christine Lagarde told Le Figaro. Short before the Christmas break Christine Lagarde had announced that bonuses above 27500€ would be taxed by 50%. The tax will be levied on market operators whose activities involve risk-taking by their banks, for about 2500 bankers. The FT writes that the figure is higher than expected and casts further doubt on the UK Treasury’s estimates. France to cut spending French budget minister Eric Woerth said that the French government intends to limit the rise in public expenditures to 1% over inflation instead of the actual 2% reports Les Echos. These remarks come one week ahead of the meeting on public finance, called in by Sarkozy as a signal that his government is serious about deficit reduction. The conference will also address the issue of how to refinance health insurance and whether a balanced budget rule should be written into the constitution. German deficit higher than expected Germany’s 2009 deficit was about 3.1 or 3.2 per cent of GDP, according German newsreports. The exact figure is due out later today. In the current year, Germany’s expects the deficit-to- GDP ratio to reach 6%, about €100bn, which includes €14.5bn in funds earmarked for the
189 stimulus programme. See Spiegel Online for more details. Wijnbergen on Iceland A very interesting analysis by Sweder van Wijnbergen in NRC Handelsblad, in which he says that it is far from clear that the UK and the Netherlands have a legal case against Iceland. Bos was citing EU legislation according to which every bank needed to be backed by a sufficient deposit-guarantee system. But this EU legislation does not say what happens if calamity strikes, and the Netherlands has no bilateral treaty with Iceland either. The way to proceed now is not through the courts, but first to recognise that Iceland is overindebted, with debts consisting of 300 to 900 per cent of GDP. Demanding full repayment in such circumstances leads to such turmoil that creditors end up with less if they had been more modest from the outset. What is needed now is a restructuring process of Icelandic debt. Wolf on Japan In his FT column, Martin Wolf writes about the lessons of Japan for the rest of the world. Here is the crunch line. “Japan’s experience strongly suggests that even sustained fiscal deficits, zero interest rates and quantitative easing will not lead to soaring inflation in post-bubble economies suffering from excess capacity and a balance-sheet overhang, such as the US. It also suggests that unwinding from such excesses is a long-term process.” Wyplosz on the Lisbon Strategy In a comment on Vox, Charles Wyplosz said the Lisbon strategy for making the EU the world’s most competitive economy is a failure, yet an extension of the failed approach is in the works. He argues that EU governments should let the strategy die a peaceful death. A new model is needed. Munchau on Volcker In the second part of a series on modern finance, Wolfgang Munchau concludes, in agreement with Paul Volcker, that the financial innovation of the last 25 years had, on balance, not contributed to real economic growth. One can defend each single innovation in some microeconomic context, but the macroeconomic consequences of financial innovation, especially the financial instability caused by an overpowering shadow banking system, more than outweigh the benefits. He concludes that regulation should thus be much tougher than hitherto been attempted. http://www.eurointelligence.com/article.581+M54c72d2b1df.0.html#
Opinion
January 13, 2010 EDITORIAL Tax Them Both The White House is talking about levying a tax or fee on large banks to recover the $120 billion it spent to bail out the financial system. That is a good place to start, but it shouldn’t stop there.
190 President Obama and Congress should also impose a windfall tax on the huge bonuses that bailed-out bankers plan to pay themselves over the next few weeks. This is an issue of fairness and sound public policy. The Treasury needs the money. A fee may also get banks and bankers to rethink the way they do business — something the much-promised, far-too-delayed and increasingly watered-down financial regulatory reform effort is unlikely to do. A permanent tax or fee imposed on the nation’s largest banks could reduce future risks by discouraging big banks from getting even bigger. Let’s be clear, the crisis spawned by banks’ recklessness has cost the country a lot more than $120 billion. Any calculation must also include the deepest recession since the 1930s and the loss of more than seven million jobs. What profits banks have made since then have not come from lending to credit-strapped businesses. They are trading profits made possible by trillions of dollars in cheap financing from the Federal Reserve. The crisis occurred because banks that had grown too big to fail came too close to failure — driven by a reckless pursuit of risk and profit. Credit froze, and the government was forced to put enormous public resources at their disposal to keep them afloat. Though all that public money has pulled banks back from the brink, some too-big-to-fail banks have since got even bigger by swallowing their weaker brethren. That means, if they get in trouble, they could wreak even greater havoc on the economy. A levy on these financial giants would help by putting a brake on this consolidation — making the largest banks somewhat less profitable and steering investment and other resources into smaller banks, which, if they failed, wouldn’t take the rest of us with them. The Obama administration has not specified either the size or the type of levy it would impose on the nation’s big banks. Officials are reportedly considering a tax on profits of the largest banks and a tax based on the size of their assets. Designing either will not be easy. Banks will deploy phalanxes of lawyers to avoid them and threaten to move their operations to friendlier climes. To be effective, any fee or tax should be implemented as part of a coordinated effort with all the big financial centers around the globe. Britain and France would be likely to come on board. The Group of 20 leading industrial and developing nations asked the International Monetary Fund last year to study different ways to make big banks raise money to contribute for present and potential future bailouts. Crafting a coordinated taxation regime might take a while. In the meantime, the Obama administration could start filling the budgetary gap with a windfall tax on those big bankers’ bonuses. It is a perfect way to say thank you. EDITORIAL Tax Them Both January 13, 2010 http://www.nytimes.com/2010/01/13/opinion/13wed1.html?ref=opinion
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Obama plans fee on financial firms to recover TARP money By Michael D. Shear Washington Post Staff Writer Wednesday, January 13, 2010; A14 President Obama will announce on Thursday a plan to impose a new fee on the nation's biggest financial firms in what officials say will be a years-long effort to recoup the government money used to bail out those institutions, a senior administration official said Tuesday night. The fee could return as much as $120 billion worth of losses to the U.S. Treasury from the $700 billion Troubled Assets Relief Program, or TARP, which was designed to rescue the firms during the economic crisis, officials said. The expected announcement appears to confirm reports that the 2011 budget Obama will submit next month will include revenues raised by such a fee -- funds that could help reduce the nation's soaring deficit. But the senior official said the motivation behind the fee is Obama's desire to recover for taxpayers the massive investment pumped into Wall Street during the financial meltdown that was triggered 15 months ago. Obama fought for the bailout in his first weeks in office but has since watched in frustration as some of the biggest firms have given billions of dollars in bonuses to their executives. The senior official, who spoke on the condition of anonymity because the decision has not been announced yet, said it has been under consideration since August. The law that created TARP requires the government to seek repayment, but a new fee would accelerate that process. "As the banking industry recovered, the president and the economic team felt it was important to discuss ways to recoup every dime for the American people more quickly than the law required," the official said. Banking executives have broadly opposed such a fee, saying it could generate new economic shock waves and stifle lending during a still-shaky recovery. In addition, economists have said they worry that any new fee -- such as one imposed on banking transactions -- could be passed on by the banks to their customers, creating in essence a new tax for consumers. The senior official declined to provide details about how the administration's plan would avoid those problems. But the official said it would not be a one-time fee and would last for years. Banks and other financial institutions have already begun to repay some of the TARP money. But government officials estimate that without a fee of some kind, losses from the program could be as much as $120 billion. "That is the highest end of a conservative estimate of the cost of TARP," the senior official said. "Officials expect the number will be much lower, and over the course of years, the fee would pay back any cost to the taxpayer." http://www.washingtonpost.com/wp- dyn/content/article/2010/01/13/AR2010011300317.html?hpid=topnews
192 Times of the Internet - France to raise 360 million euros from trader bonus tax PARIS (AFP) -- Wed Jan 13 2010 France expects to raise 360 million euros (522 million dollars) from its one-off tax on bank bonuses that will apply to some 2,500 traders, Finance Minister Christine Lagarde said Tuesday. The minister dismissed suggestion that banks will leave France in protest at the measure and said France will turn up the pressure on the United States to rein in bank bonuses during a Group of 7 meeting in February. "I don't believe that there will be an exodus of traders," said Lagarde in the interview to the pro- government Le Figaro newspaper. "Where would they go? To London?" she asked, noting that Britain was also applying the bonus tax. The 50-percent tax will apply to bankers who have earned a bonus of more than 27,500 euros and for the time being there are no plans to extend it beyond 2010, she said. "We are counting on an influx of 360 million euros, of which 270 million will be set aside to support the Guarantee Fund for Depositors to strengthen the security of account-holders," she said. The French government last month approved a draft bill for the new tax that will be contained in new legislation on financial regulation due to go before parliament this month. French President Nicolas Sarkozy and British Prime Minister Gordon Brown agreed during a meeting in Brussels in December to tax bankers' bonuses as part of a drive to make banks more responsible. "We wanted an exceptional tax to address exceptional circumstances," Lagarde said. "That was the objective guiding us." Leading French bank BNP Paribas sparked public outrage here in August over its plan to pay more than a billion euros in bonuses to its staff. It argued it was acting within Group of 20 rules and warned that foreign banks might poach its best staff if they were denied decent bonuses. But that failed to placate public opinion. The US administration has balked at such measures targeting banks but Lagarde said American public opinion was behind them. She suggested that President Barack Obama would now turn his attention to financial regulation, having completed health care reform. "I can't imagine that we would allow such excess from American banks. It would politically unmanageable in a courty where unemployment has reached 10 percent," she said. The issue will be discussed at the G7 meeting of finance ministers in Canada in early February, she said. http://www.timesoftheinternet.com/145657.html
193 EUROPE Paris looks for €360m from bank bonus tax By Ben Hall and Scheherazade Daneshkhu in Paris Published: January 12 2010 12:21 | Last updated: January 12 2010 21:42 The French government intends to raise €360m from its proposed windfall levy on bonuses paid out by banks based in France, says Christine Lagarde, the finance minister. The figure is slightly higher than expected and reflects banks’ predictions that they are likely to pay bonuses in full – absorbing the cost of the tax – if that is what banks in London do. The tax will be levied on the banks, rather than on employees. Money Supply: Taxing banks - Jan-12 European View: French bankers - Jan-12 Obama to target banks with new levy - Jan-12 UK fails to alter bank bonus culture - Jan-06 Sarkozy accused of picking easy target - Dec-11 Ms Lagarde’s estimate casts further doubt on the UK Treasury’s expected yield of £550m ($890m, €612m) from its proposed bonus tax. On that basis, Paris would expect to get more than half the revenues that the UK government is forecasting, although its financial sector is several times smaller. The French government will limit the scope of the tax to market operators whose activities involve risk-taking by their banks. Ms Lagarde told Le Figaro newspaper the French tax would cover bonuses paid to 2,500 bankers. French banks say privately that they have time to decide what to do because their bonus decisions will be made in February or March. “We will see how much outrage is sparked by what the US banks do and then we’ll decide. There is a competition issue here though – we can’t have people walk out the door,” said one banker. Another banker said: “Whatever we do, either the shareholders or the traders will be unhappy. So we will try to strike a balance.” Ms Lagarde said according to bank estimates, last year’s bonus pool would be only 16 per cent lower than the 2007 pool, the year before the financial crisis hit. Paul Jaeger, Paris-based consultant at Russell Reynolds, the recruitment consultancy, said: “Last year was a better year than 2008 for the French banks, so bonuses will be the same or higher. The main change is that a higher proportion of bonuses will be deferred in line with the new G20 rules.” The tax would apply to bonuses paid for 2009, including deferred payments and awards of stock as well as cash. It would be levied on bonuses above €27,500. It would come on top of the 10 per cent tax that banks already pay on salaries to their staff. There is frustration among banks that Nicolas Sarkozy, president, decided to follow Gordon Brown, British prime minister, in imposing the supertax instead of securing an international agreement that would apply to US banks. However, Paris intends to earmark €270m of the expected revenues to its bank deposit guarantee scheme that, under European Union rules, must raise its guarantee from €70,000 to €100,000.
194 A bill enshrining the tax will be presented to cabinet next week, debated in parliament next month and should come into effect by the end of March. Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/cc00f558-ff69-11de-8f53-00144feabdc0.html
COLUMNISTS French bankers have more to complain about than rivals By Paul Betts Published: January 11 2010 20:58 | Last updated: January 12 2010 16:58 French banks look like becoming the big losers of the current government clampdown on bankers’ pay and bonuses – on paper at least. If Nicolas Sarkozy, the Fench president follows, as he has threatened, the example of the British government in imposing a windfall tax on bonus pay-outs, French banks will face a double imposition given that many of the country’s biggest institutions, such as BNP Paribas or Société Générale, all employ armies of traders in London as well as Paris. This is certainly not the case of British banks, which have never deemed Paris as a particularly strategic financial centre. As a result the French capital, for all its charms and attractions, has not been considered an important location for the likes of Royal Bank of Scotland or Barclays. Even HSBC, a rare example of a foreign bank acquiring a French one, albeit medium sized, has hardly turned Paris into one of its key financial trading outposts. There are other good grounds for French bankers to complain. Not least the fact that French banks have in general behaved in the past more responsibly than their UK and US peers in terms of taking risks as well as in their remuneration policies. Of course, some banks were also caught out by the subprime crisis and others by a series of embarrassing rogue trading scandals. The French government, too, rushed to their support by injecting funds to bolster the capital bases. But this was nothing compared with the enormous state bail-out of British banks or of Wall Street institutions by the Washington administration. At the end of the day, French banks seemed to have weathered the financial storm better than most and indeed some, such as BNP Paribas, took advantage of the crisis to clinch a transformational deal by acquiring control of Fortis. The French bank now appears to have turned its sights on expanding its presence in Spain and has just acquired a small stake in Banco Popular, Spain’s third-largest bank. Unlike their UK or US counterparts, Paris-based bankers have really nowhere else to go. Their only realistic alternative is London or perhaps New York but then in London the government has slapped down a supertax on bonuses and Washington appears to be considering a similar levy. Unless they move to the other side of the globe to Hong Kong or Shanghai, that presumably leaves Frankfurt or Zurich as possible options. Even if some bankers might be tempted by Switzerland – Germany is out of the race since Berlin has already introduced its own restrictions on bankers’ pay – it is difficult to see French banks transferring at exorbitant costs their sophisticated trading platforms from Paris.
195 So Paris-based bankers cannot go round like their UK colleagues threatening the government of the risk of a mass exodus of talent to foreign shores to escape punitive taxes and protect their bonuses. On the other hand, they may very well be banking that the government will ultimately soften the blow when it unveils its windfall tax on bonuses this month. Mr Sarkozy certainly relishes bashing bankers and their excessive pay, especially ahead of imminent regional elections. But he is equally driven in protecting French national champions and defending the role of Paris as a financial centre – even to the extent of trying to take advantage of the City of London’s current difficulties to lure some business back to Paris. Although they would never dream of admitting it in public, this is making at least some bankers hopeful that the inevitable pain will be bearable. Drug addiction As hard to believe as it may be, the banking crisis does not seem to have been sufficiently serious to trigger the necessary concerted political will against the banks themselves. Sure, some countries are taking unilateral action. But without a concerted approach by G20 leading nations to clamp down on the bonus culture, it will probably require the bankers to get the world into another mess before governments are willing to apply genuinely co-ordinated shock treatment to end the banks’ addiction to their current remuneration structures. This could turn out to be sooner than later judging from the bubble developing in equity markets and the continuing threat of meltdown in the sovereign bond markets. The trouble is some governments still fear that the cost of taking action will lead to the migration of banks and bankers to weaker-willed and more benevolent fiscal jurisdictions. This is clearly short sighted. With the necessary commitment, co-ordinated action does work as it has proved on another issue no one thought would ever be resolved – that of tax havens and tax evasion. http://www.ft.com/cms/s/0/a698dcc0-fee4-11de-a677-00144feab49a,s01=1.html
Opinion
January 13, 2010 OP-ED CONTRIBUTORS Questions for the Big Bankers Today, the Financial Crisis Inquiry Commission, which Congress established last year to investigate the causes of the financial crisis, is scheduled to question the heads of four big banks — Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America. The Op-Ed editors asked eight financial experts to pose questions they would like to hear the bankers answer. 1. Bankers are dealers in money. The Federal Reserve is a creator of money — since the crisis began in August 2007, it has conjured up $1.1 trillion. Given the ease with which these dollars are materialized on a computer screen, how can they be worth anything?
196 2. The Federal Reserve’s setting of its benchmark federal funds rate at nearly 1 percent in 2003 to 2004 was a primary cause of the housing and mortgage debacle. Yet, in an attempt to nurse the economy back to health, the Fed has set that rate at nearly zero percent. So what’s the next bubble, and how do you intend to profit by it? 3. For Mr. Blankfein: In capitalism, profits are no sin, yet Goldman Sachs keeps making excuses for its success in 2009. If you earned the money honestly, what are you apologizing for? And if you didn’t earn it honestly, how did you do it? — JAMES GRANT, the editor of Grant’s Interest Rate Observer and the author, most recently, of “Mr. Market Miscalculates” • 1. It still isn’t clear precisely how mortgage-related losses in the financial sector grew to be many times greater than the actual losses on the mortgages themselves. What role did synthetic collateralized debt obligations — a Wall Street invention that uses credit default swaps to mimic the payments from mortgages — play in multiplying the losses? Is there any way in which a synthetic debt obligation adds value to the real economy? 2. Goldman Sachs and other Wall Street firms argue that the clients to whom they sold mortgage-related securities were sophisticated investors who fully understood the risks. Goldman has said this was also the case when its clients bought the very same mortgage securities that Goldman, on its own behalf, was betting would default. Did these clients indeed understand all the gory details? 3. At the height of the panic in the fall of 2008, Wall Street firms blamed short-sellers for trying to destroy them. What short positions did Wall Street firms have in one another’s shares, and were they also betting against each other using credit default swaps? — BETHANY McLEAN, a contributing editor for Vanity Fair, who is co-writing a book about the financial crisis with Joe Nocera of The Times • 1. Without the Troubled Asset Relief Program, Wall Street banks would not have survived the shock to the financial system that occurred in September 2008. Nor would they have subsequently accrued large profits and bonus pools in 2009. Shouldn’t a substantial share of those bonus pools be sequestered on bank balance sheets for several years to increase the banks’ capital levels and shield taxpayers against another bailout? 2. All deposits insured by the Federal Deposit Insurance Corporation that were held by Wall Street financial conglomerates should have been insulated in separate bank subsidiaries that were prohibited from trading, holding derivative securities and investing in risky assets like equities or bonds with less than a AAA rating. Wouldn’t such safeguards have reduced excess banker risk- taking, thereby reducing the need for taxpayer bailouts? 3. Wall Street turbocharged the subprime mortgage boom from 2002 to 2006 by providing billions in cheap warehouse loans to non-bank lenders that otherwise had virtually no capital or financing. Had the Federal Reserve kept short-term interest rates at a more normal 4 percent to 5 percent, rather than pushing them down to 1 percent, would this not have greatly curtailed the reckless growth of subprime loans? — DAVID STOCKMAN, a director of the Office of Management and Budget under President Ronald Reagan •
197 1. One result of the Pecora commission, the Depression equivalent of this investigation, was the Glass-Steagall Act, which kept investment banking separate from commercial banking until the act was repealed in 1999. Many experts now believe that divide should be reinstated. Yet commercial banks like Washington Mutual lost a lot of money during the crisis without having any investment banking activities, and pure investment banks like Bear Stearns and Lehman Brothers collapsed without being deposit-taking institutions. This suggests that the problem does not lie with mingling commercial and investment banking. Are you in favor of the return of Glass-Steagall, and why? 2. Many people argue that the financial industry now accounts for far too much of the gross domestic product and that it is unproductive, indeed counterproductive, to devote so much of the nation’s resources to simply moving money around rather than making things. Why has this shift occurred and what, if anything, can the government do about it? 3. Over the last 20 years, the world of finance has been irrevocably transformed: individuals have moved their money from savings accounts into money market funds, and institutional investors now keep their cash in the repo market, where Treasury securities are borrowed and lent, rather than as deposits in commercial banks. As a result, before the crisis, half of the credit provided in the United States was being channeled outside the commercial banking system. What regulatory changes do we need to ensure that our current financial system is as stable as the traditional banking system that served us so well from 1936 to 1996? — LIAQUAT AHAMED, the author of “Lords of Finance: The Bankers Who Broke the World” • 1. Describe in detail the three worst investments your bank made in 2007 and 2008 — that is, those transactions on which you lost the most money. How much did the bank lose in each case? 2. What was the total compensation of each manager or executive supervising those three transactions — including yourself — in 2007 and 2008? 3. Are those executives still with your bank? What investments do they supervise today? How much will they be paid for 2009, including their bonuses? — SIMON JOHNSON, a professor at the M.I.T. Sloan School of Management and a senior fellow at the Peterson Institute for International Economics • Some of your firms received payouts on credit-default swap contracts with American International Group. Most of those guarantees resulted from hedging supposedly safe investments (they had AAA ratings, after all) with A.I.G. or other insurers. This hedging allowed traders to book “profits” that had not yet been earned — profits that would be counted in calculating their bonuses. However, this insurance was likely to fail, as your risk managers surely knew. It involved so- called wrong-way risk: the guarantor (A.I.G.) was certain to be damaged by the same event (the housing market collapse) that would lead you to seek payment on the insurance. The insurance was effective only because the government stepped in, theoretically on the taxpayers’ behalf, and made payments for A.I.G., an otherwise bankrupt firm. Since employees’ bonuses, and ultimately yours, were based on these fraudulent profits, my questions are these: 1. How much profit did your firm record for bonus purposes on these trades that ultimately delivered huge losses? How much of those bogus profits were paid out in bonuses? 2. Have you made any effort to recover the bonuses? If not, why not?
198 — YVES SMITH, the head of Aurora Advisors, a management consulting firm, and the author of the blog Naked Capitalism and the forthcoming book “Econned: How Unenlightened Self- Interest Undermined Democracy and Corrupted Capitalism” • 1. Why did Wall Street continue to package and sell as securities so many mortgages of questionable value and underwriting standards even as the housing market started to collapse? 2. Why were Wall Street traders and other moneymen permitted to make bets — through the use of so-called credit-default swaps — on the long-term value of securities they didn’t even own? (This is akin to everyone in your neighborhood being allowed to buy fire insurance on your house. Since the only way that bet can pay off is if your house burns down, it shouldn’t be any surprise when that is exactly what happens.) 3. Why aren’t bankers and traders required to have more skin in the game — that is, more of their own salary at risk — and not just a marginal part of one year’s bonus? (In the old days, when investment banks were private partnerships, a partner’s entire net worth was on the line, every day.) — WILLIAM D. COHAN, a former Wall Street banker and the author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street,” who writes a regular column on business at nytimes.com/opinion • 1. How did you use the bailout money, and to what extent did it result in more lending or higher bonuses for your employees than you otherwise would have provided? 2. What, if any, changes do you contemplate making to your pay programs for executives and other high-level employees in light of recent events and related public concerns? 3. What have you done to modify your risk management and oversight structures to reduce the possibility that the problems of 2008 and 2009 will occur again? — DAVID M. WALKER, the president and chief executive of the Peter G. Peterson Foundation and the comptroller general of the United States from 1998 to 2008 http://www.nytimes.com/2010/01/13/opinion/13intro.ready.html?th&emc=th
01/12/2010 06:45 PM Draft Law German Government Plans to Crack Down on Rating Agencies The German government plans to curtail credit rating agencies with new legislation that imposes stricter supervision and introduces an array of fines for infringements, according to a draft of the law obtained by Reuters. Experts welcome the measures but warn they will be hard to implement. Economic analysts say the rating agencies are partly to blame for the global financial crisis. Now the German government is taking action to curb the discredited financial services firms. It plans to curtail the
199 power of the rating agencies in several important respects, according to draft legislation seen by Reuters. It plans the following measures: • to impose fines of up to €1 million ($1.45 million) if new European Union regulations are breached • to ban agencies from issuing ratings for companies that they advise • to place rating agencies under the supervision of the Federal Financial Supervisory Authority (BaFIN); the agencies will have to bear the cost of that supervision The law, which implements EU rules agreed on Sept. 16 last year, is to be approved at a German cabinet meeting on Wednesday, Jan. 13 and would later be voted on in parliament. The draft law accuses the agencies of failing to adjust their ratings quickly enough to changing market conditions as the crisis escalated. The aim of the EU regulations and the German law is improve the quality of ratings in future. Catalogue of Fines Rating agencies assess the creditworthiness of companies, banks, financial products and countries through a system that resembles school grades. The market is dominated by the three US agencies Standard & Poor's, Moody's and Fitch. The core of the draft law is a catalogue of fines listing 42 offenses. It also requires agencies to update their ratings in a timely fashion and to regularly review their calculation methods. Most infringements carry fines of up to €200,000. But in four cases the fines amount to €1 million, which will be imposed if they issue a rating despite a conflict of interest, if they advise and rate a company at the same time, if they refrain from adjusting a rating even though their calculation methods have changed, and if they issue a rating or don't withdraw a rating even though they lack sufficient data. BaFin will be put in charge of supervising the agencies. Its powers will be transferred to a new EU supervisory body in 2011. According to the draft law, BaFin will be permitted to send auditors to check the agencies at any point and without a specific reason. As a rule though, the agencies will be examined once a year. The companies being rated will not be checked. Experts Skeptical The legislation was part of the coalition agreement between Chancellor Angela Merkel's conservatives and the pro-business Free Democrats which formed the new center-right government after the general election last September. Analysts welcomed the plans but said they had doubts whether the the ambitious goals can be realized. Even though a comprehensive catalogue of fines will be put in place, it will be hard to control the agencies because it will always be difficult to assess the quality of ratings objectively. "Rating agencies basically predict how likely debtors are to become insolvent. It's unavoidable that they will be wrong in some cases," Professor Werner Neus, an expert on banking at the University of Tübingen, told SPIEGEL ONLINE in October. Stricter supervision won't be enough to achieve a fundamental improvement in the rating system, Neus said. Investors must be forced to take greater responsibility in assessing risk themselves, and they need alternative agencies that they can trust. But such alternatives don't exist. The top three -- Moody's, Standard & Poor's and Fitch -- are all based in the US and stubbornly defend their oligopoly. That will make it hard to set up the competitive European rating agency that many experts are calling for.
URL: http://www.spiegel.de/international/business/0,1518,671586,00.html RELATED SPIEGEL ONLINE LINKS: • Exacerbating the Crisis: The Power of Rating Agencies (05/06/2009) http://www.spiegel.de/international/business/0,1518,623197,00.html
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Greek Markets Rattled as EU Says Deficit Forecasts ‘Unreliable’ By Maria Petrakis and Andrew Davis
Jan. 12 (Bloomberg) -- Greek stocks and bonds tumbled after the European Commission said “severe irregularities” in the nation’s statistical data leave the accuracy of the European Union’s largest budget deficit in doubt. The benchmark ASE stock index fell 5 percent, the biggest decline since Dec. 8 when Fitch Ratings cut the country’s credit rating over its budget shortfall and rising debt. Bond declines drove the yield on Greece’s two-year note 27 basis points higher, the most in almost a month. The report distributed today by the Brussels-based commission came as International Monetary Fund officials arrived in Athens to assist the government in efforts to cut a deficit of 12.7 percent of gross domestic product, more than four times the EU limit. EU President Herman van Rompuy met with Prime Minister George Papandreou in Athens and said Greece was a concern for the entire 27-nation bloc. “You have all these stories about the IMF visiting Greece, the European Commission and a reversal in risk appetite” hurting bonds, said Peter Schaffrik, an interest-rate strategist at Commerzbank AG in London. “A combination of these factors will weigh on Greece.” Greek Promises Van Rompuy today praised Papandreou’s pledges to tame the deficit and said Greece’s promise to bring the shortfall within the EU limit of 3 percent of output in 2012 “must be met.” Papandreou’s government raised the deficit forecast for last year to more than 12 percent soon after winning elections in October, from a previous forecast of 3.7 percent, the commission said in its report. The commission questioned the accuracy of the statistics presented by both the new government and the previous administration and said political interference remained an issue. “The lack of reliability and the shortage of evidence supporting the deficit figure reported” in two revisions by the government in April and October left the data “in question,” said the commission, the EU’s executive arm. The declines in Greek bonds drove up the extra yield investors demand to hold the country’s 10- year notes instead of similar-maturity German bonds, the benchmark European securities, by 16
201 basis points to 234, the highest since Jan. 1. The difference averaged 55 basis points over the past 10 years. Banks Drop Banks were among the biggest decliners in the stock market as a further worsening of the country’s creditworthiness could leave Greek debt excluded from European Central Bank lending operations. National Bank of Greece fell 6.3 percent, the biggest drop in a month. Piraeus Bank SA fell as much as 9.1 percent, the most since the Sept. 11, 2001 terrorist attacks, before closing down 8.1 percent. “Unless the institutional weaknesses identified in this report are addressed and proper checks and balances introduced, the reliability of Greek deficit and debt data will remain in question,” the commission said in the report. Credit-default swaps on Greek bonds rose 22.5 basis points to 278, according to CMA DataVision prices. That means it costs $278,000 a year to protect $10 million of the government’s debt from default for five years. Papandreou’s government will complete this week a new deficit-reduction plan that aims to cut the shortfall to within 3 percent by the end of 2012 and avoid punishment under the EU’s excessive-deficit procedure. He said today that the plan will be approved within days and have “radical changes.” Workers to Protest The Socialist premier’s efforts, including wage freezes for some civil servants and cuts in their benefits, face opposition from labor unions, one of his biggest constituents. State workers today called a 24-hour strike for Feb. 10 to protest the austerity measures. Today’s report marks the EU’s latest challenge to Greek statistical data, after revisions in 2004 indicated the country shouldn’t have qualified to join the euro. Greece has met the EU’s deficit target once since joining the euro, according to commission figures in November. That was in 2006, when the shortfall was 2.9 percent. “The most recent revisions are an illustration of the lack of quality of the Greek fiscal statistics and of Greek macroeconomic statistics in general, and show that the progress in the compilation of fiscal statistics in the country, and the intense scrutiny by Eurostat since 2004, have not sufficed to bring the quality of Greek fiscal data to the level reached by other EU Member States,” the commission said. Papandreou said the deficit plan would help restore Greece’s credibility and pledged to make the statistics agency independent from the government. The commission said more needs to be done, noting that Greek economic data remained subject to “political pressure and electoral cycles.” Moody’s Investors Service and Standard & Poor’s followed Fitch in cutting country’s creditworthiness last month, fueling investor concern about a possible debt default. The difference in yield between Greek and German 10-year government debt widened to 276 basis points on Dec. 21, the most since March 17. To contact the reporters on this story: Maria Petrakis in Athens at http://www.bloomberg.com/apps/news?pid=20601085&sid=azBb13sgHPi4#
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13.01.2010 The Botox Economy - Part I By: Satyajit Das
Botox (botulinum toxin), a highly toxic neuro-toxic protein produced by Clostridium Botulinum, is commonly used in cosmetic procedures. Botox is sometimes injected to improve a person’s appearance by removing facial lines and other signs of ageing. The effect is temporary and can have significant side effects. The global economy is currently taking the "botox" cure. A flood of money from central banks and governments – "financial botox" - has temporarily covered up unresolved and deep-seated problems. Bad Risks… In 2009 there was a ‘recovery’ in financial asset prices. The low or zero interest rate policy ("ZIRP") of major central banks helped increase asset prices. Very low returns on cash or near cash assets forced investors to switch to riskier assets in search of return. Even Pimco’s Bill Gross discovered that his cash assets paid near zero returns. The chase for yield drove rallies in debt and equity markets. Low interest rates acted like amphetamine as investors re-risked their investment portfolios. High credit spreads for investment quality companies, driven by the panic of late 2008 and early 2009, subsided and rates returned to pre-Lehman levels. Credit spreads for investment-grade borrowers fell to just over 100 basis points from their highs of 300 basis points in March 2009. Credit spreads for non-investment grade or junk borrowers market fell to over 500 basis points from the high of 1,300 basis points in the same period, driving returns of over 50 % pa. Extremely low rated bonds, such as CCC rated bonds (a mere one notch above default), generated even higher returns falling from rates of 30-40% pa to around 10% pa. Debt markets were also underwritten by central bank purchases of structured securities. Central banks were the buyer of first and last resort for asset backed securities ("ABS") and mortgage backed securities ("MBS") driving large gains for holders. Stocks rallied, in part, because of the dividends on offer. Another driver was fear of inflation, based on the loose monetary policies of central banks. Re-risking was helped by the return of the "carry trade" as investors used near zero cost funds,
203 especially in dollars, to finance holdings of risky assets. Any asset offering a reasonable return rose sharply in value. Morgan Stanley analyst Greg Peters outlined the outlook for 2010 in the Financial Times: "We like the junkiest of the junk…" Buying drove up prices encouraging further buying reinforcing the "recovery" in asset prices. Index tracking investors and competitive pressures amongst fund managers further underwrote the rally. The recovery became widespread spreading across most asset classes. Naysayers were dismissed as perma-bears. As everyone knows: "A bubble is a rising market that one is not invested in; if one is invested, then it is a bull market." In contrast, the real economy, at best, stabilised during 2009. Most economies, with the exception of Australia and some emerging markets, most notably China and India, contracted during 2009. In Australia, which avoided a recession, GDP per capital actually fell (by around 1.5% pa.). Key real economy indicators, including employment, consumption, investment and trade, remained weak. Massive government intervention helped arrest the rate of decline of late 2008/ early 2009. Without government support, it is highly probable that most economies would have been in serious recession. Elements of the package resembled Soviet Gosplans. Just as China practised capitalism with Chinese characteristics, developed economies discovered socialism with Western characteristics. Investor sentiment ignored delays in the implementation of government initiatives. The Public Private Investment Partnership ("PSIP") was deferred and then reduced in size. The much touted loan modification program was also delayed with only around 24% of eligible loans being modified. There was also evidence that even after modification a high percentage of these loans became delinquent. Despite speculation on the "shape" of the recovery – "V", "U" or "W", key issues are unresolved. Major risks in the financial and real economy remain and may disrupt the hoped for resumption of business as usual. Bad Banks… Capital injections, central bank purchases of "toxic" assets and explicit government support for deposits and debt issues helped stabilise the financial system. Changes in accounting rules deferred write-downs of potentially bad assets. Despite these actions, the global financial system remains fragile. In their September 2009 Financial Stability Report, the International Monetary Fund ("IMF") forecast total losses from the Global Financial Crisis ("GFC") of $3.4 trillion of which $2.8 trillion would be borne by banks. Approximately $1.5 trillion of those losses, around half of which was attributed to European and U.K. banks, had not been recorded and were expected between Quarter 2 2009 and Quarter 4 2010. In December 2009, the European Central Bank ("ECB"), who are more optimistic than the IMF, forecast that Euro-zone bank write-downs between 2007 to 2010 could potentially reach €553billion ($774 billion) of which some €187 billion ($262 billion) (34%) have not been recognised to date. The ECB feared a second wave of losses reflecting weak economic conditions. Despite capital injections from governments and/or share issues taking advantage of the recovery in stock prices, bank capital positions remain under pressure from the risk of further losses. For example, the four largest U.S. banks have bad debt reserves of $130 billion (4.3% of loans) and capital of $400 billion against total assets of $7,400 billion. Difficult to value Level 3 Assets (known as "mark-to-make believe" assets) are estimated at around $346 billion, slightly less that
204 the capital available. The current market fair value of loans for these banks is estimated to be $76 billion below the carrying value. Proposed regulatory changes increase the capital required to be held by banks against risky assets, restrict the types of instruments qualifying as bank capital and place absolute limits of leverage. This may require banks to raise capital to meet the new requirements although implementation of the rules has been deferred. In 2009, strong earnings of major global banks helped re-build their capital. Credit losses and declines in investment banking revenues (down around 50% reflecting equivalent declines in deal volumes) were offset by an increase in trading revenues. Higher trading revenues reflected increased volatility, higher bid-offer spread and reduced competition. Trading revenues reflect increased risk taking and require capital. Higher trading earnings may not be sustainable reducing their contribution to restoring the banks’ capital base. Banks are likely to remain capital constrained in the near future reducing availability of credit. The capital shortage is estimated at around $1-2 trillion implying a potential contraction of 20- 30% from pre-crisis levels. Commercial and consumer loan volumes have declined reflecting a lack of supply but also a lack of demand as companies and individuals reduce leverage. High volumes of bond issues indicate a slowdown in and switch from bank lending rather than a return to normalcy in debt markets. Small to mid sized companies without access to public debt market, in particular, are likely to face difficulties in obtaining credit. Constraints on availability of credit and its higher costs are a risk to economic recovery. Bad Loans… Further losses are likely from consumer loans, including mortgages. In the U.S. mortgage market, one-in-ten householders are at least one payment behind (Quarter 3 2009) up from one- in-14 (Quarter 3 2008). If foreclosures (now at 4.47 % up from 2.97% one year ago) are included, then one-in-seven mortgagors are in some form of housing distress. Recent stability in U.S. house prices may be misleading reflecting the effect of government incentives (the $8,000 first time homebuyer tax credit) and low mortgage rates driven in part by the Fed’s MBS purchases. The value of 20-30 % of properties is less than the loan outstanding. Home sales remain modest with around 25-30% of sales of existing homes being foreclosures. Housing inventories also remain high in historic terms. With more adjustable rate mortgages resetting in 2010 and 2011, the risk of further losses on mortgages cannot be discounted unless economic conditions improve. Rising vacancy rates, falling rentals and declining values of commercial real estate ("CRE"), primarily office and retail properties, are apparent globally. In London, Nomura, the Japanese investment bank, secured a 20-year lease of a new office development on the River Thames - the 12-storey Watermark Place – for £40 per square foot. This was over 40% lower than the rents of nearly £70 per square foot demanded prior to the GFC. Nomura will also not pay any rent until 2015. Mark Lethbridge, partner at Drivers Jonas who advised Nomura, told the Financial Times: "… I’m unlikely to see [the terms] again in my career." Global commercial property lending is around $3,400 billion, 25% of which has been repackaged into commercial mortgage backed securities ("CMBS"). Current values of many properties are substantially below the loan amounts outstanding. Many CRE loans are in breach of covenants.
205 Lenders have waived breaches of loan conditions and extended maturities. Lack of liquidity, low sales volumes and difficulties in financing purchases have discouraged owner or lenders from seeking to sell properties. Sales at low values would also necessitate lenders recognising losses on other CRE loans not been written down to current distressed values. CMBS Delinquencies are currently around 3.5%, expected to peak at an estimated 10- 12%. Leveraged or private equity loans also face difficulties. Terra Firma’s £4 billion purchase of EMI, financed in part by a £2.6 billion loan from CitiGroup, is an example of the problems. In the recession, EMI’s revenues fell by around 20% and losses tripled as cost savings were offset by higher interest charges. Analyst’s estimate that EMI’s value is around £1.4 billion, below the level of its debt. In 2009, Terra Firma wrote off half its investment in EMI and offered to inject £1 billion in equity but only if CitiGroup would write off a similar amount of debt. The bank refused. Subsequently, Terra Firma commenced legal proceedings against CitiGroup claiming unspecified punitive damages on top of the £1.5 billion plus write down of its investment. Many recent private equity loans were cov lite (covenant light); that is, they lacked usual protective covenants requiring borrowers to meet financial tests, typically minimum amount of shareholders funds, loan to equity ratios and minimum coverage of debt and interest payment by the borrower’s earnings or cash flow. Some loans, known as ‘toggle’ loans, included a pay-in- kind ("PIK") feature where borrowers have the option to pay interest by issuing an IOU. This means that the lender cannot declare in absence of a failure to make scheduled cash payments default deferring recognition of problems. In the absence of a significant recovery in economic conditions, further losses may occur. Borrowers face significant refinancing risks. Over the next 5 years over $4,200 billion of debt will need re-financing, including $2,700 billion of CRE loan (peaking in 2011) and $1,500 billion of leveraged loans (peaking in 2014). Securitisation (CMBS and CLO ("Collateralised Loan Obligation")) markets were crucial in funding CRE and private equity transactions remain troubled. According to one estimate, if the CLO market remains closed and half 2012-14 leveraged loan maturities were re-financed in the high-yield bond markets, then issuance volume would need to be double 2006 peak in high-yield bond issuance to accommodate this requirement. Similarly, the equity injection needed to re- finance commercial real estate debt maturing by 2014 is estimated at between $200-750 billion. Default and re-financing risk remain high. The problems of Dubai World, in substantial part, relate to commercial property and refinancing risk. Real Bad… The real economy remains fragile. Government actions, such as fiscal stimulus and special industry support schemes (cash for clunkers; investment incentives, trade credit subsidies), have boosted demand and industrial activity in the short term. As Wells Fargo CEO John Stumpf told the Wall Street Journal on 19 September 2009: "If it’s not a government program, it’s basically not getting done." Private demand remains somnolent. The problem remains as government incentives encourage current consumption and investment but ultimately "steal" from future demand. Employment, a key indicator given the importance of consumption in developed economies, continues to decline albeit at a slower pace. In the U.S., unemployment reached 10%. Despite attempts to put positive spin on the numbers, the rise in U.S. unemployment was the highest
206 recorded since World War II. In many countries enforced reduction in working hours and taking paid or unpaid leave reduced the rise in unemployment levels significantly. Working hours and personal income have fallen. Changes in the structure of the labour force also distort the real picture. If workers working part time involuntarily and looking for full time employment are included, the U.S. underemployment figure is in the 16-18% range. Long term and youth employment also remains high. European economies, especially countries such as Spain, are also experiencing significant unemployment. In some economies, unemployment is a new "export" as guest workers are shipped back to their country of origin or remittances home fell sharply. U.S. economic activity is not generating the 200,000 to 250,000 jobs per month that would allow unemployment levels to fall. In addition, newly created jobs are part-time, casual or at lower income levels. Economic uncertainty has increased saving levels further crimping consumption. In developed countries where an increasing part of the population is nearing retirement age, wealth effects affect consumption behaviours. Low interest rates and reduced dividend levels limit income and expenditure. In the U.S. dividend cuts have resulted in investors losing approximately $58 billion in income in 2009. It is unlikely that dividends will recover to 2007 or 2008 levels until 2012 to 2013. The ability to borrow against rising asset prices to fund consumption is no longer readily available. In 2009, global trade stabilised after precipitous earlier falls. According to the CPB Netherlands Bureau for Economic Policy Analysis, as of September 2009 world trade was 8.0% above the low of May 2009 but 14% below its peak of April 2008. The OECD reported that G7 exports stabilised in Quarter 2 2009 levelling off at a year-on-year decline of 23.3%. There is concern that trade flows in late 2009 were stagnant or declined as the effects on government stimulus, inventory restocking and Chinese commodity purchases slowed. Trade protectionism threatens recovery in global trade. Despite repeated statements reaffirming a commitment to free trade, most countries have implemented implicit and explicit trade barriers. Traditional techniques (tariffs, embargoes, subsidies) have been supplemented by "buy local" programs, selective industry support schemes and directed lending to domestic borrowers. Emerging markets have been aggressive in introducing protectionist policies. Trade disputes may increase, particularly if economic recovery stalls and unemployment remains high. Stock prices assume a rapid recovery in corporate earnings. Beating much reduced expectations and a return to previous earnings levels are easily confused. The "E" in the PE ratio remains difficult to forecast. In 2009, company results reflected the effects of aggressive cost cutting and the benefits of government support. Equity pricing assumes a return to 2006 levels when U.S. corporate earnings represented a record share of profits in GDP. To return to pre-crisis levels and rates of growth, improvements in revenue and underlying demand are necessary. Stocks are also not cheap. Jeremy Grantham, founder of Boston-based fund manager GMO, recently noted ruefully that after 20 years of more or less permanent overpricing of the S&P 500 the market saw just five months of underpricing after the March 2009 trough. Growth in emerging markets reflects the effect of aggressive government policies to stimulate the economy both at home and in developed countries. Emerging markets, led by China, India and Brazil, implemented anti-cyclical spending programs, that in percentage terms were larger than those in developed markets. Emerging markets preserved or introduced social spending
207 programs to protect more vulnerable parts of the population. They also benefited from the government spending in developed economies, which flowed into emerging market exports. The spending has fuelled speculative booms in emerging markets and also in commodity suppliers who now function as proxies for direct exposure to China and India. The boom was exacerbated by the rapid flow of funds into emerging markets. In 2009, inflows into emerging market equity funds increased to $80.3 billion, well above the $29.5 billion previous record in 2007 and the highest since 1997 when data was first recorded. The inflow compared to outflows of US $86 billion from developed world equity funds in 2009 as investors sought exposure to faster growth and better prospects in emerging markets, especially the BRIC economies. The small size of emerging markets accentuated the effect of these inflows. In 2009, the FTSE All-World Emerging Markets Index rose 75% compared to a 28% rise in the FTSE All-World Developed Index. By late 2009, emerging markets were trading at about 20 times their trailing 12-month earnings, compared to about 8 times at the March 2009. Potential disappointments in the rate of improvement in developed economies or a reassessment of the prospects of emerging markets remain potential risks during 2010. http://www.eurointelligence.com/article.581+M54225b93d74.0.html
18.01.2010 The Botox Economy - Part II By: Satyajit Das
Bad Fiscals… From late 2008 onwards, Government intervention, on an unprecedented scale, has been a dominant factor in economic matters. Governments have spent aggressively, going into or increasing deficits, to increase demand within the economy to offset weak private sector consumption and investment. Central banks have maintained low interest rates, pumped liquidity into the financial system and "warehoused" toxic assets to support the financial system. In the U.S., Fed holdings of MBS reached around $1 trillion. The purchases provided much needed liquidity to banks and reduced
208 potential write-down on these securities. They also helped keep interest rates low and maintained the supply of housing finance. The take-over of and government support for Government Sponsored Enterprises ("GSE"), such as the Federal National Mortgage Association ("FNMA" or Fannie Mae) and the Federal Home Loan Mortgage Corporation ("FHLMC" or Freddie Mac"), was an integral part of the process. The U.S. Government has now agreed to provided unlimited support to Fannie and Freddie. Governments and central around the world followed the U.S. lead, implementing similar measures. Even emerging markets introduced aggressive cash transfer and make-work schemes allowing their fiscal positions to deteriorate. Brazil expanded its popular "Bolsa Familia" assistance scheme for poor families. India also expanded a program guaranteeing 100 days public work employment scheme in rural areas. Financing these initiatives presents significant challenges. In the five quarters ending September 30, 2009, U.S. Treasury borrowing and outstanding GSE-guaranteed MBS increased by $2.8 trillion, a rise of around three times from the level of previous years. The U.K. and European countries increased public debt by similar or higher amounts (in percentage terms). In 2009, investors readily bought large new issues of government debt, despite relatively low interest rates. Rating agencies maintained sovereign debt ratings, especially for major countries despite deteriorating public finances. Credit default spreads on sovereign debt for most issuers decreased in line with the general fall in credit margins. There were no outright auction failures. Central bank purchases under ‘quantitative easing’("QE") (read printing money) programs helped the market absorb the volume of new issuance. According to estimates by Morgan Stanley, Fed purchases of assets, QE programs and other liquidity support programs reduced private sector net purchases of new Treasury issues to $200 billion in 2009. In 2010, in the absence of continued Fed support, private buyers will have to absorb $2,000 billion. Large deficits are likely for some years. Continued spending and reduced tax income will ensure significant ongoing financing requirements. In many countries, the deficits are structural and not entirely related to the GFC. In 2009, U.S. tax revenues fell 18% from previous year levels. 2009 U.S. state tax collections fell 13.3 % from 2008 levels, the highest decline in 46 years in terms of overall state tax collections as well as the change in personal income and sales tax collections Central banks will find it difficult to dispose of their MBS holdings. They may remain on the central bank balance sheets for an extended period. Some securities may need to be held to maturity with underlying cash flows repaying the purchase price. These requirements will need to be financed without disrupting markets. Foreign purchases of U.S. debt (the largest single borrower) have increased in dollar terms but decreased as a percentage of the total, as new issuance outpaces growth in demand. If the global economy slows and the inevitable adjustment in global imbalances takes place, the U.S. will purchase fewer foreign goods reducing foreign current account surpluses and the U.S. dollars available for purchasing future Treasury securities. Chinese demand, which has underpinned recent foreign purchases, is uncertain in the future. Zhu Min, Deputy Governor of the People’s Bank of China, recently observed that "the world does not have so much money to buy more US Treasuries" He added that "the United States cannot force foreign governments to increase their holdings of Treasuries…" While increasing domestic savings and mandatory purchases by banks may provide some demand, it is not clear where successive large deficits are to be funded. Most deficit nations face
209 similar challenges. Recently, large investors including Pimco, one of the world’s biggest bond fund managers, have reduced exposure to U.S. and U.K. government bonds, warning that the record levels of issuance is becoming increasingly problematic. In 2009, there were three poorly bid U.S. government bond auctions. In December 2009, UK 10- year bond yields jumped 15 basis points (0.15% pa) (implying a capital loss of around 1.2% of principal) when the government failed convince investors that they were prepared to tackle the country’s debt problems in their annual pre-Budget report. In late 2009, Japanese bond yields rose when the government indicated that it would not honour commitments to cap debt issuance next year. Current initiatives mean that public debt in most countries, even many emerging markets, will increase sharply straining fiscal flexibility. For example, Japanese public debt is approaching 200% of GDP and government borrowing now exceeds tax revenues. In emerging markets, many new spending programs may prove difficult to discontinue politically. Ultimately, governments will have to balance the books. With projected public debt as of 2014 at or around 80-100% of GDP (with the dishonourable exception of Japan), the IMF estimates that just to maintain public debt levels, major developed economies will have to run budget surpluses of around 3-4% of GDP. Ireland and Greece provide an insight into the actions necessary. In order to restore fiscal stability, the Irish government introduced a special 7% pension levy and implemented the toughest budget in the country’s history. Public sector salaries were cut between 5-15%. Unemployment and welfare benefits were also cut. More recently Greece proposed a program of similar budgetary austerity. The need to maintain the confidence of rating agencies and investors as well as access to markets may ultimately force the required disciplines. As James Carville famously observed: "I want to come back as the bond market. You can intimidate everybody." Politicians everywhere will learn the reality in Thatcher’s terms: "You can’t buck the markets." Much of the strain on government debt is evident in currency markets. The decline in the value of U.S. dollar reflects, in part, the steady supply of U.S. Treasury bonds it must place with investors to finance it budget and trade deficits. Mohammed El-Erian, CEO of Pimco, observed on 19 August 2009 that: "The question is not whether the dollar will weaken over time, but how it will weaken. The real risk is that you will get a disorderly decline." Currency values are relative. The economic position of the U.K., Europe and Japan are hardly much better than the U.S. The small size of the markets in other currencies, such as the C$ and A$, limit their role in currency transactions. Many emerging market currencies, such as the Renminbi, are managed or artificially pegged limiting their use. The rise in gold – Keynes’ "barbarous relic" – reflects investor discomfort in any currency as much faith it its magical properties as a store of value. Problems in government debt markets or disorderly volatility in currency markets remain significant risks to recovery. Bad Policy… Governments and central banks have dealt with symptoms but not addressed the underlying causes of the GFC. The need to reduce the overall level of debt in certain economies has not been fully addressed. Public debt has been substituted for private debt. Despite some regulatory initiatives, many of the
210 excesses of the financial system remain. The reliance of debt fuelled consumption and the related issue of global imbalance remains in the "too difficult basket". Few, if any, lessons have been learned, especially by bankers. Large bonuses are merely emblematic of a return to old practices. Leverage and pre-crisis lax lending conditions are returning in sections of the market. Lloyd Blankfein, CEO of Goldman Sachs, recently suggested that he was engaged in "God’s work." Reports of the demise of moral hazard are exaggerated. The debt of Nakheel, a property Group, was trading at 115% of face value shortly before its parent Dubai World announced a debt restructure in late November 2009. The prices did not reflect falling property prices or the real credit risk. Upon the announcement, the price fell promptly to below 50% but recovered to again over par when Abu Dhabi lent money to Dubai to help it make due payments. Markets continue to rely on state support despite the absence of explicit provisions to this effect. Policies assume that the problems relate to temporary liquidity constraints resulting from non- functioning markets for some financial assets. They fail to acknowledge the severity of the problems and the extent to which the previous high prices of some assets reflected excessive liquidity that overstated their true value. Policy makers assume that liberal application of liquidity – financial botox – represents a permanent cure. In Albert Einstein’s words: "You can never solve a problem with the thinking that created it". At best, governments are hoping that loose money will create inflation allowing reflation of asset prices alleviating the worst of the problems. The morality of punishing savers and rewarding excessive borrowing has not been debated. The reflation hypothesis itself may be flawed. Inflation probably needs convergence of several conditions – excessively loose money supply, active lending by banks to increase the velocity of the money and an imbalance between supply and demand. Loose money supply by itself may not be sufficient to create inflation. In Japan, years of loose monetary policy and quantitative easing have not prevented significant deflation over the last two decades. The second and third conditions are not currently observable. Problems within the financial system have slowed the velocity of money. Capacity utilisation is generally low and over capacity exists in many industries. Excess capacity is being increased by government actions. Support for industries, such as the automobile manufacturers, prevents required adjustments to capacity. At the same, government spending, for example in China, is increasing capacity in anticipation of a return of demand. If demand does not re-emerge, then there is a risk that excess capacity may exert deflationary pressures. Further trade problems, through dumping and other defensive trade tactics, may also result. In the short term, high levels of inflation appear unlikely. Higher energy and food prices have prevented outright deflation in recent times. These two items represent a high proportion of spending in emerging markets. High energy and food costs reduce available disposable income reducing demand of other products at a time when these economies are trying to increase consumption. Given that re-risking assumes high inflation, changes in inflationary expectations may affect asset markets and in turn the path of the recovery. Bad Choices…
211 The last few decades have seen an economic experiment where increasing levels of debt have been used to promote high growth. This policy had the unintended consequence of increasing risk in the global economy, which was not fully understood by the individual entities taking this risk or regulators and governments. This experiment is now coming to an end. In the post World War II period, the U.S. and global economy enjoyed strong growth and increasing living standards. Despite higher debt levels, economic growth and improvements in income and wealth have slowed significantly. For the U.S., the first decade of the 21st century – the noughties – have been disappointing. Economic growth has been the slowest in the post war era. There has been no net job creation over the decade. Median income and in particular income for middle income earners declined in real terms. Household net worth, representing the value of their house, pensions and other savings, also declined. A similar pattern is evident in many developed economies. Emerging countries and their citizens have done better but off lower base levels. Some of the money, largely borrowed, was invested in assets that produced and will produce little, relative to the prices paid. This includes overpriced housing (the "MacMansions"), commercial real estate and consumer "must-haves". Investment in these assets distorted economic activity around the globe. The excesses must be worked-off. The problems are pervasive. Few groups – consumers, businesses, governments – or countries are unaffected. The real risk is of long-term economic stagnation. A period of low growth, high unemployment or underemployment and over capacity is possible while individuals, firms and governments repair balance sheets. It is not clear that markets and investors are assuming prolonged adjustment, preferring to focus on the rates of change in key indicators. As Mervyn King, Governor of the Bank of England, noted: "It’s the level, stupid – it’s not the growth rates, it’s the levels that matter here." Bad Love … The financial market rally may not be over. There is a chance of a melt-up before any meltdown. Riding an irrational price bubble is sometimes an optimal investment strategy for even rational investors As an unnamed banker told Charles MacKay, author of the 1841 book Extraordinary Delusions and the Madness of Crowd (1841): "When the rest of the world is mad, we must imitate them in some measure". Governments may introduce provide further support if economic and financial setbacks occur. Further fiscal stimulus packages are likely to be unveiled. Credit Suisse’s Neil Soss summed up the monetary policy position succinctly: "Central banks … have maxed out the amount of ‘love’ they're willing/able to give. … They probably won't take away much, if any, of the "love" they're giving us now in terms of low short-term interest rates and large central bank balance sheets for quite some time, but the change in momentum from ‘more love’ to ‘no incremental love’ is palpable and bound to influence markets." The risk of policy errors is ever present. Inopportune withdrawal of support or policy mistakes have the potential to be destabilising. High levels of volatility are likely to persist. Governments and central banks continue to inject liberal amounts of botox to cover up problems, at least, while supplies exist. In absence of any definite solutions, policymakers are deferring dealing with the problems, rolling them forward. This means that the unavoidable adjustment when it occurs will be more severe and more painful. The ability of policymakers to cushion the adjustment will be restricted by constrained balance sheets.
212 In the words of David Bowers of Absolute Strategy Research: "It’s the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments’ assumption of banks’ debts]. There’s nobody left to pass it to in the future." The exact trigger to end the current period of optimism is unpredictable. While several areas of stress are apparent, as Keynes observed: "The inevitable never happens. It is the unexpected always." The summary of 2009 and the outlook for 2010 may be the logo on a black T-shirt worn by Lisbeth Salander, the heroine of Steig Larsson’s Girl with the Dragon Tatoo: "Armageddon was yesterday - Today we have a serious problem."
Satyajit Das The Botox Economy - Part II18.01.2010 http://www.eurointelligence.com/article.581+M5f00fe185e3.0.html#
213 COMPANIES Banks braced for Basel battle By Brooke Masters and Patrick Jenkins in London Published: January 12 2010 23:01 | Last updated: January 12 2010 23:01 Banks are gearing up to fight a proposal by global regulators to sharply increase capital requirements for institutions that bring in outside investors to fund subsidiaries, saying it will cripple their ability to expand in emerging markets. Bank executives fear the provision would create huge holes in the capital stocks of a wide range of UK, European and Japanese financial institutions, at a time when they are already under pressure to increase their regulatory capital. Analysts described the proposal as one of the most “draconian” and “potentially devastating” parts of a package of measures put forward in December by the Basel committee, which sets global standards that are implemented by local regulators. Credit Suisse analysts calculate the rule would substantially reduce the estimated equity buffers that banks hold against potential losses. They estimate the so-called equity tier one capital ratio, a key measure of balance sheet strength which excludes hybrid capital such as preference shares, would be cut by 0.7 percentage points from the current 9.6 per cent. In essence, the Basel committee wants to force banks to stop counting minority-owned stakes as part of their equity capital but insists they continue to recognise the entire potential losses of any subsidiary. Regulators are essentially saying that banks are on the hook for all the losses of their subsidiaries, but that equity owned by minority investors in a particular subsidiary would not be available to absorb group losses elsewhere in the world. Banking analysts at Citi and Evolution have concluded that HSBC, BNP Paribas, Credit Agricole and Natixis would be particularly hard hit. The banks either did not respond or declined to comment. “The minorities proposal is a nightmare. But the strength of feeling against this at the banks is such that it will never survive the consultation process. It would kill the Japanese banking industry, for example,” said Simon Maughan, banks analyst at MF Global. Bank executives are already strategising on how to water down the proposal before final adoption at the end of the year. The topic has come up in several high-level industry conference calls about the Basel proposals, participants say. The Bank of Italy has made clear it is not happy with the rule, writing that it expects the committee to consider “partially recognising minority interests.” The industry is also likely to find additional allies among emerging markets governments. They often ask for the inclusion of local minority investors as a way to prevent the profits from an expanding financial sector from disappearing overseas. http://www.ft.com/cms/s/0/7902871c-ffab-11de-921f-00144feabdc0.html
214 COLUMNISTS By Martin Wolf What we can learn from Japan’s decades of trouble Published: January 12 2010 20:04 | Last updated: January 12 2010 20:04
Twenty years ago, the conventional wisdom was clear: Japan was the world’s most successful high-income country. Few guessed what the next two decades held in store. Today, the notion that Japan is on a long slide is conventional wisdom. So what went wrong? What should the new Japanese government do? What should we learn from its experience? We must put this in context. The quality of the train system and the food make a visitor from the UK realise he comes from an utterly backward country. If this is decline, then most people would welcome it. Yet decline it surely is. Over the past two decades the economy has grown at an average annual rate of 1.1 per cent. According to Angus Maddison, the economic historian, Japan’s gross domestic product per head (at purchasing power parity) rose from 20 per cent of US levels in 1950 to a peak of 85 per cent in 1991. By 2006, it was 72 per cent. In real terms, the value of the Nikkei stock market index is a quarter of what it was two decades ago. Perhaps most frighteningly, general government net and gross debt have jumped from 13 and 68 per cent of gross domestic product in 1991, to forecasts of 115 per cent and 227 per cent in 2010. What has gone wrong? Richard Koo of Nomura Research points to “balance sheet deflation”. According to Mr Koo, an economy in which the overindebted devote their efforts to paying down debt has the following three characteristics: the supply of credit and bank money stops growing, not because banks do not wish to lend, but because companies and households do not want to borrow; conventional monetary policy is largely ineffective; and the desire of the private sector to improve balance sheets makes the government emerge as borrower of last resort. As a result, all efforts at “normalising” monetary and fiscal policy fails, until the private sector’s balance-sheet adjustment is over. The sectoral balances between savings and investment (income and spending) in the Japanese economy show what has been happening (see chart). In 1990, all the sectors were close to balance. Then came the crisis. The long-lasting impact was to open up a massive surplus in Japan’s private sector. Since household savings have been declining, the principal explanation for this is the persistently high share of corporate gross savings in GDP and the declining rate of investment, once the economy went “ex growth”. The huge private surplus has, in turn, been absorbed in capital outflows and ongoing fiscal deficits.
215 Mr Koo argues that those who criticise the fiscal deficits miss the point. Without them, the country would have fallen into a depression, instead of a prolonged period of weak demand. The alternative would have been to run a bigger current account surplus. But that would have required a weaker exchange rate. Japan would have had to follow China’s exchange rate policies. The US would surely have gone berserk. Yet Mr Koo’s argument has a weakness. It explains neither why the huge debt overhangs emerged in the first place, nor why Japan has proved so vulnerable to the global shock, now that the corporate sector’s balance-sheet adjustment is at last largely completed (see chart). My own view is that the underlying structural problem has been the combination of excessive corporate savings (retained earnings) and diminished investment opportunities, once catch-up growth was over. As Andrew Smithers of London-based Smithers & Co notes, Japan’s private non-residential fixed investment was 20 per cent of GDP in 1990, close to double the US share. This has fallen to 13 per cent after a modest resurgence in the 2000s. But no comparable decline has occurred in corporate retained earnings. In the 1980s, the challenge of absorbing these savings was met by monetary policy, which drove the cost of borrowing to zero and sustained wasteful investment. In the 2000s, the challenge was met by an export and investment boom, driven largely by trade with China (see chart). Then came the current global economic crisis, which savaged exports and investment and generated a huge recession. With a peak-to-trough contraction of GDP of 8.6 per cent, Japan suffered the biggest recession in the Group of Seven high-income countries. In 2009, according to the Organisation for Economic Co-operation and Development, the decline in net exports would have shrunk the economy by 1.8 per cent on its own. Japan’s aim now must be to achieve domestically driven growth. The most important requirement is a big reduction in corporate saving. Mr Smithers argues that this will happen naturally, since savings are largely capital consumption, itself the product of the history of excessive investment. I would add that if ever an economy needed a market in corporate control, to shift cash out of the hands of sleepy managements, Japan is it. Not being beholden to Japan’s corporate establishment, the new government should adopt policies that would change corporate behaviour, at last. It is also time to stop the deflation. To achieve this result, the Bank of Japan must co-operate with the government to avoid an excessive strengthening of the exchange rate. The recent strength of the yen should have led to far more aggressive monetary policies. Once Japan has significant inflation at last – 2 per cent is a bare minimum – the country would have the negative real interest rates it still needs. Meanwhile, the rest of the world has to wonder whether it is learning the lessons from Japan’s fall from economic grace. Japan’s experience strongly suggests that even sustained fiscal deficits, zero interest rates and quantitative easing will not lead to soaring inflation in post- bubble economies suffering from excess capacity and a balance-sheet overhang, such as the US. It also suggests that unwinding from such excesses is a long-term process. Yet Japan’s experience also has a lesson for quite a different economy. It indicates that when very fast growth begins to slow in a catch-up economy with very high corporate savings and comparably high fixed investment, demand may well prove extremely difficult to manage. This is particularly true if the deliberate promotion of credit growth and asset price bubbles has been part of the mechanism used to sustain demand. And who needs to learn this vital lesson now? The answer is: China. Martin Wolf What we can learn from Japan’s decades of trouble January 12 2010 http://www.ft.com/cms/s/0/3c5b388e-ffb2-11de-921f-00144feabdc0.html
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COMMENT Why Obama must take on Wall Street By Robert Reich Published: January 12 2010 20:40 | Last updated: January 12 2010 20:40
It has been more than a year since all hell broke loose on Wall Street and, remarkably, almost nothing has been done to prevent all hell from breaking loose again. In fact, close your eyes and you could be back in the wilds of 2007. Bankers are still making wild bets, still devising new derivatives, still piling on debt. The big banks have access to money almost as cheaply as in 2007, courtesy of the Fed, so bank profits are up and bonuses as generous as at the height of the boom. The only difference is that now the Street’s biggest banks know they are “too big to fail” and will be bailed out by taxpayers if they get into trouble – which means they have every incentive to make even riskier bets. And, of course, American taxpayers are out some $120bn, while millions have lost their homes, jobs and savings. All could be forgiven if the House and Senate committees with responsibility for coming up with new regulations were about to come down hard on the Street and if the Obama administration were pushing them to. But nothing of the sort is happening. Last week, Senator Chris Dodd, chairman of the Senate banking committee, announced he would not seek re-election next November, recasting himself as a lame duck who will do whatever the banks want. Mr Dodd’s decision “makes it more likely that regulatory reform will be enacted”, says Edward Yingling, chief executive of the American Bankers Association, because it “frees him from political dynamics that would have made it more difficult for him to compromise”. Translated: Dodd’s committee will report out a bill – Democrats would be embarrassed not to – but it will be weak because voters can no longer penalise Mr Dodd for rolling over for the Street.
217 The bill that has already emerged from the House is hardly encouraging. Dubbed the “Wall Street Reform and Consumer Protection Act”, it effectively guarantees future Wall Street bail- outs. The bill authorises Fed banks to provide up to $4,000bn in emergency funding the next time the Street crashes. That is more than twice what the Fed pumped into financial markets last year. The bill also enables the government, in a banking crisis, to back financial firms’ debts – a wonderful insurance policy if you are a bondholder. To be sure, the bill authorises the Fed and Treasury to spend these funds only when “there is at least a 99 per cent likelihood that all funds and interest will be paid back,” but predictions about pending economic disasters can be conveniently flexible, especially when it comes to bailing out the Street. If this were not enough, the House bill creates regulatory loopholes big enough for bankers to drive their Jaguars through. Consider derivatives. Last year, as taxpayers threw money at the Street, congressional leaders promised to put derivative trading on public exchanges. The prices of derivatives could be disclosed and margin requirements imposed, making it more likely that traders would make good on their bets. Yet the House bill exempts nearly half the $600,000bn of outstanding derivatives trades. The bill also allows – but, notably, does not require – regulators to “prohibit any incentive-based payment arrangement”. This makes fat bonuses the norm unless a regulator has reason to prevent them. And as we witnessed last year, bank regulators tend not to disturb the status quo. The House bill does not even make an attempt to unravel the conflict of interest that led credit ratings agencies to turn a blind eye to the risks the Street was taking on. To its credit, the House bill does create a Consumer Financial Protection Agency to protect borrowers from predatory lending. Banking regulators have authority to protect consumers but failed to do so, so consolidating these powers in a new agency makes some sense. But Senate Republicans are dead-set against it, and Mr Dodd’s new willingness to compromise may well doom it in that chamber. What is truly remarkable is what Congress and the administration have shown no interest in doing. Large numbers of Americans have lost their homes to bank foreclosures or are in danger of doing so. Yet American bankruptcy law does not allow homeowners to declare bankruptcy and have their mortgages reorganised. If it did, homeowners would have more bargaining power to renegotiate with banks. But neither Congress nor the administration has pushed to change the bankruptcy laws. Wall Street opposes such change and was instrumental in narrowing the scope of personal bankruptcy in the first place. Nor have lawmakers shown any enthusiasm for resurrecting the wall that used to exist between commercial and investment banking. The Glass-Steagall Act, passed in the wake of the Great Crash of 1929, separated the two after it became obvious that commercial deposits needed to be insured by government and kept distinct from the betting parlour of investment banking. But Wall Street forced Congress to take down the wall in 1999, enabling financial supermarkets such as Citigroup to use its deposits to make all sorts of bets. Even Obama adviser and former Fed chief Paul Volcker has argued that the two functions should be separated again. Nor is anyone talking seriously about using antitrust laws to break up the biggest banks – the traditional tonic for any capitalist entity that is “too big to fail”. Five giant Wall Street banks now dominate US finance. If it was in the public’s interest to break up giant oil companies and railroads a century ago, and the mammoth telephone company AT&T, it is not unreasonable to break up the almost infinitely extensive tangles of Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs and Morgan Stanley. No one has offered a clear reason why giant banks are important to the US economy. Logic and experience suggests the reverse.
218 What happened to all the tough talk from Congress and the White House early last year? Why is the financial reform agenda so small, and so late? Part of the answer is that the American public has moved on. A major tenet of US politics is that if politicians wait long enough, public attention wanders. With the financial crisis appearing to be over, the public is more concerned about jobs. Another 85,000 jobs were lost in December, bringing total losses since the recession began in December 2007 to over 7m. One out of six Americans is unemployed or underemployed. Yet if the president and Congress wanted to, they could help Americans understand the link between widespread job losses and the irresponsibility on Wall Street that plunged America into the Great Recession. They could make tough financial reform part of the answer to sustain-able jobs growth over the long term. True, financial regulation does not make a powerful bumper sticker. Few Americans know what the denizens of Wall Street do all day. Even fewer know or care about collateralised debt obligations or credit default swaps. To the extent Americans have been paying attention to the details of any public policy, it has been the healthcare reform bill. But that only begs the question of why financial reform has not been higher on the agenda of the president and Democratic leaders. A larger explanation, I am afraid, is the grip Wall Street has over the American political process. The Street is where the money is and money buys campaign commercials on television. Wall Street firms and executives have been uniquely generous to both parties, emerging as one of the largest benefactors of the Democrats. Between November 2008 and November 2009, Wall Street doled out $42m to lawmakers, mostly to members of the House and Senate banking committees and House and Senate leaders. In the first three quarters of 2009, the industry spent $344m on lobbying – making the Street one of the major powerhouses in the nation’s capital. Money is powerful. Talk is cheap. Mr Obama recently called the top bankers “fat cats”, and the bankers insisted they were shocked – shocked! – to learn how intransigent their lobbyists had been in opposing financial reform. The bankers even claimed a “disconnect” between their intentions and their lobbyists’ actions. This was all for the cameras, of course. But the widening gulf between Wall Street and Main Street – a big bail-out for the former, unemployment checks for the latter; high profits and giant bonuses for the former, job and wage losses for the latter; buoyant expectations of the former, deep anxiety and cynicism by the latter; ever fancier estates for denizens of the former; mortgage foreclosures for the rest – is dangerous. Americans went ballistic early last summer when AIG executives got big bonuses after taxpayers had bailed them out. They will not be happy when Wall Street hands out billions in bonuses very soon. Angry populism lurks just beneath the surface of two-party politics in America. Just listen to Sarah Palin or her counterparts on American talk radio and yell television. Over the long term, the political stakes in reforming Wall Street are as high as the economic. The author, a former US labour secretary, is professor of public policy at the University of California at Berkeley. His latest book is Supercapitalism http://www.ft.com/cms/s/0/0666adfe-ffb6-11de-921f-00144feabdc0.html
219 Economy
January 12, 2010 Obama Weighs Tax on Banks to Cut Deficit
By JACKIE CALMES WASHINGTON — President Obama will try to recoup for taxpayers as much as $120 billion of the money spent to bail out the financial system, most likely through a tax on large banks, administration and Congressional officials said Monday. The president has yet to settle on the details, and his senior economic advisers are weighing a number of options as they finish the budget proposal Mr. Obama will release next month. The general idea is to devise a levy that would help reduce the budget deficit, which is now at a level not seen since World War II, and would also discourage the kinds of excessive risk-taking among financial institutions that led to a near collapse of Wall Street in 2008, the officials said. But the president also has a political purpose — to respond to the anger building across the country as big banks, having been rescued by the taxpayers, report record profits and begin paying out huge bonuses while millions of Americans remain out of work. The administration previously rejected two ideas that have received much attention in recent months: a transaction tax on financial trades and a special tax on executives’ bonuses. The most likely alternatives would be a tax based on the size and riskiness of an institution’s loans and other financial holdings, or a tax on profits. Lobbyists for bankers, taken by surprise, immediately objected to any new tax. They said financial institutions had been repaying their portion of the bailout money in full, with interest. Losses from the $700 billion bailout fund — estimated to run as high as $120 billion — are expected to come from the automobile companies and their finance arms, the insurance giant American International Group and programs to avert home foreclosures, and the president is aiming to recoup that money. “It is perplexing to us,” said Edward L. Yingling, president and chief executive of the American Bankers Association. He recalled that Mr. Obama recently had two White House meetings with bankers to urge them to provide more loans to credit-starved small businesses. But a tax, he said, would be “a hit on banks that will decrease their ability to lend.” But the industry’s objections carry less weight at a time when Mr. Obama is under intense pressure to crack down on Wall Street. In coming days, big banks are expected to begin announcing huge bonuses for their top executives and traders. A bipartisan commission charged with reporting on the causes of the financial crisis will begin a two-day hearing on Wednesday with testimony from the heads of four big banks: Goldman Sachs, JPMorgan Chase, Morgan Stanley and Bank of America. Meanwhile, industry opposition continues to stymie the president’s initiative in Congress to tighten regulations. “The president has talked on a number of occasions about ensuring that the money that taxpayers put up to rescue our financial system is paid back in full,” Robert Gibbs, the White House spokesman, said.
220 So has the Treasury secretary, Timothy F. Geithner, who has drawn criticism from both the left and the right as not being tough enough on Wall Street. Representative Barney Frank of Massachusetts, the Democrat who is chairman of the House banking committee, said the president was required to seek recovery of any losses under the law that created the $700 billion financial rescue fund, known as the Troubled Asset Relief Program, in October 2008. The law did not spell out how to do so. “I did know they were thinking about doing this and I encouraged them,” Mr. Frank said. Mr. Frank and others in Congress said they did not know any details, and administration officials say no decisions have been made beyond the fact that a proposal will be in the budget. Mr. Obama has been meeting with Mr. Geithner and with Lawrence H. Summers, his senior White House economic adviser, to discuss options from the Treasury department. News of the decision to propose some kind of tax was first reported by Politico. The 27-nation European Union called for a global transactions tax in December, and last November Prime Minister Gordon Brown of Britain proposed the idea at a meeting of the Group of 20 developed and emerging nations, saying revenue could be stockpiled to finance any future bailouts. But Mr. Geithner has said a transaction tax, on trades of complicated derivatives and other financial instruments, would simply be passed through to investors and other customers, and could put American companies at a competitive disadvantage. Separately, Britain and France have proposed a large tax on financial executives’ bonuses. Last year the administration successfully opposed a House bill that would have imposed a substantial levy on executive compensation, and officials continue to argue that corporate shareholders, not the government, should determine pay policies. Any fee that the president proposes is likely to exempt smaller banks, an official said. Community banks carry particular clout in Congress given their presence in nearly every member’s district. “Those that caused this train wreck ought to be the ones to pay to clean up the mess,” said Stephen J. Verdier, an executive vice president at the Independent Community Bankers of America. “The community bankers are every bit as much the victims as the average taxpayer in all this, so any tax ought to be devised with those principles in mind.” Losses from the $700 billion financial rescue are expected to be much less than initially feared, according to a Treasury report and government audit late last year. Besides banks’ repayment of their bailout money with interest, the government also has made money by selling the bank warrants that it held as collateral for its loans to the institutions. http://www.nytimes.com/2010/01/12/business/economy/12bailout.html?th&emc=th
221 Business
January 12, 2010
DEALBOOK COLUMN What the Financial Crisis Commission Should Ask By ANDREW ROSS SORKIN
From left, Hannelore Foerster/Bloomberg; Jin Lee/Bloomberg, Jin Lee/Bloomberg, Sara D. Davis/Getty The Financial Crisis Inquiry Commission will begin its hearings Wednesday with, from left, Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America. Questions anyone? On Wednesday, the first hearing of the Financial Crisis Inquiry Commission — what many are calling this century’s equivalent of a Pecora-style investigation that scrutinized the market crash of 1929 — will take place in Washington. Wall Street’s top brass are planning to be there (and yes, they are flying down the night before so they don’t miss it): Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America. The hearing, of course, will partly be political theater. There will be finger-pointing. But if the committee uses its inquiry for its stated purpose — “hearing testimony on the causes and current state of the crisis” — it may help direct the national conversation and steer the current reform efforts. In the spirit of trying to help start some lively discussions, here are some questions they might consider asking:
222 ¶Mr. Blankfein, your firm, and others, created and sold bundles of mortgages known as collateralized debt obligations that it simultaneously sold short, or bet against. These C.D.O.’s turned out to be bad investments for the people who bought them, but your short bets paid off for Goldman Sachs. In the process of selling them to institutional investors, however, your firm lobbied ratings agencies to assign them high ratings as solid bets — even as your firm planned on shorting them. Could you explain how Goldman bet against these C.D.O.’s while simultaneously trying to persuade ratings agencies and investors that they were good investments? Were they designed from the outset to be shorted by Goldman and possibly select clients? And were those clients involved in helping design these transactions? What explicit disclosures did you make to Standard & Poor’s and Moody’s about your plans to short these instruments? And should we continue to allow transactions in which you’re betting against what you’re also selling? ¶Mr. Dimon, during the final week before Lehman Brothers collapsed, your firm asked Lehman to post billions of dollars in collateral and threatened to stop clearing Lehman’s trades if it didn’t do so. That demand had the effect of depleting Lehman’s capital base, just when it desperately needed that capital to return funds to investors who were asking for their money back. JPMorgan clearly was trying to protect itself. But could you explain what impact you believe that “collateral call” had on Lehman’s failure and the ensuing market crisis? ¶This one is for the entire group. All of your firms are involved in some form of proprietary trading, or using your own capital to make financial bets, not unlike hedge funds and other private investors. As the recent crisis has shown, these bets can go catastrophically wrong and endanger the global financial system. Given that the government sent a clear signal in the crisis that it would not let the biggest firms fail, why should taxpayers guarantee this sort of trading? Why should the government backstop what amounts to giant hedge funds inside the walls of your firms? How is such trading helpful to the broader financial system? ¶A question for all the executives about bonuses: We keep hearing that you plan to pay out billions in bonuses this year. Given that they come out of profits that, to a large degree, seem to be the result of government programs to prop up and stimulate the banking sector, do you think they are deserved, even if they are in stock? And, while we’re on the topic, given the market crisis of 2008, were you all overpaid in 2007? ¶Again, for the group: Over the last year, your firms have actively used the Federal Reserve’s discount window to exchange various investments (including C.D.O.’s) for cash. You probably have a better idea than most about what those assets now sitting on the Fed’s balance sheet are worth. Given the growing calls for regular audits of the Fed (an idea being resisted by the likes of the chairman, Ben Bernanke), do you think the demands for such audits are warranted? ¶This question is for Mr. Mack. In November, in a surprisingly candid moment, you publicly declared, “Regulators have to be much more involved.” You then added, “We cannot control ourselves.” Can you elaborate on those comments? Is Wall Street inherently incapable of policing itself — a view contrary to what most of your peers have argued? ¶Mr. Blankfein. Your firm, like other banks on this panel, was paid in full by the American International Group on various financial contracts, thanks to the government’s bailout. You can understand how this has whipped up no small amount of fury and questions over why A.I.G. and the government did not try to renegotiate those contracts.
223 Because your firm was the largest beneficiary of the government’s decision, did you or any of your employees lobby the Fed, Treasury or any other government agency for this “100 cents on a dollar” payout? If so, enlighten us about those conversations. ¶This is for Mr. Moynihan. Please explain — and no jargon, please — why your firm believed it didn’t have to disclose mounting losses at Merrill Lynch ahead of a shareholder vote in December 2008. After all, investigations into the matter suggest company executives knew of the $4.5 billion loss Merrill suffered in October before that vote. And why, just a week or so after you became general counsel, did Bank of America decide to tell the government about those same losses that it chose not to tell shareholders about? ¶To Mr. Dimon and Mr. Moynihan: Your industry has vigorously opposed creating a consumer protection agency. But it’s clear that your millions of retail customers weren’t adequately protected, leading to hardship and heartbreak across the nation. Because you oppose creating such a regulator, what should be done to ensure these problems don’t happen again? The latest news on mergers and acquisitions can be found at nytimes.com/dealbook. http://www.nytimes.com/2010/01/12/business/12sorkin.html?hp
224 Asia Pacific
January 12, 2010 As China Rises, Fears Grow on Whether Boom Can Endure By MICHAEL WINES BEIJING — As much of the world struggles to clamber out of a serious recession, a gradual flow of economic power from West to East has turned into a flood. New high points, it seems, are reached daily. China surged past the United States to become the world’s largest automobile market — in units, if not in dollars, figures released Monday show. It also toppled Germany as the biggest exporter of manufactured goods, according to year-end trade data. World Bank estimates suggest that China — the world’s fifth-largest economy four years ago — will shortly overtake Japan to claim the No. 2 spot. The shift of economic gravity to China has occurred partly because growth here remained robust even as the world’s developed economies suffered the steepest drop in trade and economic output in decades. But that did not happen by chance: China’s decisive government intervention in the economy, combined with the defiant optimism of its companies and consumers, has propelled an economy that until recently had seemed tethered to the health of its major export markets, including the United States. Beijing’s state-run news media, indulging in a moment of self-congratulation, have hailed China’s new economic prominence as proof of national superiority. The country’s economic miracle, the newspaper People’s Daily boasted last week, exists because its leaders — unlike those in other, unnamed nations — can make quick decisions and ensure underlings carry them out. The Great Recession, the newspaper said, has laid bare cracks in plodding Western-style capitalism. Yet China confronts a number of challenges about its recent surge, including whether its formula for growth is sustainable, and how it will manage its increasingly strained economic relations with the outside world. Those are likely to prove challenging issues for a leadership unaccustomed to making policy under an international spotlight. Sustaining a global-size economy is nowhere near as simple as building one, some Chinese and Western economists say. As the Chinese navigate toward a bigger role in the world financial system, they are already running into diplomatic and political headwinds. At home, ordinary citizens and economists alike worry that the government’s decision to flood the economy with cash has created speculative bubbles — in housing, in lending — that could burst with disastrous effect. But curbing speculation requires moves, such as raising interest rates, that could crimp the sprees of investment and industrial expansion that are the main contributors to growth. Abroad, the pressure on China to revalue its currency, the renminbi, is strengthening, and it seems sure to intensify after trade statistics released Sunday showed that China’s yearlong downturn in export growth reversed in December. Keeping the renminbi fixed at a low rate against the dollar boosts China’s exports and its economy. But increasingly, it angers its trade partners.
225 China once could wave off complaints about its currency policies, arguing that it was a developing nation entitled to a bit of slack from its Western customers. But with the world’s fastest-growing economy — and more than $2 trillion in foreign reserves — that argument looks increasingly untenable. “At a time when you’ve got 10 percent unemployment in the U.S. and a very slow and gradual global recovery — and China seems to be skyrocketing — the pressure on the Chinese to change some of these policies, including the exchange-rate policy, is really going to grow this year,” said Nicholas Consonery, a China analyst at Eurasia Group, a New York-based political risk research firm. In theory, China’s growing economic clout should benefit everyone: in an interconnected world, growing trade creates jobs and money everywhere. “China’s extremely important, no doubt about it. And over all, the more important China becomes, the better it is for the American economy,” Scott Kennedy, who heads the Research Center for Chinese Politics and Business at Indiana University, said in an interview. That Shanghai-assembled iPod, Mr. Kennedy said, is the product of American research and design and marketing, and most of the proceeds from its sale go back into American coffers. But China’s rise also poses new risks both for Beijing and for its trading partners. Its largely bruise-free journey through last year’s economic crisis aside, not everyone is convinced that Beijing has eliminated threats to its financial and economic health. Hit hard by an initial drop in exports that was frighteningly steep for a leadership that has long promised and delivered fast growth, China poured $585 billion in stimulus money into its domestic economy. Officials also ordered state-run banks to increase their lending by double that amount, triggering a spree of easy money that created jobs for migrant factory workers and fueled rises in the price of assets, like stocks and real estate. Some experts fear that too much of the stimulus money was put into unprofitable projects and bad loans that will be exposed in a few years. In that view, China’s 2009 boom, in which automakers sold nearly 14 million cars and trucks, and housing prices doubled, is really a sign of an overheated economy at risk of serious recession down the road. Judged by the numbers, China’s economy still looks robust. In Beijing, officials said, per capita gross domestic product is expected to exceed $4,000 this year, a 10 percent jump from 2009. Last month, the value of China’s exports leaped by nearly a third over the same month in 2008 — and imports jumped 55 percent, pointing toward growth in manufacturing. But a Chinese economic crisis, which could have been shrugged off a few years ago, would be a considerably more serious event in a world in which Beijing runs the second-largest economy. The government appears concerned. Last week, the central bank edged up the rate on an often- watched interbank loan, the first such hike in five months. That seemed to signal concern that the economy was expanding too quickly. Many experts see few signs of immediate danger. After all, they note, China has gone on splurges before — building too many steel mills, and too many office buildings — only to see the nation’s breakneck growth sop up the excess capacity. With nearly a billion people still clawing to advance beyond peasant status, they say, China’s growth story has many chapters ahead. Mr. Kennedy, the Indiana University expert, said he was less certain that endless growth is such a panacea. “No one defies economic laws,” he said. “Eventually you get it, whether you want it or not.” http://www.nytimes.com/2010/01/12/world/asia/12china.html?hp
226 Asia Pacific
January 12, 2010 Clinton, Starting Trip, Acknowledges Possible Tensions With China By MARK LANDLER HONOLULU — Secretary of State Hillary Rodham Clinton, embarking on her first diplomatic trip of 2010, will try to ease tensions with Japan, America’s most important Asian ally, over a stalled agreement to relocate a Marine base on the island of Okinawa. But she acknowledged that relations with the region’s other major power, China, may be entering a rough period, as the United States pledges to sell weapons to Taiwan, which China regards as a renegade province, and President Obama plans a meeting with the Tibetan spiritual leader, the Dalai Lama, over the objections of Beijing, which considers him a separatist. Mrs. Clinton, speaking to reporters Monday on her plane, said the United States and China had a “mature relationship,” which she said meant that “it doesn’t go off the rails when we have differences of opinion.” “We will provide defensive arms for Taiwan,” Mrs. Clinton said. “We have a difference of perspective on the role and ambitions of the Dalai Lama, which we’ve been very public about.” Mrs. Clinton was traveling to Hawaii, her first stop in a nine-day trip that will include Papua New Guinea, New Zealand and Australia. In Honolulu, she is scheduled to give a speech on United States security strategy in Asia, and to meet the Japanese foreign minister, Katsuya Okada. Japan has frustrated and angered the Obama administration with its refusal to carry out a 2006 agreement to move a Marine Corps air station in Okinawa to a less populated area of the island. Mrs. Clinton sought to play down the dispute, saying the alliance was “much bigger than any one particular issue.” Japanese-American relations have been unsettled since August, when voters in Japan swept out the long- entrenched Liberal Democratic Party in favor of the slightly left-leaning Democratic Party, led by Yukio Hatoyama. Mr. Hatoyama spoke of forging closer ties to Asian neighbors like China, prompting concerns in Washington that Japan was pulling away from its close relations with the United States. President Obama tried to reduce tensions when he visited Tokyo in November. But after he left, Mr. Okada pushed for a government inquiry into secret agreements with the United States in the 1960s and 1970s that allowed American aircraft and ships with nuclear weapons to enter Japan. Most of the tension is rooted in the dispute over Marine Corps Air Station Futenma. The Obama administration wants Japan to honor a 2006 agreement to move the base to a less populated part of Okinawa. But Mr. Hatoyama campaigned to move it off the island or even out of Japan. Mrs. Clinton said the bumps were aftershocks from Japan’s political earthquake. “You can imagine what it would be like in our own country, if after 50 years a party that had never held power, actually held it,” she said. In her first visit to Beijing as secretary of state last February, Mrs. Clinton played down human rights concerns and emphasized cooperation on issues like trade and climate change. But on Monday, she took a tougher line, saying that Washington was a necessary counterweight to Beijing. “People want to see the United States fully engaged in Asia, so that as China rises, there’s the presence of the United States as a force for peace and stability, as a guarantor of security,” Mrs. Clinton said.
227 She also called on China to use its influence to force North Korea back into negotiations on relinquishing its nuclear weapons. North Korea said Monday that it would not return to those talks unless sanctions against it were lifted, and it was able to negotiate a formal peace treaty with the United States to replace the 1953 truce that ended the Korean War. Returning to those multiparty talks, she said, was a precondition for dealing with other issues. Starting her second year as the nation’s chief diplomat, Mrs. Clinton spoke more about pressure than diplomatic engagement. Speaking of Iran, she said the United States and its allies were discussing financial sanctions that would appear to be aimed at the Revolutionary Guards and other political players in the country, should diplomacy fail. “It is clear that there is a relatively small group of decision makers inside Iran,” she said. “They are in both political and commercial relationships, and if we can create a sanctions track that targets those who actually make the decisions, we think that is a smarter way to do sanctions.” But she added, “All that is yet to be decided upon.” MARK LANDLER Clinton, Starting Trip, Acknowledges Possible Tensions With China January 12, 2010 http://www.nytimes.com/2010/01/12/world/asia/12diplo.html?ref=global-home
In China, fear of a real estate bubble By Steven Mufson Washington Post Staff Writer Monday, January 11, 2010; A01 BEIJING -- With property prices soaring in key cities, many investors and bankers worry that China has the next great real estate bubble waiting to be popped. The Chinese government is worried, too. On Sunday, the nation's cabinet, citing "excessively rising house prices" in some cities, said it will monitor capital flows to "stop overseas speculative funds from jeopardizing China's property market." It also said that any Chinese family buying a second home must make a down payment of at least 40 percent. For investors, many of the usual bubble warning signs are flashing. Fueled by low interest rates, prices in Shanghai and Beijing doubled in less than four years, then doubled again. Most Chinese home buyers expect that today's high prices will climb even higher tomorrow, so they are stretching to pay prices at the edge of their means or beyond. Brokers say it is common for buyers to falsely inflate income statements for bank loans. Some economists and bankers fear that they have read this script before. In Japan at the end of the 1980s and in the United States in 2008, residential real estate bubbles ended in big crashes, battered banks and slow recoveries. With China acting as a key engine of global growth, a bursting of the Chinese real estate bubble could be a pop heard round the world. "It's definitely a bubble," said Beijing real estate broker Xu Xiangdong, a 24-year-old former nightclub cashier. "But it won't break because there is lots of support beneath the bubble because buying power is really strong." Many economists say there are good reasons for such optimism. Rapid economic growth, rising family incomes, continued migration to the cities, pent-up demand for housing, and a banking
228 system much less exposed to residential mortgages than banks in the United States or Japan could protect China, they say, from a real estate meltdown for years to come. If not, then development firms and Chinese banks might teeter and construction could slow down, tossing millions of Chinese people out of work. A real estate bust might also shake confidence here just when the world is looking to Chinese consumers to start spending more to bring global trade into better balance. Arthur Kroeber, a Beijing-based analyst and managing director of Dragonomics, said China's economy is "not even close" to being a bubble like those seen in Japan, which endured more than a decade of sluggish growth after prices retreated, or in the United States, which helped bring about the current sharp global downturn. "At some point the music will stop," Kroeber said. But he predicted that it would not happen in China for at least 15 years, when urbanization slows. The bigger real estate problem in China now is access to housing. For many people -- especially the young or people moving to the cities from rural areas -- the dream of owning a home is more and more difficult to attain. The Xinhua news agency quoted Goldman Sachs as saying that housing price increases had outpaced wage hikes by 30 percent in Shanghai and 80 percent in Beijing in recent years. A popular television soap opera known as "Snail House" depicts two sisters' desperate struggle to buy an ever more unaffordable home. One sister resorts to becoming the mistress of a corrupt, married official to get money for an apartment. Last month, after a broadcast official said the 33- part series was having a "vulgar and negative social impact" and using "sex to woo viewers," viewers lashed out at him on the Internet and accused him of owning multiple luxury homes. Working out of an east Beijing building decorated with Ionic and Corinthian pedestals, Xu, the real estate broker, has seen apartment prices in the complex double in the past year, to $380 a square foot. Prices had already doubled over the three previous years. Now the sales-agent manager of a Century 21 franchise, his take-home pay is more than four times what he earned as a cashier. But Xu, a vocational school graduate and son of corn farmers in Jilin province, still rents. Speculation has become common. Wang Zhongwei, a 35-year-old stock market analyst who owns the apartment where he lives, bought two apartments in 2004 for investment purposes. He borrowed from family and friends to meet mortgage payments twice as big as his take-home pay. But in the middle of last year, he sold the apartments for twice what he paid and made $145,000, a fortune here. "It's much easier than working every day to make money," Wang said. "I work very hard and compete for my so-called career every day, but I don't make that much money from work." In November, he bought two more apartments. The government has helped pump up the property market by keeping interest rates low, the currency undervalued and the fiscal spigots open. Standards for bank lending have been lax, with lending rising at a 30 percent annual pace in 2009, according to a report by the Los Angeles- based bond investment firm Pimco. Since the government exerted restraint in July, lending has risen at a slower, but still brisk, 15 percent annual rate. Now top leaders are worried. In a year-end interview with the official Xinhua news agency, Premier Wen Jiabao said that "as the property market is recovering rapidly this year, housing prices in some cities are rising too fast, which deserves great attention of the central government." He vowed to "crack down on illegal moves, including hoarding of land and
229 delaying sales for bigger profits." And he said the government would do more to provide affordable housing. Last week, the government also nudged a key interest rate higher. Still, many economists are sanguine. "One of the legacies of China's prolonged stagnant growth prior to economic liberalization is an overwhelming shortage of residential property that meets its new living standards," Koyo Ozeki said in a report published by Pimco. "It will likely take a considerable period of time for supply to catch up to demand." That wasn't true in the Japanese or U.S. bubbles. Ozeki, an executive vice president for Pimco in Tokyo, noted that the total credit for the property sector in China has grown to 40 percent of gross domestic product; in the United States, it hit 80 percent in 2007. For Chinese banks, exposure to real estate is less than 20 percent of assets, much smaller than in the United States. That should reduce the chances of a banking crisis. In addition, while property prices are soaring in such areas as Beijing and Shanghai, price increases are more modest elsewhere. Government statistics say housing prices nationwide rose only 5.7 percent last year. Moreover, China's homeowners carry less debt than homeowners abroad and the economy's rapid growth can probably keep incomes rising fast enough to cover mortgage costs. Kroeber said that mortgages issued from 2002 to 2008 equaled only 40 percent of the value of housing sold nationwide. Liu Renping, a 30-year-old construction engineer originally from the countryside of Inner Mongolia, is typical of many first-time Chinese home buyers. After deciding to get married, he hunted for four months before buying a two-bedroom, 900-square-foot apartment on the northern edge of Beijing last March, even though it won't be completed until this October. He paid $162 per square foot and took out a mortgage out for half the money needed. The other half came from his mother, friends and his savings. About 30 percent of the couple's pay will cover mortgage payments. "And my salary will increase in the near future. So I don't feel big pressure from my mortgage," Liu said. Since he bought the apartment, prices in that development have jumped more than 50 percent. "I am lucky to have bought it early," he said. "If the price was this high when I bought the apartment, I wouldn't buy at all because it would have been too expensive and I wouldn't have been able to afford it." Researcher Zhang Jie contributed to this report. Steven Mufson In China, fear of a real estate bubble January 11, 2010 http://www.washingtonpost.com/wp-dyn/content/article/2010/01/10/AR2010011002767_pf.html
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12.01.2010 Angela Merkel has changed her mind on policy co- ordination – but there is a big caveat.
FTD Deutschland reports that Angela Merkel now favours greater economic policy co-ordination though her spokesmen made it clear that she wants any co-ordination to be done at EU-level, not euro area level, as the latter would be devisive. (Merkel is talking about Lisbon-Agenda type co- ordination, like growth strategies, not macro coordination. The good news is she is apparently willing to engage in a debate about intra-EU economic imbalances.) Bond issuance rally Businesses and governments have rushed to raise tens of billions of dollars from bond markets in a frenetic round of fundraising amid expectations that interest rates would rise, writes the FT. So far this month more than $75bn has been raised, more than two-thirds of this by financial institutions trying to repair their balance sheets in the wake of the economic crisis. Spain retreats After only four daysafter Jose Luis Zapatero’s proposed to give the Commission power of enforcement in the Agenda 2010, the country is now rowing back, reports El Pais. Remarks by former PM Felipe Gonzales had alarmed other member states in particular Germany and the UK. Following a strong rejection from Germany’s economic minister Rainer Bruederle, Deputy prime minister de la Vega stressed that there was never talk of sanctions and that there is no disagreement in principal with the German government, as both countries want greater coordination of economic policies. Olli’s hearings Olli Rehn, nominated commissioner for economic and monetary affairs, was one of the first to go through confirmation hearings the European Parliament this week. Rehn told MEPs that shaky public finances in Greece and other crisis-hit European Union member states are posing “a very serious challenge” (FT), and has potential spillover effects for the eurozone but that “It is not so serious yet that it would threaten stability of the euro zone,” (New York Times). Rehn opted for incentives rather than sanctions to encourage compliance, called for a single representation in international institutions and showed an open mind about common bonds . ECB unhappy about Irish interbank-guarantees We picked this up from Karl Whelan in the Irish economy blog, who pointed to a story by
231 Emmet Oliver in the Irish Indepenent as saying that the ECB was unhappy about two aspect of the Irish government inter-bank guarantee. The first is that it is a national guarantee, and the ECB does not like measure to encourage national fragmentation of money markets. The second is the lack of a minimum maturity, which means that liabilities of less than 3-months are also covered. Berlusconi renewed tax cut pledge Silvio Berlusconi, who returned to office four weeks after he was attacked on the street by a mentally ill man, made a fresh pledge to cut taxes ahead of regional elections, writes the FT. He said that he would begin immediately to address the issue of tax reform, a longstanding pledge of successive Berlusconi governments but one he has not yet been able to address successfully. He also wants to confront a raging national debate over race riots in southern Italy. Austrian government seek full ownership of central bank The Austrian government is to go for a 100% ownership of the National Central Bank OeNB, reports Der Standard. Currently the state owns 70%, while 30% remains in private banks. The Austrian finance minister Josef Proell said that in today’s finance world it was unacceptable that banks have shares in their supervisor. Proell estimates that he needs €50m for the bargain. Earlier attempts to fully nationalise the OeNB failed amid resistance of the banks to sell their shares. This time banks signalled to be ready to negotiate. Greek deficit revision The Greek budget deficit and debt figures may be revised further because the current institutional setup for Greek statistics is ineffective and prone to political interference, Reuters quoted the European Commission’s report on that matter. Eurostat could not validate the latest deficit and debt figures that Greece sent in October 2009. The commission expects revisions especially of the 2008 data. The report will be discussed by EU finance ministers in Brussels next week. Krugman on Europe again From time to time Paul Krugman comments on Europe. In the late 1990s he wrote a famous column in the New York Times, asking Why Germany Kant Compete, not a typo but a reference to the German philosopher, in an article to explain Germany’s chronic competitiveness problems – which would strike most readers as somewhat odd with hindsight. This time, he had something very nice to say about Europe, in a column “Learning from Europe”, in which he says that we are doing almost as well as the US in productivity and all this despite the fact that we have higher taxes. His comment about Europe is, as ever, not really a comment about Europe, but about the US. He wants to make the point that you can prosper with higher taxes, and to make that argument, it is useful to say that high-tax is not as bad as American commentators make it out to be. In his blog, however, he makes some sceptical points about the euro, which we quote in full. “Europe lacks both the centralized fiscal system and the high labor mobility. (Yes, some workers move, but not nearly on the US scale). To be sure, America has at least minor-league versions of the same problems: we are having fiscal crises in the states, and the housing slump has depressed mobility in the recession. But we’re still better able to cope with asymmetric shocks than the eurozone. Was the euro a mistake? There were benefits — but the costs are proving much higher than the optimists claimed. On balance, I still consider it the wrong move, but in a way that’s irrelevant: it happened, it’s not reversible, so Europe now has to find a way to make it work.” http://www.eurointelligence.com/article.581+M559c703735d.0.html#
232 Paul Krugman
January 11, 2010, 1:44 pm White Man’s Burden? One of the responses I’m getting to my “Europe isn’t an economic hellhole” column is the claim, from conservatives, of course, that Europe is only able to prosper because we Americans are bearing the whole burden of defending freedom. I tempted to react to this in two ways: 1. Hey, you’re changing your story line: first Europe’s failure proved your point of view, now — when it turns out that your facts were wrong — European performance proves nothing; or 2. Well, in that case, you must agree with people on the left who claim that military spending is a terrible drain on the US economy. Right? But the real story is, look at the numbers. A convenient chart from the Congressional Research Service — yes, a bit out of date, but not much will have changed: Congressional Research Service: (Table: Turkey: 5,1%; Greece: 4,4%; US: 3,3%; France: 2,5%; UK: 2,4%; Italy: 1,9%; Netherlands: 1,6%; Germany: 1,5%; Spain: 1,2%; Yes, we spend more on defense than the major European countries. But it’s on the order of 1 or 2 percentage points of GDP. That’s not nearly enough to explain why they can afford such big welfare states.
January 11, 2010, 9:48 am Europe’s OK; the euro isn’t One addendum to today’s column: Europe is OK, but the single currency is having exactly the same problems ugly Americans warned about before it was created. My goal, in the column, was to take on the all-too-prevalent U.S. view of Europe as a conservative morality play: see, when those do-gooding liberals get their way, it wrecks your economy. As I pointed out, this morality play isn’t actually borne out by the facts (which leads many conservatives to invent their own facts). The euro is a quite different issue. Back when the single currency was being contemplated, the fundamental concern of many economists on this side of the Atlantic was, how will Europe adjust to asymmetric shocks? Suppose that some members of the euro zone are hit much harder by a downturn than others, so that they have much higher-than-average unemployment; how will they adjust? In the United States, such shocks are cushioned by the existence of a federal government: the Social Security and Medicare checks keep being sent to Florida, even after the bubble bursts. And we adjust to a large degree with labor mobility: workers move in large numbers from depressed states to those that are doing better. Europe lacks both the centralized fiscal system and the high labor mobility. (Yes, some workers
233 move, but not nearly on the US scale). To be sure, America has at least minor-league versions of the same problems: we are having fiscal crises in the states, and the housing slump has depressed mobility in the recession. But we’re still better able to cope with asymmetric shocks than the eurozone. Was the euro a mistake? There were benefits — but the costs are proving much higher than the optimists claimed. On balance, I still consider it the wrong move, but in a way that’s irrelevant: it happened, it’s not reversible, so Europe now has to find a way to make it work. Still, I think it’s important that just because I think Europe does better than Americans imagine doesn’t mean that it does everything right.
January 11, 2010, 8:12 am Too big to fail fail? I’m puzzled by what David Warsh says about me (not for the first time): There are meliorists, practical-minded reformers representing a broad array of banking, financial and economic types (for whom, Paul Krugman, of The New York Times, is often an effective spokesman), who believe that American banks must be large in order to compete in global markets. They think that efficiency and safety can be achieved through a combination of higher capital ratios, greater transparency, and improved consumer protection. I’m pretty sure I’ve never claimed that US banks need to be big to compete in international markets — it’s not at all what I believe, and I am, after all, the guy who spent years denouncing the whole concept of competitiveness. Where did that come from? Anyway, I have a quite different problem with the idea that breaking up big banks is the key to reform: I don’t think it would work. My basic view is that banking, left to its own devices, inherently poses risks of destabilizing runs; I’m a Diamond-Dybvig guy. To contain banking crises, the government ends up stepping in to protect bank creditors. This in turn means that you have to regulate banks in normal times, both to reduce the need for rescues and to limit the moral hazard posed by the rescues when they happen. And here’s the key point: it’s not at all clear that the size of individual banks makes much difference to this argument. It’s true that the big losses in mortgage-backed securities seem to have been concentrated at the big financial institutions. But the losses on commercial real estate, which look likely to be even worse per dollar lent, have been largely among smaller banks. Remember, the great bank runs of the early 1930s began with a run on the Bank of the United States, which was only the 28th largest bank in the country at the time. The point is that breaking up the big players is neither necessary nor sufficient to protect us against financial crises. That’s why my focus is on reducing leverage.
234 January 9, 2010, 4:19 pm European decline — a further note There’s been a big to-do in the econoblogsphere over an essay by James Manzi in National Affairs; unfortunately for Manzi, it hasn’t been the kind of debate you want. Manzi asserts that having a European-style social democracy is terrible for growth: From 1980 through today, America’s share of global output has been constant at about 21%. Europe’s share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40% of global production in the 1970s to about 25% today. Opting for social democracy instead of innovative capitalism, Europe has ceded this share to China (predominantly), India, and the rest of the developing world. Manzi’s numbers were picked up widely, including by the Times’s own Ross Douthat. But as Jonathan Chait quickly pointed out, Manzi’s definition of Europe included the Soviet bloc (!), so that he was attributing to social democracy an economic decline that was mainly about the collapse of communism. Chait also suggested that Manzi wasn’t comparing the same dates for America and Europe; and most importantly, Chait pointed out that to the extent there has been a growth divergence, it’s almost entirely because America has faster population growth; since 1980, real GDP per capita in Western Europe and the US have grown at almost the same rate. But I went back to Manzi’s source of data, and it turns out that it’s even worse than that. If you use the broad definition of Europe, which includes the USSR, it did indeed have 40 percent of world output in the early 1970s. But that share has not fallen to 25 percent — it’s still above 30 percent. The only thing I can think is that Manzi compared Europe including the eastern bloc in 1970 with Europe not including the east today. It’s probably not a deliberate case of data falsification. Instead, like so many conservatives, Manzi just knew that Europe is an economic disaster, glanced at some numbers, thought he saw his assumptions confirmed, and never checked. And that’s the real moral of the story: the image of Europe the economic failure is so ingrained on the right that it’s never questioned, even though the facts beg to differ.
January 9, 2010, 9:48 am The health insurance excise tax OK, clearly I have to weigh in on this. Should there be a limit to the tax deductibility of employer-provided health insurance, which is what the excise tax in the Senate bill is supposed to fix? My answer is yes, but the final bill should address the criticisms. The argument for limiting the tax exclusion is that the tax break on health insurance encourages over-spending, so limiting it could help in the process of “bending the curve”. More generally, since we think the United States spends too much on health for not-so-good results, it makes sense where possible to pay for expanding coverage from the health sector itself. Both arguments are reasonable. The counter-arguments seem to run along three lines.
235 First, there’s the argument that many “Cadillac” plans aren’t really luxurious — they reflect genuinely high costs. That’s surely true. A flat dollar limit to tax deductibility has real problems. At the very least, the limit should reflect the same factors insurers will be allowed to take into account in setting premiums: age and region. Second, there’s the argument that any reductions in premiums won’t be passed through into wages. I just don’t buy that. It’s true that the importance of changing premiums in past wage changes has been exaggerated by many people. But I’m enough of a card-carrying economist to believe that there’s a real tradeoff between benefits and wages. Maybe it will help the plausibility of this case to notice that we’re not actually asking whether a fall in premiums would be passed on to workers. Even with the excise tax, premiums are likely to rise over time — just more slowly than they would have otherwise. So what we’re really asking is whether slowing the growth of premiums would reduce the squeeze rising health costs would otherwise have placed on wages. Surely the answer is yes. The last argument is that this hurts unions which have traded off lower wages for better benefits. This would be a bigger issue than I think it is if the excise tax were going to kick in instantly. But it won’t, giving time to renegotiate those bargains. And bear in mind that this kind of renegotiation is exactly what the tax is supposed to accomplish. A last general point: we really don’t know what it will take to rein in health costs, but that’s a reason to try every plausible idea that experts have proposed. Limiting tax deductibility is definitely one of those ideas. Bottom line: the details of the excise tax should be fixed, but it’s on balance a good idea.
January 9, 2010, 9:19 am Bubbleheads
I was searching for unrelated material, but ran across this oldie but goodie from Jim Cramer:
As Toll Brothers (TOL - commentary - Cramer’s Take) cruises through $100, it’s time to hold the bubbleheads accountable. Who are the bubbleheads, in my book? Those are the people who have told you to bet against housing and to be worried about the speculative boom in homes. Here’s where I am coming from. All day, I listen to and read people who say that housing’s got to roll over, that these companies can’t work, that it is just a matter of time. Then I look to see what’s been outperforming these stocks. Is it drugs? I don’t think so. Financials? Nah. Techs? Nope, not at all. Now I want to know when those who have warned us incessantly or told us it can’t last will get their comeuppance.
One question I’d like to answer, but haven’t had the time to research, is this: of those who condemn fiscal stimulus and demand that the Fed start raising rates now now now, how many denied that there was a housing bubble when it was actually inflating? http://krugman.blogs.nytimes.com/
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Sovereign bonds seen as riskier than corporates By David Oakley in London Published: January 12 2010 19:47 | Last updated: January 12 2010 19:47 The cost of insuring against the risk of debt default by European nations is now higher than for top investment-grade companies for the first time, as mounting government debt prompts fears over the health of many leading economies. It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than it does for the collective risk of Europe’s top 125 investment-grade companies, according to indices compiled by data provider Markit. Switch in view on ‘risk-free’ nations - Jan-12 Rate rise fears spark rush to issue bonds - Jan-11 Greece pledges swift action on deficit - Dec-10 Embattled Spain promises austerity - Dec-10 Lex: Eurozone sovereign debt - Dec-11 Van Rompuy urges Europe to double growth - Dec-10 Markit’s iTraxx Europe index of 125 companies is trading at 63 basis points, or a cost of $63,000 to insure $10m of debt over five years. This compares with 71.5bp, or $71,500, for Markit’s SovX index of 15 European industrialised nations. Fears over sovereign risk have risen sharply in the past few months as investors have become increasingly alarmed over rising budget deficits and record levels of government bond issuance needed to pay off public debt. By contrast, hopes of a recovery have helped support corporate credit markets. Since September, the SovX index has jumped 20bp, while the iTraxx Europe index has narrowed 30bp. Bankers are even warning that big economies, such as the US and the UK, could lose their top- notch triple A status because of the deterioration in public finances. Russell Jones, head of fixed income and currency strategy research at RBC Capital Markets, said: “The US and the UK could be downgraded because of their debt levels. “Countries, such as Greece, are in a worse position, whereas many corporates look in relatively good shape.” The cost to insure Greece, which saw its stocks and bond markets tumble on Tuesday after the European Commission said there were severe irregularities in its statistical data, has risen 140bp since September, to 263bp. This is six times more than leading companies such as Unilever, BP and Deutsche Post. Before the financial crisis, the cost to insure sovereigns was lower than corporates. In August 2007, Greek CDS traded at 11bp, while Unilever, BP and Deutsche Post all traded around 20bp. Bankers caution that liquidity in the sovereign CDS markets is still low, meaning that just a handful of buy orders can move prices sharply. Liquidity in the corporate CDS market is much higher.
237 However, even in the highly liquid sovereign bond markets, the debt of governments, such as Greece, is cheaper than many corporates. Greek five year bond yields, which have an inverse relationship with prices, are 4.75 per cent compared with Deutsche Post’s five year bonds at 3.174 per cent, BP at 3.178 per cent and Unilever at 3.312 per cent http://www.ft.com/cms/s/0/50e6aa10-ffab-11de-921f-00144feabdc0.html
Rate rise fears spark rush to issue bonds By Jennifer Hughes in London and Aline van Duyn in New York Published: January 11 2010 22:11 | Last updated: January 11 2010 22:11 Businesses and governments have rushed to raise tens of billions of dollars from bond markets in a frenetic round of new year fundraising amid fears that interest rates are set to jump. A flurry of issuers, including Virgin Media, BMW and Manchester United football club, turned to the capital markets on Monday aiming to raise more than $20bn (£12.4bn).
Bond rally continues but risks lie ahead - Jan-11
238 Virgin Media to issue $1bn secured bonds - Jan-11 Man Utd confirms plans for £500m bond issue - Jan-11 Europe braced for boom in junk bonds - Jan-10 Poland and Mexico were among a number of governments that also tapped international investors. So far this month more than $75bn has been raised, more than two-thirds of this by financial institutions trying to repair their balance sheets in the wake of the economic crisis. Investors are expecting a spurt of issuance this week by junk-rated European companies, a sector of the bond market that was frozen for much of last year. Last week, the US corporate bond market had its second busiest day on record. Wayne Hiley, of Barclays Capital, said a recent rally in the corporate bond markets had lowered the interest rate premium to government bonds that businesses pay. “There are issuers who are saying ‘let’s take advantage of this’ even if they hadn’t planned to come to the market until later on,” he said. Companies usually aim to sell bonds early in the year when investors have fresh funds and before many companies enter a “purdah” period ahead of earnings announcements. However, the current round of capital raising is particularly intense. Some companies believe a recovery in economic growth this year will lead to central banks raising interest rates, pushing up the cost of borrowing. Other companies, fearing market turbulence as the authorities begin to unwind last year’s emergency monetary and fiscal measures to prop up the economy – which have included buying bonds – are borrowing as much as they can while demand for debt remains strong. Ivor Dunbar, co-head of global capital markets at Deutsche Bank said: “It’s sensible to assume that rates aren’t going much lower, so issuers are taking advantage of the conditions now”. There is also unease that Western economies might be heading for a “double dip” recession – or the chance that the economy slumps back again towards the end of this year, as fiscal stimulus fades away. Some treasurers also fear a logjam later in the year when companies issuing higher-yielding debt try to refinance cheap loans they took out in the credit boom. Additional reporting by Gillian Tett and David Oakley in London http://www.ft.com/cms/s/0/6f46f226-fef2-11de-a677-00144feab49a.html
Bond rally continues but risks lie ahead By Aline van Duyn Published: January 11 2010 18:48 | Last updated: January 11 2010 23:31 The astonishing 2009 corporate bond rally – a record-setting year in terms of returns – shows no sign of waning in the first weeks of 2010.
239 Indeed, prices on corporate bonds have continued to rise and yields have continued to fall. In the first weeks of this year, some key measures in the credit markets are again back to where they were over two years ago, before the credit market collapse that fuelled a global economic crisis. Junk bonds – debt sold by the riskiest companies – are one example. Average yields that topped 20 per cent at the height of the financial crisis just over a year ago have dropped below 9 per cent this month. The last time they reached this level was in November of 2007, according to a Merrill Lynch index. Investment grade credit – debt sold by companies with lower proportions of debt on their balance sheets – has also rallied strongly. The extra yield pick-up relative to government bonds has dropped to the lowest level in two years, in both Europe and the US. At some point, though, there is an expectation that the credit rally will stop, or even reverse. The reason is quite simple: fixed-rate bonds tend to fall in price when interest rates rise. And, after more than a year of near-zero official interest rates, it is widely expected that at some point interest rates will go up. “A natural consequence of the expected rise in rates is that yields would likely rise over 2010 and 2011,” say analysts at Deutsche Bank in a report. “The rising yields will hurt credit on a total return basis, particularly investment grade credit.” The backdrop to the sharp rally in 2009 was, in part, a return to more normal market conditions after credit markets around the world stopped functioning. The bankruptcy of Lehman Brothers and the near-collapse of AIG in September of 2008 led to a spiral of losses, forced selling and panic across markets. Last year, after central banks injected record amounts of money into banks and markets and slashed interest rates to close to zero, credit markets rallied sharply. Fears of an avalanche of defaults receded, as companies were able to refinance debt. Investors are still buying in 2010, as shown by the rush by companies and governments to sell new debt to a willing pool of investors. The activity has been so brisk that last week saw one of the busiest days ever in the world’s bond markets, when financial groups including companies like GE Capital, Lloyds Banking Group and others sold bond deals each worth more than $4bn. In some parts of the market, though, the appetite for new bonds is starting to shift, particularly away from higher quality bonds where spreads relative to government bonds have shrunk significantly. Bond sale marks retreat from QE The Bank of England has started its exit strategy from its £200bn ($323bn) emergency support programme to revive the UK economy, writes David Oakley. It has sold £77.7m of corporate bonds – the first sales – out of £2bn of company assets it has bought as part of the quantitative easing programme, which involves the printing of new money to purchase assets. The corporate side of QE has always been small compared with the government bond buy-back initiative. The Bank has bought £191bn in gilts so far. QE was launched last March as equity markets crashed to five-year lows. The Bank is expected to put QE on hold next month, once it has reached its buy-back target of £200bn. Bonds sold included those of Yorkshire Water and WPP, the UK advertising group.
240 Initially, the Bank signalled it could buy up to £50bn of corporate assets. However, it decided against buying too many company bonds because of the risks to its balance sheet from the threat of bankruptcies. Instead, it focused on buying gilts because it believed this was the most effective way of bringing down the borrowing costs of all assets. Government bonds are the benchmark for company bonds and mortgages. Demand for junk bonds remains stronger, in part because the yields relative to government bond yields are still higher than they have been historically. “We have reduced our overweighting in high grade corporate bonds,” says Gordon Fowler, chief executive of Glenmede, which manages $17bn in assets. “Spreads have come in so far that there is little cushion left to compensate for the credit or interest rate risk.” But even as some investors switch out of corporate bonds, others continue to buy. Much depends on the type of investor, and for those who seek higher returns than those made on an index of bonds, corporate bonds are still popular. This reflects the fact that, relative to the overall bond markets which include government debt, corporate bonds are shrinking. Instead, government debt and government-related debt such as that from mortgage agencies Fannie Mae and Freddie Mac is rising. By the end of this year, Barclays Capital estimates that US Treasuries will make up 33.5 per cent of its widely tracked US Aggregate Index of bonds, the highest proportion since 1998. Corporate and securitised debt will both fall this year (see chart). “In the past decade there was a real explosion in private sector debt but we are now expecting an unwind of that trend,” says Matthew Mish, analyst at Barclays Capital. He says that the limited availability of debt with yields above government bonds will boost demand for corporate debt. The risks for credit markets now are not so much looming in the creditworthiness of companies themselves, although there will, of course, still be companies or banks that face downgrades or defaults in 2010. There are also some sectors where financing remains difficult to obtain, such as commercial real estate. Instead, much is hanging on the actions taken by central banks as they exit the monetary and fiscal stimulus policies instituted during the crisis. Scenarios range from mild economic growth with continued low interest rates, to strong economic growth and higher rates, to higher interest rates caused by bond market concerns about looming inflation, to deflation. “We would stress though that it’s impossible to fully analyse credit markets without being aware of the immense largesse that the authorities have been providing markets in 2009,” say analysts at Deutsche Bank. “The reality is that we perhaps need to keep flexible and navigate the year month by month.” Should investors, particularly those who are watching the absolute returns rather than those relative to indices, just buy bonds now and hold them until they expire? If interest rates do rise, this creates another set of dangers. “Corporate bonds need to be very actively managed,” says Mr Fowler at Glenmede. “Especially when interest rates start to rise, if you buy and hold you lose out on higher coupons which will be paid down the line.” Additional reporting by Nicole Bullock in New York Aline van Duyn Bond rally continues but risks lie ahead January 11 2010 http://www.ft.com/cms/s/0/590a635c-fedf-11de-a677-00144feab49a.html
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11.01.2010 Portugal warned about credit downgrade
Rating agencies warned Portugal that it faces a credit rating downgrade unless the government takes firm measures to reduce its swollen budget deficit, reports the FT. The article quotes a Moody’s analyst as saying that the government needs to take fiscal action to avoid a downgrade. Last autumn Moody’s and Fitch both placed Portugal’s sovereign debt rating on a negative outlook, amid a budget deficit that tripled to more than 8% of GDP last year, implying a probable downgrade within 12 to 18 months. Lifting the warning would depend on what steps the government takes to improve fiscal consolidation. Portugal’s budget for 2010, due to be debated in parliament this month, is seen as a crucial test for the recently re-elected socialist government. European junk bond market expected to boom European junk bond markets will get a big boost this year as companies shift their funding towards bond markets and away from banks as they cut back lending, writes the FT. Junk bond issuance is estimated to reach €50bn. Demand is expected to continue to build up as investors poor money into junk bonds s in the search for yield. The stability of the junk bond markets in Europe, which had been all but closed for the two years after the crisis hit, is being closely watched as hundreds of billions of high-risk debt comes due for repayment in the coming years. European inventories low amid recovery doubts Businesses are holding very low stock levels and are reluctant to boost inventories, according to the FT, indicating that the business community is still in doubts about the durability of economic recovery. Fluctuating inventories had a strong stake in GDP growth: Inventories’ contribution to European GDP was -5.4pp in the first half of 2009 but rebounded to add 2.1pp of growth in the second half, according to Morgan Stanley. This quarter the contribution is only 0.1pp. Euro area unemployment on 11 year record high According to the latest data from Eurostat, euro area unemployment has reached 10% of the active population in November last year, the highest level in the last 11 years, reports Les Echos. Economists expect unemployment to rise further until the third quarter of 2010, and to continue to stay high throughout 2011.
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German economics minister rejects Zapatero’s economic proposals for the EU Ahead of the summit on the 2020 Growth Agenda in February, disagreements have surfaced after Jose Louis Zapatero’ proposed last week to equip the European Commission with new powers for the 2020 Agenda. His proposal was immediately rejected by the German economic minister Rainer Bruderle, who said on Saturday that sanctions would not work. Opposition could even be worse from the UK where Cameron is expected to win this year’s election. El Pais reports that Guy Verhofstadt, former Belgian prime minister and Liberal leader in the EP, called in a letter to Barroso for a new coordination framework with more structural funds for credible plans and results and financial sanctions for states who do not spend money in line with the objectives of the EU 2020. Economists quarrel over tax cutting in Germany The German political system and the media have worked themselves into a frenzie about the plans by the coalition to cut taxes – while the new constitutional stability law forces a balanced buget from 2016 onwards. Some commentators have calculated that Germany would have to get rid of the entire Bundeswehr and cut pensions by 20% to able to square the two goals. Frankfurter Allgemeine had a good pro and contra debate on this issue between. Jurgen von Hagen argues that higher taxes do not lead to a consolidation of public finance as they reduce economic growth, and thus tax revenues. He says the government should stick to its goal of tax cuts, while presenting a credible programme to cut federal expenses. Wolfgang Wiegard says that following the fiscal stimulus Germany is now in a position where it needs to compensate through a fiscal consolidation. This is simply the wrong moment for tax cuts. When Americans quarrel about Europe Paul Krugman has an enlightening blog post this morning, in which he criticised some wingnut conservate economist, who had proclaimed that European was an economic disaster, based on some data of Europe’s falling percentage share in global manufacturing output. The argument seemed to have been based upon inclusion of the Soviet Union, as a result of which most of the fall that is attributed to the collapse of communism. Moreover, the numbers are wrong. Krugman says US conservatives are so certain of the fact that Europe is a basket case, that they do not even check their numbers. http://www.eurointelligence.com/article.581+M5b7fdebcd9e.0.htmlb
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Portugal warned of threat to rating By Peter Wise in Lisbon Published: January 10 2010 18:32 | Last updated: January 10 2010 18:32 Portugal has been warned that it faces a credit rating downgrade unless the government takes firm measures to reduce its swollen budget deficit. “If Portugal wants to avoid a downgrade, it is going to have to take meaningful, credible steps to get the deficit under control,” said Anthony Thomas, a senior sovereign risk analyst with Moody’s credit rating agency. Portugal suffers another credit warning - Oct-29 Sócrates makes pledge on public investment - Oct-26 Portuguese companies fear radical coalition - Sep-28 Portugal’s Socialists lose overall majority - Sep-28 Sócrates wins second term in Portugal - Sep-27 Portugal faces poll stalemate - Sep-22 Portugal, where the budget deficit tripled to more than 8 per cent of gross domestic product last year, is among several European Union countries seeking to reassure international financial markets that they will not follow Greece into a debt crisis. Portugal’s budget for 2010, due to be debated in parliament this month, is seen as a crucial test for the recently re-elected socialist government to show a strong commitment to fiscal rigour. “This budget is very important for people like us,” said another senior rating analyst. “If the government puts forward ambitious measures to bring down the deficit, it will help take the pressure off the rating.” Moody’s and Fitch both placed Portugal’s sovereign debt rating on a negative outlook in the autumn, a measure that implies a probable downgrade within 12 to 18 months. Lifting the warning or downgrading the rating, said Mr Thomas, would depend on what steps the government took to improve the outlook for fiscal consolidation and the underlying growth rate. The economy is estimated to have contracted nearly 2.5 per cent last year after zero growth in 2008. In Greece, downgrades by three international rating agencies in December pushed up spreads on government bonds and left the country facing the humbling risk of an EU bail-out. However, rating analysts said there was no short-term risk that Portugal would become the next Greece by suffering a debt crisis. “Both countries suffer from deteriorating government deficits and poor international competitiveness that will hit economic growth. But the situation in Greece is far worse than in Portugal,” said Mr Thomas. “We’re talking about a different order of magnitude,” said another senior rating analyst. “Greece’s public debt and budget deficit are about 113 and 12.5 per cent of GDP respectively, against comparable figures of around 77 and 8 per cent in Portugal.”
244 Portugal also benefits from a better track record for tackling excessive deficits and presenting accurate economic data. “There is a huge credibility issue with Greece, which is not the case for Portugal,” said a London analyst. José Sócrates, Portugal’s centre-left prime minister, more than halved the budget deficit from 6.1 per cent of GDP in 2005 to 2.6 per cent in 2007. But the socialists lost their parliamentary majority in September’s general election and need to negotiate this year’s budget – delayed because of the ballot – with the main centre-right opposition party. “Markets and investors need to know that the two main parties agree on a medium-term programme to stabilise our public finances,” said Vitor Bento, an economist and company chairman. Recent reforms had not yet had a big impact on the underlying growth rate, said Mr Thomas. “It reached an average of 1 to 1.5 per cent in the previous cycle and there has so far been no indication it is going to do any better in the next.” A report by Portugal’s Banco BPI highlights the negative impact of slow growth on public finances, concluding that the economy needs to reach an annual growth rate of 2.5 per cent to stabilise public debt. “Portugal has been warned of the risks and challenges we face,” said Fernando Ulrich, BPI’s chief executive. “Only if we were irresponsible and did nothing would we risk ending up like Greece.” Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. Peter Wise Portugal warned of threat to rating January 10 2010http://www.ft.com/cms/s/0/5f756048- fe12-11de-9340-00144feab49a.html?nclick_check=1
245 COMPANIES Europe braced for boom in junk bonds By Anousha Sakoui in London and Nicole Bullock in New York Published: January 10 2010 20:08 | Last updated: January 10 2010 20:08 This week is set to be one of the busiest for European junk bond markets in a year in which non- investment grade instruments are expected to be established as a mainstream source of funding for companies. Demand this year is expected to build on high issuance volumes seen towards the end of 2009, further fuelled by the rally in credit markets, as investors pour money into junk bonds in the search for yield. Sales of dollar junk bonds hit record - Dec-20 Return of junk-rated bonds - Dec-15 Distressed debt on the wane in US markets - Dec-15 Push for US covered bond market - Dec-15 “The demand for high-yield bonds in Europe is incredible,” said Sam Cowan, senior portfolio manager at credit fund Credaris. “Credit is essentially a binary product [meaning it has only two outcomes: default or repay] and investors currently believe businesses will repay.” The expected flood of issuance highlights the broader shift in funding by companies towards bond markets, and away from banks as they cut back lending. The stability of the junk bond markets in Europe, which had been all but closed for the two years after the crisis hit, is being closely watched as hundreds of billions of high-risk debt comes due for repayment in the coming years. Strengthening of junk bond markets has already prompted rating agencies to cut default rate forecasts. “As a growing number of companies start to issue in high-yield markets, that will drive additional demand and attract more liquidity, allowing more companies to follow,” said Boris Okuliar, co-head of European leveraged capital markets at UBS. “This can assist a wider recovery as this market establishes itself as a traditional source of financing for corporates and allows banks to reduce their balance sheets,” he added. One banker estimated 15 per cent of the year’s issuance could be sold in Europe this week, with estimates that about €4bn ($5.7bn) will be raised. According to debt information provider CapitalStructure, at least six European deals could launch next week. Investors cite Virgin Media, Continental and UPC as among the potential issuers. United Airlines and Manchester United are also expected to borrow from junk bond investors. Mathew Cestar, co-head of credit capital markets at Credit Suisse said: “With market conditions so robust, I expect to see both corporates and [financial] sponsors to use high yield for acquisition financing, as well as for refinancing debt.” Peter Toal, head of leveraged finance syndicate for the Americas at Barclays Capital, said: “As you get deeper into the year, concern arises that the Federal Reserve may begin a tightening protocol and the strength of the market is unclear at that point.”
246 This year is forecast by many bankers to be a record year for European junk bond issuance with as much as €50bn expected, well above previous highs of about €30bn. After a record year in the US, the market has already kicked off strongly with more than $2.5bn new deals already priced last week. http://www.ft.com/cms/s/0/439e8134-fe11-11de-9340-00144feab49a.html
Investors focus on bonds despite a big stock rebound By Tomoeh Murakami Tse Washington Post Staff Writer Sunday, January 10, 2010; G01 NEW YORK -- Small investors, still jittery even as stocks roared back to life from the financial crisis, are turning back to the market looking for less-risky ways to reboot their portfolios. Many mom-and-pop investors who dumped stocks throughout the downturn have remained wary, content to sit on the sidelines as the Standard & Poor's 500-stock index soared 65 percent from its lows in March to ring in the new year. But instead of buying back stocks, individual investors have increasingly poured their money into bonds, which are considered to be safer but could pose risks in 2010. Investors in mutual funds, a popular way for small investors to access the markets, pulled roughly $250 billion from stock funds during the market downturn from October 2007 through March, according to the Investment Company Institute. During that 17-month period, managers of money-market funds saw a hefty $933 billion inflow as investors sought safety. Just about every investment was ravaged, including mortgage securities and stocks in emerging markets. Although signs of an economic recovery began budding in spring, nine months later, retail investors have yet to jump back into stocks in full force, instead steadily putting money into bond funds in ever-larger sums. With the damage to their retirement accounts still a recent memory, many small investors who have been sitting on their cash perceive investing in bond funds as "dipping your toe back in the pool," according to Rebecca Schreiber of Solid Ground Financial Planning in Silver Spring. "I think this is how people are reintroducing themselves to the market." There is also some chasing of past performance, analysts said, with investors pulling out of money-market funds earning near-zero interest to go after returns in bond funds, which returned an average of 13.5 percent for the year, according to Lipper, a data company that tracks mutual funds. Equity funds, meanwhile, gained an average of 34 percent. But fund investors hoping for similar gains in 2010 will probably be disappointed, analysts say. High-yield bond funds, which invest in the debt of riskier companies with non-investment-grade ratings, were trading at average discounts of 50 to 60 cents on the dollar at their lows last year. They are now back up to trading in the 90 cents on the dollar and up, according to Ken Taubes, head of U.S. portfolio management at Pioneer Investments in Boston. High-yield bond funds
247 returned a whopping 46 percent on average last year, according to Lipper. They are up nearly 4 percent over a two-year period. "Returns will be greatly reduced from last year but still reasonable," said Taubes, who expects high-yield funds to return somewhere between the high single digits to the low teens for 2010. "All those really big historic bargains are gone," said Miriam Sjoblom, senior bond fund analyst at the investment research firm Morningstar. Analysts also warn that bond investors may be in for a rude surprise when interest rates, which are at historical lows, eventually head back up. In general, bond prices take a tumble when interest rates rise and rally when rates fall. The Federal Reserve has kept its short-term interest rates low in an effort to support the economy. "Right now, interest rates are artificially low because the Federal Reserve has pumped so much money into markets," said Mark Coffelt, chief investment officer of Empiric Funds. "They're deliberately doing that to get the economy back on its feet. But at some point, they're going to have to get rates back up because they don't want inflation. I think there are going to be a lot of investors shocked at how fast those bond funds can go down when interest rates go back up." To be sure, few expect the Fed to increase rates anytime soon. The Fed said at its most recent policymaking meeting, in mid-December, that it would probably keep its target interest rate very low for an "extended period." While the central bank said it is pulling away from some of the emergency measures it put in place during the crisis, the Fed is still concerned about the weak U.S. economy and is unlikely to raise interest rates until it is on more solid footing. On Friday, the Labor Department reported that the nation lost 85,000 jobs in December, worse than expected, prompting President Obama to lament that "the road to recovery is never straight." Going forward, analysts say, investors should stay away from long-term bonds, which are more sensitive to rising interest rates, and stick to shorter-term issues. Like many investment managers, Bill Tedford, fixed-income strategist at Stephens Inc., said he has shortened the duration of the bonds in the respected portfolio he runs to about three years and under in anticipation of rising interest rates. "It's a little painful because you give up income," he said, but "there's a lot of risk of principal depreciation." Aside from high-yield funds, emerging-market debt funds were also among the best performers of 2009, returning 32 percent for the year. Meanwhile, general U.S. Treasury funds lost 6 percent. Stock analysts also don't expect supercharged returns of 2009 to continue into 2010. Many investing pros are expecting stocks to return to more normalized gains of around 8 percent. In a recent survey of money managers by Russell Investments, 42 percent of money managers said they expect U.S. stocks to rise at least 10 percent, and 37 percent predict a rise of up to 10 percent. After falling 57 percent from its October 2007 high, the S&P 500 soared 65 percent to finish 2009 with a gain of nearly 24 percent. The index was still off 29 percent from its record in October 2007 and finished down 24 percent for the decade. The Dow Jones industrial average of 30 blue-chip stocks ended up 19 percent for the year but down 9 percent for the decade. And the tech-heavy Nasdaq composite index closed up 44 percent for the year but down 44 percent for the decade. While nearly every category of stock fund finished up for the year (except those that short-sell stocks, which finished the year down an average of 41 percent), funds that invest in shares of
248 smaller companies outperformed those that invest in larger companies. The value funds that invest in large firms gained 23 percent for the year and value funds that invest in small firms gained 33 percent, Lipper said. Large-cap growth funds returned 35 percent, while small-cap growth funds gained 36 percent. Among the sector funds, global science and technology funds fared best, rising 69 percent. Basic materials funds followed with 65 percent. Utilities and financial services funds each returned 16 percent. China funds roared, gaining 69 percent, while Japan funds returned a modest 7 percent, Lipper reported. Greg Fernandez, a financial planner in McLean, said many individual investors are still in "limbo" less than a year after the market plunge. He suggested that risk-averse investors who are looking at bonds consider Treasury inflation-protected securities, or TIPS, as well as funds that short, or bet against, U.S. Treasurys. "There's a sense of 'Now what?' People are still in shock," Fernandez said. "But the principles of modern investing still stay the same. An investor still needs to think about what their goals are and what their future plans are and have and hold a very diversified portfolio. It sounds like a broken record, but it's the only proven way that we know of that works to protect against situations like the one we just went though." http://www.washingtonpost.com/wp-dyn/content/article/2010/01/08/AR2010010803783_pf.html
249 Opinion
January 11, 2010 OP-ED COLUMNIST Learning From Europe By PAUL KRUGMAN As health care reform nears the finish line, there is much wailing and rending of garments among conservatives. And I’m not just talking about the tea partiers. Even calmer conservatives have been issuing dire warnings that Obamacare will turn America into a European-style social democracy. And everyone knows that Europe has lost all its economic dynamism. Strange to say, however, what everyone knows isn’t true. Europe has its economic troubles; who doesn’t? But the story you hear all the time — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works. Actually, Europe’s economic success should be obvious even without statistics. For those Americans who have visited Paris: did it look poor and backward? What about Frankfurt or London? You should always bear in mind that when the question is which to believe — official economic statistics or your own lying eyes — the eyes have it. In any case, the statistics confirm what the eyes see. It’s true that the U.S. economy has grown faster than that of Europe for the past generation. Since 1980 — when our politics took a sharp turn to the right, while Europe’s didn’t — America’s real G.D.P. has grown, on average, 3 percent per year. Meanwhile, the E.U. 15 — the bloc of 15 countries that were members of the European Union before it was enlarged to include a number of former Communist nations — has grown only 2.2 percent a year. America rules! Or maybe not. All this really says is that we’ve had faster population growth. Since 1980, per capita real G.D.P. — which is what matters for living standards — has risen at about the same rate in America and in the E.U. 15: 1.95 percent a year here; 1.83 percent there. What about technology? In the late 1990s you could argue that the revolution in information technology was passing Europe by. But Europe has since caught up in many ways. Broadband, in particular, is just about as widespread in Europe as it is in the United States, and it’s much faster and cheaper. And what about jobs? Here America arguably does better: European unemployment rates are usually substantially higher than the rate here, and the employed fraction of the population lower. But if your vision is of millions of prime-working-age adults sitting idle, living on the dole, think again. In 2008, 80 percent of adults aged 25 to 54 in the E.U. 15 were employed (and 83 percent in France). That’s about the same as in the United States. Europeans are less likely than we are to work when young or old, but is that entirely a bad thing? And Europeans are quite productive, too: they work fewer hours, but output per hour in France and Germany is close to U.S. levels.
250 The point isn’t that Europe is utopia. Like the United States, it’s having trouble grappling with the current financial crisis. Like the United States, Europe’s big nations face serious long-run fiscal issues — and like some individual U.S. states, some European countries are teetering on the edge of fiscal crisis. (Sacramento is now the Athens of America — in a bad way.) But taking the longer view, the European economy works; it grows; it’s as dynamic, all in all, as our own. So why do we get such a different picture from many pundits? Because according to the prevailing economic dogma in this country — and I’m talking here about many Democrats as well as essentially all Republicans — European-style social democracy should be an utter disaster. And people tend to see what they want to see. After all, while reports of Europe’s economic demise are greatly exaggerated, reports of its high taxes and generous benefits aren’t. Taxes in major European nations range from 36 to 44 percent of G.D.P., compared with 28 in the United States. Universal health care is, well, universal. Social expenditure is vastly higher than it is here. So if there were anything to the economic assumptions that dominate U.S. public discussion — above all, the belief that even modestly higher taxes on the rich and benefits for the less well off would drastically undermine incentives to work, invest and innovate — Europe would be the stagnant, decaying economy of legend. But it isn’t. Europe is often held up as a cautionary tale, a demonstration that if you try to make the economy less brutal, to take better care of your fellow citizens when they’re down on their luck, you end up killing economic progress. But what European experience actually demonstrates is the opposite: social justice and progress can go hand in hand. http://www.nytimes.com/2010/01/11/opinion/11krugman.html?th&emc=th
January 9, 2010, 4:19 pm European decline — a further note There’s been a big to-do in the econoblogsphere over an essay by James Manzi in National Affairs; unfortunately for Manzi, it hasn’t been the kind of debate you want. Manzi asserts that having a European-style social democracy is terrible for growth: From 1980 through today, America’s share of global output has been constant at about 21%. Europe’s share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40% of global production in the 1970s to about 25% today. Opting for social democracy instead of innovative capitalism, Europe has ceded this share to China (predominantly), India, and the rest of the developing world. Manzi’s numbers were picked up widely, including by the Times’s own Ross Douthat. But as Jonathan Chait quickly pointed out, Manzi’s definition of Europe included the Soviet bloc (!), so that he was attributing to social democracy an economic decline that was mainly about the collapse of communism. Chait also suggested that Manzi wasn’t comparing the same dates for America and Europe; and most importantly, Chait pointed out that to the extent there has been a growth divergence, it’s almost entirely because America has faster population growth; since 1980, real GDP per capita in Western Europe and the US have grown at almost the same rate.
251 But I went back to Manzi’s source of data, and it turns out that it’s even worse than that. If you use the broad definition of Europe, which includes the USSR, it did indeed have 40 percent of world output in the early 1970s. But that share has not fallen to 25 percent — it’s still above 30 percent. The only thing I can think is that Manzi compared Europe including the eastern bloc in 1970 with Europe not including the east today. It’s probably not a deliberate case of data falsification. Instead, like so many conservatives, Manzi just knew that Europe is an economic disaster, glanced at some numbers, thought he saw his assumptions confirmed, and never checked. And that’s the real moral of the story: the image of Europe the economic failure is so ingrained on the right that it’s never questioned, even though the facts beg to differ. http://krugman.blogs.nytimes.com/2010/01/09/european-decline-a-further-note/
252 UK
Bankers escape bonus blow By Patrick Jenkins and Megan Murphy Published: January 8 2010 23:30 | Last updated: January 8 2010 23:30
253 City bankers will suffer little or no impact from the bonus supertax imposed by the government last month, according to a Financial Times poll of leading investment banks. Most banks, polled in an anonymised survey, said they would absorb all or part of the cost of the one-off 50 per cent tax by inflating their bonus pools, even at the risk of irritating the government and their own shareholders. The results chime with intelligence garnered by headhunters. “The tax is going to be 90 per cent absorbed by the banks,” said one senior recruitment consultant with clients in the City. In many cases that will mean banks doubling bonus pools, with the cost of the tax borne by shareholders. Dividends, already under pressure as regulators force banks to retain earnings to boost capital, are likely to be hit, bankers concede. Some investors are growing increasingly irritated with the banks’ plans. “Remuneration structures that seek to increase tax efficiency should not result in additional costs to the company,” the Association of British Insurers warned on Friday. One leading investor said: “Companies can’t increase the cost of employment to avoid staff paying their tax bills. We would like to see fewer banks held to ransom by staff demanding big bonuses.” On Friday, JPMorgan is due to report its 2009 results, the first of a clutch of US banks expected to unveil bumper profits – and bonuses – over the week. UK and continental European banks will report over the next six weeks, with several admitting in the FT questionnaire that their stance on the bonus tax would be driven by the precedent set by US groups, and the competitive pressure to keep pace with rivals’ bonuses. Bonus pay-outs at the part-nationalised Royal Bank of Scotland, which announces results at the end of February, will be particularly sensitive. US institutions are more likely to absorb the tax entirely, according to the poll. However, some – both US and European – said they would seek to split the cost of the bonus tax between the bank and staff. Where the cost was shared with bankers, it would be globally, not just with reference to London-based staff. The strategy will annoy the Treasury. When Alistair Darling, the chancellor, announced the supertax, he predicted it would deter banks from paying big bonuses, raising only a modest £550m in revenue. Earlier this week, the Treasury acknowledged it had failed in its aim of changing banks’ behaviour. However, that failure will be sweetened by the extra revenue it will now receive. In the FT questionnaire, banks on average said they expected the tax to generate £5bn for the Treasury. The FT quizzed 12 banks – Bank of America Merrill Lynch, Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Nomura, RBS and UBS. JPMorgan and Goldman Sachs did not respond. Additional reporting by Kate Burgess Patrick Jenkins and Megan Murphy Bankers escape bonus blow January 8 2010 http://www.ft.com/cms/s/0/caffc078-fc97-11de-bc51-00144feab49a.html
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To leave or not to leave By Patrick Jenkins and Kate Burgess Published: January 8 2010 23:30 | Last updated: January 8 2010 23:30 There is a lot of noise in the City of London still. But it is hard to tell whether it is the sound of genuinely disgruntled bank bosses preparing to abandon London’s financial centre or just whingeing staff, peeved at a 50 per cent supertax on bonuses worth more than £25,000. According to a Financial Times poll of the City’s leading investment banks, it seems the whingeing, for one, should stop. Most banks are inclined to shoulder the bulk of the supertax without passing it on to staff. So there should be relatively little for most bankers to complain about – especially with many benefiting from compensatory rises in basic pay. Bankers escape bonus blow - Jan-08 Editorial Comment: Held hostage by the City’s bankers - Jan-08 Investors must not pay, say shareholders - Jan-08 Sense of unease awaits financiers in Basel - Jan-08 UK Treasury to cash in as bonus tax fails - Jan-05 Bonus tax provokes new action - Jan-03 But that does not mean the City is safe, bank bosses warn. Asked in the FT questionnaire whether they would “consider diverting future expansion outside the UK and/or leaving London altogether”, no bank said “no”. All the banks said that certain activities were likely to be expanded elsewhere in future. This has nothing to do with actually avoiding the supertax – the levy applies to 2009 bonuses and is due to expire in April, with anti-avoidance measures to ensure banks do not simply pay bonuses later. Instead, it is evidence, critics say, of a steady chipping away at the foundations of the City. “The risk premium of being based in London has gone up,” says one top banker. “A couple of years ago colleagues of mine would say to me how much they loved London, what a great place it was to live,” says an American-born banker at a European investment bank. “Now they’re tired of being here. They feel under attack.” Trading is the most mobile investment bank business that could be shifted abroad. And while many banks have show-off, state-of-the-art trading floors in London – such as Bank of America Merrill Lynch’s at their European headquarters behind Saint Paul’s Cathedral – few would have any compunction about pragmatically shifting a portion of staff to more attractive financial centres. “A quarter of staff could be easily relocated,” says one European investment bank boss. He estimates that within six months, 5,000 to 10,000 City bankers could be shifted to an alternative European centre such as Frankfurt or Zurich. Already some bank bosses and human resources departments report a flurry of requests from London-based staff, particularly non-Britons, to shift abroad, typically to their home country. In practical terms, Swiss banks are probably the most flexible. Zurich is seen as an appealing city – pleasant, well-connected and with low taxes, where they already have a natural base.
255 Bankers say the US groups are less likely to pull out of London, given that American bosses would be uncomfortable about having a European hub in a non-English-speaking city. French banks, too, may be loath to shift more staff to Paris given President Nicolas Sarkozy’s pledge to introduce a similar bank tax back home. And many Deutsche bankers have been notoriously unenthusiastic about Frankfurt. There is also a willingness to give a new incoming Conservative government, which, if polls hold true, is expected to take office following elections due in May, a chance to change the atmosphere. Such factors are likely to limit the drain of banking talent from the City, headhunters believe. But that does not mean the bonus tax is victimless. If the banks’ estimates are right, the City will be paying the Treasury £5bn (€5.5bn, $7.9bn) in supertax – far in excess of the £550m estimated by the government last month and still way ahead of the £1bn-plus revised estimate, unofficially touted by Treasury insiders this week. If bankers do not end up footing the bill, it will eat into profits and reduce the potential dividend payments – much to the chagrin of shareholders. “I don’t see why we should bear the whole cost,” says one of the UK’s leading institutional investors. Despite that threat, there is a level of pragmatism among investors, who recognise that in the real world, banks cannot afford to reduce bonuses drastically for fear of losing staff to rivals or pushing business abroad. But Peter Montagnon, head of investment affairs at the Association of British Insurers, argues that the whole process has been made more complicated than it needs to be by the fact that “the UK is so far out on a limb in an international world. It would have been much less complicated if the government had acted with other international centres.” The FT quizzed 12 banks, Bank of America Merrill Lynch, Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Nomura, RBS and UBS. Goldman and JPMorgan did not respond. Patrick Jenkins and Kate Burgess To leave or not to leave January 8 2010 23:30 http://www.ft.com/cms/s/0/16485e9e-fc86-11de-bc51-00144feab49a.html
COMMENT Held hostage by the City’s bankers Published: January 8 2010 22:25 | Last updated: January 8 2010 22:25 The UK government’s tax on bankers’ bonuses was supposed to claw back some of the financial sector’s gains accrued thanks to taxpayer largesse during the crisis. The measure was flawed: it did not target fixed compensation in any way. But it was expected that this measure would encourage banks to refrain from handing out super-generous bonuses this year. On Saturday, FT research reveals that many banks are expected to continue cheerfully paying large bonuses. So rather than raising £550m, as the Treasury predicted, banks expect the levy to bring in between £4bn and £6bn. If only other government errors could yield such handsome returns.
256 The tax windfall highlights a chronic problem in banking. Shareholders, not bonus recipients, are expected to bear the cost of paying it, so turning the tax on bankers’ pay into a levy on bank equity. This would be evidence that big City institutions put management ahead of shareholders. This is hardly a novel complaint. Warren Buffett, the Omaha investment genius, had a decade- long involvement with Salomon Brothers – including a spell as chief executive and chairman. He encountered Wall Street’s approach to pay, and was staggered by it. “It was just so apparent that the whole thing was being run for the employees.” The UK government has already stated that this is a problem. Last year, Lord Myners, the City minister, said that the allocation of risk and reward between staff and owner “appeared tilted in favour of the executives”. The Walker review of corporate governance proposed mechanisms to force shareholders in financial companies to devote more attention to remuneration, in particular. Bank managers would insist that large compensation packages reflect the fact that if they were to skimp on pay, their rivals would steal their talent. But this concern cannot explain the breadth of the bonus culture. Not every employee being paid stellar compensation packages can be a star, or in need of enormously sharp incentives. Bank investors need to assert much tighter control of their possessions. The government, for its part, cannot repeat the supertax: the measure must remain a one-off, aimed at clawing back the proceeds of emergency aid. The state should, instead, introduce reforms to make sure that, in future, such special interventions will never be needed again. This will mean some regulation of bonuses to make sure that they are not being paid out by undercapitalised banks, nor to reward dangerous investment habits. The size of bonuses, however, is a matter that should be left to shareholders. After all, once the rescue measures are withdrawn, it will be investors’ money that the bankers are taking home. http://www.ft.com/cms/s/0/9871cd96-fc91-11de-bc51-00144feab49a.html
UK Investors must not pay, say shareholders By Published: January 8 2010 23:30 | Last updated: January 8 2010 23:30 The UK’s most influential shareholders have fired a shot over the bows of companies, warning boards against paying big bonuses and protecting directors from tax rises if investors end up meeting the bill. The Association of British Insurers has cautioned boards against signing off pay plans that would add to company costs and eat into shareholders’ returns.The ABI’s letter to the remuneration committee chairmen of the UK’s top 350 companies followed on the heels of a government announcement that it would impose a 50 per cent supertax on bankers’ bonuses of £25,000 or more and that it planned to raise the income tax rate for anyone earning more than £150,000 to 50 per cent. Investors are anxious that rather than cut pay-outs or pass the tax on to employees, banks will absorb the supertax on bonuses at the expense of dividends and earnings.
257 One top UK investor said: “We don’t expect companies to incur greater costs to improve the tax position of executives.” Structures designed to be tax efficient for staff should not bump up the company’s tax or wage bill, said the ABI in a letter reminding boards of their accountability to shareholders and the link between pay and strategy. The ABI pointed out the current economic climate had created challenges for remuneration policy and “it falls to remuneration committees to address these challenges”. It highlighted the potential reputation damage linked to tax-efficient schemes that taxed incentives as capital gains rather than income. The ABI’s letter was sent out as the annual round of meetings over pay kicked off between investors and companies such as Barclays. The ABI notes that meetings consultations to iron out disagreements picked up significantly last year, rising to 178 companies last year compared with 149 in 2007. Even so, 2009 was marked by a series of landmark battles and set a new record for shareholders failing to back companies’ plans. The remuneration reports of five UK companies, including Royal Dutch Shell and Royal Bank of Scotland, were voted down. Shareholders are concerned that boards this year will use discretion to make up for incentive schemes that fail to meet hurdles and rewarded directors regardless of performance. Pay structures ”should not focus excessively on the short term or promote inappropriate risk taking”, the ABI reminded boards. Investors are also concerned that pay might be measured against narrow comparatives rather than based on overall financial performance. The ABI said it had spotted a rising trend of companies looking at retention bonuses which it said ”rarely work”. It further warned remuneration committees that share or option grants when expressed as multiples of salary might result in excessive payments to directors after a substantial fall in shareprices. “Where this risk exists, grants should be scaled back.” Kate Burgess Investors must not pay, say shareholders http://www.ft.com/cms/s/0/8e9c47c6-fc85-11de- bc51-00144feab49a.html
258 EUROPE Sense of unease awaits financiers in Basel By Henny Sender in New York Published: January 8 2010 17:32 | Last updated: January 8 2010 17:32 Lex: BIS - Jan-07 Top banks invited to Basel risk talks - Jan-06 Opinion: Make the bankers share the losses - Jan-06 Opinion: Refocus the debate on essentials - Jan-04 Editorial: Third time lucky for Basel rules? - Dec-21 In depth: Beyond the financial crisis - Dec-23 As 2010 gets under way, the mood in the global financial system is starting to look sunnier: bank share prices are rising and credit markets booming amid optimism that the crisis is past. However, on Sunday in Switzerland, some of the world’s most powerful financiers will hold an annual closed-door meeting and this could produce a rather frosty tone. The Bank for International Settlements, the Basel-based body that is sometimes known as the “central bankers’ bank” because it plays a vital global co-ordinating role, is convening a group of senior financiers such as Stephen Green, HSBC chairman; Larry Fink, Blackrock founder; and executives from JPMorgan and Morgan Stanley. According to the private, pre-meeting notes circulated to participants, Basel officials remain uneasy about how the banking world is developing. First, the BIS frets that some large banks have still not really resolved the woes from the last crisis. “A fragile recovery, continuing challenges to the performance of credit portfolios and a looming surge in funding needs are key vulnerabilities,” the document states. “The overall outlook for banks’ credit exposures remains grim,” it adds, expressing concern about whether banks are engaging in amending loans on more favourable terms to avoid an increase in bad loans, a practice known as “evergreening”. Second, the BIS fears that banks could be exposing themselves to fresh dangers, as a result of the recent central bank injections. “The prolonged assurance of very cheap and ample funding may encourage excessive risk taking,” it adds. Thus, the BIS is not just pressing for more overhaul of the global regulatory system; it also wants banks to rethink some elements of their own business models, such as their assumption that size is valuable, or that the profit levels of recent years can be replicated again. “The return on equity targets that prevailed before the crisis were arguably unrealistic and encouraged higher leverage and risk-taking,” the report states, noting that lower target returns on equity probably ought to be encouraged. “The crisis has brought to light the shortcomings of integrated models [of large consolidated banks].” Such comments may provoke exasperation from some bankers at Sunday’s meeting, because many financiers fear that the screws on their industry are tightening too fast. “I do think there is a danger the BIS is guilty of grandstanding,” Bill Blain, co-head of fixed income at Matrix capital says. “Who elected them to tell bankers what returns on equity should be? Or what leverage levels should be?”
259 However, the BIS’s concerns are unlikely to be dismissed lightly. Some senior financiers privately share the BIS concerns about the lingering threat of toxic assets and the degree to which cheap liquidity is fuelling risk-taking. Moreover, the credibility of the organisation has risen in the past couple of years, partly because it was almost the only institution that publicly warned well before 2007 that the financial system was spinning out of control. Henny Sender Sense of unease awaits financiers in Basel January 8 2010 http://www.ft.com/cms/s/0/657b558c-fc79-11de-bc51-00144feab49a.html
COMPANIES Top banks invited to Basel risk talks By Henny Sender in New York Published: January 6 2010 23:30 | Last updated: January 6 2010 23:30 The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk- taking” that sparked the financial crisis. In its invitation, the BIS cited concerns that “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”. The BIS, known as the central banks’ bank, outlined in a restricted note to participants some specific proposals that it believes could create a healthier financial system. Those proposals including lowering return-on-equity targets for the banks as a way to discourage such risk taking. Private sector bank chiefs attending the meeting at the BIS in Basel include Larry Fink of BlackRock and Vikram Pandit of Citigroup . Lloyd Blankfein, Goldman Sachs chief executive, and Jamie Dimon, chief executive of JPMorgan Chase, were invited but are not planning to attend. The meeting comes at a moment of intense uncertainty, with the global economy’s tentative recovery shadowed by “the overhang of private-sector debt and rapidly rising public debt”, and high unemployment. “The concern here is that the prolonged assurance of very cheap and ample funding may encourage excessive risk-taking,” the BIS invitation note says. “For example, low financing costs coupled with a steep yield curve may make participants vulnerable to future increases in policy rates – a situation reminiscent of the 1994 bond market turbulence which followed the Federal Reserve’s exit from a prolonged period of low policy rates.” The note also expresses concern about deteriorating public finances and warned that doubt about fiscal prudence “could seriously disrupt bond markets if it triggered concerns about creditworthiness or inflation because of concerns with government incentives to inflate debt away.”
260 Among the charts included with the note is one indicating the cost of credit insurance against sovereign defaults. In the past, the BIS has invited the top chiefs of private-sector banks to such gatherings in Basel on a yearly basis. But such meetings have been more frequent recently. “These meetings are an attempt to bring a real world perspective to the deliberations of the wise men of the world,” one Federal Reserve official said. Central bankers “want to get a sense of what the markets are reacting to.” http://www.ft.com/cms/s/0/310b5c88-fb0d-11de-94d8-00144feab49a.html
COMMENT How to make the bankers share the losses By Neil Record Published: January 6 2010 19:54 | Last updated: January 6 2010 19:54 There are as many explanations for the causes of the credit crunch as there are economists, but some themes predominate: excessive leverage; inadequate capital; over-complex financial instruments; an asset bubble; and (pretty universally) the asymmetric incentives that arose from bankers’ bonus arrangements. Bankers were paid when the risks they took paid off, but were not penalised when their bets went sour. Since it can take years to be certain that bank risks are profits or losses, it proved too easy for them to take the cash on short-term gains but to have no responsibility for the consequences of their actions years later. There has been a proliferation of plans to fix this structural weakness of the banking system. But politicians and regulators have overlooked a really simple solution. Why not design a limited- liability model, where bankers become personally liable for the cumulative amount of their bonuses? Bankers who wish to receive a bonus above a threshold (say £50,000, or twice average earnings) would become personally liable for the amount of the bonus for a period, perhaps 10 years. They would sit between equity holders and other creditors of the bank – and so would be called upon should any bank find that its equity capital is wiped out by losses. In practice, this would mean their liability would be triggered by a government or other (private sector) rescue. If there turned out to be no rescue, then they would be liable to the liquidator. If there were a rescue, the rescuer would pay over support monies, and then reclaim them from the limited- liability bankers. The bankers would be released from this liability over time, but of course with every new bonus payment they would incur a new liability. By this mechanism, all senior bankers would have a rolling portfolio of liabilities to the extent of the cash they had taken out of the bank in bonuses. The tax treatment would have to be dealt with; I suggest the liability should be the amount of the pre-tax bonus, but if called, the banker would receive tax relief on any repayment. Bankers would have to be prevented from transferring substantial assets out of their own names until the liabilities were expunged, and would also have some residency and other restrictions to prevent them escaping their liabilities. Resignation or dismissal would not expunge the liabilities; bonus-repayment would (and would engender tax relief).
261 There would have to be anti-avoidance provisions to prevent large payments being notionally salaries not bonuses. This could easily be organised – for example, all bankers’ pay above £100,000 a year, or four times average earnings, could automatically fall into this regime. I would also suggest that bankers’ liability should not be an insurable risk; bankers would be prevented by law from insuring their exposure (just as one cannot insure against criminal penalties). As a principle this seems to embody enough incentives to change bankers’ behaviour. We know that unlimited-liability partner-owned banks had been a successful model for at least 200 years, but the scale of the capital requirements of large modern banks is now more than individual partners could provide. The 1999 flotation of Goldman Sachs in effect ended this ownership model, once used by many of the great names of Wall Street and the City of London. With this regime of banker liability we might not need any further radical banking sector regulatory changes. In particular, it could allow investment banking and retail deposit-taking to co-exist in the same banks. I see this as preferable to the dividing of the functions into separate retail banks and investment banks. If, however, the stakeholders (shareholders and liability- bearing bankers) were to decide that such a “narrow banking” division would improve their overall return-to-risk ratio, then it would happen without regulatory prompting. If I am right, then we might find that the banking sector characteristics that caused so much trouble this time round – low capital ratios, high loan-to-value ratios, high complexity and extensive securitisation and intermediation – become self-policing. It would not prevent future banking collapses, but it would much reduce the asymmetries that drove this last one. The idea would, of course, have to be accepted internationally for it to have any chance of implementation. The writer is a visiting fellow of Nuffield College, Oxford, and chairman and chief executive of Record Neil Record How to make the bankers share the losses January 6 2010 http://www.ft.com/cms/s/0/dda17cc4-fafa-11de-94d8-00144feab49a.html
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January 10, 2010 Banks Prepare for Bigger Bonuses, and Public’s Wrath By LOUISE STORY and ERIC DASH Everyone on Wall Street is fixated on The Number. The bank bonus season, that annual rite of big money and bigger egos, begins in earnest this week, and it looks as if it will be one of the largest and most controversial blowouts the industry has ever seen. Bank executives are grappling with a question that exasperates, even infuriates, many recession- weary Americans: Just how big should their paydays be? Despite calls for restraint from Washington and a chafed public, resurgent banks are preparing to pay out bonuses that rival those of the boom years. The haul, in cash and stock, will run into many billions of dollars. Industry executives acknowledge that the numbers being tossed around — six-, seven- and even eight-figure sums for some chief executives and top producers — will probably stun the many Americans still hurting from the financial collapse and ensuing Great Recession. Goldman Sachs is expected to pay its employees an average of about $595,000 apiece for 2009, one of the most profitable years in its 141-year history. Workers in the investment bank of JPMorgan Chase stand to collect about $463,000 on average. Many executives are bracing for more scrutiny of pay from Washington, as well as from officials like Andrew M. Cuomo, the attorney general of New York, who last year demanded that banks disclose details about their bonus payments. Some bankers worry that the United States, like Britain, might create an extra tax on bank bonuses, and Representative Dennis J. Kucinich, Democrat of Ohio, is proposing legislation to do so. Those worries aside, few banks are taking immediate steps to reduce bonuses substantially. Instead, Wall Street is confronting a dilemma of riches: How to wrap its eye-popping paychecks in a mantle of moderation. Because of the potential blowback, some major banks are adjusting their pay practices, paring or even eliminating some cash bonuses in favor of stock awards and reducing the portion of their revenue earmarked for pay. Some bank executives contend that financial institutions are beginning to recognize that they must recalibrate pay for a post-bailout world. “The debate has shifted in the last nine months or so from just ‘less cash, more stock’ to ‘what’s the overall number?’ ” said Robert P. Kelly, the chairman and chief executive of the Bank of New York Mellon. Like many other bank chiefs, Mr. Kelly favors rewarding employees with more long-term stock and less cash to tether their fortunes to the success of their companies. Though Wall Street bankers and traders earn six-figure base salaries, they generally receive most of their pay as a bonus based on the previous year’s performance. While average bonuses are expected to hover around half a million dollars, they will not be evenly distributed. Senior banking executives and top Wall Street producers expect to reap millions. Last year, the big winners were bond and currency traders, as well as investment bankers specializing in health care.
263 Even some industry veterans warn that such paydays could further tarnish the financial industry’s sullied reputation. John S. Reed, a founder of Citigroup, said Wall Street would not fully regain the public’s trust until banks scaled back bonuses for good — something that, to many, seems a distant prospect. “There is nothing I’ve seen that gives me the slightest feeling that these people have learned anything from the crisis,” Mr. Reed said. “They just don’t get it. They are off in a different world.” The power that the federal government once had over banker pay has waned in recent months as most big banks have started repaying the billions of dollars in federal aid that propped them up during the crisis. All have benefited from an array of federal programs and low interest rate policies that enabled the industry to roar back in profitability in 2009. This year, compensation will again eat up much of Wall Street’s revenue. During the first nine months of 2009, five of the largest banks that received federal aid — Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley — together set aside about $90 billion for compensation. That figure includes salaries, benefits and bonuses, but at several companies, bonuses make up more than half of compensation. Goldman broke with its peers in December and announced that its top 30 executives would be paid only in stock. Nearly everyone on Wall Street is waiting to see how much stock is awarded to Lloyd C. Blankfein, Goldman’s chairman and chief executive, who is a lightning rod for criticism over executive pay. In 2007, Mr. Blankfein was paid $68 million, a Wall Street record. He did not receive a bonus in 2008. Goldman put aside $16.7 billion for compensation during the first nine months of 2009. Responding to criticism over its pay practices, Goldman has already begun decreasing the percentage of revenue that it pays to employees. The bank set aside 50 percent in the first quarter, but that figure fell to 48 percent and then to 43 percent in the next two quarters. JPMorgan executives and board members have also been wrestling with how much pay is appropriate. “There are legitimate conflicts between the firm feeling like it is performing well and the public’s prevailing view that the Street was bailed out,” said one senior JPMorgan executive who was not authorized to speak for the company. JPMorgan’s investment bank, which employs about 25,000 people, has already reduced the share of revenue going to the compensation pool, from 40 percent in the first quarter to 37 percent in the third quarter. At Bank of America, traders and bankers are wondering how much Brian T. Moynihan, the bank’s new chief, will be awarded for 2010. Bank of America, which is still absorbing Merrill Lynch, is expected to pay large bonuses, given the bank’s sizable trading profits. Bank of America has also introduced provisions that would enable it to reclaim employees’ pay in the event that the bank’s business sours, and it is increasing the percentage of bonuses paid in the form of stock. “We’re paying for results, and there were some areas of the company that had terrific results, and they will be compensated for that,” said Bob Stickler, a Bank of America spokesman. At Morgan Stanley, which has had weaker trading revenue than the other banks, managers are focusing on how to pay stars in line with the industry. The bank created a pay program this year for its top 25 workers, tying a fifth of their deferred pay to metrics based on the company’s later performance.
264 A company spokesman, Mark Lake, said: “Morgan Stanley’s board and management clearly understands the extraordinary environment in which we operate and, as a result, have made a series of changes to the firm’s compensation practices.” The top 25 executives will be paid mostly in stock and deferred cash payments. John J. Mack, the chairman, is forgoing a bonus. He retired as chief executive at the end of 2009. At Citigroup, whose sprawling consumer banking business is still ailing, some managers were disappointed in recent weeks by the preliminary estimates of their bonus pools, according to people familiar with the matter. Citigroup’s overall 2009 bonus pool is expected to be about $5.3 billion, about the same as it was for 2008, although the bank has far fewer employees. The highest bonus awarded to a Citigroup executive is already known: The bank said in a regulatory filing last week that the head of its investment bank, John Havens, would receive $9 million in stock. But the bank’s chief executive, Vikram S. Pandit, is forgoing a bonus and taking a salary of just $1. http://www.nytimes.com/2010/01/10/business/10pay.html?hp
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Opinion
January 10, 2010 OP-ED COLUMNIST The Other Plot to Wreck America By FRANK RICH THERE may not be a person in America without a strong opinion about what coulda, shoulda been done to prevent the underwear bomber from boarding that Christmas flight to Detroit. In the years since 9/11, we’ve all become counterterrorists. But in the 16 months since that other calamity in downtown New York — the crash precipitated by the 9/15 failure of Lehman Brothers — most of us are still ignorant about what Warren Buffett called the “financial weapons of mass destruction” that wrecked our economy. Fluent as we are in Al Qaeda and body scanners, when it comes to synthetic C.D.O.’s and credit-default swaps, not so much. What we don’t know will hurt us, and quite possibly on a more devastating scale than any Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin. Without that reckoning, there will be no public clamor for serious reform of a financial system that was as cunningly breached as airline security at the Amsterdam airport. And without reform, another massive attack on our economic security is guaranteed. Now that it can count on government bailouts, Wall Street has more incentive than ever to pump up its risks — secure that it can keep the bonanzas while we get stuck with the losses. The window for change is rapidly closing. Health care, Afghanistan and the terrorism panic may have exhausted Washington’s already limited capacity for heavy lifting, especially in an election year. The White House’s chief economic hand, Lawrence Summers, has repeatedly announced that “everybody agrees that the recession is over” — which is technically true from an economist’s perspective and certainly true on Wall Street, where bailed-out banks are reporting record profits and bonuses. The contrary voices of Americans who have lost pay, jobs, homes and savings are either patronized or drowned out entirely by a political system where the banking lobby rules in both parties and the revolving door between finance and government never stops spinning. It’s against this backdrop that this week’s long-awaited initial public hearings of the Financial Crisis Inquiry Commission are so critical. This is the bipartisan panel that Congress mandated last spring to investigate the still murky story of what happened in the meltdown. Phil Angelides, the former California treasurer who is the inquiry’s chairman, told me in interviews late last year that he has been busy deploying a tough investigative staff and will not allow the proceedings to devolve into a typical blue-ribbon Beltway exercise in toothless bloviation. He wants to examine the financial sector’s “greed, stupidity, hubris and outright corruption” — from traders on the ground to the board room. “It’s important that we deliver new information,” he said. “We can’t just rehash what we’ve known to date.” He understands that if he fails to make news or to tell the story in a way that is comprehensible and compelling enough to arouse Americans to demand action, Wall Street and Washington will both keep moving on, unchallenged and unchastened.
266 Angelides gets it. But he has a tough act to follow: Ferdinand Pecora, the legendary prosecutor who served as chief counsel to the Senate committee that investigated the 1929 crash as F.D.R. took office. Pecora was a master of detail and drama. He riveted America even without the aid of television. His investigation led to indictments, jail sentences and, ultimately, key New Deal reforms — the creation of the Securities and Exchange Commission and the Glass-Steagall Act, designed to prevent the formation of banks too big to fail. As it happened, a major Pecora target was the chief executive of National City Bank, the institution that would grow up to be Citigroup. Among other transgressions, National City had repackaged bad Latin American debt as new securities that it then sold to easily suckered investors during the frenzied 1920s boom. Once disaster struck, the bank’s executives helped themselves to millions of dollars in interest-free loans. Yet their own employees had to keep ponying up salary deductions for decimated National City stock purchased at a heady precrash price. Trade bad Latin American debt for bad mortgage debt, and you have a partial portrait of Citigroup at the height of the housing bubble. The reckless Citi executives of our day may not have given themselves interest-free loans, but they often walked away with the short-term, illusionary profits while their employees were left with shredded jobs and 401(k)’s. Among those Citi executives was Robert Rubin, who, as the Clinton Treasury secretary, helped repeal the last vestiges of Glass-Steagall after years of Wall Street assault. Somewhere Pecora is turning in his grave Rubin has never apologized, let alone been held accountable. But he’s hardly alone. Even after all the country has gone through, the titans who fueled the bubble are heedless. In last Sunday’s Times, Sandy Weill, the former chief executive who built Citigroup (and recruited Rubin to its ranks), gave a remarkable interview to Katrina Brooker blaming his own hand-picked successor, Charles Prince, for his bank’s implosion. Weill said he preferred to be remembered for his philanthropy. Good luck with that. Among his causes is Carnegie Hall, where he is chairman of the board. To see how far American capitalism has fallen, contrast Weill with the giant who built Carnegie Hall. Not only is Andrew Carnegie remembered for far more epic and generous philanthropy than Weill’s — some 1,600 public libraries, just for starters — but also for creating a steel empire that actually helped build America’s industrial infrastructure in the late 19th century. At Citi, Weill built little more than a bloated gambling casino. As Paul Volcker, the regrettably powerless chairman of Obama’s Economic Recovery Advisory Board, said recently, there is not “one shred of neutral evidence” that any financial innovation of the past 20 years has led to economic growth. Citi, that “innovative” banking supermarket, destroyed far more wealth than Weill can or will ever give away. Even now — despite its near-death experience, despite the departures of Weill, Prince and Rubin — Citi remains as imperious as it was before 9/15. Its current chairman, Richard Parsons, was one of three executives (along with Lloyd Blankfein of Goldman Sachs and John Mack of Morgan Stanley) who failed to show up at the mid-December White House meeting where President Obama implored bankers to increase lending. (The trio blamed fog for forcing them to participate by speakerphone, but the weather hadn’t grounded their peers or Amtrak.) Last week, ABC World News was also stiffed by Citi, which refused to answer questions about its latest round of outrageous credit card rate increases and instead e-mailed a statement blaming its customers for “not paying back their loans.” This from a bank that still owes taxpayers $25 billion of its $45 billion handout! If Citi, among the most egregious of Wall Street reprobates, feels it can get away with business as usual, it’s because it fears no retribution. And it got more good news last week. Now that
267 Chris Dodd is vacating the Senate, his chairmanship of the Banking Committee may fall next year to Tim Johnson of South Dakota, home to Citi’s credit card operation. Johnson was the only Senate Democrat to vote against Congress’s recent bill policing credit card abuses. Though bad history shows every sign of repeating itself on Wall Street, it will take a near- miracle for Angelides to repeat Pecora’s triumph. Our zoo of financial skullduggery is far more complex, with many more moving pieces, than that of the 1920s. The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009. The firms under scrutiny can pay for as many lawyers as they need to stall between now and Dec. 15, deadline day for the commission’s report. More daunting still is the inquiry’s duty to reach into high places in the public sector as well as the private. The mystery of exactly what happened as TARP fell into place in the fateful fall of 2008 thickens by the day — especially the behind-closed-door machinations surrounding the government rescue of A.I.G. and its counterparties. Last week, a Republican congressman, Darrell Issa of California, released e-mail showing that officials at the New York Fed, then led by Timothy Geithner, pressured A.I.G. to delay disclosing to the S.E.C. and the public the details on the billions of bailout dollars it was funneling to its trading partners. In this backdoor rescue, taxpayers unknowingly awarded banks like Goldman 100 cents on the dollar for their bets on mortgage-backed securities. Why was our money used to make these high-flying gamblers whole while ordinary Americans received no such beneficence? Nothing less than complete transparency will connect the dots. Among the big-name witnesses that the Angelides commission has called for next week is Goldman’s Blankfein. Geithner, Henry Paulson and Ben Bernanke should be next. If they all skate away yet again by deflecting blame or mouthing pro forma mea culpas, it will be a sign that this inquiry, like so many other promises of reform since 9/15, is likely to leave Wall Street’s status quo largely intact. That’s the ticking-bomb scenario that truly imperils us all. FRANK RICH The Other Plot to Wreck America January 10, 2010 http://www.nytimes.com/2010/01/10/opinion/10rich.html
Frank Rich is an Op-Ed columnist for The New York Times. His weekly 1,500-word essay helped inaugurate the expanded opinion pages that the paper introduced in the Sunday Week in Review section in April 2005. Mr. Rich started as a columnist on the Op-Ed Page in January 1994. He first began writing his longer-form essays for the Op-Ed page in 1999, and from 1999 to 2003 was also a senior writer for The New York Times Magazine, a dual title that was a first for The Times. Before writing his column, Mr. Rich served as The Times’s chief drama critic beginning in 1980, the year he joined The Times. Fred R. Conrad/The New York Times
268 Opinion
January 10, 2010 EDITORIAL Are They Really? What’s with the apologies? Goldman Sachs’s Lloyd Blankfein caught his fellow titans by surprise in November, admitting that “we participated in things that were clearly wrong and have reason to regret.” That came less than two weeks after he infuriated pretty much everyone else by declaring that Goldman was “doing God’s work.” He was not the only banker indulging in the contrition thing. (In March, Bank of America’s Ken Lewis, who presided over the bungled acquisition of Merrill Lynch, issued his own apology and was still pushed out.) Now the former Time Warner chief executive Gerald Levin, who is not even a banker, has plunged into the zeitgeist. Mr. Levin issued a belated — by a decade — mea culpa for buying AOL and urged others to follow his lead. “I presided over the worst deal of the century, apparently,” Mr. Levin said. “I guess it’s time for those who are involved in companies to stand up and say: You know what, I’m solely responsible for it.” Wall Street has a lot to apologize for, but contrition would be more convincing if it came with accountability: a resignation or a decision to forswear bonuses and certainly a pledge to stop trying to block desperately needed financial reforms. Americans come as well equipped to apologize as anybody. Five minutes on the neighborhood playground will confirm that parents still try their best to instill in their children the merits of saying “I’m sorry.” True contrition is a rare thing in the American corner office, probably because when children become corporate executives they have lawyers who patiently explain how such good manners could get them in trouble in the land of legal liability. In bankers, this is compounded by a sense that they are truly doing God’s work — not merely gambling with taxpayers’ money. At play here, we suspect, are both tactics and a sense of history. Legend has it that during the reign of King Louis XVI, Marie Antoinette responded to her hungry subjects’ demand for bread by declaring, “Let them eat cake.” In hindsight, an apology might have been a better idea. Mr. Blankfein still has his job. EDITORIAL Are They Really? January 10, 2010 http://www.nytimes.com/2010/01/10/opinion/10sun3.html?ref=opinion
269 Opinion
January 10, 2010 EDITORIAL Health Reform, the States and Medicaid The country needs health care reform, and Congress should move quickly to pass legislation. But as House and Senate leaders work to forge a consensus bill for final approval, they should look for ways to lessen the Medicaid burden on hard-pressed state budgets — and ensure that relief is fairly apportioned. One of the important goals is to extend coverage to more low-income Americans. The bills quite sensibly require the states to expand Medicaid and offer them generous federal support to do so. Even then, the states — whose Medicaid budgets are already badly stretched — will have to put up substantial money of their own. Ideally, Congress should find some way to get more money to state Medicaid programs. But if that proves politically impossible, as seems likely, the states will have to bear part of the additional burden in what is, after all, a shared national enterprise. Their poorer citizens will benefit greatly. HOW DOES MEDICAID WORK?The program currently pays for health care and nursing home care for 50 million poor Americans. In fiscal year 2008, the federal government paid about 57 percent of the total $354 billion cost, with the states picking up the rest. Both bills would broaden eligibility, and their requirement that everyone obtain insurance should also push more currently eligible people to sign up. That is a good thing. It is important to remember that under the reform bills, all of these people would gain access to health insurance — either through Medicaid or through federally subsidized private insurance plans. Medicaid is a better deal for poor people because it typically charges much less in co- payments and premiums for a better package of benefits than private insurers are apt to provide. From an overall budgetary standpoint, Medicaid is also the cheapest way to insure people since it reimburses hospitals, doctors and other providers at a lower rate than private insurers do. The issue here is how much the states can and should pay for expanding Medicaid rolls. HOW WOULD IT CHANGE? Right now the states differ considerably on who is eligible for Medicaid. (Only a few states extend much coverage to poor, childless adults.) Both the House and the Senate versions would require the states to cover all poor people under age 65. The House version would set an income ceiling of 150 percent of the federal poverty level, or $33,000 for a family of four. The Senate bill would expand coverage only up to 133 percent of the federal poverty level, or $29,300 for a family of four. Our own preference would be to choose the higher ceiling for the benefit of more people. WHO PAYS? AND HOW MUCH? To ease the additional burden on the states, under both bills the federal government would pick up the entire tab for newly eligible enrollees for the first two or three years. After that the states would have to pick up part of the cost. The amount of federal support would differ for two categories of people. For those new enrollees who could have been covered under the state’s existing rules — but never enrolled — the federal government would pay its usual share, which varies depending on a state’s per capita income. In
270 fiscal year 2008, the federal government paid three-quarters of the program’s costs in Mississippi but only half the cost in New York and California. But for all “newly eligible” enrollees — those who were not covered by a state’s previous rules — the states would get a greatly enhanced match. That is appropriate since the goal is to enroll a lot more people. The House would have the federal government pay 91 percent of the costs of these newly eligible in every state. The Senate would pay 82 to 95 percent of the cost, depending on a state’s per capita income. We believe that per capita income is a poor measure of how much help a state needs, especially in states like New York and California, where a veneer of very- high-income people can skew the average income upward. The House approach seems fairer. A BIGGER DISPARITY. While both bills would provide enhanced matches for “newly eligible” Medicaid recipients, they have very different definitions of “new.” The House would count people who are already covered by Medicaid under so-called waiver programs, which are considered demonstration projects. The Senate bill would not. That may sound arcane, but it could make a huge difference. New York, which has large numbers of people in waiver programs, estimates that the Senate bill would cost it an additional $1 billion a year, while the House bill could actually save the state close to $4 billion a year. While good news for New York, that seems unfair. California, a state in comparable if not worse budgetary distress, would get no such relief for its previous expansions of Medicaid because they were mostly achieved through amendments to its state Medicaid plan, not the waiver process. State officials calculate that the reform bills would require it to put up $3 billion to $4 billion a year to cover additional enrollees. Instead of paying more for people already on the rolls, Congress should try to provide an enhanced share to all states for all new Medicaid enrollees, whether or not they were previously eligible. WHAT ABOUT THE LAGGARDS? Texas, a state that currently has far less generous Medicaid coverage, illustrates the problems that can confront even a laggard state. While it will get substantial federal help to pay for its “newly eligible” citizens, it estimates that it would still have to spend $20 billion to $24 billion over a decade to expand its Medicaid rolls. • There is no perfect answer to these problems other than providing a lot more federal money for Medicaid expansion. So far the Senate has provided extra money to win the votes of key senators, most notoriously by granting Nebraska full federal funding in perpetuity for all newly eligible people it enrolls. Ideally, that should be done for all states, as Senator Ben Nelson, under fire for his special deal, has recently suggested. That is not apt to happen. But surely Congress could find at least a little more money to ease the problems of California and other states that have already expanded their Medicaid rolls and now face crushing deficits. • This editorial is a part of a continuing series by The New York Times that is providing a comprehensive examination of the policy changes and politics behind the debate over health care reform. http://www.nytimes.com/2010/01/10/opinion/10sun1.html?ref=opinion
271 World
January 10, 2010 China Becomes Biggest Exporter By THE ASSOCIATED PRESS Filed at 3:49 a.m. ET BEIJING (AP) -- China overtook Germany as the world's top exporter after December exports jumped 17.7 percent for their first increase in 14 months, data showed Sunday, in another sign of China's rise as a global economic force. Exports for the last month of 2009 were $130.7 billion, the state Xinhua News Agency said, citing customs data. That raised total 2009 exports to $1.2 trillion, ahead of the 816 billion euros ($1.17 trillion) for Germany forecast by its foreign trade organization, BGA. China's new status is largely symbolic but reflects the ability of its resilient, low-cost manufacturers to keep selling abroad despite a slump in global consumer demand due to the financial crisis. December's rebound was an ''important turning point'' for exporters, a customs agency economist, Huang Guohua, said on state television, CCTV. ''We can say that China's export enterprises have completely emerged from their all-time low in exports,'' Huang said. Stronger foreign sales of Chinese goods could help to drive the country's recovery after demand plunged in 2008, forcing thousands of factories to close and throwing millions of laborers out of work. Boosted by a 4 trillion yuan ($586 billion) stimulus, China's economic expansion accelerated to 8.9 percent for the third quarter of 2009 and the government says full-year growth should be 8.3 percent. Economists and Germany's national chamber of commerce said earlier the country was likely to lose its longtime crown as top exporter. China is best known as a supplier of shoes, toys, furniture and other low-tech goods, while Germany exports machinery and other higher-value products. German commentators note that their country supplies the factory equipment used by top Chinese manufacturers. China surpassed the United States as the biggest auto market in 2009 and is on track to replace Japan as the world's second-largest economy soon. China passed Germany as the third-largest economy in 2007. China's trade surplus shrank by 34.2 percent in 2009 to $196.07 billion, Xinhua said. That reflected China's stronger demand for imported raw materials and consumer goods while the United States and other economies are struggling and demand is weak. The United States and other governments complain that part of China's export success is based on currency controls and improper subsidies that give its exporters an unfair advantage against foreign rivals. Washington has imposed anti-dumping duties on imports of Chinese-made steel pipes and some other goods, while the European Union has imposed curbs on Chinese shoes.
272 The U.S. and other governments also complain that Beijing keeps its currency, the yuan, undervalued. Beijing broke the yuan's link to the dollar in 2005 and it rose gradually until late 2008, but has been frozen since then against the U.S. currency in what economists say is an effort by Beijing to keep its exporters competitive. The dollar's weakness against the euro and some other currencies pulls down the yuan in markets that use them and makes Chinese goods even more attractive there, adding to China's trade surplus. Even though China overtook Germany as top exporter, CCTV said total 2009 Chinese trade fell 13.9 percent from 2008. China Becomes Biggest Exporter (AP) January 10, 2010 http://www.nytimes.com/aponline/2010/01/10/world/AP-AS-China-Trade.html?_r=1&hp
Opinion
January 10, 2010 OP-ED COLUMNIST Who’s Sleeping Now? By THOMAS L. FRIEDMAN Hong Kong C. H. Tung, the first Chinese-appointed chief executive of Hong Kong after the handover in 1997, offered me a three-sentence summary the other day of China’s modern economic history: “China was asleep during the Industrial Revolution. She was just waking during the Information Technology Revolution. She intends to participate fully in the Green Revolution.” I’ll say. Being in China right now I am more convinced than ever that when historians look back at the end of the first decade of the 21st century, they will say that the most important thing to happen was not the Great Recession, but China’s Green Leap Forward. The Beijing leadership clearly understands that the E.T. — Energy Technology — revolution is both a necessity and an opportunity, and they do not intend to miss it. We, by contrast, intend to fix Afghanistan. Have a nice day. O.K., that was a cheap shot. But here’s one that isn’t: Andy Grove, co-founder of Intel, liked to say that companies come to “strategic inflection points,” where the fundamentals of a business change and they either make the hard decision to invest in a down cycle and take a more promising trajectory or do nothing and wither. The same is true for countries. The U.S. is at just such a strategic inflection point. We are either going to put in place a price on carbon and the right regulatory incentives to ensure that America is China’s main competitor/partner in the E.T. revolution, or we are going to gradually cede this industry to Beijing and the good jobs and energy security that would go with it. Is President Obama going to finish health care and then put aside the pending energy legislation — and carbon pricing — that Congress has already passed in order to get through the midterms without Republicans screaming “new taxes?” Or is he going to seize this moment before the midterms — possibly his last window to put together a majority in the Senate, including some
273 Republicans, for a price on carbon — and put in place a real U.S. engine for clean energy innovation and energy security? I’ve been stunned to learn about the sheer volume of wind, solar, mass transit, nuclear and more efficient coal-burning projects that have sprouted in China in just the last year. Here’s e-mail from Bill Gross, who runs eSolar, a promising California solar-thermal start-up: On Saturday, in Beijing, said Gross, he announced “the biggest solar-thermal deal ever. It’s a 2 gigawatt, $5 billion deal to build plants in China using our California-based technology. China is being even more aggressive than the U.S. We applied for a [U.S. Department of Energy] loan for a 92 megawatt project in New Mexico, and in less time than it took them to do stage 1 of the application review, China signs, approves, and is ready to begin construction this year on a 20 times bigger project!” Yes, climate change is a concern for Beijing, but more immediately China’s leaders know that their country is in the midst of the biggest migration of people from the countryside to urban centers in the history of mankind. This is creating a surge in energy demand, which China is determined to meet with cleaner, homegrown sources so that its future economy will be less vulnerable to supply shocks and so it doesn’t pollute itself to death. In the last year alone, so many new solar panel makers emerged in China that the price of solar power has fallen from roughly 59 cents a kilowatt hour to 16 cents, according to The Times’s bureau chief here, Keith Bradsher. Meanwhile, China last week tested the fastest bullet train in the world — 217 miles per hour — from Wuhan to Guangzhou. As Bradsher noted, China “has nearly finished the construction of a high-speed rail route from Beijing to Shanghai at a cost of $23.5 billion. Trains will cover the 700-mile route in just five hours, compared with 12 hours today. By comparison, Amtrak trains require at least 18 hours to travel a similar distance from New York to Chicago.” China is also engaged in the world’s most rapid expansion of nuclear power. It is expected to build some 50 new nuclear reactors by 2020; the rest of the world combined might build 15. “By the end of this decade, China will be dominating global production of the whole range of power equipment,” said Andrew Brandler, the C.E.O. of the CLP Group, Hong Kong’s largest power utility. In the process, China is going to make clean power technologies cheaper for itself and everyone else. But even Chinese experts will tell you that it will all happen faster and more effectively if China and America work together — with the U.S. specializing in energy research and innovation, at which China is still weak, as well as in venture investing and servicing of new clean technologies, and with China specializing in mass production. This is a strategic inflection point. It is clear that if we, America, care about our energy security, economic strength and environmental quality we need to put in place a long-term carbon price that stimulates and rewards clean power innovation. We can’t afford to be asleep with an invigorated China wide awake. THOMAS L. FRIEDMAN Who’s Sleeping Now? January 10, 2010 http://www.nytimes.com/2010/01/10/opinion/10friedman.html
274 REPORTAJE: Primer plano Bernanke, ¿héroe o villano? El presidente de la Reserva Federal no vio llegar la crisis, pero la ha combatido con acierto SANDRO POZZI 10/01/2010 Si hay alguien que sabe por lo que pasa Ben Bernanke, es Paul Volcker. Su reelección como presidente de la Reserva Federal fue la más controvertida que se recuerda. Su nominación se produjo con las heridas sangrantes de una profunda recesión. Dos décadas después, el profesor de Princeton se ha convertido en el saco de boxeo hacia el que se dirige la frustración por un paro superior al 10% y por el rescate masivo de la banca. La popularidad de Bernanke está perdiendo enteros de una forma preocupante. Y el momento no puede ser más inoportuno: a tres semanas de que venza su mandato, con la reforma del marco regulador financiero negociándose en el Senado y la economía en una fase incipiente de recuperación. Además, es año electoral en Estados Unidos y muchos senadores se escudan en la rabia de sus electores para garantizarse así el asiento en noviembre. Tras el receso navideño, el Senado contará con poco más de nueve días para votar en pleno. Una cuarta parte de sus miembros estaría en contra de su reelección, en su mayoría republicanos, los mismos que hace cuatro años le colocaron en la presidencia de la Fed para suceder a Alan Greenspan. Y por si la pérdida de apoyos políticos no es suficiente para crear incertidumbre, el independiente Bernard Sanders propone que el proceso se suspenda. Volcker, ahora asesor de la Administración de Obama, recibió 16 noes en su reconfirmación en 1983. Ben Bernanke lo tiene peor y podría doblar ese número si los senadores deciden votar escuchando a Main Street, al ciudadano. Un 21% de los estadounidenses está a favor de que siga cuatro años, según Rasmussen Report. El 41% quiere una cara nueva. Si se extrapolan esos números al pleno, el maestro podría llegar a recibir entre 35 y 40 noes. Christopher Dodd, presidente del comité financiero, que se retira, confía en que sea posible hacerlo antes de la fecha guillotina del 31 de enero. Si para entonces no estuviera confirmado, podría presidir el consejo de gobernadores "pro tempore", como pasó con Marriner Eccles (1948) y el propio Alan Greenspan (1996). Pero si por falta de un apoyo sólido optara por retirarse, el vicepresidente Donald Kohn tomaría su lugar hasta dar con un sustituto. Nadie quiere pensar en este extremo. Pero la retórica que rodea el proceso de reelección crea dudas en torno al apoyo político que tendrá Bernanke para comandar la Fed en la nueva estructura del sistema de supervisión, y temen que su credibilidad se vea afectada de una forma sustancial. Los que le apoyan, como Dodd, dejan claro que es como reconocimiento a la creatividad y agresividad con la que actuó para evitar que EE UU cayera en otra depresión. Bernanke era presidente de la Fed cuando el boom inmobiliario llegó a su punto más alto, antes de reventar en el verano de 2007. Es decir, tuvo el margen de tiempo suficiente para adoptar alguna acción. Cuando Greenspan le cedió el testigo en febrero de 2006, la escalada de tipos estaba llegando a fin tras dos años de subidas. Hubo tres alzas más de un cuarto de punto, hasta alcanzar el 5,25% a final de junio de ese año. Y ahí se quedaron un año. La prioridad, dijo, era mantener la inflación y el desempleo bajos. Si debía haber subido más los tipos, para contener la expansión de la burbuja, o bajarlos, para que no reventara, es algo en discusión. Pero lo que no hizo fue elaborar planes de contingencia por si estallaba, ni alertó de
275 los peligros que amenazaban a la economía y, como regulador, fue incapaz de reconocer los problemas que acosaban a los bancos en su balance. "No esperamos que el mercado de las hipotecas subprime afecte de forma significativa al resto de la economía", dijo en mayo de 2007. Dos años antes, cuando presidía el consejo de asesores económicos de la Administración de Bush, llegó a decir que la burbuja inmobiliaria era una "posibilidad bastante improbable". Era lo mismo que pensaba Greenspan, que nunca mostró gran preocupación por lo que acabó siendo el epicentro del terremoto financiero e incluso teorizó sobre un supuesto cambio de paradigma en que los tipos bajos ya no suponían el riesgo de alimentar burbujas. Al no tener plan de emergencia desarrollado, dicen los analistas, la Fed no puedo actuar de manera más rápida y coherente frente a la crisis. Tampoco protegió de forma adecuada al consumidor ante los productos hipotecarios exóticos que ofrecían los bancos. Otros le critican no haber dejado actuar al mercado libremente, en alusión al rescate de Bearn Stearns, AIG, Merrill Lynch o Citigroup. Y están los que le reprochan no haber hecho más para combatir el paro, y que se limitara en los primeros balbuceos de la crisis a ayudar sólo a la banca. "Usted es la definición del riesgo moral", le espetó el republicano Jim Bunning, el más beligerante entre los senadores y que no pierde oportunidad para echar más gasolina al fuego. Cree que su actuación en la intervención de AIG es "una razón más que suficiente para mandarlo de vuelta a Princeton". Los senadores echan la culpa a Bernanke por lo peor de la crisis, y Bernanke se la echa a ellos. Hace una semana, respondió en Atlanta a las críticas que sugieren que la política de dinero ultrabarato entre 2001 y 2005 fue la causa de la burbuja inmobiliaria. Negó la mayor. Y con un lenguaje duro, defendió su gestión y la de su predecesor, diciendo que si hubiera una mejor supervisión se habría evitado la proliferación de hipotecas basura. John Taylor, creador de una de las teorías que guían la política monetaria, cuestiona la reflexión de Ben Bernanke. "Los bajos tipos fueron un factor en la burbuja y su posterior estallido", dijo ante el mismo foro, mientras reiteraba que esta política "elevó mucho la asunción de riesgos". Lo piensa igual Dean Baker, del Center for Economic and Policy Research. "No sé cómo puede negar su culpabilidad". Ya en agosto de 2007, cuando la crisis hipotecaria mostraba sus colmillos, Bernanke dijo que "era una mala idea" que la autoridad monetaria actuase como árbitro en el precio de los activos. "La Fed no dispone de información mejor que otros en el mercado para decir cuál es el valor correcto de un activo". Y en este punto opinó que lo mejor era poner más atención en la supervisión de los bancos, para asegurar que adoptan políticas sanas. Si hubiera optado por identificar o desinflar burbujas, el alza de tipos habría minado la incipiente recuperación tras la recesión de 2001. Tanto Bernanke como Greenspan advirtieron en el pasado que el Banco Central no dispone de muchas opciones para mitigar posibles inestabilidades asociadas a estas espirales. Es una opinión que también comparte Barney Frank, presidente del comité bancario de la Cámara de Representantes. "No se pueden desinflar burbujas sin desinflar la economía", opina el congresista demócrata, que también está de acuerdo en que debe ser la regulación, y no la política monetaria, la clave para prevenirlas en el futuro. Pero Frank recuerda que ya en 1994 se le dio poder a la Fed para supervisar el negocio hipotecario. Pero entonces Greenspan creyó que debía dejar actuar al mercado. Douglas Elliott, economista de la Brookings Institution, cree que los senadores "tienen motivos para estar enfadados" y opina que es "correcto" atribuir parte de la culpa de la crisis a la Fed.
276 Pero espera que reflexionen antes de votar, y pongan en la balanza los pros y los contras. "Línchenlo si quieren. Pero reconfírmenlo", clama. Para Elliott es muy difícil encontrar a alguien que no hubiera cometido errores en los años de la burbuja y cree que cambiar al presidente "pone en cuestión las acciones emprendidas". "La cosa podría haber sido peor sin Ben Bernanke", opinan los editores de la revista Time, en la explicación de por qué lo eligieron personaje del año. Es lo que piensa también Barack Obama y así lo expresó cuando en agosto le renovó su confianza para que siga en la Fed. Ensalzó su experiencia única como estudioso de la Gran Depresión, unas credenciales que en el momento de su nombramiento, con la economía creciendo a fuerte ritmo, parecían exóticas. Pero que le han permitido identificar los paralelismos y las diferencias entre los dos eventos y actuar de forma muy agresiva, evitando pánicos bancarios, bajando los tipos al 0% e inundando el mercado de liquidez dándole a la máquina de hacer dinero mediante la compra de activos, incluida la deuda pública. Pocos discuten que esa actuación decidida y valiente, de una dimensión sin precedentes, ha conjurado el riesgo de una depresión y ha facilitado el camino para la recuperación de la economía. Ahora lo que se teme es que las inyecciones masivas de liquidez adoptadas desde octubre de 2008 sean el germen de una nueva crisis. No es un debate sólo interno en Estados Unidos. También externo. Desde Europa y Asia, especialmente China, opinan que mantener los tipos de interés tan bajos durante tanto tiempo está creando una nueva burbuja. Y por eso reclaman a la Fed que use la política monetaria para evitar otro episodio similar. De hecho, la atención en este momento, creen los analistas, no debe concentrarse en el pasado sino en la habilidad del presidente de la Fed para desmantelar el apoyo masivo al sector financiero y a la economía, para evitar una segunda recesión o que la inflación enseñe sus garras. La misión, coinciden, es complicada, porque Bernanke debe medir muy bien en qué momento y con qué intensidad avanza hacia la normalidad monetaria. Wall Street ve a Ben Bernanke como el mejor cualificado para ello, porque conoce cómo funcionan las medidas de emergencia activadas desde octubre de 2008. La Reserva Federal, a partir de los discursos de sus gobernadores, tiene claro que deberá empezar a retirar los estímulos "bastante antes" de que la actividad económica retome su pleno potencial, pero eso no quiere decir que los tipos vayan a subir pronto en Estados Unidos, sino que se empezará con una retirada gradual de otras medidas extraordinarias de liquidez. "La experiencia que Bernanke ha tenido durante el último año y medio le hacen de lejos la persona mejor preparada para liderar la Fed durante los próximos años", opina el senador republicano Bob Corker, de los pocos entre las filas conservadoras que se declaran públicamente a favor de la reelección. El presidente de la Fed tiene lanzada una verdadera campaña de relaciones públicas para conseguirlo, con entrevistas televisadas en horario de máxima audiencia, artículos y reuniones con los legisladores. Los analistas coinciden en que Bernanke lideró claramente la lucha contra la crisis cuando las cosas se pusieron muy feas tras el colapso de Lehman Brothers. Y aprecian que reconociera muchos de los errores que cometió al manejar la economía, supervisar a los bancos y proteger al consumidor frente a los abusos. Son, además, fallos o deficiencias compartidas por otras agencias reguladoras, el Tesoro y el mismísimo Congreso de Estados Unidos. Pero por si no fuera bastante, en Estados Unidos se vive una verdadera batalla política por quién debe controlar la Fed y para delimitar su campo de acción. La reforma que propone Dodd contempla quitarle poderes, para limitar su actuación al campo de la política monetaria y poder auditar su trabajo. Como no es de extrañar, Bernanke se opone a la idea, no sólo por defender la independencia futura de la Fed, sino porque cree que eso hará menos efectiva la supervisión
277 futura. Ésa es una batalla que trasciende a Bernanke. ¿Será la Reserva Federal capaz de prevenir y combatir a tiempo la próxima burbuja? http://www.elpais.com/articulo/primer/plano/Bernanke/heroe/villano/elpepueconeg/20100110elp neglse_2/Tes EDITORIAL La soledad de Bernanke 10/01/2010 Quien pretenda entender la racionalidad de las dificultades políticas que ha de vencer Ben Bernanke para ser reelegido presidente de la Reserva Federal (Fed) debería tener en cuenta la complejidad del debate económico en Estados Unidos. Frente a la indigencia de las discusiones sobre política económica en España, limitadas a huecas declaraciones sobre la prioridad de la protección social que recaban unos, siempre en la estratosfera genérica de la defensa del Estado del bienestar, o la grotesca defensa de la mutilación del gasto público que predican otros -para quejarse a continuación de que "falta Estado"-, en el paisaje político americano se alimenta incesantemente la contraposición de instrumentos de política económica desde intereses económicos bien organizados. Main Street (la economía industrial o real) defiende sus posiciones frente a Wall Street (la economía financiera), se cavan trincheras a favor de los programas de estímulo frente a las de quienes defienden la contención del déficit federal y algunos economistas explican la crisis financiera por la incompetente política monetaria de Greenspan y Bernanke mientras otros culpan del desastre a la débil regulación. Puede suceder incluso que esas u otras diferencias, a veces capitales, a veces de matiz, se den entre votantes de un mismo partido y nadie se ruboriza por ello. La reelección de Bernanke pende de un hilo por obvios motivos políticos (es año electoral), pero sobre todo porque hay argumentos (eso sí, manejados con un evidente sectarismo) en contra de su gestión al frente de la Fed. Bernanke no detectó a tiempo el riesgo gravísimo de la burbuja inmobiliaria, minusvaloró las consecuencias de las hipotecas subprime y se mostró demasiado renuente a intervenir en el mercado bancario con el argumento, inmaculado, pero políticamente letal, de que la Fed "no dispone de mejor información que otros para decir cuál es el valor correcto de un activo". Estas imputaciones pueden extenderse a su predecesor, Alan Greenspan, absurdamente convencido de que la sofisticada ingeniería financiera de seguros y reaseguros de las activos traficados y revalorizados era la vacuna infalible para prevenir el estallido de la burbuja hipotecaria. Pero el resto de los cargos que presenta el Partido Republicano no soporta el peso de las pruebas. La política Bernanke, consistente en inundar de liquidez los mercados, era la más segura para cortar la amenaza de deflación, que, con razón o sin ella, se había convertido en la pesadilla recurrente de todas las voces económicas estadounidenses y algunas europeas. Algo tendrá la táctica de la liquidez exuberante de Bernanke cuando hasta un cruzado del ascetismo monetario como Jean Claude Trichet se apresuró a bendecirla. Si la prioridad era la deflación y el riesgo era catastrófico, mal puede argumentarse ahora que los océanos de liquidez van a generar inflación. Por otra parte, las discusiones sobre política monetaria, siempre interesantes, destilan pocas certezas. Todavía se discute en las cátedras si en 1929 hubiese sido más acertado subir los tipos de interés para sofocar el dislocado crecimiento de la Bolsa o bajarlos para frenar la entrada de dinero caliente. A Bernanke se le podrá acusar de que no vio llegar el temporal, pero no de que le haya temblado el pulso para minimizar los daños. http://www.elpais.com/articulo/primer/plano/soledad/Bernanke/elpepueconeg/20100110elpnegls e_1/Tes
278 Versión para imprimir
TRIBUNA: Laboratorio de ideas J. BRADFORD DELONG La justicia del rescate financiero J. BRADFORD DELONG 10/01/2010 Quizá la mejor manera de analizar una crisis financiera sea considerarla un colapso en la tolerancia del riesgo por parte de los inversores en los mercados financieros privados. Tal vez el colapso surja de pésimos controles internos en las firmas financieras que, protegidas por garantías gubernamentales implícitas, prodigan a sus empleados enormes recompensas a cambio de un comportamiento de riesgo. O quizá una larga racha de buena suerte haya dejado al mercado financiero en manos de optimistas disparatados que finalmente lo descifraron. O quizá simplemente surja de un pánico irracional. Cualquiera que fuera la causa, cuando sucumbe la tolerancia del riesgo del mercado, también lo hacen los precios de los activos financieros de riesgo. Todos saben que hay inmensas pérdidas no realizadas en los activos financieros, pero nadie está seguro de saber dónde están esas pérdidas. Comprar -o incluso tener- activos riesgosos en una situación semejante es una receta para el desastre financiero. Al igual que comprar o tener acciones de empresas que pueden tener activos riesgosos, más allá de lo "seguras" que antes podían parecer las acciones de una empresa. Al resto de nosotros, esta caída de los precios de los activos financieros riesgosos no nos preocuparía excesivamente si no fuera por la confusión que generó en el sistema de precios, que le está enviando un mensaje peculiar a la economía real. El sistema de precios está diciendo: cierren las actividades de producción de riesgo y no emprendan ninguna actividad nueva que pudiera resultar de riesgo. Sin embargo, no hay suficientes empresas seguras y sólidas que puedan absorber a todos los trabajadores despedidos de las empresas de riesgo. Y si la caída de los salarios nominales es una señal de que hay un exceso de oferta de mano de obra, las cosas se ponen aún peor. La deflación general elimina el capital de cada vez más intermediarios financieros, y hace que una porción aún mayor de activos que antes se consideraban seguros se vuelvan de riesgo. Desde 1825, la respuesta convencional de los bancos centrales en estas situaciones -excepto durante la Gran Depresión de los años treinta- siempre fue la misma: aumentar y respaldar los precios de los activos financieros con riesgo, e impedir que los mercados le envíen una señal a la economía real de cerrar las empresas de riesgo y evitar las inversiones de riesgo. Esta respuesta es entendible que sea polémica, ya que recompensa a quienes apuestan a activos arriesgados, muchos de los cuales aceptaron el riesgo con los ojos abiertos y hoy deben asumir cierta responsabilidad por haber causado la crisis. Pero un rescate efectivo no se puede hacer de otra manera. Una política que deja empobrecidos a los dueños de activos financieros con riesgo es una política que pone un cerrojo al dinamismo en la economía real. El problema político se puede resolver: como observó recientemente Don Kohn, vicepresidente de la Reserva Federal, enseñarles a unos pocos miles de financieros irresponsables a no especular excesivamente es mucho menos importante que asegurar los empleos de millones de norteamericanos y decenas de millones de personas en el mundo. Las operaciones de rescate financiero que benefician incluso a quienes no lo merecen pueden resultar aceptables si benefician a todos -incluso si quienes no lo merecen obtienen más beneficios de los que les corresponden.
279 Lo que no se puede aceptar son las operaciones de rescate financiero que benefician a quienes no lo merecen y ocasionan pérdidas a otros grupos importantes -como los contribuyentes y los asalariados-. Y ésa, desafortunadamente, es la percepción que tienen muchos hoy, sobre todo en Estados Unidos. Es fácil entender por qué. Cuando el candidato a la vicepresidencia Jack Kemp atacó al vicepresidente Al Gore en 1996 por la decisión de la Administración de Clinton de rescatar al Gobierno irresponsable de México durante la crisis financiera de 1994-1995, Gore respondió que EE UU ganó 1.500 millones de dólares con el trato. De la misma manera, el secretario del Tesoro de Clinton, Robert Rubin, y el director del FMI, Michel Camdessus, fueron atacados por comprometer dinero público para rescatar a bancos de Nueva York que les habían otorgado préstamos a irresponsables del este de Asia en 1997-1998. Ellos respondieron que no habían rescatado al actor especulativo verdaderamente nefasto, Rusia; que habían "comprometido", no rescatado, a los bancos de Nueva York, exigiéndoles que entregaran dinero adicional para respaldar la economía de Corea del Sur, y que todos se habían beneficiado masivamente, porque se había evitado una recesión global. Hoy día, en cambio, el Gobierno norteamericano no puede esgrimir ninguno de estos argumentos. Los funcionarios no pueden decir que se ha evitado una recesión global; que "comprometieron" a los bancos; que -con excepción de Lehman Brothers y Bear Stearns- forzaron a los actores especulativos nefastos a la quiebra, o que el Gobierno ganó dinero con el trato. Es cierto que las políticas del sector bancario que se implementaron fueron buenas -o al menos mejores que no hacer nada-. Pero la certeza de que las cosas habrían sido mucho peores si se hubiera adoptado una estrategia de no intervención, a la Andrew Mellon, el secretario del Tesoro republicano, en 1930-1931, no es lo suficientemente concreta como para alterar las percepciones públicas. Lo que sí es bastante concreto son los crecientes sobresueldos de los banqueros y una economía real que sigue perdiendo empleos.
Copyright: Project Syndicate, 2009. www.project-syndicate.org. http://www.elpais.com/articulo/primer/plano/justicia/rescate/financiero/elpepueconeg/20100110e lpneglse_6/Tes
TRIBUNA: Laboratorio de ideas KENNETH ROGOFF Grandes maestros y crecimiento mundial KENNETH ROGOFF 10/01/2010 Ahora que la economía sale cojeando de la última década para entrar en una nueva en 2010, ¿cuál será el próximo gran motor del crecimiento mundial? Por aquí se apuesta por la de la "decena", que será una década en la que la inteligencia artificial alcanzará la velocidad de escape y empezará a tener una influencia económica equiparable a la irrupción de la India y China. Reconozco que mi perspectiva está muy condicionada por los acontecimientos del mundo del ajedrez, un juego que antes practicaba como profesional y que todavía sigo a distancia. Aunque
280 especial, el ajedrez por ordenador ofrece a pesar de todo una ventana para observar la evolución tecnológica y un barómetro del modo en que la gente podría adaptarse a ella. Un poco de historia podría venir bien. En 1996 y 1997, el campeón mundial de ajedrez, Gary Kaspárov, jugó un par de partidas contra un ordenador de IBM llamado Deep Blue. En aquella época, Kaspárov dominaba el ajedrez mundial del mismo modo en que Tiger Woods -al menos hasta hace poco- ha dominado el golf. En la competición de 1996, Deep Blue asombró al campeón venciéndole en la primera partida. Pero Kaspárov se adaptó rápidamente para explotar la debilidad del ordenador en la planificación estratégica a largo plazo, donde su juicio e intuición parecían superar el conteo mecánico del ordenador. Desafortunadamente, el extremadamente confiado Kaspárov no se tomó a Deep Blue lo bastante en serio en la revancha de 1997. Deep Blue aplastó al campeón, y ganó la competición por 3,5 a 2,5. Muchos analistas han afirmado que el triunfo de Deep Blue es uno de los acontecimientos más importantes del siglo XX. Quizá Kaspárov habría ganado la revancha si ésta se hubiese prolongado 24 partidas (por entonces, la duración habitual de los campeonatos mundiales). Pero durante los años siguientes, aun cuando los humanos aprendían de los ordenadores, éstos avanzaban a un ritmo más rápido. Con procesadores cada vez más potentes, los jugadores virtuales de ajedrez desarrollaron tanto la capacidad de anticiparse en sus cálculos que la distinción entre cálculos tácticos a corto plazo y planificación estratégica a largo plazo dejó de estar clara. Al mismo tiempo, los programas de ordenador empezaron a explotar enormes bases de datos de juegos entre grandes maestros (el título más alto en el ajedrez), utilizando los resultados de las partidas humanas para extrapolar qué movimientos tenían más probabilidades de éxito. Pronto quedó claro que hasta los mejores jugadores de ajedrez humanos tendrían pocas posibilidades de conseguir algo más que unas tablas ocasionales. Actualmente, los programas de ajedrez han llegado a ser tan buenos que hasta los grandes maestros tienen a veces dificultades para comprender la lógica que hay tras sus movimientos. En las revistas de ajedrez se ven a menudo comentarios de importantes jugadores, que dicen cosas como: "Mi amigo virtual dice que debería haber movido el rey en lugar de la reina, pero sigo pensando que he hecho el mejor movimiento humano que era posible". Y la cosa se pone aún peor. Muchos programas de ordenador disponibles en las tiendas pueden configurarse para imitar los estilos de los grandes maestros hasta un punto que resulta casi increíble. De hecho, los programas de ajedrez están ahora muy cerca de superar la última prueba para la inteligencia artificial propuesta por el matemático británico Alan Turing, ya fallecido: ¿puede un humano que converse con la máquina saber que no es humana? Yo, desde luego, no. Irónicamente, como el fraude con la ayuda de ordenadores está cada vez más presente en los torneos de ajedrez (con acusaciones que alcanzan los niveles más altos), el principal dispositivo de detección requiere el uso de otro ordenador. Solamente una máquina puede saber a ciencia cierta lo que otro ordenador haría en una situación determinada. Quizá si Turing estuviese vivo hoy día, definiría la inteligencia artificial como la incapacidad de un ordenador para saber si otra máquina es humana. Así que ¿ha dejado todo esto sin trabajo a los jugadores de ajedrez? La respuesta es "todavía no", lo cual resulta alentador. De hecho, en cierto sentido, el ajedrez es tan popular y tiene tanto éxito hoy como en cualquier momento de las últimas décadas. El ajedrez se presta muy bien al juego en Internet, y los aficionados pueden seguir los torneos de máxima categoría en tiempo real, a menudo con comentarios. La tecnología ha contribuido enormemente a universalizar el ajedrez: el indio Vishy Anand es ahora el primer campeón mundial asiático y el atractivo joven noruego
281 Magnus Carlson tiene el mismo estatus que una estrella de rock. El hombre y la máquina han aprendido a coexistir, por ahora. Por supuesto, esto es una pequeña muestra de los cambios mayores que podemos esperar. Los horribles sistemas informatizados de atención telefónica que todos padecemos ahora podrían mejorar realmente y puedo imaginar que algún día lleguemos a preferir de hecho a los operadores digitales antes que a los humanos. Puede que en 50 años los ordenadores hagan de todo, desde conducir taxis a realizar intervenciones quirúrgicas rutinarias. Antes de llegar a eso la inteligencia artificial transformará la educación superior y hará posible que una formación universitaria de primera categoría esté al alcance de la población general, incluida la de los países pobres en vías de desarrollo. Y, naturalmente, hay aplicaciones más prosaicas pero cruciales de la inteligencia artificial en todas partes, desde la gestión de la electrónica y la iluminación de nuestras casas hasta la aparición de "rejillas inteligentes" para el agua y la electricidad, que contribuirán a controlar éstos y otros sistemas para reducir los residuos. En resumen, no comparto el punto de vista de muchos que afirman que, después de Internet y el ordenador personal, habrá que esperar mucho hasta la próxima innovación que genere cambios paradigmáticos. La inteligencia artificial proporcionará el impulso que hará avanzar a la década de la decena. De modo que, a pesar de un mal comienzo con la crisis financiera (la cual seguirá ralentizando el crecimiento mundial este año y el que viene), no hay ningún motivo por el que la nueva década tenga que ser un fracaso económico. A menos que se produzca otra serie de crisis financieras profundas no lo será (siempre que los políticos no se interpongan en el camino del nuevo paradigma del comercio, la tecnología y la inteligencia artificial). Traducción de News Clips. http://www.elpais.com/articulo/primer/plano/Grandes/maestros/crecimiento/mundial/elpepuecon eg/20100110elpneglse_5/Tes
282 Opinion
January 9, 2010 Op-Ed Columnist Invitation to Disaster By BOB HERBERT We didn’t pay attention to the housing bubble. We closed our eyes to warnings that the levees in New Orleans were inadequate. We gave short shrift to reports that bin Laden was determined to attack the U.S. And now we’re all but ignoring the fiscal train wreck that is coming from states with budget crises big enough to boggle the mind. The states are in the worst fiscal shape since the Depression. The Great Recession has caused state tax revenues to fall off a cliff. Some states — New York and California come quickly to mind — are facing prolonged budget nightmares. Across the country, critical state services are being chopped like firewood. More cuts are coming. Taxes and fees are being raised. Yet the budgets in dozens and dozens of states remain drastically out of balance. This is an arrow aimed straight at the heart of a robust national recovery. The Center on Budget and Policy Priorities has pointed out that if you add up the state budget gaps that have recently been plugged (in most cases, temporarily and haphazardly) and those that remain to be dealt with, you’ll likely reach a staggering $350 billion for the 2010 and 2011 fiscal years. This is not a disaster waiting to happen. It’s under way. Without substantial new federal help, state cuts that are now merely drastic will become draconian, and hundreds of thousands of additional jobs will be lost. The suffering is already widespread. Some states have laid off or furloughed employees. Tens of thousands of teachers have been let go as cuts have been made to public schools and critically important preschool programs. California has bludgeoned its public higher education system, one of the finest in the world. Michigan has cut some of the benefits it provided to middle-class families struggling with the costs of health care for severely disabled children — benefits that helped pay for such things as incontinence supplies and transportation to special care centers. The Grand Rapids Press quoted a state official who acknowledged that the cuts were “tough” and were hurting families. But he added, “The state simply doesn’t have the money.” The collapse of state tax revenues caused by the recession is the sharpest on record. Steep budget cuts have not been enough to offset the unprecedented plunge in tax collections that resulted from unemployment and other aspects of the downturn. The shortfalls swept the nation. As the Rockefeller Institute of Government reported, “Total tax revenue declined in all 44 states for which comparable early data are available.” State governments are not without fault. Very few have been paragons of fiscal responsibility over the years. California is a well-known basket case. New York has a Legislature that is a laughingstock. But for the federal government to resist offering substantial additional help in the face of this growing crisis would be foolhardy. You can’t have a healthy national economy while dozens of states are hooked up to life support.
283 The Center on Budget offered some insight into how the trouble in the states adds up to trouble for us all: “Expenditure cuts are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. “In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy.” The Obama administration has provided significant help to states through its stimulus program, and it has made a difference. It prevented the crisis from being much worse. But much of that assistance will run out by the end of the year and states are fashioning budgets right now that will absolutely hammer the quality of life for some of their most vulnerable residents. New York’s lieutenant governor, Richard Ravitch, has been trying to bring a measure of sanity to the state’s budget process. But as he told me this week, without additional federal help, many states will have no choice but to impose extreme budget cuts, or raise taxes, or — most likely — do both. We need more responsible and less wasteful fiscal behavior from all levels of government. But the country is still faced with a national economic emergency, with tens of millions out of work or underemployed. We can hardly afford any additional economic shocks. Turning our backs on the desperate trouble the states are in right now is nothing less than an utterly willful invitation to disaster. http://www.nytimes.com/2010/01/09/opinion/09herbert.html?hp
284 Opinion
January 9, 2010 EDITORIAL Jobs and Politics If there’s a silver lining in the December jobs report, it is this: Nothing concentrates the minds of politicians like rising unemployment in an election year. Unless Congress and the White House push a robust job-creation agenda — starting now — worsening joblessness is a distinct possibility, even if the economy in general recovers in the coming months. That means the unemployment rate could still be high or even climbing when the midterm elections near. That may be the best hope for concerted federal action to put Americans back to work. At 10 percent, the unemployment rate was unchanged from November to December. But the only reason it held steady is that 661,000 jobless Americans were not counted as unemployed last month because they had not looked for a job in the four weeks preceding the December survey. If they had been included, the jobless rate would have been closer to 10.4 percent. Over all, an estimated 3.6 million out-of-work people have been uncounted since the recession began in December 2007. They include people who had not recently looked for work and those who would have entered the work force in normal times, like recent high school and college graduates, but remained on the sidelines as jobs disappeared. Here’s the rub: As soon as the economy shows more signs of life, those missing workers are likely to start looking for work. That would add to the ranks of the officially unemployed, causing the jobless rate to rise, perhaps dramatically — unless jobs are being created to absorb the labor glut. The private sector alone is unlikely to create enough new jobs, even as the economy recovers. Employers are more likely to add hours to the truncated workweeks of existing employees than to hire new workers. They may also prefer to make temporary workers permanent rather than add new staff. And even if hiring were unexpectedly strong, it could not repair the severely damaged job market anytime soon. The economy lost another 85,000 jobs in December, bringing the official total job loss over the past two years to 7.2 million jobs. But with the population growing — and with revisions to earlier data expected to show larger losses than previously reported — the economy is probably coming up short by 10 million to 11 million jobs. The job growth that would be needed to recoup losses of that magnitude in the next three years — some 400,000 jobs a month — is simply not in the cards. Responding to the jobs report on Friday, Mr. Obama reminded Americans that $2.3 billion in tax credits — passed by Congress last year as part of the fiscal stimulus — would soon begin to spur the creation of some 17,000 green technology jobs. He also called on Congress to approve another $5 billion in spending for more clean energy manufacturing. And he urged lawmakers to move on legislation for several job ideas he put forth last month, including a plan for public- works employment and bolstered small business lending. That’s a start, but now he has to get Congress to act. The jobs he saves may be those of members of Congress from his own party. http://www.nytimes.com/2010/01/09/opinion/09sat2.html?ref=opinion
285 Opinion
January 8, 2010 OP-ED COLUMNIST
Bubbles and the Banks By PAUL KRUGMAN Health care reform is almost (knock on wood) a done deal. Next up: fixing the financial system. I’ll be writing a lot about financial reform in the weeks ahead. Let me begin by asking a basic question: What should reformers try to accomplish? A lot of the public debate has been about protecting borrowers. Indeed, a new Consumer Financial Protection Agency to help stop deceptive lending practices is a very good idea. And better consumer protection might have limited the overall size of the housing bubble. But consumer protection, while it might have blocked many subprime loans, wouldn’t have prevented the sharply rising rate of delinquency on conventional, plain-vanilla mortgages. And it certainly wouldn’t have prevented the monstrous boom and bust in commercial real estate. Reform, in other words, probably can’t prevent either bad loans or bubbles. But it can do a great deal to ensure that bubbles don’t collapse the financial system when they burst. Bear in mind that the implosion of the 1990s stock bubble, while nasty — households took a $5 trillion hit — didn’t provoke a financial crisis. So what was different about the housing bubble that followed? The short answer is that while the stock bubble created a lot of risk, that risk was fairly widely diffused across the economy. By contrast, the risks created by the housing bubble were strongly concentrated in the financial sector. As a result, the collapse of the housing bubble threatened to bring down the nation’s banks. And banks play a special role in the economy. If they can’t function, the wheels of commerce as a whole grind to a halt. Why did the bankers take on so much risk? Because it was in their self-interest to do so. By increasing leverage — that is, by making risky investments with borrowed money — banks could increase their short-term profits. And these short-term profits, in turn, were reflected in immense personal bonuses. If the concentration of risk in the banking sector increased the danger of a systemwide financial crisis, well, that wasn’t the bankers’ problem.1 Of course, that conflict of interest is the reason we have bank regulation. But in the years before the crisis, the rules were relaxed — and, even more important, regulators failed to expand the rules to cover the growing “shadow” banking system, consisting of institutions like Lehman Brothers that performed banklike functions even though they didn’t offer conventional bank deposits. The result was a financial industry that was hugely profitable as long as housing prices were going up — finance accounted for more than a third of total U.S. profits as the bubble was inflating — but was brought to the edge of collapse once the bubble burst. It took government aid on an immense scale, and the promise of even more aid if needed, to pull the industry back from the brink.
1 Emilio Botin y toda su familia tienen buena parte de su patrimonio invertido en acciones del Santander. Sus intereses a largo plazo coinciden con los del banco. ¿Hay que reivindicar la “Banca familiar”?
286 And here’s the thing: Since that aid came with few strings — in particular, no major banks were nationalized even though some clearly wouldn’t have survived without government help — there’s every incentive for bankers to engage in a repeat performance. After all, it’s now clear that they’re living in a heads-they-win, tails-taxpayers-lose world. The test for reform, then, is whether it reduces bankers’ incentives and ability to concentrate risk going forward. Transparency is part of the answer. Before the crisis, hardly anyone realized just how much risk the banks were taking on. More disclosure, especially with regard to complex financial derivatives, would clearly help. Beyond that, an important aspect of reform should be new rules limiting bank leverage. I’ll be delving into proposed legislation in future columns, but here’s what I can say about the financial reform bill the House passed — with zero Republican votes — last month: Its limits on leverage look O.K. Not great, but O.K. It would, however, be all too easy for those rules to get weakened to the point where they wouldn’t do the job. A few tweaks in the fine print and banks would be free to play the same game all over again. And reform really should take on the financial industry’s compensation practices. If Congress can’t legislate away the financial rewards for excessive risk-taking, it can at least try to tax them. Let me conclude with a political note. The main reason for reform is to serve the nation. If we don’t get major financial reform now, we’re laying the foundations for the next crisis. But there are also political reasons to act. For there’s a populist rage building in this country, and President Obama’s kid-gloves treatment of the bankers has put Democrats on the wrong side of this rage. If Congressional Democrats don’t take a tough line with the banks in the months ahead, they will pay a big price in November. 151. HIGHLIGHT (what's this?) Alvaro Espina Madrid January 8th, 2010 1:39 pm Excellent! The main problem is that permitting the "shadow" bank system to supplant the genuine banks (kindleberger dixit)the Fed lost the control of the monetary policy (because of the credit multiplier, as defined by Karl Brunner). I link this idea with Minsky framework here: http://biblioteca.meh.es... (Sorry, only in spanish)
Recommend Recommended by 5 Readers http://community.nytimes.com/comments/www.nytimes.com/2010/01/08/opinion/08krugman.ht ml
287 http://krugman.blogs.nytimes.com/ January 8, 2010, 11:51 am Payrolls and paradigms Disappointing job number this morning. Still, a month is just a month, right? Well, not quite. Here’s the way I think about the economic news: each piece of data tells us something about which model of recovery is right. More specifically, each disappointing piece of data strengthens the case of the pessimists. From the beginning, there have been two schools of thought about the likely path of recovery. One school — strongly represented among Wall Street economists — said that the 2008-2009 recession should be compared with other deep US recessions: 1957 (the “Edsel” recession), 1974-5, 1981-2. These recessions were followed by rapid, V-shaped recoveries. The other school of thought said that this was a postmodern recession, very different in character from those prior deep recessions, and that it was likely to be followed by a prolonged “jobless recovery”. Added to that were worries based on the historical aftermath of financial crises, which tends to be prolonged and ugly. The debate a year ago over the size of stimulus was in part an implicit debate between these two views; those who argued that the stimulus was much too small did so because they had a pessimistic view about the likely pace of recovery. Sad to say, each successive bad jobs report adds to the evidence that the pessimists were right. January 7, 2010, 6:05 pm This is the way the Chicago School ends Not with a bang, but with a cackle. Brad DeLong, Justin Fox, and Paul Kedrosky have already weighed in on the not-available- online John Cassidy piece on Chicago economics. Like them, I find it really sad. Here’s Eugene Fama, insisting that there was no financial crisis, just markets reacting rationally to an economic crisis caused by something or other — hey, macro isn’t his department. John Cochrane, on the other hand, says that it’s all because George W. Bush gave a scary speech. What struck me was the fact that Cochrane is still trying the argument-from-authority thing: this was all proved false in the 1970s, nobody serious believes in it, etc.. At this point he knows (although one wonders whether he did originally) that there’s this thing called New Keynesian economics on which a lot of smart people have been working since the mid-1980s. And yes, the models do allow for effective fiscal policy. But Cochrane is still using the Lucas giggles and whispers line. It’s hard to avoid the sense that Chicago just turned inward on itself circa 1982, and stopped paying attention either to the world or to anyone not of its tribe. And now it finds that the rest of the world is returning the favor.
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The Curious Capitalist Commentary on the economy, the markets, and business From Chicago School to just another (excellent) economics department Posted by Justin Fox Tuesday, January 5, 2010 at 9:58 pm Whoops, sorry. I got so caught up in a must-write-column trance today that I forgot to blog. I did briefly consider saying something about John Cassidy's edifying and entertaining New Yorker piece on Chicago School economics, which I read while eating breakfast and making Curious Capitalist Jr.'s lunch this morning. But when I looked it up online, I discovered it's not online. Well, not unless I could type in my subscriber number. And guess what? I have failed to memorize my New Yorker subscriber number! There is an audio interview with Cassidy available to all. And as I'm about to go work at a place that puts lots and lots of stuff behind a paywall, I really better not complain too much. But still: Frustrating! Now I'm back home with a paper copy of the New Yorker in front of me. And the article's still good. Cassidy talks to three sorts of Chicago scholars. There's my buddy Gene Fama and his son- in-law John Cochrane, who by defining all the accomplishments of post-World War II financial theory down to the commonplace observation that it's hard to outguess the market are able to argue that there's nothing wrong with this theory. They may be right, but they also don't have much of anything interesting or useful to say about the events of the past couple of years. They have defined themselves out of the discussion. Then there are the old-school Chicago economists (a group that in Cassidy's telling includes Judge Richard Posner) who have adapted their thinking in various degrees to recent events. Posner has become a sort-of Keynesian, albeit a sort-of Keynesian who continues to drive real Keynesians bonkers. Posner's buddy and co-blogger Gary Becker hasn't gone quite that far, but does manage to sound pretty moderate and reasonable in Cassidy's article. Robert Lucas refused to talk to Cassidy, but has established a fence-straddling record of sounding moderate when e- mailing with the likes of me and unrepentant when talking with the likes of Amity Shlaes. Finally, there's the majority of today's Chicago economics faculty, an assortment of behavioral economists, freakonomists, financial-plumbing specialists and others who, while perhaps a bit more free-market-oriented than their counterparts at Harvard or MIT, no longer really constitute an ideological bloc. Posner says at the end of Cassidy's piece that "probably the term 'Chicago School' should be retired," and probably he's right. Chicago has become just another top economics department, as it was before Milton Friedman, George Stigler & Co. turned it into a "School" in the 1950s. Which is sort of a mixed blessing. Chicago economics has become more reasonable. But its very reasonableness may render it less influential. By the way, and I'm starting to feel a little guilty about this, I still haven't read Cassidy's new book. When I got the galley months ago I read a few pages and it was a bit like seeing a ghost. They covered some of the same territory that I do in Myth of the Rational Market, and they did it really well. Frighteningly well. So ever since then I've been afraid to read the whole book. I promise to get over this fear at some point.
289 Grasping Reality with Opposable Thumbs Why Do "Efficient Markets" Economists Think a Speech by George W. Bush Caused the 2008 Financial Meltdown? January 06, 2010 Actually, I think Justin is wrong. It's much more than defining themselves out of the discussion. Cochrane says more than that it's not possible to outguess the market. On the one hand he wants to say that there is no evidence that financial markets are not "efficient." On the other hand he wants to say that President Bush by giving a speech caused the stock market to crash--push it down in value by one-third--and caused the bond market to freeze up: [T]he President gets on the television and says the financial markets are near collapse. On what planet do markets not crash after that? Now when the stock market's dividend yield is 3%, fully 75% of the present value of stocks comes from dividends that are to be paid more than a decade hence. Unless you think that one speech by President Bush had a profound effect on dividend levels and discount factors in 2019 and beyond, you simply cannot (a) know enough about the dividend- discount model to remember that at a dividend yield of 3% three-quarters of the present value comes a decade and more hence, (b) claim that the market is "efficient," and also (c) claim that a speech by George W. Bush caused the meltdown. Paul Kedrosky's Infectious Greed Musing about technology, finance, venture capital, & the money culture with Paul Kedrosky by Paul Kedrosky Chicago School of Economics Circles the Theoretical Drain By Paul Kedrosky · Monday, January 4, 2010 · In the current issue of the New Yorker there is an alternatively depressing and fascinating piece by John Cassidy about how the Chicago School of economics – monetarism, rational expectations, efficient market theory, etc. – is circling the theoretical drain. While some economists are abandoning the faith, many are not, and the result is, as Cassidy says, much like what happened in cosmology with Edwin Hubble discovered the expanding universe: Economists have lost their footing and are engaged in everything from rear-guard actions to active peer denunciations, and pretty much everything in between. The following quote from Chicago economist John Cochrane jumped out at me, however, in its mealy-mouthed implicit apologia for the theoretical status quo: “What is there about recent events that would lead you to say markets are inefficient?” he said to me. “The market crashed. To which I would say, We had the events last September in which the President gets on television and says the financial markets are near collapse. On what planet do markets not crash after that?” The only reason the markets crashed in 2008 was because the U.S. President got on TV and said they might? Leaving aside that heads of state say stupid things about markets, both in the U.S. and elsewhere, all the time and nothing happens, that is just dumb. By that point we had had an
290 unprecedented run on the shadow-banking system, assets for many banks looking like zero, Fannie/Freddie as state wards, banks up to Goldman and Merrill wobbling, and it was the President that made a crash happen? Simply staggering – and, in its fact-free and inflexible defense of a particular economic ideology, a crushing indictment. http://paul.kedrosky.com/archives/2010/01/chicago_school.html Latest Stories One Economist to Rule Them All? Really? Do We Have To? By Paul Kedrosky · Thursday, January 7, 2010 · Last night on TV Ontario I participated in a roundtable discussion about economists’ culpability in the current financial mess, as well as about its potential for doing anything useful as we try to get out. On the one side, you had Ken Rogoff, arguing somewhat in favor of economics’ continuing credibility. On the other side you had Dan Ariely, arguing against orthodox economics, but in favor of its behavioral variant. I took a more middling view, which was admittedly unusual for me. I like some of the history in orthodox economics, some of the “aren’t people nuts?” stuff in behavioral economics, and a dollop of the general skepticism brought by fellow discussant Diane Francis. But my general view is anti-expert, with it puzzling to me why we would throw out one group of economic svengali for another group, no matter how much funnier and more charming their stories are. After all, if we concede that traditional economists are historians with a math fetish, then behavioral economists are mathematicians with a psychology fetish. Either way, I don’t feel any more comfortable handing them the keys to the financial kingdom. Peak Cars, or Just a Car Sales Trough? By Paul Kedrosky · Wednesday, January 6, 2010 · While this comes from an admittedly polemical source -- Lester Brown at EPI -- the graph shows that for the first time new vehicles sold in the U.S. has fallen below scrappage in the same period. Yes, there are many reasons to believe this is transient, downturn-driven, and aided and abetted by government programs, but it's an intriguing anomaly.
Doom, the Shorter Version By Paul Kedrosky · Wednesday, January 6, 2010 Courtesy of Paul Farrell, here is a quick tour of gloomy pronouncements from some of the most bearish folks out there. This sort of thing is always a good tonic, so check Farrell for the whole thing:
291 (Paul B. Farrell “Optimist? Or pessimist? Test your 2010 strategy! 12 'Dr. Dooms' warn Wall Street's optimism misleads, will trigger new crash,” Jan. 5, 2010, en: http://www.marketwatch.com/story/story/print?guid=83A47014- F716-45BB-A115-25E342A73B62) 4. Johnson: Running out of time before Great Depression 2 Yes, "we're running out of time ... to prevent a true depression," warns former IMF chief economist Simon Johnson. The "financial industry has effectively captured our government" and is "blocking essential reform," and unless we break Wall Street's "stranglehold" we will be unable prevent the Great Depression 2. 7. Soros: Dollar dead as a reserve currency, nest eggs dying Billionaire investor George Soros' "New Paradigm:" America's 25-year "superboom ... led to massive deregulation ... blindly chasing free markets ... unleashed excessive greed ... created the dot-com and credit meltdowns" and a "shadow banking system" of derivatives. "The system is broken. The current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency," warns Soros. "We're now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances." 10. Kaufman: Irrationality replaced reason, science, technology Henry Kaufman was Salomon's chief economist and "Dr. Doom" for 24 years: "Why are we so poor at managing our key economic institutions while at the same time so accomplished in medicine, engineering and telecommunications? Why can we land men on the moon with pinpoint accuracy, yet fail to steer our economy away from the rocks? Why do our computers work so well, except when we use them to manage derivatives and hedge funds?" Kaufman warns: "The computations were correct, but far too often the conclusions drawn from them were not." Why? Selfish, myopic politicians and bankers. 11. Biggs: Sell everything, buy guns, food, head for the hills In his 2008 bestseller "Wealth, War and Wisdom" former Morgan Stanley research guru Barton Biggs warns us to prepare for a "breakdown of civilization ... Your safe haven must be self-sufficient and capable of growing some kind of food ... It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc ... A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage." Biggs sounds like an anarchist militiaman. 12. Diamond: Nations ignore obvious till it's too late, then collapse The end will be swift. In our age of short-term consumerism and instant gratification, few hear the warnings of our favorite evolutionary biologist, Jared Diamond. Societies fail because they're unprepared, will be in denial till it's too late: "Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power." http://paul.kedrosky.com/
292 Grasping Reality with Opposable Thumbs Why Do "Efficient Markets" Economists Think a Speech by George W. Bush Caused the 2008 Financial Meltdown? January 06, 2010 But, as I said above, it is not a defense of the efficient-markets ideology. 75% of the present value of the market depends on dividends and discount factors more than a decade in the future-- dividends and discount factors that can in no conceivable way be affected by George W. Bush's speech. TrackBack URL for this entry: http://delong.typepad.com/sdj/2010/01/why-do-efficient-markets-economists-think-a-speech-by- george-w-bush-caused-the-2008-financial-meltdown.html Listed below are links to weblogs that reference Why Do "Efficient Markets" Economists Think a Speech by George W. Bush Caused the 2008 Financial Meltdown?:
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Letter from Chicago After the Blowup Laissez-faire economists do some soul-searching—and finger-pointing. by John Cassidy January 11, 2010 ASTRACT: LETTER FROM CHICAGO about the state of the Chicago School of economics after the financial crash. Earlier this year, Judge Richard A. Posner published “A Failure of Capitalism,” in which he argues that lax monetary policy and deregulation helped bring on the current economic slump. Posner has been a leading figure in the conservative Chicago School of economics for decades. In September, he came out as a Keynesian. As acts of betrayal go, this was roughly akin to Johnny Damon’s forsaking the Red Sox Nation and joining the Yankees. Ever since Milton Friedman, George Stigler, and others founded the Chicago School, in the nineteen-forties and fifties, one of its goals has been to displace Keynesianism, and it had largely succeeded. In the areas of regulation, trade, anti-trust laws, taxes, interest rates, and welfare, Chicago thinking greatly influenced policymaking in the U.S. and many other parts of the world. But in the year after the crash Keynes’s name appeared to be everywhere. In “A Failure of Capitalism,” Posner singles out several economists, including Robert Lucas and John Cochrane, both of the Chicago School, for failing to appreciate the magnitude of the subprime crisis, and he questioned the entire methodology that Lucas and his colleagues pioneered. Its basic notions were the efficient-markets hypothesis and the rational-expectations theory. In Posner’s view, older, less dogmatic theories better explained how the problems in the financial sector dragged down the rest of the economy. In the course of a few days, the writer talked to economists from various branches of the subject. The over-all reaction he encountered put him in mind of what happened to cosmology after the astronomer Edwin Hubble discovered that the universe was expanding, and was much larger than scientists believed. The profession fell into turmoil, with some physicists sticking to existing theories, while others came up with the big-bang theory. Eugene Fama, of Chicago’s Booth School of Business, was firmly in the denial camp. He defended the efficient-markets hypothesis, which underpinned the deregulation of the banking system championed by Alan Greenspan and others. He insisted that the real culprit in the mortgage mess was the federal government. Mentions John Cochrane. Gary Becker, who won the Nobel in 1992, says that Posner and others raised fair critiques of Chicago economics. Mentions Robert Lucas and James Heckman. If the economic equivalent of a big-bang theory is to emerge, it will almost certainly come from scholars much less invested in the old doctrines than Fama and Lucas. Mentions Richard Thaler. Raghuram Rajan, an Indian-born Chicago professor, is one of the few economists who warned about the dangers of the financial crisis. In 2005, he said that deregulation, trading in complex financial products, and the proliferation of bonuses for traders had greatly increased the risk of a blowup. In a new book he’s working on, “Fault Lines,” Rajan argues that the initial causes of the breakdown were stagnant wages and rising inequality. With the purchasing power of many middle-class households lagging behind the cost of living, there was an urgent demand for credit. The side effects of unrestrained credit growth turned out to be devastating. The impact of the financial crisis shouldn’t be underestimated, especially for Chicago-style economics. “Keynes is back,” Posner said, “and behavioral finance is on the march.” http://www.newyorker.com/reporting/2010/01/11/100111fa_fact_cassidy
294 January 7, 2010, 5:53 pm CRE-ative destruction For some reason I haven’t seen this: a comparison of commercial real estate prices from Moody’s/MIT with housing prices from Standard and Poor’s/Case-Shiller. Here it is:
Precios: commercial real estate y Case-Shiller S&P C-20
200
180
160
140
120
commercial real estate prices from Moody’s/MIT
100 Composite-20: SCPS20R
80 diciembre 2000 diciembre 2002 diciembre 2004 diciembre 2006 diciembre 2008 diciembre 2001 diciembre 2003 diciembre 2005 diciembre 2007
From my perspective, the CRE bubble is highly significant; it gives the lie both to those who blame Fannie/Freddie/Community Reinvestment for the housing bubble, and those who blame predatory lending. This was a broad-based bubble.
Comments 1. January 8, 2010 1:55 am Paul, perhaps cause and effect may be at play here, such that as housing prices increase (irrationally, without fundamentals to support them), commercial real estate values would tend to follow (lag, but parrallel housing price rises & declines) for the same irrational reasons since the same mentality that promoted the housing price rises would come into play in other real-estate as well. Bare land (undeveloped idle or farm land)prices rose right along with housing prices, but lagged by 6 months or so, in our neck of the woods. If borrowing costs low and qualification terms easy for the housing market, then it stands to reason that commercial real estate borrowing cost would also tend to be lower, and qualification terms easier as well compared to the norm. If banks were banking on the eternal continuous real- estate price rising for the immediately forseeable future, then it would also see the same earnings potential in a bigger way for commercial real estate, no? Since housing was not in fact in short supply relative to normal (preboom) initial term interest rates and qualification requirements, then with reductions in initial interest rates and easier terms, I see no reason why the banks wouldn’t be just as inclined to increase market demand for loans from CRE’s under the same easier credit terms… which fuels the CRE demand in the same fashion as it does housing. There’s a direct association between CRE’s and housing …. both use the same raw materials to build, and virtually the same labor supply. If housing demand gives incentive for residential housing to increase buildiing, thus increase in demand for the raw materials and building labor, then the prices of these also rise… which forces building costs up for CRE’s as well as residential. If CRE business’s forseee a rise in costs due to residential housing costs rising, then they are forced to decide whether to build now before building costs rise even further, or wait until there’s an increase in supply of raw materials and construction labor (which is only forseeable if you believe the housing market was a bubble waiting to burst). So as I see it, CRE’s would naturally follow housing price rises, though lagged in time. — Longtooth http://krugman.blogs.nytimes.com/2010/01/07/cre-ative-destruction/
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Financial crisis panel seeks bankers' testimony By Binyamin Appelbaum Washington Post Staff Writer Friday, January 8, 2010; A14 The commission appointed by Congress to examine the causes of the financial crisis is to hear testimony Wednesday from the heads of four of the nation's largest banks, as the panel begins a year-long investigation that its chairman described as an effort to figure out "what the heck happened." Philip Angelides, chairman of the Financial Crisis Inquiry Commission, said he planned to hold a series of public hearings, conduct hundreds of interviews and request or subpoena information from companies and government agencies. "This is a proxy for the American people, giving them the chance to ask what led this country to the economic precipice," said Angelides, a Democrat who served as California's state treasurer until 2007. The commission has until Dec. 15 to produce a report. Although legislation to reform financial regulation already is moving through Congress, Angelides said the commission's work remains relevant because more bills are likely to follow and a better understanding of what happened could inform the way laws are enforced. The commission's vice chairman, William Thomas, a retired Republican congressman from California who once headed the House's tax-writing committee, said the commission would also benefit from its instructions to focus on understanding the crisis rather than providing policy recommendations. Thomas said commissions that focus on recommendations often bog down in political debates and accomplish little. During a meeting Thursday with Washington Post reporters and editors, both men pointed to the success of the 9/11 Commission as a model for their own work. "They were looking to say what happened and not what should happen next," Thomas said. Still, the Financial Crisis Inquiry Commission faces a number of challenges. House and Senate leaders, who appointed six Democrats and four Republicans to the commission, allocated $8 million for its work, enough to hire about 50 investigators but "probably less than any of the investment banks will spend dealing with this investigation," Angelides said. The tight timetable also makes it impossible to produce a comprehensive account of the crisis, both men said. Instead, the commission will focus its work on particular topics, perhaps producing a series of case studies, Angelides said. Four bank executives are to appear at the first hearing: Jamie Dimon of J.P. Morgan Chase; Lloyd C. Blankfein of Goldman Sachs; Brian Moynihan, the new chief executive at Bank of America; and John Mack, who retired at the end of December as chief executive of Morgan Stanley but remains the company's chairman. The commission did not invite anyone from Citigroup, the other U.S. company with a large investment banking operation. The next day, the commission is to hear from local and state regulators about ongoing investigations related to the financial crisis.
296 President Obama detailed his financial reform agenda in June, and the House has already passed its version. Democrats and Republicans on the Senate banking committee continue to negotiate their differences, but Democratic leaders say they are confident that a bill will pass before the midterm elections in November -- at least a month before the commission is required to publish its findings. In addition to shaping future legislative efforts, Angelides said, an authoritative account of the crisis could have an impact beyond Washington, affecting public debate on issues such as executive compensation. Both Angelides and Thomas acknowledged that the commission is off to a slow start, having waited more than a year since the peak of the crisis to hold its first hearing. Thomas said that a lot of work already was happening behind the scenes and that the hearing next week could be compared to a rocket lifting off after a lengthy construction process. Even as books and speeches about the crisis pile up, Thomas expressed confidence that the committee's work could still make a difference. "There are a lot of people who still haven't learned the lessons," he said. http://www.washingtonpost.com/wp-dyn/content/article/2010/01/07/AR2010010704090_pf.html
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08.01.2010 Report says Mersh to succeed Papademos
Yves Mersh, the central banker who once made the infamous comment that you have to keep interest rates well above zero to avoid falling into a liquidity trap, is tipped to succeed Lucas Papademos as vice president of the ECB, according to a report by FT Deutschland. Luxembourg’s representative of the ECB’s governing council is otherwise known to be a hardliner. The paper says there are other candidates include Vitor Contancio of Portugal and Peter Praet of Belgium, but Mersh was the current favourite. The German government has apparently not yet made up its mind, but might have a position when Spain’s finance minister Elena Salgado visits Berlin next week. The problem, from a German perspective, is that a vice presidency of Mersh might reduce the chances that Axel Weber becomes the president of the ECB.
Zapatero wants Commission to have stricter powers to enforce 2020 agenda In a proposal likely to stir controversy among other EU governments, José Luis Zapatero , in his first speech since Spain took over the EU presidency, said the European Commission should be granted powers to enforce compliance with the new 2020 growth strategy, reports the FT. The 2020 Strategy is on the agenda for the extraordinary summit with EU president Van Rompuy in February. Zapatero said that the February summit “must bring up incentive measures and, if advisable, introduce corrective measures regarding the objectives set forth in our economic policies”.
Eurozone economic sentiment improves Eurozone economic confidence rose for the ninth consecutive month in December to the highest level in 18 months (91.3), according to the FT, but weak figures for retail sales in the eurozone and for German industrial orders sent worrying signals about the pace of recovery. The data
298 came as the EU president Herman Van Rompuy warned the EU’s long-term outlook was “not bright”.
Sarkozy steps up rhetoric on exchange rates Nicolas Sarkozy stepped up his attack on global exchange rate imbalances saying “monetary disorder” had become “unacceptable”. The FT reports that Sarkozy said he would make exchange rate policy an important theme of France’s presidency of the G8 and G20 forums in 2011. He has sharpened his criticism in recent days amid concerns that a balanced economic recovery in the eurozone could be choked off by an overvalued currency.
France in quest of new budget rules ... France is set to study new ways of introducing binding budget constraints a series of conferences on deficits with the first on January 20, reports Les Echos. The debate started when Nicolas Sarkozy evoked a constitutional balanced budget rule a la Germany at the end of 2009. (It is not likely to happen but some sort of rules might come out of this process). ...and new tax income All newspapers picked up the story that the French government is seeking to tax search portals such as Google on their advertisement income. Read Les Echos for the full story.
Yen falls as new finance minister calls for weaker currency Japan’s newly appointed finance minister Naoto Kan abruptly reversed his predecessor’s currency strategy at his first day in office with his call for a weaker yen provoking an immediate sell-off in global markets, writes the FT. Kan noted that many in the business community believed an appropriate level for the yen was about Y95 to the US dollar.
Is the Fed beginning to worry about inflation? The Wall Street Journal has a couple of stories indicating that pressure is building up inside the Federal Reserve to be careful about incipient price pressures. One article cites two working papers, one published by the Federal Reserve Bank of St. Louis, which says price pressure would rise more quickly than thought previously. Another from the Richmond Fed said the Fed’s was over-reliant on the output gap in formulating its monetary response. In another article, the WSJ cites Kansas Fed chief Thomas Hoenig as saying that the Fed should start tightening earlier rather than later, and return to a more normal level of the Fed funds rate of 3.5-4.5%. http://www.eurointelligence.com/article.581+M5cccfdcab54.0.html
299 07.01.2010 The case for optimism: Three reasons why global GDP growth will accelerate in 2010 By: Eric Chaney
End of 2009 business cycle and market indicators were not as bullish as they were in the first phase of the global recovery, which, tracked by the global trade of manufactured products, started in June. Various signs of a global slowdown have recently appeared in business surveys, from China (PMI) to the US (see our Surprise Gap built from the ISM survey) and Germany (industrial production). Global stock markets have moved sideways since the end of October, as uncertainties about the continuation of the recovery grew. In addition, the announced restructuring of Dubai World’s debt, the downgrade of Greece and the bailout of an Austrian bank have raised the markets’ awareness that, in a still deflationist world, debts do not vanish in thin air, they just move from hands to hands, like hot potatoes.
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US Surprise Gap: from acceleration to more stable growth
Source : US ISM survey, AXA IM Research Against this backdrop, it is natural that the risk of a double-dip catches the attention of decision makers in the corporate world. However, I believe that these concerns are overblown, at least in
301 the short to medium term.
There are three reasons for my non consensual optimism:
1. The global inventory cycle will prove more powerful than generally assumed. What happened after Lehman’s bankruptcy still matters for what is going on today. My working assumption is that most goods producing companies in the world liquidated inventories to cut production, not because final demand was collapsing, but because they feared a full blown credit crunch and decided to heap up as much cash as possible as an life insurance policy. The fear of a generalised liquidity crunch, rather than its reality, was at the core of the global recession. Since central banks have conjured away this fear, companies need to replenish their inventories even if the recovery in final demand is sluggish. For what it is worth --this is the first global recession of the modern globalisation age-- historical evidence suggests that the positive leg of the inventory cycle could add as much as 2 percentage points to global growth over the period spanning from mid 2009 to mid 2010.
The global inventory cycle may add up to 2 pp to GDP growth in 2010
Source : US, Euro area and Japan Quarterly National Accounts, AXA IM Research
2. The global effect of fiscal stimulus is most probably underestimated According to the IMF, the fiscal stimulus plans decided in early 2009 and progressively implemented across the world amount to roughly 2% of the combined GDP of the G20. The consensus view among professional economists and modellers is that the fiscal multiplier is at best 1, i.e. 1 dollar of stimulus increases output (temporarily) by no more than 1 dollar. Two factors are often evoked to explain why multipliers are relatively low: import substitution reduces the impact of government spending, and households may save tax cuts instead of spending the fiscal mana or, in case of increased government spending, may save in anticipation of higher
302 taxes in the future. With a global fiscal stimulus, the first offsetting factor does not hold, since we do not trade with other planets. As regards to the second limitation, saving behaviour, a growing body of academic work shows that things may be different when the central bank does not (or cannot) react to a fiscal stimulus. This is clearly the case when it cannot cut short term interest rates as much as would be necessary, because of the zero bound for interest rates. Lawrence Christiano of Northwestern University or Robert Hall of Stanford University estimate that, in these conditions, the fiscal multiplier might be as large as 1.7, up to 2. Given the relatively long time lags (4 to 6 quarters) associated with fiscal policy changes, it is fair to assume that most of this enhanced fiscal booster should show up in GDP growth in the course of 2010.
The fiscal multiplier may be higher when monetary policy is stuck at the zero bound
Source : AXA IM Research, inspired by Christiano and alii, NBER Working Paper 15394
3. In the short term, the price of crude oil is likely to decline Although the spot price of crude oil is more and more driven by bullish long term expectations and a very cheap cost of carry due to lax monetary policies, oil markets cannot totally ignore the balance of supply and demand. The current picture is that of an oil glut on the supply side and declining needs on the demand side. Since the price of oil is the ‘fair price’ of the extra barrel delivered to the market, what matters is the behaviour of the marginal supplier and the marginal consumer. As for the former, OPEC increased crude output by 140mb/d in 3Q vs. 2Q (according to OPEC), while Nopecs boosted production even more. As for the marginal consumer, Chinese apparent oil demand exceeded all expectations in September. Yet the ongoing slowdown engineered by Beijing authorities should trim the quarterly GDP growth rate from 10% (annualized) in 3Q to around 5% in 4Q/1Q 2010 (this would still be consistent with respectively 10% and 7% year-on-year rates) and thus should significantly reduce oil demand. If gasoline and heating fuel prices ease, as I expect, this would be good news for the global recovery, since it
303 would boost consumers’ purchasing power in the US and Europe, where job creation is still choked.
The longer term assessment is more uncertain. To become sustainable, the global recovery will have to start walking on its own legs, as policy crutches are either removed (monetary policy) or crumble under their own weight (fiscal policies). My conviction is that, in its second stage, the global recovery will be driven by government spending on infrastructures, the supply and distribution of energy being the most important spending item, and by private companies’ capital expenditure, as new lines of products emerge from the crisis and competition becomes, again, the main driver of corporate decisions, in contrast with the ‘survival behaviour’ that prevailed during the crisis. On the other hand, consumer spending is likely to be the junior partner in this cycle, with US consumers constrained by the imperious need to rebuild their depleted savings, and Chinese consumers not yet able to take over from their US or European counterparts, even if Chinese authorities deliver on their goal to stimulate domestic demand.
Three headwinds will test the global economy during the transition from a policy-fuelled recovery to sustainable growth.
Headwind #1. The credit crunch. It is still biting, as traditional financing channels remain partially clogged, especially intermediated credit. Central banks have no other choice than keeping nominal rates at zero and managing their inflated balanced sheets until money multipliers start recovering. In this regard, the recent contraction of money supply in the euro area (M3 down 1.7% in November 2009, on a quarterly annualised basis) is worrying;
Headwind #2. Uncertainties about monetary and fiscal exit strategies, and a possible lack of international coordination. Note that coordination does not mean synchronisation. In my view, the first best would be the Fed exiting before the ECB, because intermediation is more critical for the real economy in the euro area than in the US. Unfortunately, the opposite seems more likely;
Headwind #3. A possible negative feedback on credit supply from hardened banking and insurance regulation (capital requirements, leverage ratios). Note that, even if regulators give time to banks to adjust their capital structure, the impact on credit supply may come quickly, as a result of competition between companies.
At this juncture, I am tempted to give the benefit of the doubt to policy makers, since they have, so far, done the right things to fend off the worst possible outcome of the financial crisis, i.e. another Great Depression with unpredictable social and political consequences. Once short term uncertainties dissipate and with abundant liquidity in the system, equity markets might well resume their upward trend.
Eric Chaney is Chief economist of the AXA Group http://www.eurointelligence.com/article.581+M560726e6a03.0.html#
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07.01.2010 Stark says no bail-out for Greece
Greece rejected speculation on Wednesday that it would need a bail-out to tackle its swollen budget deficit as officials flew in from Brussels to scrutinise the government’s tax and spending plans, reports the FT. It was prompted by Jürgen Stark, member of the executive board of the ECB, who told Il Sole 24 Ore that “The markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece.” The Stark interview sent the euro down against the dollar by half a cent, and triggered much commentary. See, for example, Edward Hugh’s blog entry “Stark raving mad”. Under pressure from the markets the Greek government decided to step up fiscal adjustment. Kathimerini reports that the government plans to bring the deficit from 12.7% to below 3% of GDP by the end of 2012 a year earlier than planned. The target for this year is to reduce the deficit by €10bn to 8.7% of GDP. In the years 2011 - 2012 the government is to take additional measures of €2.5bn or 1% of GDP on top of the already planed.
Laurence Boone propose a new structural adjustment policy Writing in Telos, Laurance Boone argues that the EU needs an explicit policy to deal with cases such as Greece. The present legal and institutional arrangements are insufficient. The stability pact’s sanctions have never, and probably will never be applied. A country cannot be forced out of the EU, and even the suspension of voting rights in the Council can only be enacted, if ever, under extreme circumstances, nothing to do with economics. What the EU needs is a transparent procedures, in which countries in trouble are helped. The EU could finance investments, via the structural funds or the EIB, conditional on adjustments. The advantage of this approach would be that it would require no treaty revision.
Fitch downgrades Iceland to junk status After the decision by Iceland’s president to veto the Icesave bill, and to put it to a referendum,
305 the Fitch rating agency has downgraded Icelandic debt to junk status. For details on the reason, see this interview on Bloomberg TV (hat tip Credit Writedowns). Writing in the FT, Michael Hudson makes the point that Iceland is not reneging on its legal obligations, merely seeking a way to repay debt without crippling the country. He notes that the IMF concluded that a further depreciation of the currency would not be feasible, as it would raise the debt-to-GDP ratio to 240%. The Icesave deal would have done the same. The country’s ability to pay foreign debts – out of net exports – is limited.
BIS wants banks to cut return-on-equity targets The BIS will gather top central bankers and financiers this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis, reports the FT. The FT cites details from a note to the participants, in which the BIS made some specific proposals including lowering return-on-equity targets banks as a way to discourage such risk taking. In the note the BIS also express its concerns about deteriorating public finances warning. These meetings used to take place once a year in the past but have been more frequent recently.
Risk aversion fades The FT has a short note that the iTraxx Crossoverindex, an index of European credit default swaps of underlying junk bonds, has fallen below 400 basis points, the lowest level for two years. CDS indices are indicators of market attitude towards risk, and the fall in the CDS index suggests that the market are rediscovering their risk appetitie.
Sarkozy congratulates himself In his New Years address Nicolas Sarkozy congratulated himself for the success of his banks rescue package, which brought in some €2bn extra revenue for the government, reports Les Echos. These €2bn are to help the less fortunate and serve as a basis for further investments, he told his audience. The extra income comes among others from commission fees the government charged for its bank guarantees. Sarkozy said that his measures guaranteed that no financial institution got bankrupt. For more details on his speech read Les Echos. http://www.eurointelligence.com/article.581+M5fff75f244b.0.html#
06.01.2010 Iceland stakes EU entry by refusing to sign Icesave
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Iceland’s president Ólafur Ragnar Grímsson refused to sign the Icesave legislation to repay Britain and the Netherlands almost €4bn lost in a failed Icelandic bank, according to the FT. Instead, he said the bill should be put to a national referendum, amid overwhelming public opposition to the terms of the proposed repayments. About a quarter of the Icelandic voting age population have signed a petition against the deal, which critics say would lumber Iceland with unmanageable debts. Iceland was subsequently warned that it risked international isolation, with repercussions for Iceland’s bid to join the European Union and for its $10bn international economic rescue programme. FT Deutschland leads its front page with the story, and the headline the Iceland is endangering its EU membership as a result of this decision, as the UK and the Netherlands would both be expected to block the country’s EU membership unless the funds are repayed.
Spanish unemployment reaches new heights Spanish unemployment doubled throughout the crisis and rose to its highest level for more than a decade in December, reaching almost 4m, reports El Pais, a blow to José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, who has made job creation the focus of his economic strategy. Social Security also has suffered the blow of the crisis. Since the summer of 2007, the number of members of the system has declined by almost one and half million contributors to 17.9m employees. No other country has suffered so severe deterioration of its labor market. The December data yesterday contrasted with the reduction of unemployment in Germany in the same month.
Euro area inflation at 0.9% The Eurostat flash estimate for inflation in December was 0.9%, up from 0.5% in November, and still significantly below the ECB’s target of less than, but close to 2%. The FT noted that average monthly inflation rates were 0.3% during 2009, well below the target, but over the lifespan of the euro, the rate came in at 1.96%, i.e. bang on target. The article also makes a reference to an interview by Athanasios Orphanides, the Cypriot central bank governor, and member of the ECB’s council, who said weakening inflation was a matter of concern for the ECB.
€14bn legacy currencies still in circulation Lost, horded out of Nostalgia or just forgotten, €14bn of banknotes and coins of the eurozone legacy curencies are still circulation reports Spiegel Online. €7bn alone in Germany, where the
307 citizens were particularily attached to their D-Mark. Second is Italy (€1.77bn) and Spain (€1.76bn). What to do with it if found? Modalities differ among countries, but banknotes can still be exchanged into euros, only for coins several countries have stopped accepting those.
Wolf on the euro area In his FT column, Martin Wolf takes a particularly gloomy look at the euro area , and finds that the peripheral countries are trapped. Without the possibility of a devaluation or an independent monetary boost, they are likely to suffer a prolonged slump, especially since the adjustment mechanisms that exist in a nation state – cross regional fiscal support and migration, are not available. Wolf says Ireland has accepted this fate, but Spain and Greece have not. A wave of defaults, public and private, might be a consequence. He concludes that the euro area is not optimal currency area, and says time will tell whether this matters.
Kay on finance In an even gloomier column, John Kay writes in the FT that the policy to prop up markets in a crisis is very likely to lead to disaster. Our current crisis is only the culmination of a serial financial crisis that started with the Asian debt crisis in the late nineties, then the new economy boom, and now the credit crisis. Each time governments are bailing out, and make it worse. He said he was look with great apprehensive to the next decade, for the world has created a monster which it can barely control.
Munchau on finance In the first of a two part series on the effects of financial innovation on economic growth, Wolfgang Munchau assesses Paul Volcker’s comment that financial innovation over the has had zero effect on economic growth. While it is difficult to make a direct cost-benefit analysis, he agrees partially with the statement because the financial crisis was costly, and the socially most beneficially financial innovation were indeed not those of the last 25 year – i.e. those from 1985 onwards – but those in the 1960s and 1970s. So Paul Volcker might be technically correct, but only because we are drawing the line in the middle of a crisis, and because we are only looking at a particular subset of financial innovation. Seux’s New Years wish for Europe In Les Echos Dominique Seux calls on Europe to redefine its economic model amid strong competition from Asia and a revived US. It is not enough that Europe distinguishes itself through a superior social system it has to redefine its growth strategy based on innovation, research and technology. Europe is not there yet. http://www.eurointelligence.com/article.581+M5ad5aaed3aa.0.html#
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05.01.2010 Greek’s revised stability programme – first hints
Kathimerini has some details about the revised stability programme, to be handed in soon, according to which the immediate objective is to reduce the deficit by 4pp (instead of 3.7pp), with €1bn to be achieved by a 10% expenditure cut (€500m-€600m) in benefits (except family allowances)and a duty on cigarettes and drinks (€400bn). No suggestion of a VAT increase, but a planned revision of wages policy in February. Funds cut their holdings in US and UK bonds The FT reports that the world’s biggest investment funds are reducing their holdings in US and UK government bonds amid fears that rising public debt and the withdrawal of central bank support for their economy could scupper the recovery. Fund managers seem more upbeat about the euro area as the ECB’s support programme has been less aggressive and inflationary pressures are lower. US 10-year Treasury yields have jumped 63 bp to 3.83% since end November, while UK gilts have jumped 44bp to 3.96%. German bund yields have only risen by 23bp to 3.38% over the same timespan. Investment banks threaten to leave London After JP Morgan it is now Goldman Sachs which threatens to relocate their European activities out of London in reaction to the 50% tax on bonuses in 2009 introduced by Gordon Brown in December. There are also rumours that Deutsche Bank is reconsidering its position. Geneva in Switzerland is considered a likely candidate for relocation. The tax was to sharpen the profile of the Labour party ahead of elections in May. The government now threatens that the bonus tax could be extended if too many bankers had used tricks to circumvent this one time measure. The Bank of England said earlier that this financial sector relocation is a price worth paying to ensure a financial sector reform. FT Deutschland writes that this power showdown is wasted, too little revenue for the government and a perfect excuse for the investment sector to block further reforms.
309 German communes to cut back investments German municipalities are to cut back investments amid falling tax revenues and the government’s plans for further tax reductions, reports the FT Deutschland. The announcement alarmed the construction industry, which was initially optimistic about 2010. 60% of all total public investment programmes are initiated by local authorities. Currently, many communes have to take up credits to pay salaries. First day on the job for EU president Herman van Rompuy, had his first day in office as the new president of the European Council. Le Monde looks at the challenges that await him. As a first initiative he has called an extraordinary summit on February 11 to intensify cooperation as to stimulate economic growth. Van Rompuy reserves the right to call for other extraordinary summits on energy or the budget. Van Rompuy also plans to meet Barroso once a week. Meanwhile José Luis Zapatero, the Spanish prime minister and current holder of the EU’s rotating presidency, called in an expert group on the economic crisis. According to El Pais, members include Jacques Delors, Felipe González and Pedro Solbes. Krugman on 1937 Paul Krugman is now predicting a 30 to 40% probability of a recession in 2010, and a more than 50% chance that growth is slowing sufficiently for unemployment to rise again, according to Bloomberg (hat tip Calculated Risk). He has given a more elaborate version of his pessimistic outlook in his New York Times column, in which he argues that policy makers are already repeating the mistake of the Roosevelt administration which led to the 1937 recession.
Atkins on Spain Ralph Atkins has a note on Spain in the FT’s money supply blog, in which he starts by pointing out that Spain is heading in the other direction than the euro area economy, with manufacturing activity falling continuously. He says high unemployment explains the lack of domestic demand but not the persistent weakness of the export sector. He quotes an expert as saying that this may have to do with the nature of the goods the country produces and a lack of competitiveness. http://www.eurointelligence.com/article.581+M5bcda906d32.0.html#
ft.com/money-supply Spain left behind January 4, 2010 by Ralph Atkins The economic news from Spain has turned more worrisome. Eurozone purchasing managers’ indices for manufacturing showed the region’s recovery humming along nicely (December’s final index reading at 51.6, up from 51.2 in November, was in line with the preliminary estimate released last month). But Spain is heading in the opposite direction. Activity in its manufacturing sector continued to fall, and the pace of contraction in the fourth quarter was faster than in the third quarter, according to Markit, which produces the survey. Spain’s manufacturers are also reporting far steeper job losses than in other large eurozone economies, according to Chris Williamson, Markit’s chief economist. High unemployment could, in turn, be one reason why Spanish manufacturing output continues to contract - there is less demand for manufactured consumer products. But it does not explain why Spanish exports are also under-performing the eurozone average. Mr Williamson says anecdotal responses point to issues such as credit constraints and a lack of working capital to invest in marketing, promotion and new stock. But such problems are common across the eurozone. “This suggests that Spain’s problems also reflect the nature of the goods it produces and uncompetitiveness,” Mr WIlliamson concludes, rather gloomily. http://blogs.ft.com/money-supply/2010/01/04/spain-left-behind/
310 Euro Watch Following The Eurozone Economy
Edward Hugh Tuesday, January 05, 2010 Is Spain Getting Left Behind?
This not unreasonable question was asked today by Ralph Atkins on the FT's Money Supply Blog: The economic news from Spain has turned more worrisome. Eurozone purchasing managers’ indices for manufacturing showed the region’s recovery humming along nicely (December’s final index reading at 51.6, up from 51.2 in November, was in line with the preliminary estimate released last month). But Spain is heading in the opposite direction. Activity in its manufacturing sector continued to fall, and the pace of contraction in the fourth quarter was faster than in the third quarter, according to Markit, which produces the survey. Spain’s manufacturers are also reporting far steeper job losses than in other large eurozone economies, according to Chris Williamson, Markit’s chief economist. Ralph certainly has a point here. Spain's December PMI results are shocking, it posted 45.2 in December, just below the 45.3 posted in November, indicating a still substantial rate of contraction. Even more to the point this is the third month running where Spain has turned in the worst reading of any of the 26 countries included in JPMorgan's Global Manufacturing Survey. As Andrew Harker, economist at Markit, puts it: “The December PMI data completes a dreadful year for the Spanish manufacturing sector. Output decreased in each month apart from a marginal rise in July, with demand showing very little sign of recovery. The weakness of demand, amplified by dire labour market conditions in Spain, means that while input costs are rising, firms are forced to continue to offer discounts, further harming margins.”
As Ralph points out, Spain's high unemployment could be one reason why Spanish manufacturing output continues to contract - there is less demand for manufactured consumer products. But this does not explain why Spanish exports are also under-performing the eurozone
311 average. As he says, to understand this you need to understand the competitiveness issue. Spain's trade deficit has in fact deteriorated rather than improving in recent months, so something somewhere isn't working.
And meanwhile, according to the latest Bank of Spain data, net external debt rose in the third quarter, to 955 billion euros, or just under 90% of GDP.
And the government deficit keeps rising and rising. According to estimates by Julian Callow of Barclays Capital, Spain's general government borrowing requirement in the third quarter was around 33.96 billion euros (or an estimated 13.0% of GDP), up from 31.2 billion in the second quarter (around 11.9% of GDP).Based on this estimated Callow reckons the fiscal deficit to GDP ratio might come out at an average of around 11.5% of GDP for 2009, substantially worse than most estimates (e.g. the OECD’s mid-November estimate of 9.6% of GDP). I largely agree, and have been working on a rule of thumb estimate of 12% of GDP deficit (partly because I think GDP will finally come in lower than expected, and partly because I fear revenue will fall more than anticipated). And to cap it all (for today) October house sales and new mortgages both fell back sharply from September.Take a good look at the two charts below (the first is the % drop in new mortages constituted from the peak, the second is a three month moving average of new house sales) I'm sure you'll agree, they have recovery written all over them.
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But to come back to Ralph's initial point, I wouldn't say that Spain is simply being left behind, it is actually going backwards. And now the screws are really - slowly but steadily - going to start to tighten. The first hint came last week with the announcement that the latest one year Euribor "fixing" had gone upwards for the first time in a year, due to the slow movement upwards of the Eonia inter bank rate (as forecast in this post). So mortgage interest rates are now going up, and it will be a long long time before they start to come down again. Secondly, while almost everyone in the private sector is busy adjusting prices downwards, a whole raft of government and local authority administered prices were raised on 1st January. And then, next July, VAT will also be raised. What all of these three moves have in common is that they are going to scoop domestic demand out of the economy. The first, in the form of interest payments to those who hold Spain's external debt, and the other two in order to reduce the government fiscal deficit. That is, there will be no growth benefit from any of these moves, quite the contrary, which is why I say, Spain isn't just being left behind, it is actually travelling backwards. Posted by Edward Hugh at 7:08 PM http://eurowatch.blogspot.com/2010/01/is-spain-getting-left-behind.html
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Zapatero embarks on mission to raise nation's profile By Mark Mulligan in Madrid Published: January 4 2010 02:00 | Last updated: January 4 2010 02:00 Spain's European Union presidency comes at a complicated time for the eurozone's fourth-largest economy. Madrid wants to show it can take the lead on managing EU economic recovery while grappling with its worst domestic recession for more than 50 years. With unemployment at close to 20 per cent, its economy likely to shrink for a second year running and a financial system facing sharp asset writedowns and losses, Spain will have to commit to much-needed fiscal austerity and structural reform to provide an example to other EU states. José Luis Rodríguez Zapatero, the prime minister, unveiled his own blueprint last month for a "sustainable economy", built around weaning the economy off construction and property and investing more in value-added sectors such as renewable energy and biotechnology. However, he has no delusions about finding a panacea for all of Europe, say observers. "The economic crisis is much too big for one country to take on by itself," says José Ignacio Torreblanca, head of the European Council on Foreign Relations in Madrid. "Spain's role here is about steering the EU towards a new economic model, mediating where there is conflict on issues such as regulation and finding common ground among member states. In part, it should be about reviving the spirit of the Lisbon treaty [on unification of markets and competition]." In an editorial in yesterday's El País newspaper, Mr Zapatero and Herman Van Rompuy, EU president, called for more economic co-operation between states. "We've managed to create monetary union, and we have a single market, but we are still a long way from having configured economic union, the need for which . . . has been brought amply into relief by the crisis," they wrote. Spain is also counting on the summits it is hosting to raise its global profile. Two of these - with Morocco in March and the US in May - are of strategic importance to Spain; the first because of lingering territorial disputes, the second because it wants to put behind it years of prickly US relations. Spain's reliance on places such as Algeria for energy needs, and the emergence of an al-Qaeda terrorist network in north Africa, have made fluid EU ties with the region's Maghreb nations increasingly important. http://www.ft.com/cms/s/0/0c1cc216-f8d0-11de-beb8-00144feab49a.html
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Krugman Sees 30-40% Chance of U.S. Recession in 2010 (Update3) By Steve Matthews
Jan. 4 (Bloomberg) -- Nobel Prize-winning economist Paul Krugman said he sees about a one- third chance the U.S. economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade. “It is not a low probability event, 30 to 40 percent chance,” Krugman said today in an interview in Atlanta, where he was attending an economics conference. “The chance that we will have growth slowing enough that unemployment ticks up again I would say is better than even.” Krugman, 56, said growth will slow as the Federal Reserve ends purchases of securities, the Obama administration’s $787 billion stimulus program winds down and companies stop rebuilding depleted stockpiles. The Princeton University professor joined Harvard’s Martin Feldstein and Columbia’s Joseph Stiglitz, another Nobel laureate, in sounding an alarm for the world’s largest economy during the annual meeting of the American Economic Association. Feldstein yesterday called the fading stimulus “a serious cloud,” and Stiglitz said growth won’t be “robust” soon. While inventory rebuilding may have raised U.S. growth to a more than 4 percent annual pace in the fourth quarter, this year’s rate will be “more like 2 percent,” with the risk of outright declines late in the year, Krugman said. Unemployment “ends the year a little higher than it began,” Krugman said. Survey of Economists Krugman’s forecast is more pessimistic than the median estimate of 58 economists surveyed by Bloomberg News in early December, which called for a 2.6 percent expansion this year following a 2.5 percent contraction in 2009. The Federal Reserve’s plan to end purchases of $1.25 trillion of mortgage-backed securities and about $175 billion of federal agency debt in March could spur an increase in mortgage rates and lead to declines in home sales and prices, Krugman said. “Probably mortgage rates go up some,” he said. “New home sales are still pretty weak and new home construction is a joke by the standards of a few years ago. But they probably falter.”
315 The Fed should consider buying another $2 trillion in assets to reduce unemployment, Krugman said, citing research by Joseph Gagnon, a former Fed staff economist. Fed Chairman Ben S. Bernanke and his fellow policy makers cut the benchmark interest rate almost to zero in December 2008 while switching to asset purchases and credit programs as the main policy tools. The central bank has expanded its balance sheet to $2.24 trillion from $858 billion at the start of 2007. Manufacturing Expands U.S. manufacturing expanded in December at the fastest pace in more than three years, aided by government-assisted rebounds in housing and auto-making, a report today from the Institute of Supply Management indicated. The ISM’s factory index rose to 55.9, the highest level since April 2006. Readings greater than 50 signal expansion. Construction spending dropped for a seventh month, the Commerce Department said in a separate release today. “Stimulus we know starts fading and goes negative around the middle of the year,” Krugman said. “Inventory bounce, which is driving things right now, will fade out as inventory bounces do.” Any sales by the Fed of mortgage-backed securities as part of a so-called “exit strategy” from record stimulus could increase mortgage rates by 1 percentage point and impede the recovery, Krugman said. The rate for 30-year fixed U.S. home loans rose to 5.14 percent in the week ended Dec. 31, the fourth straight weekly increase and highest level since August, according to mortgage finance company Freddie Mac. Stock Rebound Krugman said he disagreed with former Fed Chairman Alan Greenspan’s view that the surge in stock prices last year reduces the need for additional government stimulus. The Standard & Poor’s 500 Index rallied 23 percent in 2009, its best performance since 2003. “People are a lot poorer than they were four years ago,” Krugman said. “Consumption is not that dependent on stock values, much more so on housing values.” Advanced economies in Europe and Asia also face the risk of a renewed recession, Krugman said. “The double dip issue is present everywhere in the advanced world,” he said. “We all have stimulus programs that kind of fade out.” The U.S. dollar may weaken “a little bit” against other advanced country currencies, he said. “The weakening of the dollar is all good for us, not so good for the Europeans and the Japanese,” Krugman said in response to audience questions after a speech today to the Atlanta meeting. ‘Currency Crises’ “There’s certainly a lot of currency crises wanting to happen in eastern Europe right now,” Krugman said without elaboration. At its last meeting in December, the central bank’s Federal Open Market Committee said economic activity had picked up, while affirming a pledge to keep the target interest rate exceptionally low for an “extended period.” “Historically, financial crises are very, very prolonged,” Krugman said. While the U.S. banking system has “stabilized,” it hasn’t returned to normal, he said.
316 “Small business is still very constrained in its borrowing,” he said. “That is not a good thing. We do not have a fully healthy, functional financial system.” The economy expanded at a 2.2 percent annual rate in the third quarter. The nation’s jobless rate stood at 10 percent in November, up from 9.8 percent in September. The rate will probably rise to 10.1 percent in December, according to the median estimate in a Bloomberg News survey of economists ahead of the Labor Department’s report on Jan. 8. To contact the reporters on this story: Steve Matthews in Atlanta at [email protected]; Last Updated: January 4, 2010 16:47 EST http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aluoqvsvAwO8#
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04.01.2010 Pessimistic into 2010
The FT reports that European company executives they have spoken to are pessimistic about the business outlook for 2010. The head of ABB said the main source of profitability was cost cutting, while an auto executive said 2010 is going to be another tough year for the industry. The head of a Dutch insurance company said he would not exclude the possibility of a double-dip recession, while the head of a management consultancy said the world economy was characterised by zombies in the public and private sectors. The Wall Street Journal reports from the annual conference of the American Economics Association in Atlanta, with some gloomy forecasts from Martin Feldstein and others. M3 falls for the first time Euro area M3 fell by 0.2% in November, the first time since the start of the euro in 1999,and a sign of the persistent weakness of the euro area economy. FTD Deutschland also reports that credits to companies also fell in November, for the third consecutive months. The article quotes analysts as saying that these data underline the ECB’s current course, and suggest that no rate rise is likely until at least late 2010. French credit holds up, more or less No, the French banking system did not deliver the promised credit growth of between 3 and 4%, but according to statics from the Bank of France, credit held up reasonably well, with credit to households up by 3.7% during the year (which is a much better performance than the euro area average of 0.5%), while credits to companies were down by 2.3%. According to Les Echos, the latter is due to two factors, a fall in demand as a result of the recession, and a trend among larger comapnies to turn to the capital market for funding. Merkel’s party boss seeks transactions tax Volker Kauder, the CDU’s parliamentary chief, is calling for a transactions tax on financial institutions to help pay for the costs of the financial crisis. Kauder said it would be wrong for banks not to participate in burdening the costs of the crisis. He was concretely proposing a tax of 0.05% on all financial transactions, which would raise €160bn EU-wide, which is more
318 than the entire EU budget. The FDP is strictly opposed to such a tax, and it is also explicitly ruled out in the coalition agreement between the two parties.
IMF predicts continued price rises of commodities The commodities boom is likely to continue in 2010, according to an IMF study, as reported by FT Deutschland. According to the IMF said the price increases will be relatively more moderate than last year, given the existing inventories. The recovery in commodities prices has been significantly strongly than during previous recessions. The IMF said structurally price are likely to remain under pressure, given the persistent strong demand from emerging countries, and supply side fragility.
Update on Greece The last weeks of the previous year were dominated by news from Greece. Here are the latest developements. Kathimerini reports this morning that the finance minister will send a revise stability and growth programme to Brussels today, and on Wednesday a negotiations team from the Commission and the European Central Bank will arrive in Athens to finalise the content. There has also been some speculation about another upward revision of the 2009 deficit from 12.7%. See Edward Hugh for more details on this, including a report by capital.gr on speculation of an upward revision of a few decimal points. Finance minister George Papaconstantinou, however, insisted, that the final figure will be close to the projection. Harold James on the forgotten lesson of the Great Depression A good commentary by Harold James, who writes in the Financial Times that we have not drawn all the lessons from the Great Depression. We have taken the macro lessons – in the form of stimulus spending and monetary support – but not the micro lessons. “A 1931-type event requires micro-economic restructuring, not macro-economic stimulus and liquidity provision. It cannot be imposed from above by an all-wise planner but requires many businesses and individuals to change behaviour. The improvement of regulation, while a good idea, is better suited to avoiding future crises than dealing with a catastrophe that has already occurred.” He also made the point that the international crisis propagation systems work just as destructively today as the did in the early 1930s.
Inflation in China James Hamilton has a post in his blog, in which he wonders why Chinese inflation is not higher given that artificially undervalued exchange rate. He said the answer is probably a shift in relative prices, as Chinese companies and investors are pilining into real estate and comodities, including cooper and garlic. http://www.eurointelligence.com/article.581+M56234e863e2.0.html#
319 Blogs REAL TIME ECONOMICS Economic insight and analysis from The Wall Street
Journal.
January 3, 2010, 5:58 PM ET Harvard’s Feldstein: Economy Might Run Out of Steam in ‘10
By Michael S. Derby
Veteran economist Martin Feldstein, of Harvard University, is not sure the U.S. economy will escape a second trip back into recession in the new year. Feldstein, who is also the emeritus president of the business cycle dating organization the National Bureau of Economic Research, tied this risk of a renewed downturn after the worst recession in decades to a poorly conceived government stimulus effort. “I supported the idea we needed to have a fiscal stimulus, somewhat to the dismay of my conservative friends,” Feldstein said Sunday at a meeting of the American Economic Association in Atlanta. But the design of the stimulus was put in the hands of congress and it was poorly done, which meant it “delivered much less” in actual stimulus than its nearly $800 billion price tag suggested it should. While the stimulus has helped push the economy out of recession so far, other negative forces still at play raise questions about the effort’s ultimate durability. “There is a significant risk the economy could run out of steam sometime in 2010,” Feldstein warned. In his comments, Feldstein was also worried about the longer run U.S. fiscal situation, which contains a rising and worrisome tide of U.S. debt. But his worry was countered by James Galbraith, of the University of Texas-Austin. The academic agreed with Feldstein that the fiscal stimulus had underdelivered, but said the remedy to that was to do even more government stimulus. Galbraith downplayed the budget implications of this new borrowing. “You pay too much attention to those voices” who worry about rising debt- to-GDP ratios. “Those numbers are financial artifacts,” and “the problem to focus on is the 14 million unemployed,” Galbraith said. He noted that the debt-to-GDP ratio hit 100% of GDP after World War II, and that period was followed by a huge period of U.S. economic growth. In a later session, Joseph Stiglitz, the Nobel laureate. warned against “deficit fetiishism,” and said government spending could go to productivity-improvement investments, such as environmental technology. But Olivier Blanchard, chief economist of the International Monetary Fund, countered that prospective investments in green projects were too small to have a macro-economic impact. Michael S. Derby Harvard’s Feldstein: Economy Might Run Out of Steam in ‘10 January 3, 2010, http://blogs.wsj.com/economics/2010/01/03/harvards-feldstein-risk-economy-mahl-run-out-of- steam-in-10/tab/print/
320 UK COMPANIES Virgin prepares for banking push By Adam Jones Published: January 8 2010 09:17 | Last updated: January 8 2010 11:27 Sir Richard Branson’s Virgin Money on Friday announced that it was buying a tiny Yeovil-based bank called Church House Trust as the prelude to a bigger push into retail banking. Jayne-Anne Gadhia, Virgin Money chief executive, also said the financial services group was considering selling payment protection insurance (PPI) in competition with high street banks, broadening its assault on the sector. Church House Trust is a regional private bank set up in 1987 by partners of Battens Solicitors, which has offices in Dorset and Somerset. As well as lending and taking deposits, it has asset management, pensions and tax businesses. However, the non-banking activities are being hived off before Virgin Money takes control in a deal that values the target’s equity at about £12m. Virgin Money’s recommended offer for Church House Trust also involves the injection of a further £37m in new capital after the deal concludes, giving an overall value to the acquisition of just under £50m. Ms Gadhia said Virgin Money’s unsuccessful attempt to buy Northern Rock in 2007-8 had left it convinced that there was a demand for Virgin-branded banking, partly because of the “breakdown in trust in the banking sector”. Church House Trust will be used as a platform for the sale of a full range of retail banking products – such as deposit accounts and mortgages – under the Virgin Money brand. The expansion will be online initially, although a future high street presence is possible, according to a person familiar with the matter. Virgin Money said the purchase would also enable it to contemplate future acquisitions. The group has been seen as a potential buyer of parts of Northern Rock, Royal Bank of Scotland and Lloyds Banking Group, which all have some form of full or partial government ownership. “The government has said it hopes the disposal of bank assets will see new players enter the market and Virgin Money may consider opportunities should they present themselves,” the group said. Virgin Money is not unacquainted with retail banking. Through a joint venture with RBS, it launched the Virgin One bank account in 1997. RBS bought it out of the partnership in 2001. Virgin’s return to the sector comes amid expansion by the banking arm of Tesco, the supermarket chain. Two new retail banks – one called Metro Bank, the other planned by Sandy Chen, a banking analyst at Panmure Gordon – are also looking to launch. In approving the planned acquisition of Church House Trust, the Financial Services Authority had given Virgin Money the same level of scrutiny that it would have received had it applied for a new banking licence, Ms Gadhia said.
321 Payment protection insurance is a form of cover against borrowers missing loan repayments. Sales of PPI have been lucrative for banks in the past. However, it has been subject to a regulatory crackdown following claims that PPI was often very expensive, mis-sold and prone to unreasonable claim exclusions. Ms Gadhia told the Financial Times that Virgin Money was considering launching Virgin- branded PPI cover in conjunction with Bank of America. http://www.ft.com/cms/s/0/f064ccce-fc28-11de-826f-00144feab49a.html Licences given for £100bn wind farm scheme By Ed Crooks, Energy Editor Published: January 8 2010 12:15 | Last updated: January 8 2010 12:50 Sixteen companies including many of Europe’s leading energy groups have been awarded licences to develop wind farms off the coast of Britain, launching a huge expansion of the country’s offshore wind industry. The £100bn investment programme, which would make the UK by far the world leader for offshore wind, is of a comparable scale to the opening of the North Sea to oil and gas production in the 1970s. Gordon Brown, the prime minister, welcomed the announcement on Friday morning, which the government believes could create 70,000 jobs by 2020. Mr Brown said: “We are determined to do everything that we can... to bring these jobs to this country.” However, Britain lacks any significant capacity to manufacture wind turbines, and there are fears that the bulk of the capital spending will go to suppliers in Germany and Denmark rather than the UK. The results of the licensing process, known as Round Three, were announced by the Crown Estate, which manages offshore property for the government. Nine consortia were awarded licences to develop areas capable of generating 32,000 megawatts of electricity; a huge increase from the UK’s present capacity of less than 700MW. The biggest winners of licences were Centrica, the owner of British Gas, Scottish and Southern Energy, RWE of Germany, Iberdrola of Spain, owner of Scottish Power, and Vattenfall of Sweden. All of those, except for Vattenfall, are already leading suppliers to the UK electricity market. Other companies involved in consortia that have won licences include Statoil of Norway, EDP of Portugal, Eneco of the Netherlands and SeaEnergy, which has converted itself from an oil exploration business to the UK’s only listed specialist offshore wind developer. One particularly intriguing name on the list is Siemens, the German engineering group, which has a 50 per cent stake in a consortium awarded an area off the Yorkshire coast with the potential to generate 4,000MW. Siemens is a well-established manufacturer of wind turbines for offshore use; it will supply the turbines for the London Array, planned to be the world’s biggest offshore wind farm, now under construction in the Thames estuary.
322 Siemens has been looking at setting up a turbine manufacturing base in the UK, and the government will hope that its participation in the latest licensing round will make that investment more likely. Greg Clark, the Conservative shadow energy secretary, said: “Britain has some of the best natural resources in the world for wave, tidal and wind power but Labour’s lack of action on renewable energy means that Britain has lost its leading position and is now losing jobs and business too.” But Lord Mandelson, the business secretary, said the expansion of offshore wind created a “huge opportunity for the UK economy”, building on the country’s expertise in manufacturing and offshore engineering in particular. “It is something that we’ve all got to work very closely on, to secure these opportunities for our country,” he said. “When we grow big in Britain, we can then grow big in Europe and in the rest of the world.” http://www.ft.com/cms/s/0/61b08a12-fc4c-11de-826f-00144feab49a.html
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January 8, 2010 Mises Daily [email protected]
Today's other Mises Hoppe in One Lesson, Dailies: Illustrated in Welfare The Doctrines of One Obscure and Heterodox Economics Scholastic by Murray N. by Jeffrey M. Herbener on January 8, 2010 Rothbard
[Excerpted from Property, Freedom and Society: Essays in Honor Four Hundred Years of of Hans-Hermann Hoppe.] Dynamic Efficiency by Every schoolboy learns that, to reach a true conclusion, one must Jesus Huerta de Soto start with true premises and use valid logic. The lesson, unfortunately, is largely forgotten later in life. Most lack the intelligence, interest, or courage to apply the lesson rigorously. Many break or bend the rules to further their own agendas or careers. Others can only muster the will to follow the rules in some part or in some cases. Rare is the person who masters the lesson. Hans-Hermann Hoppe has demonstrated the intellectual heights that can be reached by employing the lesson with a brilliant mind, fervent devotion to the truth, and unflagging moral courage. What follows is a brief account of how he set right the entire field of welfare economics.[1] Old-welfare economics attempted to overturn the laissez-faire conclusions of the Classical school on the basis of the theory of marginal utility ushered in by the marginalist revolution. If utility can be compared interpersonally, by various assumptions such as cardinal utility or identical utility schedules or utility of money among people, the old-welfare economists argued that diminishing marginal utility implied a social-welfare gain from, among other interventions of the state, redistributing wealth from the rich to the poor. This line of argument was brought up short by the demonstration that the subjectivity of value precludes interpersonal-utility comparisons. Therefore, social welfare can only be said to unambiguously improve from a change if it makes at least one person better off and no one else worse off. This Pareto rule forbade economists from claiming social-welfare improvements from state interventions since they do make some better off and others worse off. New-welfare economics tried to weave a case for state intervention within the constraints of the Pareto rule. The conclusions of new-welfare economics can be drawn from its main theorems. The first welfare theorem states that a perfectly competitive general equilibrium is Pareto optimal. From this theorem, the new-welfare economists conclude that a divergence of the real economy from this hypothetical condition justifies state intervention to improve social welfare. Economics journals are replete with cases demonstrating how the market economy fails to achieve a perfectly competitive general equilibrium and what interventions the state should make to remove the market's inefficiency. The second-welfare theorem states that any Pareto-optimal solution can be brought about by a perfectly competitive general equilibrium. For each pattern of initial endowments of income among persons, the perfectly functioning market economy would reach a different Pareto- optimal outcome of production and exchange. From this theorem, new-welfare economists
324 conclude that the state can distribute income, in whatever pattern it wants, e.g., to achieve a particular conception of equity, without impairing the social-welfare-maximizing property of the perfectly functioning market economy. In his article on utility and welfare economics in 1956, Murray Rothbard demonstrated that new- welfare economists were wrong to think that a case against laissez-faire could be constructed on the ground of the subjectivity of value.[2] He argued that new-welfare economists were correct to infer the impossibility of interpersonal-utility comparisons from the subjectivity of value. Value is a state of mind without an extensive property that could be objectively analyzed. As such, no common unit of value exists among persons in which their mental states could be measured and, thus, compared. Having accepted the subjectivity of value as the reason for the impossibility of interpersonal- utility comparisons, which they made a pillar of their welfare economics, new-welfare economists commit themselves to other corollaries of subjective value. In particular, Rothbard contended, they must embrace the concept of demonstrated preference. Because preferences exist solely in a person's mind, another person can acquire objective knowledge about them only by inferring them from his actions. Since no other objective knowledge of a person's preferences exists, only demonstrated preference can be used in the analysis of welfare economics. Both the impossibility of interpersonal-utility comparisons and demonstrated preference are deduced directly from the subjectivity of value, and therefore, new-welfare economists cannot, validly, accept one and reject the other. The impossibility of interpersonal-utility comparisons constrains welfare economics by the Pareto rule, making it harder to justify state intervention than otherwise, but demonstrated preference raises the bar for justifying state intervention that much higher. According to new-welfare economists, the level set by the Pareto rule is determined by the market's deviation from the optimal result of a perfectly competitive, general-equilibrium model, but demonstrated preference eliminates any use of hypothetical values, including the utility functions of economic agents that underlie such models. To be scientific, welfare economics must confine itself to statements about preferences that actual persons demonstrate in their actions. Rothbard wrote, Demonstrated preference, as we remember, eliminates hypothetical imaginings about individual value scales. Welfare economics has until now always considered values as hypothetical valuations of hypothetical "social states." But demonstrated preference only treats values as revealed through chosen action.[3] The first welfare theorem, reconstituted along Rothbardian lines, does not refer to the general equilibrium state of models invented by economists. It refers to the actual economy, for which it is more difficult to demonstrate social-welfare improvements from state intervention. If market outcomes are compared to other realizable conditions reached in actual economic systems, instead of unrealizable outcomes of perfectly functioning, fictitious models, then market failure seems unlikely. And, as Rothbard showed, the market does surpass the levels of social welfare reached in other, actual economic systems. The second welfare theorem, however, seemed unscathed by Rothbard's critique. New-welfare economists could still advocate one intervention of the state. Without impairing the efficiency of the market in bringing about a Pareto-optimal point, the state could still distribute income to achieve its conception of equity. Rothbard responded that private property was the proper initial distribution of wealth from which market activity renders a Pareto-optimal outcome. And, because the initial distribution of private property is not arbitrary, but follows the lines of self- ownership of labor, homesteader ownership of land, and producer ownership of goods, state intervention in property ownership could not produce an outcome commensurate in social welfare with the Pareto-optimal outcome of laissez-faire.
325 New welfare economists, however, not being adherents to Rothbard's natural-rights theory of property, denied that state distribution of property ownership would lead to a market outcome inferior in social welfare to that of the unhampered market. Even some economists who favored laissez-faire agreed that the pattern of property ownership in society is arbitrary with respect to the market achieving a Pareto-optimal outcome, and hence, the state can rearrange it without detrimental consequences on social welfare. It was left to Hoppe to work out the logic of Rothbard's argument and reach a definitive conclusion about the effect on social welfare of state distribution of property ownership.[4] In so doing, he reoriented welfare economics to its true course. Although latent in Rothbard's analysis, Hoppe was the one who demonstrated that the Pareto-rule approach to social-welfare economics leads, not to an optimization end point, but to a step-by-step Pareto-superior process with an objective starting point. As Rothbard had done before him, Hoppe confronted new-welfare economists with a logical inconsistency in their argument. They had accepted a basic principle, this time self-ownership, from which they inferred social-welfare consequences of voluntary exchange, i.e., they pronounced on the social-welfare consequences of voluntary exchange from the viewpoint of the traders themselves. But, in embracing self-ownership, they must also accept its logical corollary, namely Lockean property acquisition. Hoppe pointed out that self-ownership is a necessary precondition to all acquisition and use of property and not just voluntary exchange. Therefore, it is the starting point for each succeeding step of social interaction. In critiquing Kirzner's view of welfare economics, Hoppe writes, If, however, the Pareto criterion is firmly wedded to the notion of demonstrated preference, it in fact can be employed to yield such a starting point and serve, then, as a perfectly unobjectionable welfare criterion: a person's original appropriation of unowned resources, as demonstrated by this very action, increases his utility (at least ex ante). At the same time, it makes no one worse off, because in appropriating them he takes nothing away from others. For obviously, others could have homesteaded these resources, too, if only they had perceived them as scarce. But they did not actually do so, which demonstrates that they attached no value to them whatsoever, and hence they cannot be said to have lost any utility on account of this act. Proceeding from this Pareto-optimal basis, then, any further act of production, utilizing homesteaded resources, is equally Pareto- optimal on demonstrated preference grounds, provided only that it does not uninvitedly impair the physical integrity of the resources homesteaded, or produced with homesteaded means by others. And finally, every voluntary exchange starting from this basis must also be regarded as a Pareto-optimal change, because it can only take place if both parties expect to benefit from it. Thus, contrary to Kirzner, Pareto-optimality is not only compatible with methodological individualism; together with the notion of demonstrated preference, it also provides the key to (Austrian) welfare economics and its proof that the free market, operating according to the rules just described, always, and invariably so, increases social utility, while each deviation from it decreases it.[5] Hoppe showed that the Pareto rule needed to be applied to the social-welfare consequences of the acquisition of property and not just its use. Self-ownership is the immutable starting point for the process of acquiring and then using property. State distribution of income to achieve an ostensibly more equitable "initial" endowment of income among persons fails to satisfy the Pareto rule. In other words, the second welfare theorem, reconstituted along Hoppean lines, is
326 false. Only one initial endowment, the Lockean one, is capable of producing a Pareto-optimal outcome. Moreover, Hoppe's argument dispatches entirely the notion of Pareto optimality as a social- welfare-maximizing end state. Welfare economics starts with the objective fact of self-ownership and then demonstrates that each step of voluntary acquisition and use of property satisfies the Pareto rule and thereby, improves social welfare. Moreover, each instance of state intervention into the voluntary acquisition or use of property benefits some and harms others and, thereby, fails to improve social welfare. The actual market, then, is not compared to some end point it may eventually reach but has not yet achieved. If that were the case, it might be claimed that some interventions of the state could facilitate the actual market in achieving the higher level of social welfare at its end point. Instead, welfare economics is constrained to comparing the actual market to actual state intervention. No room is left for the claim that the market fails to attain some ideal which might be used to justify state intervention. Hoppe definitively established that the unhampered market is superior in improving social welfare. Welfare economics is arguably the least of Hoppe's accomplishments in employing the lesson. In every field that has drawn his attention, he has, like Ludwig von Mises and Murray Rothbard before him, exemplified sound reasoning in social analysis. He improved the edifice they constructed by clarifying first principles and relentlessly and fearlessly tracing out the logical implications of these premises to their conclusions. He is an exemplar for all those who love the truth.
Jeffrey Herbener teaches economics at Grove City College. Send him mail. See Jeffrey M. Herbener's article archives. This article is excerpted from Property, Freedom and Society: Essays in Honor of Hans- Hermann Hoppe. Comment on the blog. You can subscribe to future articles by Jeffrey M. Herbener via this RSS feed. Notes [1] On the development of Welfare economics, see Mark Blaug, "The Fundamental Theorems of Welfare Economics, Historically Considered," History of Political Economy 39, no. 2 (2007): 185–207 and Jeffrey M. Herbener, "The Pareto Rule and Welfare Economics," Review of Austrian Economics 10 (1997): 79–106. [2] Murray N. Rothbard, "Toward a Reconstruction of Utility and Welfare Economics," The Logic of Action, One (Cheltenham, U.K.: Edward Elgar, 1997), pp. 211–54. [3] Ibid., p. 240. [4] Hans-Hermann Hoppe, "Review of Man, Economy, and Liberty," Review of Austrian Economics 4 (1990): 249–63. [5] Ibid., pp. 257–58.
327 COMPANIES BIS Published: January 7 2010 09:40 | Last updated: January 7 2010 13:22 Bankers are back to the excessive risk taking that brought on the financial crisis. That, at least, is the fear of the Bank for International Settlements. The so-called “central banks’ central bank” has summoned a number of private sector bank chiefs to Basel this weekend to rap their knuckles about the return of “aggressive behaviour that prevailed during the pre-crisis period”. Given that the BIS was one of the few official organisations to warn of the credit crisis way back when, its latest admonition is worrying. Yet, at the same time, the BIS wants to have its cake and eat it. Central banks want private bankers to take more risk. They want them to lend, even if credit demand is weak. More generally, they want to see funds flow out of cash and into the real economy. That, after all, is the point of near-zero interest rate policies and quantitative easing. The result has been a colossal and lucrative carry trade, with both welcome and unwanted consequences. The supply of cheap funding has created useful demand for government bonds, just as fiscal deficits are rising. It has also helped banks rebuild their balance sheets. It may even have led to an incremental increase in the supply of credit. But being able to borrow at zero in the US and lend at, say, 9 per cent plus in Brazil has unleashed a possibly dangerous surge of hot money into emerging markets. Back home, it has also produced embarrassingly large profits at banks that weathered the crisis well, such as Goldman Sachs. It is well-nigh impossible to separate desirable risk-taking from undesirable until either interest rates rise, or new bank regulations such as higher capital requirements are in place. In the meantime, the banks will make hay. http://www.ft.com/cms/s/3/99104cf4-fb70-11de-93d1-00144feab49a.html Top banks invited to Basel risk talks By Henny Sender in New York Published: January 6 2010 23:30 | Last updated: January 6 2010 23:30 The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk- taking” that sparked the financial crisis. In its invitation, the BIS cited concerns that “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”. The BIS, known as the central banks’ bank, outlined in a restricted note to participants some specific proposals that it believes could create a healthier financial system. Those proposals including lowering return-on-equity targets for the banks as a way to discourage such risk taking. Private sector bank chiefs attending the meeting at the BIS in Basel include Larry Fink of BlackRock, Vikram Pandit of Citigroup, and John Stumpf of Wells Fargo. Lloyd Blankfein, Goldman Sachs chief executive, and Jamie Dimon, chief executive of JPMorgan Chase, were invited but are not planning to attend
328 The meeting comes at a moment of intense uncertainty, with the global economy’s tentative recovery shadowed by “the overhang of private-sector debt and rapidly rising public debt”, and high unemployment. “The concern here is that the prolonged assurance of very cheap and ample funding may encourage excessive risk-taking,” the BIS invitation note says. “For example, low financing costs coupled with a steep yield curve may make participants vulnerable to future increases in policy rates – a situation reminiscent of the 1994 bond market turbulence which followed the Federal Reserve’s exit from a prolonged period of low policy rates.” The note also expresses concern about deteriorating public finances and warned that doubt about fiscal prudence “could seriously disrupt bond markets if it triggered concerns about creditworthiness or inflation because of concerns with government incentives to inflate debt away.” Among the charts included with the note is one indicating the cost of credit insurance against sovereign defaults. In the past, the BIS has invited the top chiefs of private-sector banks to such gatherings in Basel on a yearly basis. But such meetings have been more frequent recently. “These meetings are an attempt to bring a real world perspective to the deliberations of the wise men of the world,” one Federal Reserve official said. Central bankers “want to get a sense of what the markets are reacting to.” Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/310b5c88-fb0d-11de-94d8-00144feab49a.html
329 Opinion January 7, 2010, 5:34 pm The Three Magi of the Meltdown
By William D. Cohan on Wall Street and Main Street. Just because hindsight is 20/20 doesn’t mean we shouldn’t occasionally avail ourselves of it. The upcoming second-year anniversary of the collapse of Bear Stearns provides just such an opportunity to look back with a degree of analytical wisdom not available at the time of the firm’s shocking demise in March 2008. The new, inescapable conclusion — thanks to the passage of time, of course — is that Wall Street and Main Street would be better off today had the power troika of Henry Paulson, Ben Bernanke and Tim Geithner (at the time, Treasury secretary, Federal Reserve chairman and president of the New York Federal Reserve, respectively) let the 85-year-old firm fail outright instead of crafting their clever rescue. Had Paulson, Bernanke and Geithner handled Bear Stearns differently two years ago, we might have avoided Tarp, 10 percent unemployment and the Great Recession. By arranging for Bear’s shareholders to get a tip — it turned out to be $10 a share in JPMorganChase stock at the time (worth around $9 a share these days, based on JPMorgan’s recent stock price) — and for Bear’s creditors to get 100 cents on the dollar for what was a bankrupt company (where creditors would likely fight for years over the carcass), these three men single-handedly sent to the market a powerful message it would all too quickly misinterpret, much to our collective peril: For the first time in the history of American capitalism, the federal government would not let a big Wall Street securities firm fail. As painful as it may have been at that time, the Committee to Save the World, Version 2.0, could have just as easily sent a very different message, one sent to the shareholders and creditors of poorly managed companies all the time: Too bad. You took risks you didn’t understand? Got too greedy? Took your eye off the ball? Kept in place executives and their cronies on the board of directors who should have retired or been replaced years earlier? Well, then, you are about to learn the valuable lesson of American capitalism and what it means to take stupid risks with other people’s money. You will lose your investments, your jobs and your company. Sorry about that. Stuff happens. The market understands that message loud and clear. Instead, the message got very muddled. It is useful to remember how that happened, especially with free-market oriented Republicans like Paulson and Robert Steel, his deputy at Treasury and liaison with Wall Street. Both Paulson and Steel were former senior Goldman Sachs executives. And there is little question that before March 2008, neither man was of a mind to save a failing securities firm. Their prevailing thinking, Steel has told me, was that “depository institutions are systemically important institutions, but securities firms aren’t. A failed securities firm was not a systemic issue.” Before March 2008, if a securities firm failed it was either liquidated or merged into a healthier business. That view changed suddenly on the morning of March 13, after Bear Stearns’ outside counsel, H. Rodgin Cohen of the white-shoe law firm Sullivan & Cromwell, informed Steel that Bear Stearns was having serious liquidity problems and might not be able to meet its obligations — of around $75 billion a day — when they became due. In other words, the firm was bankrupt.
330 The night before, Cohen had given the same message to Geithner, who while not Wall Street’s primary regulator — that job belonged to the Securities and Exchange Commission — was intimately familiar with the plumbing of Wall Street and knew what it could mean if Bear Stearns went belly up. “I think I’ve been around long enough to sense a very serious problem, and this seems like one,” Cohen recalled telling Geithner. And at breakfast with Steel the next morning in Washington, Cohen told me later, he said, “There’s a chance we can work through this. But this is pretty unattractive.” Steel has told me that after that breakfast he ducked into Paulson’s office and warned him about his growing fears. “We’re not going to know a lot more for a few hours,” Steel told his boss, “but let’s get some people to start to think about various issues and ways to deal with this.” In an understandable panic brought on by their collective concern that the rapid demise of Bear Stearns would rupture confidence in the global capital-markets system — since Bear was a counterparty on many thousands of trades the world over — they decided to have the Fed provide a $30 billion line of credit to the firm (using JPMorgan Chase as a conduit since Bear Stearns could not borrow directly from the Fed). But the market responded poorly to that drastic move, so a day later Paulson, Bernanke and Geithner arranged for the outright sale of Bear Stearns to JPMorgan by agreeing to have the Fed underwrite $29 billion in losses on $30 billion of Bear’s squirrelly assets that JPMorgan refused to take. At the time, the plan seemed like a good one. Staunch the bleeding by applying a tourniquet directly to the gaping wound that was Bear Stearns, and hope the other large financial firms — including Lehman Brothers, Merrill Lynch and A.I.G., the global insurer, which were nothing more than Bear Stearns on steroids — would somehow survive. The Band-Aid worked for six months until the patients all bled out in September 2008. In retrospect, had Bear been allowed to fail and then been liquidated, the rest of Wall Street would have immediately come to grips with the seriousness of the situation instead of dallying for six months while thinking the Feds would step in and save them, too. Chances are Lehman rather than Bear would now be part of JPMorgan; Bank of America would likely still have bought Merrill Lynch. Morgan Stanley and Goldman Sachs would probably have just skated by with their investments from Mitsubishi and Warren Buffett, respectively. But the Panic of 2008 could have been largely avoided, and with it large chunks of the $700 billion Troubled Asset Relief Program (the Fed’s $12 trillion — and counting — pledge to buck up the financial system), the misery of 10 percent unemployment and today’s Great Recession. Easy to say now, of course. William D. Cohan The Three Magi of the Meltdown January 7, 2010, http://opinionator.blogs.nytimes.com/2010/01/07/the-three-magi-of-the-meltdown/ William D. Cohan, a former investigative reporter in Raleigh, N.C., worked on Wall Street as a senior mergers and acquisitions banker for 15 years. He also worked for two years at GE Capital. He is the author of "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street" and "The Last Tycoons: The Secret History of Lazard Freres & Co." In addition to The New York Times, he writes regularly for Vanity Fair, Fortune, the Financial Times, ArtNews and The Daily Beast.
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El paro se duplica durante la crisis La cifra de desempleados registrados crece en casi 800.000 en 2009 y roza los cuatro millones - Diciembre certifica que el deterioro del mercado laboral se frena El Ejecutivo espera que la situación mejore en los próximos meses El desempleo en la construcción crece ante el fin del Plan E y el mal tiempo Los contratos suben respecto al año anterior, pero caen los indefinidos Los sindicatos piden estímulos al empleo, y la CEOE una reforma laboral
MANUEL V. GÓMEZ - Madrid - 06/01/2010 De más a menos, a un ritmo menguante pero inexorable, 2009 ha acabado con casi cuatro millones de parados registrados en las listas del Ministerio de Trabajo, tras subir en 794.640 personas en los últimos 12 meses. Las oleadas de nuevos desempleados con que se inició el año han perdido fuerza. De más a menos, a un ritmo menguante pero inexorable, 2009 ha acabado con casi cuatro millones de parados registrados en las listas del Ministerio de Trabajo, tras subir en 794.640 personas en los últimos 12 meses. Las oleadas de nuevos desempleados con que se inició el año han perdido fuerza. Pero no tanta como para evitar que en poco más de dos años -desde que en agosto de 2007 comenzara la crisis financiera internacional que acabó gripando la economía real- la cola del paro en España se haya duplicado, según los datos publicados ayer por el Ministerio de Trabajo. Salvo un breve paréntesis entre mayo y julio, el número de parados ha crecido machaconamente mes tras mes. Así hasta llegar a sumar 54.657 parados en diciembre y cerrar en año en 3.923.603 parados, un 25,4% más que en el mismo mes del año anterior. No obstante, hay que recordar que el termómetro que refleja con mayor precisión la situación del mercado laboral es la Encuesta de Población Activa que se publica cada trimestre. El pasado septiembre la estadística del INE situaba el número de parados en septiembre en 4.123.300 y la tasa de paro en el 17,9%. También la Seguridad Social ha sufrido el golpe de la crisis. Desde el verano de 2007, el número de afiliados ha menguado en casi un millón y medio hasta 17.851.173 cotizantes empleados.
332 Ningún otro país ha sufrido un deterioro tan intenso de su mercado laboral. El dato de diciembre contrastaba ayer mismo con la reducción del paro en Alemania en ese mismo mes. "2009 ha sido un año muy difícil en términos de empleo", resumió ayer la secretaria general de Empleo, Maravillas Rojo al valorar los números de diciembre. Por su parte, el secretario de Estado de la Seguridad Social, Octavio Granado, hizo hincapié en el menor deterioro de los datos de afiliación en los últimos meses y expresó su confianza en que la situación mejore con el paso de los meses. De la misma opinión es Javier Andrés, catedrático de Análisis Económico de la Universidad de Valencia: "Estamos tocando el suelo de la destrucción de empleo, pero eso es parco consuelo". Andrés cree que el problema al que ahora se enfrenta España es la de un alto paro durante año, algo que el mismo Gobierno admite en sus previsiones. Del dramatismo de las cifras de hace un año hablan los 139.694 parados más de diciembre de 2008. El deterioro incluso fue a más en los primeros meses del pasado año. Pero conforme fue transcurriendo 2009 los datos han sido menos escalofriantes. Así en diciembre se contabilizaron 54.657 parados más que en noviembre y 43.830 afiliados a la Seguridad Social menos, unas cifras que se reducen hasta poco más de 35.000 para el primer caso y unos 15.400 para el segundo si se descuentan los efectos del calendario. En la paulatina ralentización de la caída del empleo el año pasado influyeron, por un lado, el insostenible ritmo que mantuvo en el último trimestre de 2008 y el primero de 2009, cuando se trituraron casi 1,3 millones de empleos. Andrés resume este argumento de forma sencilla: "Las cosas tienen que dejar de caer alguna vez. Ya se han destruido muchos puestos de trabajo". Pero también las medidas fiscales que puso en marcha el Ejecutivo, sobre todo el fondo de inversión local. Esta iniciativa ha logrado frenar el desplome de la construcción. Pero sus efectos se han ido diluyendo con el paso del tiempo. Y así el papel del ladrillo en el crecimiento del paro de diciembre ha sido determinante. Este sector sumó 54.936 parados más. Sus números superaron ampliamente a los de la industria y los servicios y fueron compensados en parte por la caída de la agricultura y quienes no tenían un trabajo antes de inscribirse en la oficinas del paro. Diciembre es tradicionalmente un mal mes para la construcción. El invierno no es una estación que estimule este sector. A este factor, en 2009 hay que sumar el final de las obras del fondo de inversión local que tocan a su fin. Además, según explicó ayer la secretaria general de Empleo, Maravillas Rojo, este año el mal tiempo ha forzado el final de muchos contratos ligados a este sector. La evolución de la construcción conllevó un contundente aumento del paro entre los hombres (72.135). Este sector emplea casi en exclusiva a mano de obra masculina, por lo que su desplome -una característica clave en la crisis- lleva consigo el hundimiento del empleo entre los hombres. Entre los datos de diciembre, destaca el repunte de los contratos firmados respecto al mismo mes del año anterior. Un dato que se debe sólo al aumento de los contratos temporales, que crecieron un 3,67%, circunstancia aprovechada por Agett, la patronal de las empresas de trabajo temporar para subrayar que es por ahí por donde se "reactiva el mercado laboral". Pero este dato positivo tiene su lunar. Los compromisos indefinidos cayeron un 16,72%. Para Andrés, esto es una prueba de que la crisis comienza a afectar al núcleo del empleo, al fijo. Conocidas las cifras, UGT manifestó su pesimismo sobre el futuro: "No parecen vislumbrarse signos de recuperación en términos de empleo". Y reclamó el mantenimiento de políticas que estimulen el empleo. CC OO, por su parte, pidió que "mientras la reactivación económica no genere empleo habrá que reforzar la protección al desempleo". En la orilla empresarial, la
333 patronal CEOE volvió a insistir en la necesidad de hacer reformas profundas del mercado de trabajo. Algo parecido reclamó el portavoz económico del PP, Cristóbal Montoro: "Si se hubiesen hecho los deberes [en referencia a las reformas] no pagaríamos el coste social del paro". Para Montoro, 2009 ha sido un año "terrible" para el mercado laboral tanto por el incremento del desempleo como por la pérdida del número de afiliados a la Seguridad Social. http://www.elpais.com/articulo/economia/paro/duplica/durante/crisis/elpepueco/20100106elpepie co_2/Tes El alto gasto permite mantener a raya la cifra de parados sin cobertura El dato de desempleados desprotegidos es menor ahora que a finales de 2003 M. V. G. - Madrid - 06/01/2010 El paro se ha encaramado durante la crisis a cifras históricamente altas. Al acabar 2009 se registraban casi cuatro millones de desempleados en las oficinas públicas de empleo. Con ellos, el gasto de prestaciones y subsidios se ha disparado. Este año el Ministerio de Trabajo prevé gastar 32.611 millones de euros y será una de las causas principales de un déficit que se prevé se sitúe en torno al 10% del PIB. El paro se ha encaramado durante la crisis a cifras históricamente altas. Al acabar 2009 se registraban casi cuatro millones de desempleados en las oficinas públicas de empleo. Con ellos, el gasto de prestaciones y subsidios se ha disparado. Este año el Ministerio de Trabajo prevé gastar 32.611 millones de euros y será una de las causas principales de un déficit que se prevé se sitúe en torno al 10% del PIB. Sólo en noviembre, el gasto ascendió 2.740 millones, un 24,7% más que en el mismo mes del año anterior. Pero el esfuerzo no es en vano. El número de parados que en noviembre no recibían ninguna de ayuda de los Servicios Públicos de Empleo quedaba en 1.090.612, lo que situaba la tasa de cobertura al desempleo en el 78,7%, según el Ministerio de Trabajo. Hay que remontarse hasta los últimos meses de los Gobiernos de José María Aznar, en 2003, para encontrar un mes de noviembre en que el número de desempleados sin prestación o subsidio supere el millón. Y entonces, en plena época de expansión económica y creación de empleo, la cifra era de 1.107.743 parados desprotegidos, y la tasa de cobertura del 49,2%. Para alcanzar este nivel de protección, primero hay que tener en cuenta el punto de partida. Dicho en román paladino, la crisis viene precedida de una época prolongado de crecimiento y abundante trabajo. Esto ha propiciado que aquellos asalariados que han perdido su trabajo hayan acumulado importantes derechos de percepción de prestaciones. Además, el Ejecutivo, incapaz de detener la destrucción de empleo, ha tomado diversas iniciativas para reforzar la protección. La primera fue la eliminación en marzo del mes de espera entre quienes pasan de percibir la prestación contributiva al subsidio por desempleo. Otra de ellas es la creación de una paga de 420 euros durante seis meses para los parados que hayan agotado su protección desde el 1 de enero. Bajo este manto se encontraban el pasado noviembre unos 368.000 parados. También en esa línea se han dado otros pasos como el refuerzo de los servicios de empleo con más personal, que ha permitido rebajar de siete a cinco días el tiempo de espera de los parados para ver reconocida su prestación. http://www.elpais.com/articulo/economia/alto/gasto/permite/mantener/raya/cifra/parados/cobertu ra/elpepueco/20100106elpepieco_4/Tes
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Año pésimo en el Mediterráneo C. PÉREZ - Madrid - 06/01/2010 Lo más lacerante de la recesión es el paro, la enfermedad socioeconómica más destructiva de ésta y de todas las crisis. España vivió un 2009 pésimo en el mercado laboral, con la destrucción de empleo más rápida de las últimas décadas y del conjunto de Europa. Y con la consiguiente pérdida de bienestar y de retraso en la convergencia real con la UE. Pero el análisis por comunidades introduce un serio problema adicional: las agudas diferencias regionales que deja la crisis. Es decir, mayores disparidades por comunidades. Aunque en todas -absolutamente todas- las comunidades el desempleo registró un fuerte impulso en 2009, la cuenca mediterránea se lleva la palma: Murcia, Comunidad Valenciana y Cataluña presentan alzas del paro superiores al 32% en 2009, seguidas de cerca por Madrid. El pinchazo de la burbuja inmobiliaria tiene mucho que ver con esos datos. En el otro extremo, el paro golpeó con menos fuerza en Extremadura y Galicia, con alzas inferiores al 18% en 2009. Andalucía y Asturias, junto con Ceuta y Melilla, presentan también subidas inferiores al 20%, muy por debajo de la media española (25,4%). De nuevo el ladrillo explica parte de esa historia. Desde el inicio de los problemas, allá por agosto de 2007, los datos son parecidos. El paro se ha triplicado en Baleares, con una crisis de doble hélice: turismo-construcción. Y ha azotado con fuerza a prácticamente los mismos sospechosos habituales: Murcia, Aragón (tras el final de la
335 Exposición Universal), Comunidad Valenciana, Cantabria y Cataluña registran aumentos del paro superiores al 120%. Extremadura y Galicia, de nuevo, son los que mejor resisten, aunque con notables aumentos, que rozan el 60% desde el comienzo de la crisis. http://www.elpais.com/articulo/economia/Ano/pesimo/Mediterraneo/elpepueco/20100106elpepie co_3/Tes
EDITORIAL Señales confusas Desaparece la amenaza de deflación, pero el paro se confirma como el gran problema de 2010 06/01/2010 El ejercicio económico de 2009 concluyó con dos evidencias de signo opuesto. La primera es que la amenaza deflacionista, agitada como un espantajo por la oposición política más visceral, ha sido desmentida por la realidad. El año pasado los precios subieron el 0,9% en tasa anual, según el índice armonizado que elabora el Instituto Nacional de Estadística. Aunque es la tasa más baja desde que se mide la inflación (1962), lo cierto es que los precios suben por segundo mes consecutivo después de ocho de continuos descensos y confirman un pronóstico de subidas moderadas durante todo el año gracias sobre todo a la presión de los precios de la energía. Importa precisar la causa, porque lo cierto es que la recuperación de los precios no se debe a la reactivación de la demanda interna. El consumo seguirá bajo mínimos al menos durante todo el primer semestre de 2010. La segunda evidencia apunta a que el desempleo seguirá siendo el estrangulamiento decisivo de la economía española durante este ejercicio. El paro registrado en las oficinas del Inem aumentó durante 2009 en 769.640 personas y afectó a un total de 3.923.603 trabajadores. Una comparación estadística sencilla demuestra que este aumento es inferior al de 2008, cuando el paro subió en 999.416 personas. Ahora bien, no conviene apresurarse a festejar una desaceleración del paro o en decidir, como anunció ayer el secretario de Estado de la Seguridad Social, Octavio Granado, que "hemos dejado atrás lo más duro del ajuste laboral". La tendencia que marca el Inem debe ser confirmada por la medida auténtica del desempleo, que es la que realiza la Encuesta de Población Activa (EPA). Y no sólo porque detecta con más precisión el volumen real de parados -próximo a los 4,5 millones- sino porque permite examinar la evolución de las personas dispuestas a trabajar y mide el efecto desánimo que produce la recesión. Sería más prudente celebrar la desaceleración del paro cuando se hayan comprobado los efectos que tendrán algunas decisiones económicas de gran alcance sobre la actividad económica española. Esas decisiones son la retirada paulatina de las facilidades crediticias del Banco Central Europeo, la subida de tipos que sugiere el propio BCE o la desaparición de los programas nacionales de estímulo económico. La desaceleración del paro registrado en diciembre es sólo un signo, esperanzador si se quiere, pero confuso y parcial todavía. http://www.elpais.com/articulo/opinion/Senales/confusas/elpepueco/20100106elpepiopi_2/Tes
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El número de parados se ha duplicado en dos años de crisis El deterioro del mercado laboral se frena a finales de 2009 06/01/2010 España es el país en el que la crisis económica internacional ha pasado una factura más severa al mercado laboral. Tras el aumento de un millón de desempleados a lo largo de 2008, el año 2009 se cerró con casi 800.000 personas más inscritas en las listas del paro, cerca de 2.200 diarias. España es el país en el que la crisis económica internacional ha pasado una factura más severa al mercado laboral. Tras el aumento de un millón de desempleados a lo largo de 2008, el año 2009 se cerró con casi 800.000 personas más inscritas en las listas del paro, cerca de 2.200 diarias. En algo más de dos años, el número de parados registrados se ha duplicado hasta cerca de cuatro millones, un listón que ya se supera según los datos de la Encuesta de Población Activa, el termómetro más fiable. El deterioro del mercado laboral se ha frenado algo en el tramo final de año. Aun así, en diciembre el paro se elevó en 54.657 personas. Incapaz de contener el aumento del desempleo, el Gobierno se ha centrado en aumentar el gasto social para paliar sus efectos. Así, aunque el número de parados es el más alto registrado, la cifra de desempleados sin cobertura es inferior a la que había a finales de 2003, cuando la economía crecía a buen ritmo. http://www.elpais.com/articulo/portada/numero/parados/ha/duplicado/anos/crisis/elpepueco/2010 0106elpepipor_3/Tes
337 COLUMNISTS The eurozone’s next decade will be tough By Martin Wolf Published: January 5 2010 20:17 | Last updated: January 5 2010 20:17
What would have happened during the financial crisis if the euro had not existed? The short answer is that there would have been currency crises among its members. The currencies of Greece, Ireland, Italy, Portugal and Spain would surely have fallen sharply against the old D- Mark. That is the outcome the creators of the eurozone wished to avoid. They have been successful. But, if the exchange rate cannot adjust, something else must instead. That “something else” is the economies of peripheral eurozone member countries. They are locked into competitive disinflation against Germany, the world’s foremost exporter of very high-quality manufactures. I wish them luck. Martin Wolf: Why China’s exchange rate policy is a common concern - Dec-08 Martin Wolf: Tax the windfall banking bonuses - Nov-19 Economists’ forum - Oct-01 Blog: Money Supply - Oct-07 Martin Wolf: Victory in the cold war was a start as well as an ending - Nov-10 Martin Wolf: Turner is asking the right questions on finance - Sep-10 The eurozone matters. Its economy is almost as big as that of the US. It is three times bigger than those of Japan or China. So far, it has passed its initial test. Nevertheless, the peak to trough decline of the US economy was only 3.8 per cent (second quarter 2008 to second quarter 2009), while the eurozone’s was 5.1 per cent (first quarter 2008 to second quarter 2009). More important than the eurozone’s overall performance is what is going on inside the zone. The starting point must be with the pattern of current account deficits and surpluses. In 2006, the zone was in rough balance. Inside it, however, were Germany, with a huge surplus of $190bn (6.5 per cent of gross domestic product) and the Netherlands, with a surplus of $64bn (9.4 per cent of GDP). At the opposite end of the spectrum were the capital importers, of which Spain was the most important, with a huge deficit of $111bn (9 per cent of GDP). Many have argued that, within a currency union, current account deficits do not matter any more than between Yorkshire and Lancashire. They are wrong. Deficit countries are net sellers of claims to the rest of the world. What happens if people in the rest of the world sell these claims or withdraw their loans? The answer is a recession. But within a country, people can move relatively easily to another region. That is usually far harder across borders. There is another,
338 bigger, difference: the Spanish government cannot respond to the complaints of the Spanish unemployed by arguing that things are not so bad elsewhere in the eurozone. It must offer a national solution. The question is what. Before the crisis, peripheral countries had an excess of demand over supply, while countries in the core were in the opposite position. Since fiscal positions were similar, patterns of private demand had to diverge: in 2006, the private sectors of Greece, Ireland, Portugal and Spain were spending far more than income, while the private sectors of Germany and the Netherlands were spending far less (see charts.) Then came the crash. Inevitably, it hit the most extended private sectors hardest. Between 2006 and 2009, the private sectors of Ireland, Spain and Greece shifted their balances between income and spending by 16 per cent, 15 per cent and 10 per cent of GDP, respectively. The offset was also quite predictable: it was a huge deterioration in the fiscal position. This underlines a point that economists seem amazingly reluctant to take on board: the fiscal position is unsustainable if the financing of the private sector is unsustainable. In these countries, the latter was just that, with dire consequences, as the crisis made evident. In its first decade of existence, the imbalances inside the eurozone (and associated bubbles) finished up by doing massive damage to the credit of the private sectors of the booming economies. But now it is damaging the credit of their public sectors. While risk spreads have fallen in financial markets, those on sovereign debt in the eurozone are an important exception. Spreads over German 10-year bunds have soared from what used to be negligible levels: in the case of Greece, spreads recently reached 274 basis points. The late Charles Kindleberger of MIT argued that an open economy required a hegemon. One of its roles is to be spender and borrower of last resort in a crisis. The hegemon, then, is the country with the best credit. In the eurozone, it is Germany. But Germany is a lender, not a borrower, and is sure to remain so. This being so, weaker borrowers must fulfil the role, with dire results for their credit ratings. Where does that leave peripheral countries today? In structural recession, is the answer. At some point, they have to slash fiscal deficits. Without monetary or exchange rate offsets, that seems sure to worsen the recession already caused by the collapse in their bubble-fuelled private spending. Worse, in the boom years, these countries lost competitiveness within the eurozone. That was also inherent in the system. The interest rates set by the European Central Bank, aimed at balancing supply and demand in the zone, were too low for bubble-fuelled countries. With inflation in sectors producing non-tradeables relatively high, real interest rates were also relatively low in these countries. A loss of external competitiveness and strong domestic demand expanded external deficits. These generated the demand needed by core countries with excess capacity. To add insult to injury, since the core country is highly competitive globally and the eurozone has a robust external position and a sound currency, the euro itself has soared in value. This leaves peripheral countries in a trap: they cannot readily generate an external surplus; they cannot easily restart private sector borrowing; and they cannot easily sustain present fiscal deficits. Mass emigration would be a possibility, but surely not a recommendation. Mass immigration of wealthy foreigners, to live in now-cheap properties, would be far better. Yet, at worst, a lengthy slump might be needed to grind out a reduction in nominal prices and wages. Ireland seems to have accepted such a future. Spain and Greece have not. Moreover, the affected country would also suffer debt deflation: with falling nominal prices and wages, the real burden of debt denominated in euros will rise. A wave of defaults – private and even public – threaten. The crisis in the eurozone’s periphery is not an accident: it is inherent in the system. The weaker members have to find an escape from the trap they are in. They will receive little help: the zone
339 has no willing spender of last resort; and the euro itself is also very strong. But they must succeed. When the eurozone was created, a huge literature emerged on whether it was an optimal currency union. We know now it was not. We are about to find out whether this matters. [email protected] More columns at www.ft.com/martinwolf http://www.ft.com/cms/s/0/19da1d26-fa2f-11de-beed-00144feab49a.html
A stumbling Spain must guide Europe Published: January 5 2010 20:07 | Last updated: January 5 2010 20:07 By any standards, it was an unfortunate beginning. Spain’s six-month presidency of the European Union, which got underway this week, appears to have been subject to an attack by computer-hackers. On its first day, web-surfers navigating to the special presidency website found themselves staring at photos of Mr Bean, the hapless British comedy character who (some claim), bears a resemblance to José Luis Rodríguez Zapatero, the Spanish prime minister. Mr Bean is famous for his stumbles and mishaps – and Spain is also looking accident-prone at the moment. On the previous occasions that Spain has assumed the presidency of the EU, the country’s mood was very different. Both the González and Aznar governments were presiding over a booming economy that infused the whole nation with a certain swagger. But Spain has been hit very hard by the global recession. Unemployment is close to 20 per cent and the all- important construction sector is on its back. Spain’s jobless total nears 4m - Jan-05 Mr Bean stumbles on to EU website - Jan-05 Spain treads carefully in testing new treaty - Jan-03 Zapatero seeks reforms to combat recession - Jan-03 Austerity takes slice out of ham sales - Dec-28 Catalonia moves nearer to bullfighting ban - Dec-18 Perhaps Mr Zapatero is being distracted by his domestic travails, because the work programme that he has proposed for the Spanish presidency is remarkably anodyne, even by the undemanding standards of most European Union presidencies. The now unhacked website claims that the EU’s new Lisbon treaty will be the “focus of the Spanish presidency”. Since the treaty has just come into force – and puts into place a complex structure that combines the rotating presidency Spain has just assumed with a new permanent presidency – it is understandable that the Spanish see getting this new system to work as a priority. All the same, if the Spanish presidency genuinely does concentrate on making the Lisbon treaty work, it would be making a mistake that is all too typical of the European Union: concentrating on the fine-tuning of institutional arrangements, at the expense of dealing with real-world problems that trouble European citizens. Of these problems, by far and away the most important is the economic crisis. Growth is still feeble across Europe – and Spain is no exception. During the Spanish presidency, European governments will have to try to agree whether – and how fast – to withdraw the fiscal stimuli that were put in place last year. The next six months could also see a full-blown fiscal crisis in Greece or Latvia. Dealing with these challenges, without any unfortunate Bean-like mishaps, will be Mr Zapatero’s biggest challenge over the next six months. http://www.ft.com/cms/s/0/076fa8f4-fa2f-11de-beed-00144feab49a.html
340 Economy
January 6, 2010 ECONOMIC SCENE Fed Missed This Bubble. Will It See a New One? By DAVID LEONHARDT If only we’d had more power, we could have kept the financial crisis from getting so bad. That has been the position of Ben Bernanke, the Federal Reserve chairman, and other regulators. It explains why Mr. Bernanke and the Obama administration are pushing Congress to give the Fed more authority over financial firms. So let’s consider what an empowered Fed might have done during the housing bubble, based on the words of the people who were running it. In 2004, Alan Greenspan, then the chairman, said the rise in home values was “not enough in our judgment to raise major concerns.” In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.” As late as May 2007, he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.” The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble? Just this week, Mr. Bernanke went to the annual meeting of academic economists in Atlanta to offer his own history of Fed policy during the bubble. Most of his speech, though, was a spirited defense of the Fed’s interest rate policy, complete with slides and formulas, like (pt - pt*) > 0. Only in the last few minutes did he discuss lax regulation. The solution, he said, was “better and smarter” regulation. He never acknowledged that the Fed simply missed the bubble. This lack of self-criticism is feeding Congressional hostility toward the Fed. Mr. Bernanke is still likely to win confirmation for a second term, based on his aggressive and creative policies once the crisis began. But Congress hasn’t decided whether to expand his regulatory authority and is considering reining in the Fed’s other main mission — setting interest rates. A once-marginal proposal — from Representative Ron Paul, the Texas Republican — that would give Congress the power to review interest rate decisions recently passed the House and will soon be considered by the Senate. Economists are generally horrified by this idea. If Congress could force Fed officials to answer questions about every interest rate move, the process could easily become politicized. A politicized central bank is a first step toward runaway inflation. But politicizing monetary policy isn’t the only mistake Congress could make. It also could end up going in the other direction and handing Fed officials more power without asking them to grapple with their failures. When Mr. Bernanke is challenged about the Fed’s performance, he often points out that recognizing a bubble is hard. “It is extraordinarily difficult,” he said during his Senate confirmation hearing last month, “to know in real time if an asset price is appropriate or not.”
341 Most of the time, that’s true. Do you know if stocks will keep going up? Is gold now in the midst of a bubble? What will happen to your house’s value? Questions like these are usually an invitation to hubris. But the recent housing bubble was an exception. By any serious measure, houses in much of this country had become overvalued. From the late 1960s to 2000, the ratio of the median national house price to median income hovered from 2.9 to 3.2. By 2005, it had shot up to 4.5. In some places, buyers were spending twice as much on their monthly mortgage payment as they would have spent renting a similar house, without even considering the down payment. More than a few people — economists, journalists, even some Fed officials — noticed this phenomenon. It wasn’t that hard, if you were willing to look at economic fundamentals. You couldn’t know exactly when or how far prices would fall, but it seemed clear they were out of control. Indeed, making that call was similar to what the Fed does when it sets interest rates: using concrete data to decide whether some part of the economy is too hot (or too cold). And Fed officials could have had a real impact if they had decided to attack the bubble. Imagine if Mr. Greenspan, then considered an oracle, announced he was cracking down on wishful- thinking mortgages, as he had the authority to do. So why did Mr. Greenspan and Mr. Bernanke get it wrong? The answer seems to be more psychological than economic. They got trapped in an echo chamber of conventional wisdom. Real estate agents, home builders, Wall Street executives, many economists and millions of homeowners were all saying that home prices would not drop, and the typically sober-minded officials at the Fed persuaded themselves that it was true. “We’ve never had a decline in house prices on a nationwide basis,” Mr. Bernanke said on CNBC in 2005. He and his colleagues fell victim to the same weakness that bedeviled the engineers of the Challenger space shuttle, the planners of the Vietnam and Iraq Wars, and the airline pilots who have made tragic cockpit errors. They didn’t adequately question their own assumptions. It’s an entirely human mistake. Which is why it is likely to happen again. What’s missing from the debate over financial re- regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along. A simple first step would be for Mr. Bernanke to discuss the Fed’s recent failures, in detail. If he doesn’t volunteer such an accounting, Congress could request one. In the future, a review process like this could become a standard response to a financial crisis. Andrew Lo, an M.I.T. economist, has proposed a financial version of the National Transportation Safety Board — an independent body to issue a fact-finding report after a crash or a bust. If such a board had existed after the savings and loan crisis, notes Paul Romer, the Stanford economist and expert on economic growth, it might have done some good. Whether we like it or not, the Fed really does seem to be the best agency to regulate financial firms. (It now has authority over only some firms.) As the lender of last resort, it already has a vested interest in the health of those firms. The Fed’s prestige also tends to give it its pick of people who want to work on economic policy. “The Federal Reserve has unparalleled expertise,” Mr. Bernanke told Congress last month. “We have a great group of economists, financial market experts and others who are unique in Washington in their ability to address these issues.” Fair enough. At some point, though, it sure would be nice to hear those experts explain how they missed the biggest bubble of our time. http://www.nytimes.com/2010/01/06/business/economy/06leonhardt.html?scp=2&sq=david%20leonhardt&st=cse
342 COLUMNISTS The cause of our crises has not gone away By John Kay Published: January 5 2010 20:13 | Last updated: January 5 2010 20:13 The credit crunch of 2007-08 was the third phase of a larger and longer financial crisis. The first phase was the emerging market defaults of the 1990s. The second was the new economy boom and bust at the turn of the century. The third was the collapse of markets for structured debt products, which had grown so rapidly in the five years up to 2007. The manifestation of the problem in each phase was different – first emerging markets, then stock markets, then debt. But the mechanics were essentially the same. Financial institutions identified a genuine economic change – the assimilation of some poor countries into the global economy, the opportunities offered to business by new information technology, and the development of opportunities to manage risk and maturity mismatch more effectively through markets. Competition to sell products led to wild exaggeration of the pace and scope of these trends. The resulting herd enthusiasm led to mispricing – particularly in asset markets, which yielded large, and largely illusory, profits, of which a substantial fraction was paid to employees. Eventually, at the end of each phase, reality impinged. The activities that once seemed so profitable – funding the financial systems of emerging economies, promoting start-up internet businesses, trading in structured debt products – turned out, in fact, to have been a source of losses. Lenders had to make write-offs, most of the new economy stocks proved valueless and many structured products became unmarketable. Governments, and particularly the US government, reacted on each occasion by pumping money into the financial system in the hope of staving off wider collapse, with some degree of success. At the end of each phase, regulators and financial institutions declared that lessons had been learnt. While measures were implemented which, if they had been introduced five years earlier, might have prevented the most recent crisis from taking the particular form it did, these responses addressed the particular problem that had just occurred, rather than the underlying generic problems of skewed incentives and dysfunctional institutional structures. The public support of markets provided on each occasion the fuel needed to stoke the next crisis. Each boom and bust is larger than the last. Since the alleviating action is also larger, the pattern is one of cycles of increasing amplitude. I do not know what the epicentre of the next crisis will be, except that it is unlikely to involve structured debt products. I do know that unless human nature changes or there is fundamental change in the structure of the financial services industry – equally improbable – there will be another manifestation once again based on naive extrapolation and collective magical thinking. The recent crisis taxed to the full – the word tax is used deliberately – the resources of world governments and their citizens. Even if there is will to respond to the next crisis, the capacity to do so may not be there. The citizens of that most placid of countries, Iceland, now backed by their president, have found a characteristically polite and restrained way of disputing an obligation to stump up large sums of cash to pay for the arrogance and greed of other people. They are right. We should listen to them before the same message is conveyed in much more violent form, in another place and at another time. But it seems unlikely that we will.
343 We made a mistake in the closing decades of the 20th century. We removed restrictions that had imposed functional separation on financial institutions. This led to businesses riddled with conflicts of interest and culture, controlled by warring groups of their own senior employees. The scale of resources such businesses commanded enabled them to wield influence to create a – for them – virtuous circle of growing economic and political power. That mistake will not be easily remedied, and that is why I view the new decade with great apprehension. In the name of free markets, we created a monster that threatens to destroy the very free markets we extol. http://www.ft.com/cms/s/0/1959f72c-fa2f-11de-beed-00144feab49a.html cause of our crises has not gone away
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Taylor Disputes Bernanke on Bubble, Blaming Low Rates (Update1) By Steve Matthews Jan. 5 (Bloomberg) -- John Taylor, creator of the so-called Taylor Rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble. “The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta. Taylor, a former Treasury undersecretary, was responding to a speech by Bernanke two days ago, when he said the Fed’s monetary policy after the 2001 recession “appears to have been reasonably appropriate” and that better regulation would have been more effective than higher rates in curbing the boom. Under former Chairman Alan Greenspan, the Fed lowered its benchmark rate to 1.75 percent from 6.5 percent in 2001 and cut it to 1 percent in June 2003. The central bank left the federal funds rate for overnight interbank lending at 1 percent for a year before raising it in quarter-point increments from 2004 to 2006. “It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting. Taylor echoed criticism of scholars including Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who say the Fed helped inflate U.S. housing prices by keeping rates too low for too long. The collapse in housing prices led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs. Almost Zero Bernanke and his fellow policy makers cut the benchmark interest rate almost to zero in December 2008 and have created unprecedented emergency credit programs to revive lending and spur a recovery. The Fed chief, speaking at the same conference on Jan. 3, said increased use of variable-rate and interest-only mortgages, and the “associated decline of underwriting standards,” were more to blame for the price bubble than low interest rates. Bernanke, 56, served as a Fed governor from 2002 until 2005 and backed all the interest-rate decisions under his predecessor, Alan Greenspan. Bernanke took over as Fed chairman in 2006 after serving for half a year as chairman of the White House Council of Economic Advisers. “Low rates certainly contributed to the crisis,” Baker said in an interview on Jan. 3. “I don’t know how he can deny culpability. You brought the economy to the brink of a Great Depression.” In his Jan. 3 speech, Bernanke used a modified form of the Taylor rule to support his argument that interest rates weren’t too low following the 2001 recession.
345 Inflation, Growth The formula suggests how a central bank should set rates if inflation or growth veers from goals. While the standard rule uses existing data, Bernanke argued that policy makers instead should employ forecasts of prices and output. Robert Hall, who heads the National Bureau of Economic Research’s panel that dates the beginning and end of recessions, said he found Bernanke’s argument convincing. “I think Bernanke is completely correct,” Hall said. Taylor said he didn’t agree with Bernanke’s “alternative interpretation” of his rule. Still, he said the rule supports the Fed’s current policy of keeping interest rates near zero. “If we are fortunate to get a stronger recovery or if we are unfortunate and inflation picks up, the rate will have to rise,” he said. To contact the reporters on this story: Steve Matthews in Atlanta at [email protected]; Last Updated: January 5, 2010 18:29 EST http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a44P5KTDjWWY#
Bernanke calls for stronger financial regulation By Tom Braithwaite in Washington Published: January 4 2010 02:00 | Last updated: January 4 2010 02:00 Ben Bernankehas called for reform of financial regulation, arguing yesterday that it was lapses in regulatory oversight rather than loose monetary policy that stoked the US housing bubble. The Federal Reserve chairman told the American Economic Association that exotic new mortgages and lending to borrowers who could not hope to repay their loans were chief causes of the sharp increase in home prices that ran from the late 1990s until 2006 and whose collapse hurt millions of Americans. "All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs," he said. If reforms were not "adequate", the Fed might be forced to tackle the next asset bubble using the "blunt tool" of monetary policy, he said. This year will see the Fed fighting for its vision of regulatory reform - closely allied to that of the Obama administration - which is under threat in Congress as some legislators seek to diminish the central bank's role in supervision of financial institutions and subject it to sweeping audits. Mr Bernanke said that there was little evidence that low interest rates had been a large contributor to the housing bubble, one of the charges that has fuelled criticism of the Fed. "Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term . . . This description suggests that regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices." http://www.ft.com/cms/s/0/de50c652-f8cf-11de-beb8-00144feab49a.html
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January 4, 2010 Mises Daily: http://mises.org/daily/4005
Today's other Mises
Mankiw's Baseless Arguments Dailies: by Robert P. Murphy on January 4, 2010 Applied Value Investing, Greg Mankiw's recent blog post carries a rather risky title: "The Austrian Style by C.J. Monetary Base Is Exploding. So What?" I really am trying to Maloney understand the viewpoint of the wide range of economists (including Mankiw, Paul Krugman, Scott Sumner, Mike "Mish" Shedlock, Bryan Caplan, and David R. Henderson) who think the dollar is not going to fall sharply in the foreseeable future. But I've yet to see a convincing explanation as to how Bernanke (or his successor) is going to avoid large price inflation, given the corner the Fed and the feds have painted us into. Mankiw's latest post recapitulates many of the standard arguments coming from the "no worries" camp, so it's worth explaining their deficiencies. The Exploding Monetary Base Before quoting Mankiw, let's review what the fuss is about. The monetary base (sometimes called M0 or "high-powered money") is composed of (a) actual currency in the hands of the public, and (b) bank reserves, whether in the form of cash in the banks' vaults or on deposit with the Federal Reserve. The monetary base does not include checkbook balances held by the public. In contrast to other monetary aggregates (M1, M2, etc.), the Federal Reserve can directly control M0 (i.e., the monetary base), at least within very broad limits. If the Fed wants to increase the base, it can buy assets like US Treasurys from dealers in the private sector and pay for them by writing a check on the Federal Reserve itself. The seller of the Treasurys then deposits the new check in his own bank account. His bank in turn takes the check and clears it with the Fed, so that the bank's reserves go up by the dollar amount of the check. In our scenario, whether the bank makes additional loans or not, the monetary base has gone up by exactly the amount of the check written on the Fed. If the bank makes new loans to its customers, it can affect the total amount of checking deposits, but that figure isn't included in the monetary base. So commercial banks through their lending decisions can affect the broader monetary aggregates such as M1, and M2. But the Fed exercises strict control over the monetary base, M0.[1] Because of the truly unprecedented buying spree upon which Bernanke embarked in the fall of 2008, the Fed's balance sheet has exploded. By writing more than a trillion dollars worth of checks drawn on itself (i.e., out of thin air), the Fed has caused the monetary base to explode as well: Naturally, many common-sense analysts are quite worried by the above chart. Not only does it signify that the alleged economic recovery of 2009 is bogus, but it demonstrates a serious threat to the dollar itself. Yet Greg Mankiw shrugs off these worries. Now that we understand the context, let's examine Mankiw's points.
347 The Broader Monetary Aggregates Aren't Surging? Mankiw first tries to defuse the hysteria by making a distinction between the monetary base and the broader aggregates: It is true that the monetary base is exploding.… Normally, such [a] surge in the monetary base would be inflationary. The textbook story is that an increase in the monetary base will increase bank lending, which will increase the broad monetary aggregates such as M2, which in the long run leads to inflation. That is not happening right now, however. The broader monetary aggregates are not surging. Much of the base is instead being held as excess reserves. Mankiw is basically right here. Historically, banks don't keep "excess reserves" in their vaults as cash or on deposit with the Fed. By definition, excess reserves are those above the legal limit established by a bank's total checking deposits (and other items). So if a bank is holding $1 million in excess reserves, it has the legal ability to grant its customers up to $1 million in new loans (which show up on the bank's liability side as checking deposits granted to the borrowers who can then spend the money). To repeat, historically, banks hold very little excess reserves, because they can put them to work earning interest by loaning them out to their customers. However, these are far from ordinary times, and Mankiw is correct that the banks have let their excess reserves pile up, rather than extend new loans. In fact, there is now a "credit crunch." However, even though Mankiw is right that the banks are sitting on their reserves rather than extending new loans, he gives the reader the impression that the broader monetary aggregates have been unaffected by the surge in the base. That is not true. Look at what happened to M1 and M2 since the fall of 2008: If Mankiw doesn't think M1 (the blue line) has surged since the fall of 2008, I'd hate to put him in charge of Iraqi troop levels. Note that M2 (the red line) saw an acceleration in its growth trend at the same time the monetary base exploded, but it admittedly plateaued in early 2009 and is only recently back on an upswing. Now, I want to offer my sympathies to the reader: believe me, my eyes glaze over too when I read financial reports that are chock-full of charts, each of which seems to reverse the "lesson" of the previous one. But please bear with me for just a bit longer. One of the main arguments stressed by people in the deflation camp — and I'm not saying Mankiw himself would make this claim — runs like this: "In a modern economy with a fractional-reserve banking system, new money enters the system in the form of loans. It doesn't matter how hard Bernanke pushes, the banks are undercapitalized right now and so they won't extend new loans. There's no way for the money supply to grow until the economy recovers and the banks repair their balance sheets." I hope the last chart above dispels this myth. The monetary aggregate M1 includes checkable deposits. Even though bank lending — both commercial and consumer — has fallen fairly substantially, M1 has gone through the roof. And the explanation isn't that there is some other component of M1 rising while checkable deposits are falling: this chart shows that demand deposits exploded at the end of 2008, then retreated, but have since resumed their upward trend and are far higher now than they were before the crisis. How Loans Can Fall While the Money Supply Doesn't My point here isn't to get bogged down in the various components of the monetary aggregates and come up with a theory of why some have gone up and others have fallen like a stone. All I want to do is get those readers who expect deflation to see that there is something crucially wrong with their argument. It is not the case that falling loan volume translates into falling money supply. The people claiming that Bernanke is literally incapable of expanding M1 and M2
348 (in the present economic environment) need to explain how he has managed to do so since the onset of the crisis. Before returning to Mankiw's article, let me offer one possibility to make the deflationists see what could be happening: Suppose that we start with the Acme Bank, which is fully "loaned up," meaning that it has no excess reserves. The Fed then buys some bonds worth $1 million from one of Acme's customers, Bill the bond dealer. Bill takes the $1 million check and deposits it in his account. Bill's checking account balance goes up by $1 million, and Acme's total reserves go up by $1 million. Because of the roughly 10 percent reserve ratio, Acme's excess reserves go up by $900,000. In other words, Acme is only legally required to set aside $100,000 of Bill's new deposit to "back up" his checking account. The Fed's actions so far have increased the money supply (M1) by $1 million, because Bill's checking account now has that much more in it. Because we assume we are in normal times, Acme spies a hot new real-estate development and gladly lends out the excess $900,000 to the developer, Shady Slick, for 12 months at an interest rate of 10 percent. Slick quickly spends all of the borrowed money on permits, union contractors, building materials, and so forth. Now M1 is $1,900,000 higher than it was before the Fed bought the bonds. "The people claiming that Bernanke is literally incapable of expanding M1 and M2 need to explain how he has managed to do so since the onset of the crisis." The money that Acme Bank lent to the real-estate developer, Shady Slick, is certainly "in the economy" pushing up prices. We can imagine that the $900,000 in Slick's checking account has now been disbursed around the county into the checking-account balances of various workers, shingle manufacturers, and local government building inspectors. What if our story takes a sad turn? Suppose a federal bureaucrat is taking a nap on a park bench next to the hot real-estate development, and spots a rare beetle being crushed by a backhoe. The feds come in and completely halt development. All the prospective buyers who were on a waiting list for the trendy new lofts now pull out. Shady Slick is ruined and spends the rest of his days riding the L train and mumbling. The troubles are not limited to Slick, for Acme is hurt too. Exactly one year has passed since Acme lent Slick the money, meaning that Acme's balance sheet showed $990,000 on the asset side as the loan that was maturing. But of course that entry is now bogus, and so Acme's accountants must replace it with a figure of $0. The write-down causes a direct hit to the equity held by Acme's shareholders, and may cause the bank to run afoul of regulatory capital requirements. Now here's where the deflationists go wrong: I think many of them assume that somehow the money supply must have shrunk in the economy because of Slick's default on his loan. But that's not true. The checking accounts of the union contractors, shingle manufacturers, and so forth still have (collectively) the $900,000 that Slick originally spent on their products and services. Thus, even though the total value of outstanding loans dropped by $990,000 because of Acme's write-down, the total value of checking or demand deposits didn't drop at all. This is true, even though it took a loan to originally push up the total value of demand deposits. (In contrast, if Slick had paid off his debt rather than defaulting, and then Acme didn't extend new loans, it is true that the money supply [M1] would have shrunk by $900,000.) As I said before, I'm not trying to make an empirical case for what is currently happening in the US economy. I'm just pointing out that some of the glib deflationist arguments are incomplete.
349 People who are expecting the money supply to collapse are overlooking some serious gaps in their argument. Is the Monetary Base "Uninteresting"? Let's return to Mankiw: But, you might ask, won't the inflationary logic eventually take hold as the economy recovers and banks start lending more freely? Not necessarily. Recall that the Fed now pays interest on reserves. As long as the interest rate on reserves is high enough, banks should be happy to hold onto those excess reserves. That should prevent a surge in the monetary base from being inflationary. Here is one way to think about it. The standard way of reducing the monetary base is open market operations. The Fed sells Treasury bills, say, and drains reserves from the banking system, reducing the monetary base. But consider what this means in the [current monetary] regime. An open market operation merely removes interest-paying reserves from a bank's balance sheet and replaces them with interest-paying T-bills. What difference does it make? None at all. Both reserves and T-bills are interest-paying obligations of the Federal government (including the Federal Reserve). They are essentially perfect substitutes. The monetary base, however, includes one of them but not the other, largely for historical reasons. The bottom line is that when reserves pay interest, the monetary base is a pretty uninteresting economic statistic. I am astounded by Mankiw's performance. If I understand him, he's making an argument analogous to someone saying, "A good counterfeiter has no real impact on the economy. Here is one way to think about it: A merchant can sell his goods in exchange for authentic $20 bills, or in exchange for bills made with a laser printer in some guy's basement. So long as the counterfeits are indistinguishable from the real thing, what difference does it make to the merchant? None at all."[2] In particular, in the second-last paragraph quoted above, I think Mankiw overlooks quite a serious difference between Treasurys and reserves. The reason we include reserves as part of the monetary base is that they can act as the "base" of the monetary pyramid in our fractional-reserve system. That seems like a pretty good reason to me. In contrast, Treasurys do not form part of the base of the monetary pyramid. When the federal government runs a deficit, that means it is spending more than it takes in through tax receipts. The Treasury can sell bonds to the public in order to cover the shortfall. Thus private citizens can lend the Treasury the money it needs to pay its bills. There is nothing inflationary per se about this. No new money is created in the system. The government has more money to spend, but the lenders have less money. This is true even if a bank happens to buy the Treasury bonds. Owning such assets doesn't give the bank the legal ability to make more loans to its customers. If customers line up at the bank and want to empty out their checking accounts, the bank can't hand them Treasurys. Conclusion Mankiw is right that an individual bank doesn't care whether it holds a Treasury security yielding 1 percent interest, or the equivalent amount of reserves on deposit with the Fed, where they also earn 1 percent interest. But that's not the end of the story. When the Treasury pays someone interest, it's not inflationary; it simply leaves less money (out of general tax receipts) available for other spending purposes. On the other hand, when the Fed pays interest on reserves, it necessarily increases the monetary base.
350 Thus, Mankiw's solution for dealing with unprecedented excess reserves is for the Fed to create even more reserves in order to pay bankers not to make new loans. Does that sound like a good long-term plan for the economy?
351 Opinion
January 4, 2010 OP-ED COLUMNIST That 1937 Feeling By PAUL KRUGMAN Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder. But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths. This shouldn’t be happening. Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama’s Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against re-enacting the events of 1937. But those who remember the past sometimes repeat it anyway. As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year. And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade. Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up. Which brings us to the still grim fundamentals of the economic situation. During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore. What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.
352 Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust. So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are. The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action. Meanwhile, all the talk at the Fed is about the need for an “exit strategy” from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It’s widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn’t raise interest rates directly — and there’s a lot of pressure on Mr. Bernanke to do that too. Will the Fed realize, before it’s too late, that the job of fighting the slump isn’t finished? Will Congress do the same? If they don’t, 2010 will be a year that began in false economic hope and ended in grief. http://www.nytimes.com/2010/01/04/opinion/04krugman.html
January 1, 2010 OP-ED COLUMNIST Chinese New Year By PAUL KRUGMAN It’s the season when pundits traditionally make predictions about the year ahead. Mine concerns international economics: I predict that 2010 will be the year of China. And not in a good way. Actually, the biggest problems with China involve climate change. But today I want to focus on currency policy. China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory. Here’s how it works: Unlike the dollar, the euro or the yen, whose values fluctuate freely, China’s currency is pegged by official policy at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses. Under normal circumstances, the inflow of dollars from those surpluses would push up the value of China’s currency, unless it was offset by private investors heading the other way. And private investors are trying to get into China, not out of it. But China’s government restricts capital inflows, even as it buys up dollars and parks them abroad, adding to a $2 trillion-plus hoard of foreign exchange reserves.
353 This policy is good for China’s export-oriented state-industrial complex, not so good for Chinese consumers. But what about the rest of us? In the past, China’s accumulation of foreign reserves, many of which were invested in American bonds, was arguably doing us a favor by keeping interest rates low — although what we did with those low interest rates was mainly to inflate a housing bubble. But right now the world is awash in cheap money, looking for someplace to go. Short-term interest rates are close to zero; long-term interest rates are higher, but only because investors expect the zero-rate policy to end some day. China’s bond purchases make little or no difference. Meanwhile, that trade surplus drains much-needed demand away from a depressed world economy. My back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing U.S. employment by around 1.4 million jobs. The Chinese refuse to acknowledge the problem. Recently Wen Jiabao, the prime minister, dismissed foreign complaints: “On one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures.” Indeed: other countries are taking (modest) protectionist measures precisely because China refuses to let its currency rise. And more such measures are entirely appropriate. Or are they? I usually hear two reasons for not confronting China over its policies. Neither holds water. First, there’s the claim that we can’t confront the Chinese because they would wreak havoc with the U.S. economy by dumping their hoard of dollars. This is all wrong, and not just because in so doing the Chinese would inflict large losses on themselves. The larger point is that the same forces that make Chinese mercantilism so damaging right now also mean that China has little or no financial leverage. Again, right now the world is awash in cheap money. So if China were to start selling dollars, there’s no reason to think it would significantly raise U.S. interest rates. It would probably weaken the dollar against other currencies — but that would be good, not bad, for U.S. competitiveness and employment. So if the Chinese do dump dollars, we should send them a thank-you note. Second, there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply. Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “With employment less than full ... all the debunked mercantilistic arguments” — that is, claims that nations who subsidize their exports effectively steal jobs from other countries — “turn out to be valid.” He then went on to argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen. The bottom line is that Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation. So I’d urge China’s government to reconsider its stubbornness. Otherwise, the very mild protectionism it’s currently complaining about will be the start of something much bigger. http://www.nytimes.com/2010/01/01/opinion/01krugman.html
354 Opinion
December 28, 2009 OP-ED COLUMNIST The Big Zero By PAUL KRUGMAN Maybe we knew, at some unconscious, instinctive level, that it would be an era best forgotten. Whatever the reason, we got through the first decade of the new millennium without ever agreeing on what to call it. The aughts? The naughties? Whatever. (Yes, I know that strictly speaking the millennium didn’t begin until 2001. Do we really care?) But from an economic point of view, I’d suggest that we call the decade past the Big Zero. It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true. It was a decade with basically zero job creation. O.K., the headline employment number for December 2009 will be slightly higher than that for December 1999, but only slightly. And private-sector employment has actually declined — the first decade on record in which that happened. It was a decade with zero economic gains for the typical family. Actually, even at the height of the alleged “Bush boom,” in 2007, median household income adjusted for inflation was lower than it had been in 1999. And you know what happened next. It was a decade of zero gains for homeowners, even if they bought early: right now housing prices, adjusted for inflation, are roughly back to where they were at the beginning of the decade. And for those who bought in the decade’s middle years — when all the serious people ridiculed warnings that housing prices made no sense, that we were in the middle of a gigantic bubble — well, I feel your pain. Almost a quarter of all mortgages in America, and 45 percent of mortgages in Florida, are underwater, with owners owing more than their houses are worth. Last and least for most Americans — but a big deal for retirement accounts, not to mention the talking heads on financial TV — it was a decade of zero gains for stocks, even without taking inflation into account. Remember the excitement when the Dow first topped 10,000, and best- selling books like “Dow 36,000” predicted that the good times would just keep rolling? Well, that was back in 1999. Last week the market closed at 10,520. So there was a whole lot of nothing going on in measures of economic progress or success. Funny how that happened. For as the decade began, there was an overwhelming sense of economic triumphalism in America’s business and political establishments, a belief that we — more than anyone else in the world — knew what we were doing. Let me quote from a speech that Lawrence Summers, then deputy Treasury secretary (and now the Obama administration’s top economist), gave in 1999. “If you ask why the American financial system succeeds,” he said, “at least my reading of the history would be that there is no innovation more important than that of generally accepted accounting principles: it means that every investor gets to see information presented on a comparable basis; that there is discipline on company managements in the way they report and monitor their activities.” And he went on to
355 declare that there is “an ongoing process that really is what makes our capital market work and work as stably as it does.” So here’s what Mr. Summers — and, to be fair, just about everyone in a policy-making position at the time — believed in 1999: America has honest corporate accounting; this lets investors make good decisions, and also forces management to behave responsibly; and the result is a stable, well-functioning financial system. What percentage of all this turned out to be true? Zero. What was truly impressive about the decade past, however, was our unwillingness, as a nation, to learn from our mistakes. Even as the dot-com bubble deflated, credulous bankers and investors began inflating a new bubble in housing. Even after famous, admired companies like Enron and WorldCom were revealed to have been Potemkin corporations with facades built out of creative accounting, analysts and investors believed banks’ claims about their own financial strength and bought into the hype about investments they didn’t understand. Even after triggering a global economic collapse, and having to be rescued at taxpayers’ expense, bankers wasted no time going right back to the culture of giant bonuses and excessive leverage. Then there are the politicians. Even now, it’s hard to get Democrats, President Obama included, to deliver a full-throated critique of the practices that got us into the mess we’re in. And as for the Republicans: now that their policies of tax cuts and deregulation have led us into an economic quagmire, their prescription for recovery is — tax cuts and deregulation. So let’s bid a not at all fond farewell to the Big Zero — the decade in which we achieved nothing and learned nothing. Will the next decade be better? Stay tuned. Oh, and happy New Year. http://www.nytimes.com/2009/12/28/opinion/28krugman.html
356 Opinion
December 25, 2009 OP-ED COLUMNIST Tidings of Comfort By PAUL KRUGMAN Indulge me while I tell you a story — a near-future version of Charles Dickens’s “A Christmas Carol.” It begins with sad news: young Timothy Cratchit, a k a Tiny Tim, is sick. And his treatment will cost far more than his parents can pay out of pocket. Fortunately, our story is set in 2014, and the Cratchits have health insurance. Not from their employer: Ebenezer Scrooge doesn’t do employee benefits. And just a few years earlier they wouldn’t have been able to buy insurance on their own because Tiny Tim has a pre-existing condition, and, anyway, the premiums would have been out of their reach. But reform legislation enacted in 2010 banned insurance discrimination on the basis of medical history and also created a system of subsidies to help families pay for coverage. Even so, insurance doesn’t come cheap — but the Cratchits do have it, and they’re grateful. God bless us, everyone. O.K., that was fiction, but there will be millions of real stories like that in the years to come. Imperfect as it is, the legislation that passed the Senate on Thursday and will probably, in a slightly modified version, soon become law will make America a much better country. So why are so many people complaining? There are three main groups of critics. First, there’s the crazy right, the tea party and death panel people — a lunatic fringe that is no longer a fringe but has moved into the heart of the Republican Party. In the past, there was a general understanding, a sort of implicit clause in the rules of American politics, that major parties would at least pretend to distance themselves from irrational extremists. But those rules are no longer operative. No, Virginia, at this point there is no sanity clause. A second strand of opposition comes from what I think of as the Bah Humbug caucus: fiscal scolds who routinely issue sententious warnings about rising debt. By rights, this caucus should find much to like in the Senate health bill, which the Congressional Budget Office says would reduce the deficit, and which — in the judgment of leading health economists — does far more to control costs than anyone has attempted in the past. But, with few exceptions, the fiscal scolds have had nothing good to say about the bill. And in the process they have revealed that their alleged concern about deficits is, well, humbug. As Slate’s Daniel Gross says, what really motivates them is “the haunting fear that someone, somewhere, is receiving social insurance.” Finally, there has been opposition from some progressives who are unhappy with the bill’s limitations. Some would settle for nothing less than a full, Medicare-type, single-payer system. Others had their hearts set on the creation of a public option to compete with private insurers. And there are complaints that the subsidies are inadequate, that many families will still have trouble paying for medical care. Unlike the tea partiers and the humbuggers, disappointed progressives have valid complaints. But those complaints don’t add up to a reason to reject the bill. Yes, it’s a hackneyed phrase, but politics is the art of the possible.
357 The truth is that there isn’t a Congressional majority in favor of anything like single-payer. There is a narrow majority in favor of a plan with a moderately strong public option. The House has passed such a plan. But given the way the Senate rules work, it takes 60 votes to do almost anything. And that fact, combined with total Republican opposition, has placed sharp limits on what can be enacted. If progressives want more, they’ll have to make changing those Senate rules a priority. They’ll also have to work long term on electing a more progressive Congress. But, meanwhile, the bill the Senate has just passed, with a few tweaks — I’d especially like to move the start date up from 2014, if that’s at all possible — is more or less what the Democratic leadership can get. And for all its flaws and limitations, it’s a great achievement. It will provide real, concrete help to tens of millions of Americans and greater security to everyone. And it establishes the principle — even if it falls somewhat short in practice — that all Americans are entitled to essential health care. Many people deserve credit for this moment. What really made it possible was the remarkable emergence of universal health care as a core principle during the Democratic primaries of 2007- 2008 — an emergence that, in turn, owed a lot to progressive activism. (For what it’s worth, the reform that’s being passed is closer to Hillary Clinton’s plan than to President Obama’s). This made health reform a must-win for the next president. And it’s actually happening. So progressives shouldn’t stop complaining, but they should congratulate themselves on what is, in the end, a big win for them — and for America. http://www.nytimes.com/2009/12/25/opinion/25krugman.html
358
Beware the crisis around the corner By Clive Crook Published: January 3 2010 19:36 | Last updated: January 3 2010 19:36
The US economy is sickly, but the mood of impending doom has lifted. The response of US and other authorities to the emergency is unfinished business and needs continuing attention – but in 2010, if the crisis continues to ease, the danger is that politicians will relax and minds will wander from the need for new financial rules. The next model of US financial regulation is unclear. The House of Representatives has passed a bill concentrating on regulatory structure: that is, on which regulators are responsible for what. What the Senate will do is anybody’s guess. Important as the regulatory organisation chart may be, however, it is not the key thing. The rules regulators apply are what matter. The need for better rules is greater now than before the crisis. Critics of the US government say its response has made another financial collapse more likely – and they have a point. They worry about institutions that are too big to fail. The authorities encouraged consolidation as a way to restore short-term stability, but at what cost in the longer term? Attacking this concentration, critics say, is crucial. One way to do this, they argue, is to restore the Glass-Steagall separation of commercial and investment banking. Create a heavily regulated, safe, utility-like system of deposit-taking banks and fence it off from the more lightly regulated casino of the securities markets. You would get institutions that are both smaller and more conservatively run. It sounds plausible, but the debate over a new Glass-Steagall is unhelpful. The degree of interest in the idea is puzzling. After all, the financial collapse did not show that universal banks are more hazardous than separated commercial and investment banks. If anything, it showed the opposite. Investment banks such as Bear Stearns and Lehman Brothers were thought to pose big systemic risks even though they were not deposit-takers. Moreover, the commercial banks that failed did so mainly through losses in traditional banking. So far as dealing in securities was concerned, the repeal of Glass-Steagall actually made little difference: the law permitted most of the securities transactions that commercial banks were undertaking when the crisis hit. Forget Glass-Steagall. “Too big to fail”, on the other hand, is no distraction. It matters, and the reason why is familiar. A financial institution thought, or explicitly deemed by the authorities, to be too big to fail has a licence to take excessive risks. The problem is moral hazard. The implicit government guarantee
359 will make its managers less cautious, and its creditors too. The burden of prudential oversight falls entirely on regulators, one they cannot hope to carry alone. All this is correct – but it is not the whole, or even the larger part, of the problem. Remember that the US authorities, acting out of concern over moral hazard, let Lehman fail. In a way, they were right. It was not too big to fail: its collapse did not imperil the payments system and its counterparties did not fold. Yet praise for that principled decision was less than universal. Many argued, and continue to argue, that it was the worst mistake of the whole saga. The authorities are unlikely to forget this when another institution – which, regardless of its size, might be “too interconnected to fail” – looks ready to topple. And everybody knows it. The precondition for big financial busts is always the same: unwarranted optimism. When everybody gets it into his head that inflation is tamed, interest rates will stay low, asset prices will keep rising and economic growth will never stop, overborrowing is sure to follow. In other words, moral hazard is only one factor reducing perceived risk. In a prolonged upswing, investors feel safe regardless – not because a bail-out will protect them from losses, but because they expect no losses. Also, in that kind of climate people will tend to make the same mistakes. Many small banks making bad bets on property may be safer than a system with a few big ones doing the same thing – but only a little. The first small bank to fail might cause a crisis of confidence that would bring down others, and then the rest. After 2007-09, what government is going to risk finding out? So judge the new rules by one criterion above all. In the words of a former Fed chairman, William McChesney Martin, do they take away the punch bowl before the party gets going? Interest rates that take into account asset prices as well as general inflation are part of this, of course. But when it comes to financial regulation, the key thing is rules that recognise the credit cycle, and change as it proceeds. Most important, as argued by Charles Goodhart in these pages, capital and liquidity requirements should be time-varying and strongly anti-cyclical. In good times, when lending is expanding quickly and financial institutions’ concerns about capital and liquidity are at their least, the requirements should tighten. Under current rules, they do the opposite. Fixing financial regulation is a hugely complex task, and the details matter. But no repair – whether it concentrates on ending “too big to fail”, on separating commercial and investment banking, or you name it – is going to succeed unless this simple principle is adopted. Financial institutions will oppose the idea, because it amounts to a tax on their growth. Of the many battles that one might fight in this area, this is one that simply has to be won. [email protected] More columns at www.ft.com/clivecrook http://www.ft.com/cms/s/0/46d725b0-f897-11de-beb8-00144feab49a.html
360 Unlearnt Lessons of the Great Depression by DianeC on Mon 04 Jan 2010 10:39 GMT | The superb economic historian Harold James has a column of this title in today's Financial Times, based on his most recent book, The Creation and Destruction of Value. I must confess that despite being a big fan of Professor James, including his previous book, The End of Globalization, I haven't yet read the latest one (which was published in September). The column makes me feel sure I'd agree with him. He writes: " ....[F]inding a way out of the damage was very tough in the 1930s and is just as hard now. Unlike in the case of a 1929-type challenge, there are no obvious macro-economic answers to financial distress. The answers lie in the slow, painful cleaning up of balance sheets; and in designing an incentive system that compels banks to operate less dangerously. A 1931-type event requires micro-economic restructuring, not macro-economic stimulus and liquidity provision. It cannot be imposed from above by an all-wise planner but requires many businesses and individuals to change behaviour." This point is exactly what puzzles me about the optimists who seen sprouting green shoots in recent economic data; macro stability is only the precondition for the reconstructive surgery needed now. A second point in the column is that the recent era of financial globalisation suited small and nimble trading states such as Singapore and Ireland, whereas the dawning age of retrenchment severely limits their options and will be an age of big states. The BRICs, to be precise, not the old G7. Reading about the economy of the 1930s is essential for understanding what's happening now. I shall order Prof James's book at once. http://blog.enlightenmenteconomics.com/blog/_archives/2010/1/4/4419863.html
361 UK House prices are too high, say economists By Chris Giles and Daniel Pimlott Published: January 3 2010 22:31 | Last updated: January 3 2010 22:41 Britain’s leading economists are almost unanimous in their view that house prices are still too high. Of the 70 who answered the question, 13 believed residential property prices were now fairly valued, while 55 said they were not and two did not express a view. UK deficit warning from City economists - Jan-03 Experts divided on when to tackle deficit - Jan-03 Europe’s chief executives see sluggish 2010 - Jan-03 European business braced for struggle - Jan-03 2010 survey of economists: Full responses - Jan-04 Video: Surviving the ‘zombie economy’ - Jan-03 The judgment that the housing market remains overinflated sits uncomfortably alongside extensive evidence that prices are rising rapidly. But the general view is that the recent surge in prices reflects low interest rates and low levels of supply – a situation that cannot last for long. House prices are also likely to be hit by weak income growth and still weak bank lending, economists argue. Ross Walker, at the Royal Bank of Scotland, said: “The poor disposable income outlook, coupled to the absence of a financial sector able or willing to extend large quantities of new mortgage finance, will at the least constrain further house price gains and probably force modest declines.” House prices were still 10-15 per cent too high, according to Ray Barrell, of the National Institute of Economic and Social Research. Prices did remain significantly below their pre-recession levels, improving the situation, but still left homes looking expensive relative to incomes, economists argued. House prices remained high in relation to determinants of value such as rents and earnings, said Martin Gahbauer, economist at Nationwide. But few suggested that prices would fall much in the near future. Andrew Goodwin, of Oxford Economics, said: “I would estimate they remain overvalued, but to a much lesser extent than before the crisis ... I wouldn’t expect another crash, more a gentle downturn in prices.” Generally economists were agreed that, whatever the downside risk to prices, a shortage of housing in the UK would support the market. Meanwhile a number were convinced that the correction had probably gone far enough. Tim Leunig, of the London School of Economics, said: “Given prices are increasing in a recession, with credit constraints, claims of a bubble make no sense.” Amit Kara, of UBS, believes property values are fair because interest rates will stay low for a prolonged period, although other commentators seemed to view rate rises as more imminent.
362 Gary Styles, of Hometrack, pointed to house price expectations as evidence prices had stabilised. Last January the median expectation for house prices in 2009 was a fall of 10.8 per cent. By last June this had reached a decline of 8 per cent, but by November the expectation was for a rise of 3.4 per cent. “This dramatic turnround in expectations combined with the self-fulfilling prophecy nature of the UK housing market leads me to believe we are close to fair value,” said Mr Styles. Peter Warburton, of Economic Perspectives, thought that UK residential property prices were within 20 per cent of fair value in 80 per cent of cases. Many economists pointed to regional variations. Michael Dicks, of Barclays Wealth, pointed out that the most expensive homes were benefiting from a weak pound, but the rest of the market would probably suffer more. http://www.ft.com/cms/s/0/ade2abbe-f8a9-11de-beb8-00144feab49a.html
363 COMMENT Unlearnt lessons of the Great Depression By Harold James Published: January 3 2010 19:35 | Last updated: January 3 2010 19:35 We are puzzled by the length and severity of the financial crisis and its effects on the real economy. We are also mesmerised by the possibility of parallels to the Great Depression. But at the same time we are sure that we have learnt the lessons of the Great Depression. We assume that we can avoid a repetition of the disasters of the deglobalisation that occurred in the 1930s. The problem is that there are several different lessons from the Great Depression. They are confusing when we conflate them. Especially in the US, the Great Depression is usually identified with the stock market crash of 1929. Economists have two simple macro-economic policy answers to that kind of collapse. The first is the lesson that John Maynard Keynes already taught in the 1930s – in the face of a collapse in private demand, there is a need for new public sector demand or for fiscal activism. The second is the lesson above all drawn by Milton Friedman and Anna Schwartz in the 1960s. In their view, the Depression was the result of the Fed’s policy failure in the aftermath of 1929. There was a massive monetary contraction, which was responsible for the severity of the downturn. In the future, central banks should commit themselves to providing extra liquidity in such cases. Both lessons have been applied, consistently and quite successfully, not just to deal with the turmoil of 2007-08. Stock market panics in 1987, or 1998, or 2000-01, were treated with the infusion of liquidity. The fact that these anti-crisis measures were applied in many countries after 2007 also explains why the fallout is milder than it might have been. The years 2007-08, and especially the dramatic aftermath of the Lehman collapse, brought a new challenge, in that it repeated one aspect of the Great Depression story that is different from 1929. That type of crisis demands a different set of policy debates. In the summer of 1931, a series of bank panics emanated from central Europe and spread financial contagion to Great Britain and then to the US, France and the whole world. This turmoil was decisive in turning a bad recession (from which the US was already recovering in the spring of 1931) into the Great Depression. But finding a way out of the damage was very tough in the 1930s and is just as hard now. Unlike in the case of a 1929-type challenge, there are no obvious macro-economic answers to financial distress. The answers lie in the slow, painful cleaning up of balance sheets; and in designing an incentive system that compels banks to operate less dangerously. A 1931-type event requires micro-economic restructuring, not macro-economic stimulus and liquidity provision. It cannot be imposed from above by an all-wise planner but requires many businesses and individuals to change behaviour. The improvement of regulation, while a good idea, is better suited to avoiding future crises than dealing with a catastrophe that has already occurred. There is another reason that the aftermath of Lehman looks reminiscent of the world of depression economics. The international economy spreads problems fast. Austrian and German
364 bank collapses would not have knocked the world from recession into depression had they occurred in isolated or self-contained economies. But these economies were built on borrowed money in the second half of the 1920s, with the chief sources of the funds lying in America. The analogy of that dependence is the way money from emerging economies, mostly in Asia, flowed to the US in the 2000s, and an apparent economic miracle was based on China’s willingness to lend. The bank collapses in 1931 and in 2008 shook the confidence of the international creditor: then the US, now China. As in the Great Depression, the attention focuses on the big states and their policy responses. This is true of the by now classic answers to a “1929” problem. Smaller countries find it harder to apply Keynesian fiscal policies, or pursue autonomous monetary policies. Some countries, such as Greece or Ireland, have reached or exceeded the limits for fiscal activism; and there is – as in the 1930s – a threat of countries going bankrupt. From the perspective of the US, debate has been distorted by fears that something like this could hit America. That is unrealistic. But even the default of an agglomeration of smaller countries would end any hope of an open international economy and inaugurate an age of financial nationalism. In the recently ended era of financial globalisation, in the 20-year period since the collapse of Soviet communism, the most dynamic and richest states were generally small open economies: Singapore, Taiwan, Chile, New Zealand and in Europe the former communist states of central Europe, Ireland, Austria and Switzerland. In the world after the crisis, the centre of economic gravity has shifted to really large agglomerations of power. There has been an obsession with the Brics (Brazil, Russia, India, China) as new giants. The continuation of the crisis will turn them into Big Really Imperial Countries. The writer is professor of history and international affairs at Princeton University. This article is based on ‘The Creation and Destruction of Value’, Harvard University Press, 2009 http://www.ft.com/cms/s/0/4ac86302-f895-11de-beb8-00144feab49a.html
COMMENT
The baby boomers come of old age Published: January 3 2010 19:33 | Last updated: January 3 2010 19:33 This year marks the start of the decade when – if the penny has not dropped already – employers will realise they are not just dealing with an ageing workforce, but with an ageing workforce much of which will want to work on. No bad thing. Indeed, an excellent one. For longer working lives are essential. Individually, they are needed to pay for the much longer retirements that rocketing life expectancy has delivered. Collectively, they are needed to pay not just for health and social care but much other government-supported activity from roads to policing: the “dependency ratio”, the proportion of working age people to retirees, suddenly looks much less frightening if more people work on. They are also needed because in many developed countries there will be a shortage of younger employees. UK work incentives proposed - Dec-16 Warning of lasting unemployment - Dec-11 Agencies see signs of better job prospects - Dec-09
365 Workless over-50s need intensive support - Dec-01 Call for improvements on engineering sites - Nov-29 Sharp rise in number of young jobless - Nov-19 In the UK, for example, as the baby boomers head towards traditional retirement ages in ever greater numbers, there will be a decline in the numbers aged between 15 and 24, and indeed those aged between 35 and 49. Meanwhile, the tally for those aged between 50 and 69 will rocket, and the world of work will have to change as a result. It has already started to. But not yet far enough. In the run-up to the recession, the single fastest growing part of the UK workforce was those past state pension age. Today 1.4m of them are in work. A narrow majority of them are part-timers. Many more are women than men, partly owing to women’s lower state pension age. And many more now expect or want to do the same. Financial reasons – which include recession and the steady erosion of strong employer-provided pensions – are the dominant cause. But they are far from the only ones. In a recent survey of over-55s, 65 per cent said they wished to continue to use their skills and experience past normal state pension age. Fifty-eight per cent said they wanted the social interaction that work brings. And 44 per cent rated work good for their self-esteem. And they are right. Their individual views are backed by research which shows that work – decent work and notnecessarily full-time employment as people age – is indeed good for you, from the point of view of physical health, mental agility and a sense of belonging to society. What does this mean for employers and governments? Age discrimination needs to be outlawed not just in theory but in practice. Skills, not years, are what count. More employers need to learn to be more flexible about hours worked and the nature of work done, about training in later life (to which individuals may well need to contribute more) and about the balance of experience to energy. This will be easier for some companies than for others. It will also mean taking “wellness” at work increasingly seriously – encouraging healthy lifestyles and tackling short-term sickness absence before it becomes long term; a challenge that larger employers will inevitably tend to find easier than smaller ones. But the biggest change this will bring is less one for employers alone than for individuals and for society as a whole. No longer will people be expected to retire at the peak of their earning power and from their most senior job. It will become more commonplace for people to see their earnings peak in their 40s or 50s and then decline as they take on less senior posts or fewer hours. Such individuals will need to be respected and contented – a big change for western societies where what you do has done much, too much, to define who you are. For good or ill, through sheer weight of numbers the baby boomers have changed much as they have gone along – whether in music, social mores, consumerism or now, up to a point, greenery. They are probably capable of changing the ageing equation too. Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. http://www.ft.com/cms/s/0/2909fd80-f880-11de-beb8-00144feab49a.html
366 COMMENT Analysis After the decade of debt: A course to chart By Michael MacKenzie, Francesco Guerrera and Gillian Tett Published: January 3 2010 20:01 | Last updated: January 3 2010 20:01
Five years ago, one place that ultra-bright mathematicians loved to work was in credit derivatives. Back then, the fast-exploding arena of debt was an exciting intellectual frontier – and one that also produced fat profits. No longer. In the last couple of years, the credit markets have been shaken to their core, as the explosion of the financial crisis created some $2,600bn worth of losses. “Leverage” and “innovation” are now dirty words. So some of the brightest minds in finance – often dubbed “quants”, or those who specialise in quantitative, maths- based finance – are now quietly wriggling out of the credit world, searching for fresh challenges. “Really good quants are moving on – they don’t see so many opportunities in credit derivatives now,” admits one credit boom veteran, who still works in a senior Wall Street role. “The big areas [for creativity] are things like algorithmic or flash trading,” he adds, referring to the branch of finance that uses complex computing programs to implement ultra-fast trades in equity markets and elsewhere. It is a telling point, and one that bankers, policymakers and investors may feel the need to ponder as a new decade dawns. The western financial system has reshaped itself numerous times over the centuries as it responded to different periods of boom and bust and changes in regulation. But the shifts that have taken place in the past decade have arguably been some of the most striking – not least because they were almost entirely unforeseen at the turn of the millennium. After all, back in 2000 it was widely presumed that the early years of the new century would be a period when equity markets – and equity-focused financiers – ruled the roost. That was because during the last years of the 20th century, stock markets had boomed, amid the internet revolution and a wave of mergers and acquisitions; projecting the past on to the future, investors and bankers presumed that would continue in the 21st century. Meanwhile, in 2000 the world of debt and credit seemed profoundly unglamorous. Indeed, some pundits even thought the government bond market would shrink this decade, because there were predictions that America could soon pay off its national debt. Thus the fixed-income teams at
367 banks tended to be viewed as laggards – and the future “winners” on Wall Street and in the City were considered the banks that had big equity teams or balance sheets hefty enough to support corporate deals. But in reality these assumptions – like so many others made on the eve of the new century – were wrong. Far from dazzling investors, western equity markets have produced appalling returns; bonds have boomed. A Barclays Capital index of US Treasury bonds shows a total return, including capital gains and interest, of about 85 per cent this decade, while investment in the equivalent indices for UK gilts and European government bonds generated total returns of 72 per cent and 71 per cent respectively.
The debt markets surged not only in scale but complexity. Since 2000, for example, the amount of US bond market debt has nearly doubled in size, according to the Securities Industry and Financial Markets Association. That boom can partly be attributed to ultra-low US interest rates in the first half of the decade, coupled with an Asian savings glut, which flooded the financial system with liquidity. Another crucial factor was an explosion in innovation, as bankers – including the “quants” – developed tools such as credit derivatives and collateralised debt obligations, which allowed financiers to repackage and trade debt more actively than ever before. That created more investor demand for those debt instruments, which lowered the cost of borrowing for consumers and companies alike – fuelling a credit bubble. “Financial innovation in areas such as credit derivatives and securitisation created enormous growth in fixed-income during the decade,” says Andrew Lo, a professor at the Massachusetts Institute of Technology. Or as William Cunningham, from State Street Global Advisors, says:
368 “Virtually all of the structured credit issued was a way to create more consumer credit, as banks took exposure off their balance sheets and securitised it ... There was huge demand from investors as rates were so low.” The big question now hanging over the industry, however, is whether this wild debt boom can continue for the next decade, in the aftermath of the recent financial turmoil? Is it time, in other words, for banks and investors to focus on another area of finance for profits in the next decade – be that the equity markets again or something else altogether? In the short term, at least, the – perhaps surprising – message from most Wall Street and City of London banks is that the debt markets are still a lucrative area of activity. The fixed-income departments that drove profits for many large investment banks before the crisis have continued to produce fat revenues for the likes of Goldman Sachs, JPMorgan or Barclays Capital. One reason is that governments have flooded the financial system this year with liquidity in response to the crisis, creating rich trading opportunities for banks that can borrow at ultra-cheap rates and then invest in higher-yielding assets, at a time of considerable volatility. But another factor behind the boom is that companies have been rushing to raise finance in the bond markets, partly because banks are cutting lending. At the same time, moreover, the deteriorating fiscal position of western governments has prompted a deluge of sovereign bond issuance. In 2009, some $12,000bn worth of sovereign bonds were issued by developed countries, up from $9,000bn-odd three years ago. As a result, McKinsey consultants calculate that the total scale of leverage (or debt relative to assets) in the western financial system has actually risen in the two years since the credit crisis started – even though western policymakers agree leverage needs to be reduced because excessive borrowing was a big reason behind the crisis. Some bankers expect this pattern to continue. After all, they point out, there is little chance that the western financial system will be able to wean itself off its addiction to debt any time soon. And one consequence of the recent financial shake-out is that it has left the debt world – and the profits associated with it – in the hands of a tiny pool of banks and their so-called FICC (fixed- income, commodities and currency) teams. “The rise of FICC is a secular event,” says a senior Wall Street executive. “The crisis has created an oligopoly of big trading firms. The barriers to entry are high and volumes on the up, so we expect the boom to continue.” Others are less sure, saying the lucrative nature of the business is attracting new competitors. BlackRock, the giant fund manager, for example, has raised the prospect of setting up its own trading business to compete with Wall Street. Meanwhile, the financial crisis is prompting increased regulatory scrutiny that could undercut banks’ ability to make money from innovative ideas. “The boom in FICC is probably not a long-term phenomenon,” says Peter Nerby of Moody’s, the credit rating agency. “Companies will have to come up with new ideas [but] there is serious concern among regulators that the companies did not do as good a job controlling risk as they were in creating new products.” In addition, it remains unclear whether consumers, companies or even governments will continue to keep borrowing at the same pace into the next decade. “On the government side, it will take a while to get deficits under control, in the US and for other countries,” says Gerald Lucas of Deutsche Bank. But in the medium term, central banks are widely expected to withdraw their generous support for bond markets, and high-spending governments will face increasing pressure to reduce issuance.
369 There is also the prospect that western consumers will eventually start cutting their addiction to debt – such as the credit cards and home equity loans that boosted their spending power and also provided banks with a hefty securitisation business. “The liberalisation of credit for households, which began in the 1980s, has been fundamentally altered by the intersection of the financial crisis and the great recession,” argues Neal Soss of Credit Suisse, who forecasts less rapid debt growth in the US in the future, as a stricter credit regime with tougher underwriting standards emerges. T hat leaves many bankers – including those quants – frantically trying to identify the next boom story. Many financiers say one fruitful new avenue of potential growth is likely to be in emerging market bonds and equities. As McKinsey recently pointed out, while western financial markets look increasingly mature after a three-decade-long boom, countries such as the “Brics” – Brazil, Russia, India and China – still have huge scope since their capital markets remain underdeveloped. Other areas that could produce growth, some bankers say, include the trading of environmental assets, commodities, life assurance and pension contracts. Another potential focus for innovation is the nature of the trading process, as hedge funds and banks increasingly adopt so-called “algorithmic” and “flash” trading systems, which enable them to conduct deals at lightning speed. That might fuel a new boom in equity-related activity, switching the relative position of debt and equity markets yet again. But perhaps the most telling – and humbling – lesson of all from the last decade is that old adage often found printed at the bottom of financial products: “The past cannot be considered a good guide to the future.” Whatever the 2020 financial system looks like, in other words, it will not be the same as today, either in terms of the relative status of asset classes or financial groups. Policymakers and investors, in other words, had better stay nimble and keep watching carefully to see where those smart financial brains move in the next decade – if, indeed, they stay in finance at all.
● A dollar invested in one-month US Treasury bills in 2000 would be worth $1.31 now, writes Nicole Bullock in New York. The same dollar invested in the S&P 500 index of leading US shares would be worth 89 cents. In between was a roller-coaster ride in which many average Americans lost half of their money in the internet bust, then made it back in the credit boom, only to lose the gains again, winding up exhausted and just below break-even. “It has been a really bad 10 years for stocks,” says Gregg Fisher, an adviser. The fraught experience was a far cry from the previous decade, when the stock market made investors an annualised return of nearly 20 per cent, he says. Indeed, burnt retail investors may be moving away from equities. In 2009, in spite of a 69 per cent rise in the S&P 500 since March, investors took money out of mutual funds that specialise in American stocks. Net redemptions from US equity funds were $9bn last year, according to Lipper FMI, a unit of Thomson Reuters. “If I am a little kid and I touch a hot stove, am I going to keep touching it? Probably not,” Mr Fisher says. “Is there any economic logic to the fact that people should not be rewarded for investing in businesses?” Still, retail investors appear willing to take the middle ground – lending money to companies rather than owning them. They have poured $176bn into mutual funds that buy investment-grade corporate bonds, more than double the previous record set in 2007.
370 Bondholders have a higher claim than stockholders on a company’s assets in default and traditionally get more of their money back if the company fails outright. After the sell-off in credit in 2008 sent even highly rated bonds reeling, investment-grade bonds last year posted an impressive total return of 20 per cent, the best performance since 1995, according to a Merrill Lynch index. High-grade corporate issues were the right hiding place in 2009 but experts warn that these, too, leave investors vulnerable to pain ahead. Corporate bonds fall when interest rates rise, which many believe will happen at some point in 2010 as the Federal Reserve begins to exit from recovery initiatives that include near-zero official rates. “It is not irrational for people to shift some of their money to high-quality corporates rather than be effectively 100 per cent in equities, especially after having a taste of real volatility,” says Brad Golding at Christofferson Robb, a money manager. “But are people again chasing returns? Probably. Do they realise there is still risk? Let’s hope so.” http://www.ft.com/cms/s/0/800f1876-f88b-11de-beb8-00144feab49a.html
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Credit Crunch in the Eurozone Intensifies: Loans to Non-Financial Corporations Decrease Further
The annual rate of change of M3 decreased to -0.2% in November 2009, from 0.3% in October 2009. Regarding the main components of M3, the annual rate of growth of M1 increased to 12.6% in November 2009, from 11.8% in October. The annual rate of change of loans to the private sector was -0.7% in November, after -0.8% in the previous month. The annual rate of change of loans to nonfinancial corporations decreased to -1.9% in November, from -1.2% in October. The annual growth rate of loans to households increased to 0.5% in November, from -0.1% in the previous
month. (ECB, 12/30/09) Nils Jannsen and Klaus-Jürgen Gern of the Kiel Institute: An analysis of credit growth and interest rates in the U.S., Germany, and the eurozone so far does not suggest that credit supply is the limiting factor to investment and economic growth (i.e. a credit crunch) given the deterioration of the credit quality of borrowers during this downturn. Nevertheless, the authors point to risks that insufficient bank capitalization may constrain credit growth, especially in Germany, where bank core
capitalization is low by international standards. (12/2009)
http://www.roubini.com/briefings/47441.php#73516 Sovereign Risk in the Eurozone
Dec 24, 2009 12:00:00 PM | Last Updated
Spain Leads Moody's Sovereign "Misery Index": Further Downgrades Ahead? Moody's Downgrades Greek Sovereign Rating to A2: Government Resorts to Private Debt Placements More Problems for Ireland as Fitch Downgrades Should the EMU Bail Out Members in Trouble Despite No-Bail Out Clause? EMU Government Bonds Diverge on Downgrades: Is a Common Euro Bond the Solution?
Overview:
As countries entered the European Monetary Union (EMU) in 1999, exchange rate risks were eliminated and yield spread among eurozone countries converged significantly. The theory of interest rate parity suggests yield spreads between comparable bonds should have vanished yet investors did not regard government bonds of different EMU countries as complete substitutes. Thus, spread remained and began to diverge significantly following the collapse of Lehman Brothers and the onset of the worst financial crisis in recent times. The EMU nation default or the potential break-up of the eurozone became more conceivable. http://www.roubini.com/briefings/47577.php
372 Economy
December 19, 2009 OFF THE CHARTS These Days, Countries in Misery Have Lots of Company By FLOYD NORRIS SOMETIMES economies can be too good.
That is one lesson from the history of a new “misery index,” created by Pierre Cailleteau, an economist and sovereign risk analyst at Moody’s. The index adds together a country’s budget deficit, as a percentage of gross domestic product, and its unemployment rate. It captures the current conundrum for many countries: their economies need stimulus, but their budgets may not be able to afford it. The unfortunate leader in that misery index among the countries cited by Moody’s is Spain, with an index of 30, thanks to an unemployment rate of 20 percent and a deficit of 10 percent of G.D.P. The figures are Moody’s estimates for 2010. While Spain is extreme, the indexes are high for many countries, with the United States and Britain both expected to score over 20 next year. In 2005, as can be seen in the accompanying graphic featuring 13 European countries and the United States and Iceland, the two countries with the highest misery indexes were Hungary and Greece, at 15.1, or just more than half Spain’s current figure. In 2010, only three countries are expected to be lower than 15.1 — the Czech Republic, Germany and Italy.
373 In the glory days for the world economy, when no one would have thought to put together this index, two countries managed to have negative figures, which can happen if budget surpluses are large and unemployment rates are minuscule. Iceland, whose economy was once viewed as a testament to the strength that could come if a country cultivated a strong and expanding financial industry, had a negative misery index in 2000 and again from 2005 through 2007. Ireland, which also had a growing banking system and seemed to have positioned itself as the economic star of the euro zone, had an index reading of less than 5 for nine consecutive years, from 1999 to 2007, including a negative reading in 2000. Those countries have been among the worst hit by the financial crisis. Both had property booms that left prices dangerously overextended, and both have been forced to sharply cut government spending despite rising unemployment. The original misery index, created by the economist Arthur M. Okun, added together a country’s unemployment rate and its inflation rate. That index came to symbolize stagflation, a significant problem of the 1970s, when consumer prices continued to rise even as economies stagnated and unemployment rose. The new index could prove to be an indicator of the dilemma facing many developed countries in coming years. If economies do not recover quickly, there will a strong case for fiscal stimulus to bring down unemployment. But there are limits to the budget deficits that some countries can run, providing a counterargument against such stimulus. A lesson of the stagflation era — one taught by Paul A. Volcker in the United States — was that countries sometimes had to get inflation under control even if it did prolong economic pain and raise unemployment. It would have been much better, in the long run, if inflation had been attacked earlier. This new misery index serves to highlight the risks the world took by not being afraid of the inflation of recent years — inflation not in consumer prices but in real estate and financial assets. Instead, gains in those areas were taken as proof of excellent economic policies. Now, the world is paying for that excess, and finding the price to be high. Floyd Norris comments on finance and economics in his blog at nytimes.com/norris. http://www.nytimes.com/2009/12/19/business/economy/19charts.html?_r=1
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Global house prices Ratio rentals Dec 30th 2009 From The Economist print edition House prices are still far above their fair value in many countries—though no longer in America WHEN The Economist last published its round-up of global house prices in September (see article) there were only two countries (Switzerland and China) in which prices were higher than a year earlier. Since then many housing markets have strengthened. The latest survey shows that house-price inflation has turned positive in six countries, and in Hong Kong the rate of increase is now in double digits. Even where prices are still falling year on year, markets are healing. In America the S&P/Case-Shiller index of prices in ten big cities was unchanged in October, after five monthly increases. That has left prices 6.4% below their levels 12 months earlier; go back a year and house-price deflation was almost three times as high.
That markets are now stabilising could suggest that prices have fallen far enough to correct the excesses of the global housing bubble. To test that hypothesis The Economist has created a fair- value measure for property based on the ratio of house prices to rents. The gauge is much like the price/earnings ratio used by stockmarket analysts. Just as the worth of a share is determined by the present value of future earnings, house prices should reflect the expected value of benefits
375 that come from home ownership. These benefits are captured by the rents earned by property investors, which are equivalent to the tenancy costs saved by owner-occupiers.
Shares are deemed pricey when the p/e ratio is above its long-run average. Similarly, homebuyers are likely to be overpaying for property when the price-to-rents ratio is higher than normal. By that yardstick house prices seem low in only a handful of countries in our survey, as the final column in the table shows. One is Japan, where steadily falling property prices mean the price-to-rents ratio is 34% below its average since 1975. Switzerland’s ratio is also less than its long-run average. Germany looks cheap as well, and since our valuation benchmark goes back only to 1996 and so misses out a period when German house prices were frothier, may be cheaper still.
The global housing bubble passed Japan and Germany by, so it is not surprising to learn that housing is cheap there. A more striking finding is that America’s housing bust has taken prices back to their long-run average value against rents. Based on the Case-Shiller national index, American house prices had fallen to 3% below their fair value by the third quarter of 2009, well down from their inflated values at the start of 2006 (see chart). Another index from the Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, tells a different story. On that basis America’s house price-to-rents ratio is still some 14% above its average. But that measure may not fully capture how far values have fallen, as it excludes homes that were paid for with subprime mortgages, for which fire sales are more common.
The correction in house prices has not gone as far in other countries. In Britain, where prices are increasing again, housing still looks expensive (if not quite as dear as in Australia). Prices in China are rising, too, but its market does not yet look bubbly. Hong Kong is a different matter. Its notoriously volatile market is booming again, even though the price-to-rents ratio is already more than 50% above its historical average. At least house prices are still falling in the euro area’s overvalued markets, such as France, Spain and Ireland.
No valuation measure is perfect. One flaw with the price-to-rents gauge is that it takes no account of shifts in real interest rates. Spain and Ireland have enjoyed far lower real rates than they did before they joined the euro in 1999. These might justify smaller rental yields and thus a higher fair-value price-to-rents ratio than suggested by history. That would help explain why Spain’s price-to-rents ratio has trended upwards over time, in contrast with Britain’s, which has fluctuated more obviously around its long-run average.
Partly for this reason, fair-value gauges can also be sensitive to how far back the figures go for each country. Ireland may look less overvalued than Spain because the available data go back only to 1990 and omit a period of less bouncy markets. If the average price-to-rents ratio is calculated from 1990 onwards, Spain’s market is overvalued by 24%, rather than the 55% shown in the table (based on figures from 1975). That would make both markets similarly overpriced.
In spite of these blemishes, the price-to-rents gauge is a useful check on how puffed-up property markets are. A housing boom turns into a bubble when prices are driven up by expectations of future price gains. Scarcity of supply or population shifts are often used to rationalise high house prices, but such fundamentals should push up rents, too. That house prices in America are back in line with rents suggests the worst of its correction is over (although a further downward leg is possible since past housing busts have pushed prices below their fair value and there is a large stock of unsold houses to clear). Europe’s housing correction, however, seems far from over.
376 http://www.economist.com/businessfinance/displaystory.cfm?story_id=15179388
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The world economy The Great Stabilisation Dec 17th 2009 From The Economist print edition The recession was less calamitous than many feared. Its aftermath will be more dangerous than many expect
IT HAS become known as the “Great Recession”, the year in which the global economy suffered its deepest slump since the second world war. But an equally apt name would be the “Great Stabilisation”. For 2009 was extraordinary not just for how output fell, but for how a catastrophe was averted. Twelve months ago, the panic sown by the bankruptcy of Lehman Brothers had pushed financial markets close to collapse. Global economic activity, from industrial production to foreign trade, was falling faster than in the early 1930s. This time, though, the decline was stemmed within months. Big emerging economies accelerated first and fastest. China’s output, which stalled but never fell, was growing by an annualised rate of some 17% in the second quarter. By mid-year the world’s big, rich economies (with the exception of Britain and Spain) had started to expand again. Only a few laggards, such as Latvia and Ireland, are now likely still to be in recession. There has been a lot of collateral damage. Average unemployment across the OECD is almost 9%. In America, where the recession began much earlier, the jobless rate has doubled to 10%. In some places years of progress in poverty reduction have been undone as the poorest have been hit by the double whammy of weak economies and still-high food prices. But thanks to the resilience of big, populous economies such as China, India and Indonesia, the emerging world overall fared no worse in this downturn than in the 1991 recession. For many people on the planet, the Great Recession was not all that great. That outcome was not inevitable. It was the result of the biggest, broadest and fastest government response in history. Teetering banks were wrapped in a multi-trillion-dollar cocoon of public cash and guarantees. Central banks slashed interest rates; the big ones dramatically expanded their balance-sheets. Governments worldwide embraced fiscal stimulus with gusto. This extraordinary activism helped to stem panic, prop up the financial system and counter the collapse in private demand. Despite claims to the contrary, the Great Recession could have been a Depression without it. Stable but frail So much for the good news. The bad news is that today’s stability, however welcome, is worryingly fragile, both because global demand is still dependent on government support and because public largesse has papered over old problems while creating new sources of volatility. Property prices are still falling in more places than they are rising, and, as this week’s nationalisation of Austria’s Hypo Group shows, banking stresses still persist. Apparent signs of success, such as American megabanks repaying public capital early (see article), make it easy to
378 forget that the recovery still depends on government support. Strip out the temporary effects of firms’ restocking, and much of the rebound in global demand is thanks to the public purse, from the officially induced investment surge in China to stimulus-prompted spending in America. That is revving recovery in big emerging economies, while only staving off a relapse into recession in much of the rich world. This divergence will persist. Demand in the rich world will remain weak, especially in countries with over-indebted households and broken banking systems. For all the talk of deleveraging, American households’ debt, relative to their income, is only slightly below its peak and some 30% above its level a decade ago. British and Spanish households have adjusted even less, so the odds of prolonged weakness in private spending are even greater. And as their public-debt burden rises, rich-world governments will find it increasingly difficult to borrow still more to compensate. The contrast with better-run emerging economies will sharpen. Investors are already worried about Greece defaulting (see article), but other members of the euro zone are also at risk. Even Britain and America could face sharply higher borrowing costs. Big emerging economies face the opposite problem: the spectre of asset bubbles and other distortions as governments choose, or are forced, to keep financial conditions too loose for too long. China is a worry, thanks to the scale and composition of its stimulus. Liquidity is alarmingly abundant and the government’s refusal to allow the yuan to appreciate is hampering the economy’s shift towards consumption (see article). But loose monetary policy in the rich world makes it hard for emerging economies to tighten even if they want to, since that would suck in even more speculative foreign capital. Walking a fine line Whether the world economy moves smoothly from the Great Stabilisation to a sustainable recovery depends on how well these divergent challenges are met. Some of the remedies are obvious. A stronger yuan would accelerate the rebalancing of China’s economy while reducing the pressure on other emerging markets. Credible plans for medium-term fiscal cuts would reduce the risk of rising long-term interest rates in the rich world. But there are genuine trade- offs. Fiscal tightening now could kill the rich world’s recovery. And the monetary stance that makes sense for America’s domestic economy will add to the problems facing the emerging world. That is why policymakers face huge technical difficulties in getting the exit strategies right. Worse, they must do so against a darkening political backdrop. As Britain’s tax on bank bonuses shows, fiscal policy in the rich world risks being driven by rising public fury at bankers and bail- outs. In America the independence of the Federal Reserve is under threat from Congress. And the politics of high unemployment means trade spats are becoming a bigger risk, especially with China. Add all this up, and what do you get? Pessimists expect all kinds of shocks in 2010, from sovereign-debt crises (a Greek default?) to reckless protectionism (American tariffs against China’s “unfair” currency, say). More likely is a plethora of lesser problems, from sudden surges in bond yields (Britain before the election), to short-sighted fiscal decisions (a financial- transactions tax) to strikes over pay cuts (British Airways is a portent, see article). Small beer compared with the cataclysm of a year ago—but enough to temper the holiday cheer. http://www.economist.com/opinion/displaystory.cfm?story_id=15127608
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Deflation in Japan To lose one decade may be misfortune... Dec 30th 2009 | TOKYO From The Economist print edition Twenty years on Japan is still paying its bubble-era bills
Reuters FOR many Japanese the boom years are still seared on their memories. They recall the embarrassing prices paid for works by Van Gogh and Renoir; the trophy properties in Manhattan; the crazy working hours and the rush to get to the overcrowded ski resorts at the weekend, only to waste hours queuing at the lifts. The bust, when it came, was less perceptible. The world did not come crashing down after December 29th 1989, the last trading day of that decade, when the stockmarket peaked. The next year Japanese buyers were still paying record prices for Impressionist art at Christie’s. It was not until 1991 that the property bubble burst. There was no Lehman-style collapse or Bernie Madoff- type fraud to hammer home the full extent of the hubris. But once the Nikkei 225 hit 38,916 points 20 years ago this week, life began to leach out of the Japanese economy. In the third quarter of 2009 nominal GDP—though still vast by global standards—sank below its level in 1992, reinforcing the impression of not one but two lost decades. Deflation is back in the headlines. On December 29th the Nikkei stood at 10,638, 73% below its peak, though an expansionary budget drafted on December 25th has given it a recent lift. Urban property prices have fallen by almost two-thirds. Some ski apartments are worth just one-tenth of what the “bubble generation” paid for them. What effect has this steady erosion of value had on the psychology of Japanese people? The bust did not lay waste to Japan, after all, as the Depression did to America in the 1930s. Homelessness
380 and suicide have risen, and life has got much harder for young people seeking good jobs. But Japan still has ¥1,500 trillion ($16.3 trillion) of savings, its exporters are world-class, and many of its citizens dress, shop and eat lavishly. As a senior civil servant puts it: “Japanese people have never really felt that they are in crisis, even though the economy is slowly withering away.” For individuals the damage lies below the surface. One of the first bubbles to pop, says Peter Tasker of Arcus Research, who has written several books on the bust, was a psychological one: confidence. Instead of getting angry, people lost faith in Japan’s economic prowess. “It became all about declining expectations and how society coped with it,” Mr Tasker says. The mood among investors swiftly turned risk-averse. Remarkably, retail investors were among the first to get out of the stockmarket and were net sellers of equities from 1991 to 2007, says Kathy Matsui, chief strategist for Goldman Sachs in Japan. Though there have been four bear- market share-price rallies since 1989, they have all been driven by foreigners.
The Japanese parked their money instead in government-backed shelters such as the post office, which in turn invested in safe bonds. The result has been a 78% rally in ten-year government bonds since their trough in 1990 (see chart). “Fixed income has been one of the longest-duration bull markets in the world,” Ms Matsui notes. A deflationary mindset started to take hold. With prices falling, even inert money in the bank or post office earned, in real terms, a small tax-free return. Once the banking system began to look frail, there was a boom in the sale of safes for people to keep their cash at home. A long period of zero interest rates led a few to hunt for higher yields abroad. The mythical figure of Mrs Watanabe—housewives in Japan manage the family money—invested in New Zealand dollars and Icelandic kronur. These days she is placing large bets on Brazilian bonds, leading to the quip that although Tokyo failed to secure the 2016 Olympics, the Japanese will finance the games in Rio de Janeiro anyway. Yet individual Japanese investors are still only gingerly returning to their own stockmarket. The most pernicious effects of the bust, economists say, have been transmitted via banks and businesses. Banks found themselves loaded down with non-performing loans. Belatedly they faced up to many of their losses, restructured and consolidated. But according to Takuji Aida, an economist at UBS in Japan, long-term yields remained very low because of deflationary expectations, thereby flattening the yield curve (the difference between short- and long-term
381 interest rates). That prevented banks from earning their way out of crisis, so lending remains weak. Companies, meanwhile, have been focused on paying down debt, as well as coping with deflation in the domestic economy and competition from cut-price imports. Large exporters were forced to restructure and enjoyed a long boom from 2002 to 2007. But firms in more protected areas of the domestic economy have fared badly: profitability, wages and investment have declined in the past decade. This has fed back to households. As firms cut back, the proportion of full-time contract jobs has fallen from almost 80% of the labour force in 1990 to 66% in 2007, according to the OECD. The proportion of lower-paid non-regular jobs has risen correspondingly. This is partly down to the increasing role of women in the workforce, as declining wages and benefits force families to rely on two incomes. But there are long-term social costs to this extended income drought. “The slow wear-and-tear of the recession has made people much less confident of their ability to finance children,” Mr Tasker says. A weak culture of consumer borrowing means that people have been forced to rely even more on their savings—or those of their parents. But as society ages, growth in the stock of savings has dwindled. Savings are bound to fall as more people retire. For the younger generation the next decade may be even tougher than the past two. http://www.economist.com/businessfinance/displaystory.cfm?story_id=15176489
Japan's two lost decades An end to the Japanese lesson Dec 30th 2009 From The Economist print edition Japan has taught the world a great deal about coping with the financial crisis. Now the West is on its own
Illustration by S. Kambayashi “NEW Year rally expected on Tokyo market next week.” That was a typically boosterish Japanese newswire headline on December 29th 1989, the day that one of the world’s biggest ever asset-price bubbles reached bursting point. Exactly 20 years later the Japanese are still paying the price for such hubris (see article). The Nikkei 225 index, which peaked at 38,916, now languishes at just over one-quarter of that level (though once again there is talk of a New Year rally). Japan’s economy has barely grown in nominal terms after two “lost decades”, and is again suffering from deflation. Where Japan was once bearing down on America, it now feels the hot
382 breath of China on its neck. Remember “Japan as Number One”? These days the country’s chief claim to fame is having a gross government debt burden approaching 200% of GDP. For the Japanese this has all been deeply troubling. But in the past two years, as the Western world has faced many of the same problems that Japan has been grappling with since 1989 (the collapse of asset prices, a surge in distressed debt and a looming threat of deflation), Japan has provided some useful lessons on how governments should, and should not, tackle potentially systemic financial meltdowns. Thanks to the precedent set by Japan, many of these lessons were quickly put into practice. Acting far more swiftly than the Japanese authorities did (the Japanese had the misfortune of having to learn through trial and error), Western policymakers provided liquidity to their banks and forced them to rebuild capital, while pumping in generous doses of fiscal stimulus to offset the collapse in private-sector demand. And like the Bank of Japan, they slashed interest rates and took extraordinary measures to try to keep credit flowing. The efficacy of these steps has led to growing optimism about the world economy. So what is the Japanese lesson now? In many ways, the analogy is no longer terribly helpful. That is partly because the pupils are in a worse pickle than the teacher ever was. The most vulnerable countries, such as Greece, now face a risk that Japan never did: that markets will lose faith in their creditworthiness. Japan, for all its woes, has benefited from a huge pool of domestic savings and investors happier to keep their money at home than abroad. Meanwhile, the scale of the global upheaval makes Japan’s problems, which had little impact overseas and took place against a backdrop of global growth, look small by comparison. And with huge deficits in so many nations, the risk of a sudden loss of fiscal credibility is more acute than it ever was in Japan. But there are other ways in which the pupils are in better shape. That is partly because they have less rigid systems. In the more adaptable Western economies there has been less resistance to structural changes in order to maintain productivity. There are also usually fewer political barriers to dealing with bad private-sector debts than there were in Japan. Moreover Westerners are also reaping the rewards of having acted more decisively than the Japanese did—especially when it came to pumping money into the economy and cleaning up financial balance-sheets. With fewer zombie banks, fewer signs of entrenched deflation and much earlier signs of growth, the West is in uncharted territory: it has arguably already got to a stage that Japan never really did. Nothing more will I teach you today That makes it very difficult to keep on drawing particular lessons from Japan’s sad plight. It does, however, still leave a general lesson common to all economic disasters: don’t be suckered by false signs of economic recovery. In Japan’s case, such hopes have led it repeatedly to tighten fiscal policy before private demand was strong enough to sustain a recovery. That entrenched deflation. Japan also left its banks too short of capital to cope with subsequent shocks. Policymakers in the developed world still have an enormous task on their hands. Many banks have huge write-downs to make on their loans, economies are burdened with excess capacity and households’ debt levels remain high. It would be disastrous to tighten policy too soon, as Japan’s example shows. But Japan provides no useful guidance on when the right time would be. For that, there is only trial and error. And the more errors there are, the more the West’s next decade may look like Japan’s two lost ones. http://www.economist.com/opinion/displaystory.cfm?story_id=15174533
383 CHARLEMAGNE
Charlemagne Lessons from “The Leopard” Dec 10th 2009 From The Economist print edition Is Europe becoming too accustomed to genteel decline?
Illustration by Peter Schrank ONE of the great studies of decline is a novel about a fictional Sicilian prince, living more than a century ago. There is much about Giuseppe di Lampedusa’s “The Leopard” that is remote now: peasants paying their rent with wheels of cheese and freshly killed lambs, footmen in knee- breeches, a constant threat of revolutionary violence on the horizon. Today’s Europe is at peace. Feudalism is long gone. Blatant inequalities are frowned on. Yet today’s European leaders would still do well to study “The Leopard”, for it offers them some topical lessons. Talk of Europe’s relative decline seems to be everywhere just now. Listen to a speech by any European leader and you are likely to hear about the dangers of a G2 world, run by America and China, if Europe does not get its act together and speak with one voice. You may hear glum figures about Europe’s future weight, and with some reason. In 1900 Europe accounted for a quarter of the world’s population. By 2060 it may account for just 6%—and almost a third of these will be more than 65 years old. Such gloomy reflections are the cue for ringing phrases about the future. Some leaders may point to the new Lisbon treaty and predict that it will bring about a “Europe of results”. Others will thump lecterns and call for banks to return to their “proper function” of low-risk lending to business. Or they may hint that fighting climate change will be painless, predicting that Europe will create millions of new, green jobs. Yet if politicians were more honest, they would admit that a tightly regulated financial sector will produce less growth. They would admit that fighting climate change may also curb growth (even if it is the right thing to do), and not produce any jobs bonanza. After all, the same rivals who test Europe in other fields—the Brazils, Indias and Chinas, as well as America—will want their own green jobs. More fundamentally, much of Europe has long been living beyond its means. Take an acute example, Spain, where the collapse of a construction-fed boom has led to nearly 20% unemployment. One in every two euros spent next year by the Spanish government will go on pensions, welfare payments or unemployment benefits. Yet the same government is unwilling to tackle one of the biggest barriers to sustainable growth: its unjust, two-tier labour market, in
384 which some workers are nearly unsackable but others (the young, immigrants and others on temporary contracts) take the pain. In general, leaders’ warnings about European decline are not often matched by political courage or even much ambition (think of Herman Van Rompuy and Catherine Ashton, the obscure and unthreatening pair of politicians chosen to fill the two top jobs created by the Lisbon treaty). One reason for this lack of courage is that “we are all talking about decline, but we can’t feel it yet,” as one European ambassador puts it. That may change. The shocking state of public finances may at last drive through big structural reforms in Europe, especially to labour markets (where huge resources have gone into protecting incumbents through the recession) and welfare states (which may mean more means-testing to exclude the middle classes who so often capture the system). “The Leopard” offers another factor that helps to explain European complacency. It teaches that living with decline is not always a question of denial: decline can be a seductive choice. Don Fabrizio, Prince of Salina, sees his new rich neighbours snapping up parcels of land from destitute nobles, and knows that his own inheritance is going to ruin. But his class is too proud to act to save itself. He still has his palaces, along with a life of culture and elegance. And his newly rich rivals aspire to his way of life, squeezing into tailcoats to ape his own evening dress, and marrying their daughters into his family. You hear similar arguments from today’s European politicians: our rivals may be overtaking us but, across the Atlantic, the Americans are copying our health-care model; and, in the other direction, the Chinese are intrigued by our welfare system. So what, they ask, if Europe’s military might no longer makes the world quake: is it so terrible to be a peaceful, prosperous old continent? To which one answer is: it is a problem if your way of life is unsustainable. And the fact that some of your finest achievements are aped by rivals does not make them sustainable. A lot of ruin in a continent Lampedusa’s hero hopes that his children, and perhaps his grandchildren, will also know his life of privilege. But the novel’s author knows the end is much nearer. He compares the prince’s estates to September swallows: filling all the trees around in seemingly limitless numbers, but in truth poised for sudden departure. Don Fabrizio is also too tired to act. Sicilians, he tells one would-be political reformer, are “very old,” and too “exhausted” for arguments about doing things well or badly. For them, he says, the great sin is “doing” anything at all. Today “The Leopard” is best-known for a single line: “If we want things to stay as they are, things will have to change.” It is a fine line, but it is also one that can easily be misinterpreted. Today’s European leaders talk about things changing, but in ways designed to appeal, all too often, to the side of Europe that is old, tired and anxious. Buzzwords of the moment include a “Europe that protects” (a phrase recently used by both President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany). It is a horribly defeatist slogan. What about a Europe that makes its citizens strong, or one that equips them to compete? Europeans can live off their inherited wealth for a bit longer, and many still lead largely enviable lives. There is much that is fine and even noble about Europe, including its ambitions to reduce social inequalities. But Europe’s rivals are young and hungry. The old continent should resist the allure of a genteel surrender. http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=3856661&sto ry_id=15065405
385 Global Business
December 26, 2009 Earth-Friendly Elements, Mined Destructively By KEITH BRADSHER GUYUN VILLAGE, China — Some of the greenest technologies of the age, from electric cars to efficient light bulbs to very large wind turbines, are made possible by an unusual group of elements called rare earths. The world’s dependence on these substances is rising fast. Just one problem: These elements come almost entirely from China, from some of the most environmentally damaging mines in the country, in an industry dominated by criminal gangs. Western capitals have suddenly grown worried over China’s near monopoly, which gives it a potential stranglehold on technologies of the future. In Washington, Congress is fretting about the United States military’s dependence on Chinese rare earths, and has just ordered a study of potential alternatives. Here in Guyun Village, a small community in southeastern China fringed by lush bamboo groves and banana trees, the environmental damage can be seen in the red-brown scars of barren clay that run down narrow valleys and the dead lands below, where emerald rice fields once grew. Miners scrape off the topsoil and shovel golden-flecked clay into dirt pits, using acids to extract the rare earths. The acids ultimately wash into streams and rivers, destroying rice paddies and fish farms and tainting water supplies. On a recent rainy afternoon, Zeng Guohui, a 41-year-old laborer, walked to an abandoned mine where he used to shovel ore, and pointed out still-barren expanses of dirt and mud. The mine exhausted the local deposit of heavy rare earths in three years, but a decade after the mine closed, no one has tried to revive the downstream rice fields. Small mines producing heavy rare earths like dysprosium and terbium still operate on nearby hills. “There are constant protests because it damages the farmland — people are always demanding compensation,” Mr. Zeng said. “In many places, the mining is abused,” said Wang Caifeng, the top rare-earths industry regulator at the Ministry of Industry and Information Technology in China. “This has caused great harm to the ecology and environment.” There are 17 rare-earth elements — some of which, despite the name, are not particularly rare — but two heavy rare earths, dysprosium and terbium, are in especially short supply, mainly because they have emerged as the miracle ingredients of green energy products. Tiny quantities of dysprosium can make magnets in electric motors lighter by 90 percent, while terbium can help cut the electricity usage of lights by 80 percent. Dysprosium prices have climbed nearly sevenfold since 2003, to $53 a pound. Terbium prices quadrupled from 2003 to 2008, peaking at $407 a pound, before slumping in the global economic crisis to $205 a pound. China mines more than 99 percent of the world’s dysprosium and terbium. Most of China’s production comes from about 200 mines here in northern Guangdong and in neighboring Jiangxi Province.
386 China is also the world’s dominant producer of lighter rare earth elements, valuable to a wide range of industries. But these are in less short supply, and the mining is more regulated. Half the heavy rare earth mines have licenses and the other half are illegal, industry executives said. But even the legal mines, like the one where Mr. Zeng worked, often pose environmental hazards. A close-knit group of mainland Chinese gangs with a capacity for murder dominates much of the mining and has ties to local officials, said Stephen G. Vickers, the former head of criminal intelligence for the Hong Kong police who is now the chief executive of International Risk, a global security company. Mr. Zeng defended the industry, saying that he had cousins who owned rare-earth mines and were legitimate businessmen who paid compensation to farmers. The Ministry of Industry and Information Technology issued a draft plan last April to halt all exports of heavy rare earths, partly on environmental grounds and partly to force other countries to buy manufactured products from China. When the plan was reported on Sept. 1, Western governments and companies strongly objected and Ms. Wang announced on Sept. 3 that China would not halt exports and would revise its overall plan. But the ministry subsequently cut the annual export quota for all rare earths by 12 percent, the fourth steep cut in as many years. Congress responded to the Chinese moves by ordering the Defense Department to conduct a comprehensive review, by April 1, of the American military’s dependence on imported rare earths for devices like night-vision gear and rangefinders. Western users of heavy rare earths say that they have no way of figuring out what proportion of the minerals they buy from China comes from responsibly operated mines. Licensed and illegal mines alike sell to itinerant traders. They buy the valuable material with sacks of cash, then sell it to processing centers in and around Guangzhou that separate the rare earths from each other. Companies that buy these rare earths, including a few in Japan and the West, turn them into refined metal powders.
“I don’t know if part of that feed, internal in China, came from an illegal mine and went in a legal separator,” said David Kennedy, the president of Great Western Technologies in Troy, Mich., which imports Chinese rare earths and turns them into powders that are sold worldwide.
387 Smuggling is another issue. Mr. Kennedy said that he bought only rare earths covered by Chinese export licenses. But up to half of China’s exports of heavy rare earths leave the country illegally, other industry executives said. Zhang Peichen, deputy director of the government-backed Baotou Rare Earth Research Institute, said that smugglers mix rare earths with steel and then export the steel composites, making the smuggling hard to detect. The process is eventually reversed, frequently in Japan, and the rare earths are recovered. Chinese customs officials have stepped up their scrutiny of steel exports to try to stop this trick, one trader said. According to the Baotou institute, heavy rare-earth deposits in the hills here will be exhausted in 15 years. Companies want to expand production outside China, but most rare-earth deposits, unlike those in southern China, are accompanied by radioactive uranium and thorium that complicate mining. Multinational corporations are starting to review their dependence on heavy rare earths. Toyota said that it bought auto parts that include rare earths, but did not participate in the purchases of materials by its suppliers. Osram, a large lighting manufacturer that is part of Siemens of Germany, said it used the lowest feasible amount of rare earths. The biggest user of heavy rare earths in the years ahead could be large wind turbines, which need much lighter magnets for the five-ton generators at the top of ever-taller towers. Vestas, a Danish company that has become the world’s biggest wind turbine manufacturer, said that prototypes for its next generation used dysprosium, and that the company was studying the sustainability of the supply. Goldwind, the biggest Chinese turbine maker, has switched from conventional magnets to rare-earth magnets. Executives in the $1.3 billion rare-earths mining industry say that less environmentally damaging mining is needed, given the importance of their product for green energy technologies. Developers hope to open mines in Canada, South Africa and Australia, but all are years from large-scale production and will produce sizable quantities of light rare earths. Their output of heavy rare earths will most likely be snapped up to meet rising demand from the wind turbine industry. “This industry wants to save the world,” said Nicholas Curtis, the executive chairman of the Lynas Corporation of Australia, in a speech to an industry gathering in Hong Kong in late November. “We can’t do it and leave a product that is glowing in the dark somewhere else, killing people.” http://www.nytimes.com/2009/12/26/business/global/26rare.html?ref=business
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bepress Journals December 28, 2009
New Articles The Economists' Voice
http://www.bepress.com/ev
Columns Casey B. Mulligan Is Macroeconomics Off Track? Paul Krugman has made the case that economics, at least in Chicago, is grossly off track, but Casey Mulligan does not see this in his area of research. Mulligan, Casey B. (2009) "Is Macroeconomics Off Track?," The Economists' Voice: Vol. 6 : Iss. 10, Article 6. DOI: 10.2202/1553-3832.1674 Available at: http://www.bepress.com/ev/vol6/iss10/art6 The Allocation of Permits in U.S. Climate Change Legislation Don Fullerton and Daniel H. Karney Don Fullerton and Daniel Karney of the University of Illinois take a hard look at the allocation of CO2 emissions permits under the Waxman-Markey bill and give it minimally passing marks. ARMs, Not Subprimes, Caused the Mortgage Crisis Stan J. Liebowitz Stan Liebowitz of UT Dallas argues that the conventional wisdom on the crisis is not fact based. Letters Stephen M. Miller Comment on Edlin and Jaffee: Back to Basics Stephen M. Miller uses money multiplier models to calculate the impact Edlin and Jaffee's proposal to sharply reduce excess banking reserves would have on the total supply of credit. Miller, Stephen M. (2009) "Comment on Edlin and Jaffee: Back to Basics," The Economists' Voice: Vol. 6 : Iss. 9, Article 3. DOI: 10.2202/1553-3832.1586 Available at: http://www.bepress.com/ev/vol6/iss9/art3 John Thornton Comment on Edlin and Jaffee: From Banking Crisis to Currency Crisis Thornton, John (2009) "Comment on Edlin and Jaffee: From Banking Crisis to Currency Crisis," The Economists' Voice: Vol. 6 : Iss. 10, Article 1. DOI: 10.2202/1553-3832.1590 Available at: http://www.bepress.com/ev/vol6/iss10/art1 A tax on excess reserves would worsen the banking crisis and could lead to a run on the dollar, according to John Thornton. Sven E. Wilson Comment on Brad Delong: Tell the Whole Story Brad Delong mischaracterizes economic options, according to Sven Wilson of Brigham Young University. Featured Article "Investment Banking Regulation After Bear Stearns", by Dwight M. Jaffee and Mark Perlow, examines the conditions that led to the Fed’s bailout of Bear Stearns, and proposes a regulatory mechanism to re-regulate investment banks so as to minimize the likelihood of a future failure. Jaffee, Dwight M. and Perlow, Mark (2008) "Investment Banking Regulation After Bear Stearns," The Economists' Voice: Vol. 5 : Iss. 5, Article 1. DOI: 10.2202/1553-3832.1401 Available at: http://www.bepress.com/ev/vol5/iss5/art1
389 Appendix to Comment on Edlin and Dwight Jaffee: Back to Basics
Stephen M. Miller
The banking multipliers are defined as follows:
where k, r, and t equal the ratios of currency in circulation (C), adjusted reserves (R), and non- transactions deposits (T) to transactions deposits (D).
So, in the Feb09 column, we see the following calculations:
In the Feb09a column, we replace the reserve ratio of 1.00 with 0.08, its August 2008 value, holding the values of the currency (k*) and non-transactions deposit (t*) ratios unchanged at their February 2009 values. The new calculated values are superscripted with an “a”. First, the money multipliers adjust as follows:
where ra equals the hypothetical value of 0.08.
Given these new multipliers, we multiply them times the adjusted monetary base (H) to calculate the new money supplies as follows:
390 Having determined the currency (k*), reserve (ra), and non-transactions deposit (t*) ratios, we can calculate the levels of Ca, Da, and Ta as follows:
Then we can calculate the other entries in column Feb09a as follows:
The change column in Table 1 measures the counterfactual change in values when we convert the reserve ratio to 0.08 rather than its February value of 1.00. Thus, for example, we have the following hypothetical increases in M1 and M2:
ΔM1 = $2,661 - $1,560 ≈ $1,101 and
ΔM2 = $14,100 - $8,264 ≈ $5,832.
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Citigroup completa la devolución de 14.000 millones al Tesoro La entidad ha recibido 31.300 millones a lo largo de la crisis para garantizar su solvencia EFE - Nueva York - 24/12/2009 El banco estadounidense Citigroup ha anunciado hoy que ha completado la devolución de 20.000 millones de dólares (algo menos de 14.000 millones de euros) que recibió del Departamento del Tesoro de Estados Unidos para sobrevivir a la crisis financiera. Esa entidad ha comprado las acciones preferentes que, por ese importe, había otorgado al Tesoro como parte del paquete de ayuda que recibió del Programa de Alivio de Activos Depreciados (TARP, por sus siglas en inglés), explicó en un comunicado de prensa. El pago de esa cantidad, así como la cancelación del acuerdo que tenía con el Gobierno para compartir pérdidas generadas por activos problemáticos, ha sido posible después de una reciente emisión de acciones con la que recaudó 20.500 millones de dólares. El Departamento del Tesoro mantiene no obstante opciones para adquirir acciones comunes de la entidad, lo que también estaban incluido en el paquete de ayuda pública recibida, así como 7.700 millones de títulos comunes, que ese departamento tiene previsto vender durante el próximo año. Citigroup ha recibido una inyección de fondos públicos en plena crisis financiera por un total de 45.000 millones de dólares (31.300 millones de euros) a cambio de acciones preferentes de la entidad y el Tesoro convirtió este año en comunes una porción de esos títulos, por valor de 25.000 millones de dólares (17.500 millones de euros). Wells Fargo, con sede en San Francisco (California), también informó de que ha completado el abono de las ayudas públicas recibidas, de un total de 25.000 millones de dólares (17.500 millones de euros), tras acogerse al programa de rescate gubernamental. Este banco precisó en un comunicado que ha abonado además 131,9 millones de dólares (91 millones de euros) en dividendos asociados a esas acciones que entregó al Gobierno en octubre de 2008, con lo que se eleva a 1.441 millones de dólares (1.000 millones de euros) el total que ha pagado al Tesoro por ese concepto. Las acciones de Citigroup acabaron este miércoles con un descenso del 1,5% la sesión regular de la Bolsa de Nueva York, donde cerraron a un precio de 3,29 dólares cada una y en lo que va de año sus títulos acumulan una depreciación del 50,97%. http://www.elpais.com/articulo/economia/Citigroup/completa/devolucion/14000/millones/Tesoro /elpepueco/20091224elpepueco_2/Tes
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Nouriel Roubini's EconoMonitor Roubini's Latest Project Syndicate Op-Ed: The Gold Bubble and the Gold Bugs Nouriel Roubini Dec 23, 2009 2:19PM From Project Syndicate: NEW YORK – Gold prices have been rising sharply, breaching the $1,000 barrier and in recent weeks rising towards $1,200 an ounce and above. Today’s “gold bugs” argue that the price could top $2,000. But the recent price surge looks suspiciously like a bubble, with the increase only partly justified by economic fundamentals. Gold prices rise sharply only in two situations: when inflation is high and rising, gold becomes a hedge against inflation; and when there is a risk of a near depression and investors fear for the security of their bank deposits, gold becomes a safe haven. The last two years fit this pattern. Gold prices started to rise sharply in the first half of 2008, when emerging markets were overheating, commodity prices were rising, and there was concern about rising inflation in high-growth emerging markets. Even that rise was partly a bubble, which collapsed in the second half of 2008, when – after oil reached $145, killing global growth –the world economy fell into recession. As concerns about deflation replaced fear of inflation, gold prices started to fall with the correction in commodity prices. The second price spike occurred when Lehman Brothers collapsed, leaving investors scared about the safety of their financial assets – including bank deposits. That scare was contained when the G-7 committed to increase guarantees of bank deposits and to backstop the financial system. With panic subsiding towards the end of 2008, gold prices resumed their downward movement. By that time, with the global economy spinning into near-depression, commercial and industrial gold use, and even luxury demand, took a further dive. Gold rose above $1,000 again in February-March 2009, when it looked like most of the financial system in the United States and Europe might be near insolvency, and that many governments could not guarantee deposits and backstop the financial system, because banks that were too big to fail were also too big to be saved. That panic subsided – and gold prices started to drift down again – after US banks were subjected to “stress tests,” America’s Troubled Asset Relief Program further backstopped the financial system by removing bad assets from banks’ balance sheets, and the global economy gradually bottomed out. So, with no near-term risk of inflation or depression, why have gold prices started to rise sharply again in the last few months? There are several reasons why gold prices are rising, but they suggest a gradual rise with significant risks of a downward correction, rather than a rapid rise towards $2,000, as today’s gold bugs claim. First, while we are still in a world of global deflation, large, monetized fiscal deficits are fueling concerns over medium-term inflation. Second, a massive wave of liquidity, via easy monetary policy, is chasing assets, including commodities, which may eventually stoke inflation further. Third, dollar-funded carry trades are pushing the US dollar sharply down, and there is an inverse
393 relation between the value of the dollar and the dollar price of commodities: the lower the dollar, the higher the dollar price of oil, energy, and other commodities – including gold. Fourth, the global supply of gold – both existing and newly produced – is limited, and demand is rising faster than it can be met. Some of this demand is coming from central banks, such as those of India, China, and South Korea. And some of it is coming from private investors, who are using gold as a hedge against what remain low-probability “tail” risks (high inflation and another near- depression caused by a double-dip recession). Indeed, investors increasingly want to hedge against such risks early on. Given the inelastic supply of gold, even a small shift in the portfolios of central banks and private investors towards gold increases its price significantly. Finally, sovereign risk is rising – consider the troubles faced by investors in Dubai, Greece, and other emerging markets and advanced economies. This has revived concerns that governments may be unable to backstop a too-big-to-save financial system. But, since gold has no intrinsic value, there are significant risks of a downward correction. Eventually, central banks will need to exit quantitative easing and zero-interest rates, putting downward pressure on risky assets, including commodities. Or the global recovery may turn out to be fragile and anemic, leading to a rise in bearish sentiment on commodities – and in bullishness about the US dollar. Another downside risk is that the dollar-funded carry trade may unravel, crashing the global asset bubble that it, together with the wave of monetary liquidity, has caused. And, since the carry trade and the wave of liquidity are causing a global asset bubble, some of gold’s recent rise is also bubble-driven, with herding behavior and “momentum trading” by investors pushing gold higher and higher. But all bubbles eventually burst. The bigger the bubble, the greater the collapse. The recent rise in gold prices is only partially justified by fundamentals. Nor is it clear why investors should stock up on gold if the global economy dips into recession again and concerns about a near depression and rampant deflation rise sharply. If you truly fear a global economic meltdown, you should stock up on guns, canned food, and other commodities that you can actually use in your log cabin. http://www.roubini.com/roubini-monitor/258169/roubini_s_latest_project_syndicate_op- ed__the_gold_bubble_and_the_gold_bugs
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Las reformas esquivan el parón de la vivienda al subir un 10,8% Los visados para construir casas mantienen su desplome con un 59,7% hasta octubre EUROPA PRESS - Madrid - 23/12/2009 Los visados solicitados para construir nuevas viviendas cayeron un 59,7% en los diez primeros meses del año en comparación con el mismo periodo de 2008, hasta situarse en 93.471, según la estadística del Ministerio de Fomento. Por contra, frente al constante desplome de la obra nueva, la estadística muestra un incremento en las reformas y las restauraciones, dado que los permisos se incrementaron un 10,8% hasta octubre, con 26.760 unidades. No obstante, aunque las caídas siguen siendo importantes, el último dato del sector refleja una leve mejora de unas décimas frente a septiembre, cuando los visados caían a un ritmo del 60,9%. Este alivio se nota también en la comparación intermensual, ya que las peticiones para empezar a edificar nuevos pisos crecieron un 19,8% en octubre frente al mes precedente con 9.297 unidades. Con todo, esta cifra supone algo más de la mitad respecto a los 16.754 visados de nuevos pisos que se pidieron en octubre de 2008. Así, entre enero y octubre de este año se pidieron una media de 9.347 visados para nuevas viviendas al mes, con lo que de mantenerse este ratio la edificación de nuevos pisos no alcanzará siquiera el mínimo histórico de 150.000 unidades, tal como ya pronosticaron las distintas patronales del sector. Del total, el 75,3% correspondieron a pisos en bloque, y el resto a casas unifamiliares. En cuanto a ampliaciones, entre enero y octubre se pidieron 3.177 autorizaciones para ampliar viviendas, cifra que arroja una reducción del 38,9% en comparación a un año antes. EUROPA PRESS Las reformas esquivan el parón de la vivienda al subir un 10,8%.Los visados para construir casas mantienen su desplome con un 59,7% hasta octubre 23/12/2009 http://www.elpais.com/articulo/economia/reformas/esquivan/paron/vivienda/subir/108/elpe pueco/20091223elpepueco_4/Tes
395 Versión para imprimir Moody's alerta al BCE del riesgo de su política para Grecia Tercera agencia en rebajar la nota de la deuda helena 23/12/2009 A. GONZÁLEZ - Madrid - 23/12/2009 Nadie puede decir que la decisión de Moody's le haya pillado desprevenido. Es la tercera agencia de calificación en rebajar el rating de la deuda a largo plazo de Grecia en las últimas semanas y hasta el propio Gobierno reconocía que contaba con ello. Es más. Nadie puede decir que la decisión de Moody's le haya pillado desprevenido. Es la tercera agencia de calificación en rebajar el rating de la deuda a largo plazo de Grecia en las últimas semanas y hasta el propio Gobierno reconocía que contaba con ello. Es más. Los inversores consideraron que Moody's fue mucho más benévola de lo previsto y la Bolsa de Atenas cerró con un alza del 4,48%. Moody's sólo rebajó su calificación desde A1 hasta A2, dos niveles por encima de las calificaciones otorgadas por Standard & Poor's y Fitch. A juicio de Sarah Carison, analista de riesgo soberano de Moody's, esta nota evidencia "riesgos muy reducidos de liquidez de Grecia" de inmediato, aunque admite que los riesgos de solvencia a medio y largo plazo tienen su origen en "débiles instituciones fiscales, que arrojan dudas sobre la habilidad del Gobierno para implementar el decisivo ajuste fiscal que restaure la sostenibilidad de la deuda". De ahí que Moody's haya puesto las perspectivas del país en negativo. Quizá lo más significativo es la llamada de atención al Banco Central Europeo (BCE) que la agencia incluye en su nota y firmada nada menos que por el vicepresidente del grupo para riesgo soberano, Arnaud Marès. "Moody's cree altamente improbable que Grecia afronte problemas de refinanciación a corto plazo a no ser que el BCE decida tomar la inusual medida de hacer que la deuda de un Estado miembro no sea elegible como colateral para las operaciones de recompra bancarias, un riesgo que consideramos remoto", dice Marès. A finales de 2010, el BCE volverá a sus normas anteriores a la crisis y exigirá, al menos, una calificación de A- para poder acceder a sus operaciones de financiación, sin las cuales los bancos, y el conjunto de la economía, pueden tener serios problemas de crédito. Ahora, sólo la calificación de Moody's le permitiría optar a esos fondos de ahí que el mercado hable del poder de veto de Moody's.Porque si algo ha dejado la crisis como legado ha sido el fuerte deterioro de los perfiles de riesgo de los países considerados más solventes. La agencia Fitch advertía ayer en un informe que países con la máxima calificación "como Reino Unido, España o Francia" deben aprobar en 2010 programas creíbles de ajuste para controlar el déficit y la deuda pues de lo contrario "pondrían una gran presión sobre sus ratings". Moody's aseguraba en su nota que "las dificultades del Gobierno griego no representan un test vital para el futuro de la eurozona". Pero no es una opinión unánime. El economista jefe de Goldman Sachs, Jim O'Neill, apuntaba que la estabilidad del euro estaba amenazada si la prima de riesgo que el mercado exige a Grecia por sus dificultades presupuestarias se extiende a otros países como España. "Obviamente el euro parece que ya se ve afectado por ello". A. GONZÁLEZ Moody's alerta al BCE del riesgo de su política para Grecia Tercera agencia en rebajar la nota de la deuda helena 23/12/2009
396 http://www.elpais.com/articulo/economia/Moody/s/alerta/BCE/riesgo/politica/Grecia/elpepueco/ 20091223elpepieco_9/Tes
397 Economy
December 23, 2009 Tax Credit Gives a Lift to Housing By JAVIER C. HERNANDEZ
Data released on Tuesday indicated that the economic recovery, while still uneven, has carried into the end of the year, and analysts expect it to gain strength, a view seconded by investors. The fragile housing sector showed signs of firming up, according to a report from the National Association of Realtors, with existing home sales climbing a greater-than- expected 7.4 percent in November, to a seasonally adjusted annual rate of 6.54 million, up from 6.09 million in October. Economists cautioned that the results reflected a rush to take advantage of an $8,000 tax credit for first-time home buyers and would probably taper off in December. “It’s good news, but we’re still in a very depressed housing market,” said Guy D. Cecala, publisher of Inside Mortgage Finance, a weekly newsletter. “We need a bunch more of these increases before we can say we have a healthy or stabilized housing market.” Mortgage applications have recently declined, and economists expect home sales to remain in a deep slump next year, rising briefly in the spring but then falling again after the housing credit expires in April. Home sales were up 44.1 percent compared with November 2008, and inventories fell to 3.52 million homes, down significantly from peaks last year. But that figure does not include the large number of homes foreclosed by banks that are not listed with realty agents. The market for high-priced homes also remained subdued, an indication that as household incomes and credit streams dry up, consumers are turning to low and midrange options. Home prices were essentially flat from October, with the median sales price at $172,600, but they were down 4.3 percent from a year ago. A separate report showed that the economic recovery was weaker than expected in the third quarter, held back by slow business construction and dwindling inventories. The Commerce Department said the economy expanded at an annual rate of 2.2 percent from July through September, down from the original forecast of 3.5 percent. The downward revision was well above average, but analysts still foresee stronger growth in the fourth quarter as exports rise and an improved jobs market encourages consumer spending. “We did get off to a slightly slower start than we had thought,” said Nigel Gault, chief United States economist for IHS Global Insight. “That would be very worrying if we didn’t have evidence that we had done well in the fourth quarter.” Stock markets showed solid gains, with the Dow Jones industrial average climbing 50.79 points, or 0.49 percent, to 10,464.93. The Standard & Poor’s 500-stock index gained 3.97 points, or 0.36 percent, to 1,118.02, after touching an intraday high for the year. The Nasdaq composite index
398 rose 15.01 points, or 0.67 percent, to 2,252.67. The benchmark 10-year Treasury bill was down 21/32, to 96 28/32. The yield was 3.75 percent, up from 3.67 percent late Monday.
As the new year approaches, investors are optimistic that the economy will build on its earlier gains rather than fall into another downturn. Retail sales were higher than expected in November, and the trade deficit unexpectedly narrowed in October. In addition, a weak dollar is making American products overseas cheaper, contributing to hope that exports will rise. Though the third quarter was weaker than forecast, it was the first period of growth in a year, suggesting the longest contraction since World War II had ended. Government stimulus efforts, like the popular cash-for-clunkers program, helped spur spending. Analysts were caught off guard by the size of the decline in the rate of expansion, measured in terms of gross domestic product — the total value of goods and services in the economy. Last month, the government revised the rate to 2.8 percent in the third quarter, down from 3.5 percent in October, and economists surveyed by Bloomberg expected it to remain steady. A revival of exports and consumer spending in the last part of 2009 is expected to bring the rate of growth to about 5 percent for the fourth quarter. The momentum will probably continue into 2010, economists say, though high levels of unemployment and a skittish business climate may curb consumer spending, hiring and production. The Commerce Department’s revisions were based on smaller- than-expected business inventories, which fell by $139.2 billion. Spending by businesses on items like software and equipment was also weaker than expected, rising by 5 percent rather than the 8.4 percent originally predicted. Paul Dales, chief economist for Toronto-based Capital Economics, said the drop was “nothing to worry about,” but he expressed concern about the decrease in investment by businesses. “It may suggest that a lot of the demand pent up during the recession has already been released,” Mr. Dales wrote in a research note Tuesday. “High uncertainty and lots of spare capacity are limiting capital spending.” Construction of business facilities like malls and office buildings fell more than previously thought, by 18.4 percent rather than 15.1 percent. Economists attribute that drop to a frail commercial real estate market, which is confronting high vacancy rates and banks that are reluctant to finance business expansions. Spending by state and local governments was also weaker than expected, falling 0.6 percent, compared with the 0.1 percent originally forecast. Consumer spending was revised slightly, growing 2.8 percent in the quarter rather than 2.9 percent. Following are the results of Tuesday’s Treasury auction of four-week bills: JAVIER C. HERNANDEZ Tax Credit Gives a Lift to Housing December 23, 2009http://www.nytimes.com/2009/12/23/business/economy/23econ.html?_r=1&th=&emc=th&pagewanted=print
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November existing-home sales surge By Dina ElBoghdady and Neil Irwin Washington Post Staff Writer Wednesday, December 23, 2009; A14 Federal programs designed to jump start the housing market helped boost sales of previously owned homes to their highest level since February 2007 and whittle down the excess supply of homes on the market in November. The National Association of Realtors reported on Tuesday that sales of existing single-family homes, townhomes, condominiums and cooperatives rose 7.4 percent in November from the previous month to a seasonally adjusted annual rate of 6.54 million homes. Sales were up 44 percent from a year ago, the highest annual gain since the group started tracking the data in 1999. A separate report released Tuesday shows that the economy grew at a more tepid pace than thought over the summer, confirming that the nation's return to growth earlier in the year was less than resounding. Gross domestic product rose at a 2.2 percent annual rate in the July-to- September quarter, less than the 2.8 percent most recently estimated, and well below the 3.5 percent the government originally announced. But details in the GDP report, along with the new housing numbers, suggest that the economy is growing at a more rapid clip in the fourth quarter. Businesses drew down inventories more rapidly than previously thought, which lays the groundwork for an economic bump as companies rebuild those inventories, and many forecasters now think that the economy is growing at a 3 percent or higher rate in the fourth quarter. The Realtors group attributes the rise in home buying to a federal program that helped push down interest rates and a rush to take advantage of a tax credit for first-time buyers that was due to expire Nov. 30. The tax credit has since been extended and expanded to include other types of buyers. But some analysts singled out low prices as the key driver. "Clearly, the tax credit and the feds meddling in the mortgage market has helped add an extra kicker to home sales in the short term, but that's not the only factor at work," said Michael D. Larson, a housing analyst at Weiss Research. "As housing prices fall, home ownership becomes competitive with renting, and buyers start to come out of the woodwork." A huge volume of aggressively priced foreclosures has helped drag prices down. Distressed properties made up 33 percent of all sales in November and continue to distort median prices in every region of the country, the Realtors group reported. The median price for existing homes was $172,600 in November, down 4.3 percent from a year ago. In the South, which includes the Washington area, the price was $151,400, down 1.4 percent. But the median price in the District was up 5.9 percent, rising to $306,900 from $289,900. As sales pick up, the excess homes clear out, which helps stabilize prices. The supply of existing homes for sale at the end of November declined 1.3 percent to 3.52 million. If sales were to continue at the current pace, there would be a 6.5-month supply of existing homes on the market, down from a seven-month supply in October. Generally, a six- month supply is considered healthy.
400 Gross domestic product, which captures the value of goods and services produced within U.S. borders in a given time period, was revised downward because investment in software and other business investments was weaker, and inventories depleted more, than first thought. Also, personal consumption expenditures and government spending rose slightly less than estimated. The 2.2 percent growth rate is below the level economists think the nation is capable of attaining in the long run, meaning that the United States was not climbing out of its deep economic hole in the third quarter. That helps explain why the job market has remained weak despite several consecutive months of apparent growth in production of goods and services. Dina ElBoghdady and Neil Irwin November existing-home sales surge December 23, 2009 http://www.washingtonpost.com/wp- dyn/content/article/2009/12/22/AR2009122203347.html?wpisrc=newsletter
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Federal Trade Commission For immediate release December 22, 2009 Agencies Issue Final Rules on Risk-Based Pricing Notices The Federal Reserve Board and the Federal Trade Commission today announced final rules that generally require a creditor to provide a consumer with a notice when, based on the consumer's credit report, the creditor provides credit to the consumer on less favorable terms than it provides to other consumers. Consumers who receive this "risk-based pricing" notice will be able to obtain a free credit report to check the accuracy of the report. Risk-based pricing refers to the practice of setting or adjusting the price and other terms of credit provided to a particular consumer based on the consumer's creditworthiness. The final rules provide creditors with several methods for determining which consumers must receive risk-based pricing notices. As an alternative to providing risk-based pricing notices, the final rules permit creditors to provide consumers who apply for credit with a free credit score and information about their score. Today, most consumers must pay a fee to obtain their credit score. The final rules implement section 311 of the Fair and Accurate Credit Transactions Act of 2003, which amends the Fair Credit Reporting Act. The Federal Register notice is attached. The final rules are effective January 1, 2011. Attachment (698 KB PDF) http://www.federalreserve.gov/newsevents/press/bcreg/20091222b.htm
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U.S. recovery expectations drive dollar up, gold down By Reuters Tuesday, December 22, 2009; A15 NEW YORK -- Optimism about the economic recovery Monday encouraged investors to buy stocks and dump U.S. Treasurys, while gold prices fell as investors expected the dollar to remain firm in the beginning of 2010. Expectations that the U.S. economy is reviving drove the dollar to more than a six-week high against the yen and kept it near its strongest level against the euro in three months. The price of oil rose on concerns about the security of energy facilities in Iraq and Nigeria, and as cold weather on both sides of the Atlantic increased fuel demand. The pan-European FTSEurofirst 300 index jumped 1.4 percent to 1,027.87 points, after two consecutive sessions of losses, buoyed by energy shares. The Dow Jones industrial average rose 119.49 points, or 1.16 percent, to 10,448.38, while the Standard & Poor's 500-stock index gained 14.74 points, or 1.34 percent, to 1117.21. The tech- heavy Nasdaq was up 29.62 points, or 1.34 percent, at 2241.31. Investors have been cautiously optimistic about retail sales during this holiday season, after higher-than-expected jobs and producer inflation data last week were seen as a sign that the economy is recovering. "We have an economy that is recovering, and we have a Federal Reserve that says they are going to keep rates lower for longer," said James Caron, co-head of global rates research at Morgan Stanley in New York. U.S. Treasury debt prices fell, with the 30-year bond down more than a full point as investors looked to riskier assets. Bets that the Federal Reserve will have to raise interest rates in the future caused spreads between yields on two-year and 10-year U.S. Treasury notes to widen sharply on Monday, taking the yield curve to its steepest on record. The yield spread between those two maturities widened to 280 basis points from 274 basis points last week, according to Reuters data. Also weighing on Treasurys prices were worries about an expected massive wave of government debt issuance next year. Trade volume was thin at the beginning of a holiday-shortened week, exacerbating price moves, analysts said. The benchmark 10-year U.S. Treasury note was down 23/32, with the yield at 3.6322 percent, up from 3.54 percent late on Friday. The two-year U.S. Treasury note was down 3/32, with the yield at 0.8395 percent from 0.80 percent. Higher Treasury yields, coupled with expectations that the U.S. economy might be recovering faster than expected, led the dollar to strengthen 0.71 percent against the Japanese yen, to 90.94. The dollar earlier climbed as high as 91.01 yen, according to Reuters data, the highest level since early November. http://www.washingtonpost.com/wp-dyn/content/article/2009/12/21/AR2009122103204.html?wpisrc=newsletter
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Farewell, Richard Posner Mises Daily: Monday, December 21, 2009 by Allen Mendenhall [A Failure of Capitalism: The Crisis of '08 and the Descent into Depression • By Richard Posner • Harvard University Press (2009) • 368 pages]
With his latest book, A Failure of Capitalism, Richard Posner has lived up to his oft-maligned reputation as a provocateur. Coming from a man who is the founder of the law-and-economics movement and an elected member of the Mont Pelerin Society, the sensational declaration that capitalism has failed will surely raise eyebrows. But Posner's musings, besides being premature, too often reek of false starts and gross prevarications. We libertarians should commend Posner, one of the most original thinkers of our time, for his longstanding rejection of groupthink and for his refusal to conform to hackneyed ideologies. Nevertheless, we must also bid him farewell. This latest book, a career about-face, will do little to help those affected by the crisis. It will even hurt them further. Posner suggests that, rather than euphemize, we call a spade a spade: the financial downturn is a depression, not merely a crisis. He insists on the unpalatable term "depression" because the current troubles far exceed any modest slump of recent decades and have precipitated government intervention unrivaled since the Great Depression. Posner is probably right on this score. He's often right in his critique of the housing bubble as well, even if he fails to fully account for government's role in subprime mortgage loans: hyping home ownership, slashing interest rates, channeling artificial demand into the housing industry, and so on. Posner's thesis — that the depression represents a market failure brought on by deregulation — pivots on the myth that regulators actually regulate rather than serve the interests of leviathan beneficiaries (i.e., their cronies and themselves). As for this latter point, Posner does acknowledge, among other things, that the SEC was bound up with agents of the private-securities industry despite its obligation to enforce federal security laws. All the same, he does not adequately deal with this problem or even the related problems involving government- sponsored enterprises (e.g., Fannie, Freddie, and the like) that privilege the interests of the elite few at the expense of the many. Simply put, Posner ignores corporatism. I have neither the time nor space to undertake this issue here. For further reading, I recommend Thomas E. Woods's Meltdown, a short, well- reasoned book that is accessible to the layperson (like me).
404 Posner's proposal that "we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails" seems quixotic at best. For an intelligent government (were there such a thing) would minimize rather than increase state impositions on the economy and would allow resources to flow from declining to expanding industries according to natural market forces. Fraught with references to, and implicit endorsements of, Keynesian economics — the power of which, Posner claims, lies in its "simple, commonsense logic" — this book is a statist tour de force. Mario J. Rizzo has written at length about Posner's Keynesian conversion. Suffice it to say that Posner argues on the one hand that government can prevent depressions, and on the other hand that government failed to curb the recent economic downturn. This disjuncture begs the question: would more government bureaucracy and regulation have brought about a timelier and more coherent response? Is it not risky to put so much stock in something with such a volatile track record? Posner submits that "conservatives," a strikingly vague term that he leaves undefined, argue that government triggered the crisis with "legislative pressures on banks to facilitate home-ownership by easing mortgage requirements and conditions." True, many self-described conservatives take this position. But Posner, apparently trying to cast these "conservatives" as hypocritical, indicts former President Bush for pushing homeownership as part of a compassionate-conservative agenda. That Posner casts President Bush as the face of "conservative economics" (an oddly misleading category in itself) is not only telling but also, quite frankly, preposterous. For Bush — who championed massive government bailouts long before Obama — was hardly conservative in any small-government sense. He ran up budget deficits far greater than his predecessors, led us into two costly wars, and doubled the national debt. In light of these big-government flops, it seems outrageous for Posner to claim that "the way was open for a doctrinaire free-market, pro-business, anti-regulatory ideology to dominate the Bush Administration's economic thinking." Posner achieves his goal of a "concise, constructive, jargon- and acronym-free, non-technical, unsensational, light-on-anecdote, analytical examination," but his hurried analysis is fatally flawed. Small wonder that his book has received little attention. Most likely dashed off on a tight deadline, it reads like several blog posts carelessly cobbled together (Posner admits in the preface that he's incorporated several blog posts). Although we cannot fault him for the time sensitivity of his project, we can and should point out where the rush has taken its toll. At one point, for instance, Posner claims that the Democrats scored with the American public by bailing out the auto industry; shortly thereafter, he claims that the American public opposed the auto-industry bailout. In moments like this, Posner, having his cake and eating it too, disappoints over and over again.
Apparently flirting with supporters of both major political parties, he equivocates ad nauseam by spelling out a putatively conservative argument, a putatively liberal argument, and then his own argument, a convenient cherry-picking of the two. As another gesture toward mass audiences, he eschews footnotes and criticizes the economics profession — which he dubs an elite group of academics and finance theorists — for its apparent laxity and ineptitude. Posner's newfound populism, though, is unconvincing. Even sympathetic readers will quickly tire of Posner's cocky rhetoric. Posner is — to the best of my knowledge — a magnanimous person with a genuine concern for the lives of millions of Americans, but his book, if heeded, will only exacerbate current conditions. The Mont Pelerin Society declares that its members "see danger in the expansion of government." If Posner still shares this view, he has a funny way of showing it. Allen Mendenhall is a former adjunct legal associate with the Cato Institute. He earned his MA in English and JD at West Virginia University, his BA in English at Furman University, and will complete the LLM in transnational law at the Tokyo campus of Temple University, Beasley School of Law, in 2010. Send him mail. See Allen Mendenhall's article archives. Allen Mendenhall Farewell, Richard Posner December 21, 2009 http://mises.org/daily/3929
405 Economy
December 21, 2009 Labor Data Show Surge in Hiring of Temp Workers By LOUIS UCHITELLE The hiring of temporary workers has surged, suggesting that the nation’s employers might soon take the next step, bringing on permanent workers, if they can just convince themselves that the upturn in the economy will be sustained. As demand rose after the last two recessions, in the early 1990s and in 2001, employers moved more quickly. They added temps for only two or three months before stepping up the hiring of permanent workers. Now temp hiring has risen for four months, the economy is growing, and still corporate managers have been reluctant to shift to hiring permanent workers, relying instead on temps and other casual labor easily shed if demand slows again. “When a job comes open now, our members fill it with a temp, or they extend a part-timer’s hours, or they bring in a freelancer — and then they wait to see what will happen next,” said William J. Dennis Jr., director of research for the National Federation of Independent Business. The rising employment of temp workers is not all bad. However uncertain their status, they do count in government statistics as wage-earning workers, adding to the employment rolls and helping to bring down the monthly job loss to just 11,000 in November. Indeed, the unemployment rate fell in 36 states in November, the Bureau of Labor Statistics reported last week, partly because of the growing use of temps. The bureau, which issues the monthly employment reports, does not distinguish between permanent and casual employment, with one exception: it has a special category for temp workers, the men and women supplied by Manpower, Kelly Services, Adecco and other agencies. Last month 52,000 temps were added, greater than the number of new workers in any other category. Not even health care and government, stalwarts through the long recession, did better. “Sometimes we’re asked by a company to bring back ex-employees as temps,” said Joanie Ruge, a senior vice president of Adecco. Some are even ex-employees who have been laid off. “That does happen,” she said. In the past, temps who do well have often been offered regular employment, with higher pay and benefits. Given the uncertainties about this recovery, companies are not doing that now, and temps, as a result, are less likely to spend as freely as regular employees or to qualify for credit, generating less demand than permanent employment would. Adding to this undertow, corporate America is investing very little in expansion at a moment when current capacity — the machinery and floor space now available — is underused. And pressure is rising on the Obama administration and Congress to offset the shortfalls by authorizing more stimulus spending — enough to bring the national unemployment rate down from the present 10 percent. “Depression has been forestalled only because major government borrowing and spending is filling the gap,” Albert M. Wojnilower, a Wall Street economist and consultant at Craig Drill Capital, said in a newsletter last week.
406 Caution in hiring is certainly the watchword at Eggrock, which makes prefabricated bathrooms in Littleton, Mass. During the summer, Eggrock received its first new order since the recession began: 462 units for a hospital project in Canada. The order caught the company with only 10 workers on the factory floor, down from 45 early last year. But rather than recall those who had been laid off, Eggrock arranged for 40 temps from Manpower: plumbers, electricians, assemblers and the like. “The biggest factor in prompting us to shift from temps to permanent employees would be a solid order backlog,” said Phillip Littlefield, a vice president at the company. So far a backlog has not materialized, or even a second order, although there is an “uptick in interest,” as Mr. Littlefield put it. “We are optimistic,” he said. Halfway across the country, in Burlington, Iowa, the recession bypassed the Winegard Company. That is perhaps because Winegard makes television antennas and satellite receivers, and in hard times people watch more television, said Denise Baker, Winegard’s director of human resources. Whatever the case, to keep up with new orders, the company has added 70 workers in the last two years — all of them temps. “An actual employee with benefits costs more than a temp or a contract worker,” Ms. Baker said, “and as long as I can still get highly skilled temps, I’ll go that route. It gives me more room to reverse course if the economy weakens again and sales do finally sink.” Given the nature of the upturn, that could happen. After 18 months of contraction, the economy expanded from July through September at a 2.8 percent annual rate, and many economists expect the expansion to be even stronger in the fourth quarter, approaching 4 percent. The rebound is robust mainly because of a “turnaround in inventory policies from breakneck liquidation to slow accumulation,” Mr. Wojnilower said. If this restocking of shelves and warehouses were to stop or slow next year, a possibility that concerns Mr. Littlefield and Ms. Baker, then the temps, freelancers and contract workers they and many other employers now use would have a harder time moving from casual to regular employment. The temp agencies often promote themselves as employment agencies — skilled at quickly finding qualified workers whom companies can convert to regular employment after using them initially as temps. That mechanism works well in good times, but not these days, certainly not for Walter Latham of Coram, Long Island, who lost his job 14 months ago as a project manager at the Reserve, a money market fund based in New York. His wife, Marjorie, works for Kelly Services as a temp at a health insurance company’s call center, and Mr. Latham, 56, finally joined her two weeks ago after hunting for months for higher-paying, permanent work. The temp assignment pays him less than $25 an hour — “a long way down from the $135,000 a year I once made,” Mr. Latham said. The Lathams have gone through the more than $200,000 in savings that he accumulated during 20 years in the financial services industry. The call center assignment ends on March 31, and neither Mr. Latham nor his wife have gotten any hint that the insurance company would convert them to permanent employment with benefits like health insurance, which neither has today. “My future is Latham Golf,” he said, describing a Web site that he and some partners started 15 days ago to teach subscribers how to swing golf clubs. Until Latham Golf pays off, if it ever does, Mr. Latham says that he and his wife, who sells jewelry on the side, will continue to work as temps. “I’ve never seen the job market this horrible,” he said, “when you couldn’t get a job or even an offer of a job at a decent pay level.” http://www.nytimes.com/2009/12/21/business/economy/21temps.html
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Fed's approach to regulation left banks exposed to crisis By Binyamin Appelbaum and David Cho Washington Post Staff Writer Monday, December 21, 2009; A01 Foreclosures already pocked Chicago's poorer neighborhoods but the downtown still was booming as the Federal Reserve Bank of Chicago convened its annual conference in May 2007. The keynote speaker, Federal Reserve Chairman Ben S. Bernanke, assured the bankers and businessmen gathered at the Westin Hotel on Michigan Avenue that their prosperity was not threatened by the plight of borrowers struggling to repay high-cost subprime loans. Bernanke, who was in charge of regulating the nation's largest banks, told the audience that these firms were not at risk. He said most were not even involved in subprime lending. And the broader economy, he concluded, would be fine. "Importantly, we see no serious broad spillover to banks or thrift institutions from the problems in the subprime market," Bernanke said. "The troubled lenders, for the most part, have not been institutions with federally insured deposits." He was wrong. Five of the 10 largest subprime lenders during the previous year were banks regulated by the Fed. Even as Bernanke spoke, the spillover from subprime lending was driving the banking industry into a historic crisis that some firms would not survive. And the upheaval would shove the economy into recession. Just as the Fed had failed to protect borrowers from the consequences of subprime lending, so too had it failed to protect banks. The central bank's performance has sparked a great debate about its future as a regulator, pitting those who want to expand its role against those who want to strip its powers. It also has come under pressure from politicians seeking greater oversight of its primary job, adjusting interest rates to moderate economic growth. The battles have complicated Bernanke's bid for a second term as chairman. The Senate Banking Committee voted to approve Bernanke 16 to 7 on Thursday, setting the stage for a January battle on the Senate floor. The Fed's failure to foresee the crisis or to require adequate safeguards happened in part because it did not understand the risks that banks were taking, according to documents and interviews with more than three dozen current and former government officials, bank executives and regulatory experts. Regulatory agencies exist to lean against the wind. But rather than looking for warning signs, the Fed had joined -- and at times defined -- the mainstream consensus among policymakers that financial innovations had made banking safer. Bernanke said the economy had entered an era of smaller and less frequent downturns, which he and others called "the great moderation." The consequences of this miscalculation can be seen in the stories of three large banks the government ultimately rescued from collapse.
408 The Fed let Citigroup make vast investments without setting aside enough money to cover its eventual losses. The company would need more than $45 billion in federal aid. The Fed watched as National City made billions of dollars in subprime loans that were never repaid. Regulators would arrange its sale to a rival, PNC. And the Fed approved Wachovia's purchase of a California mortgage lender shortly before California mortgage lenders led the nation into recession. Wachovia, on the verge of collapse, was bought by Wells Fargo with government help. "I don't think any regulatory agency can deny that it didn't have adequately targeted supervision in place," said Fed governor Daniel Tarullo, appointed by President Obama to overhaul the Fed's approach to regulation. "Worldwide, there wasn't enough done on capital, liquidity and risk- management requirements. . . . There wasn't a structure in the supervisory process in which to ask the questions that needed to be asked about emerging risks throughout the financial system." Sen. Christopher J. Dodd (D-Conn.), who has called the Fed's performance an "abysmal failure," wants to give its job to a new agency. Tarullo said the appropriate response is to improve the Fed, not to replace it. "Supervision of the largest institutions is something that's going to be very hard to do and to do well," Tarullo said, "and the Fed is the one part of government that has the resources and the capacity and the expertise to fill this role." Citigroup's bad bets Citigroup grew fat during the great moderation, thanks to rules crafted by the Fed that allowed banks to gamble beyond their means. For a time, the nation's largest bank profited massively. But as the crisis rolled in, Citigroup quickly ran low on money to cover its losing bets. The crux of the problem was capital, the reserve that banks are required to hold against unexpected losses. While bank regulation is divided among four federal agencies, the Fed has long played the leading role in dictating how much capital banks should hold. By the late 1990s, those rules were outdated. Rather than wait for borrowers to repay loans, banks were adopting a technique called securitization. The banks created pools of loans and sold investors the right to collect portions of the inflowing payments. The bank got its money upfront. Equally important, under accounting rules it was allowed to report that the loans had been sold, and therefore it did not need to hold any additional capital. But in many cases, the bank still pledged to cover losses if borrowers defaulted. "It was like selling your car but agreeing to keep paying for any maintenance, repairs, oil changes," said Joseph Mason, a finance professor at Louisiana State University. "You've sold the benefit of the automobile, but you haven't sold the risk." The Fed embraced securitization nonetheless. Increased lending boosted the economy. The Fed also wanted banks to remain competitive with lenders including General Electric and GMAC that were not subject to capital requirements. Furthermore, the central bank trusted in the wisdom of financial markets, and investors were cheering companies that used securitization to boost profit. In November 2001, the Fed and its fellow regulators ruled that securitization made banks safer. In general, banks must hold $10 in capital for every $100 in loans and other assets, but banks can hold less on safer assets such as U.S. government bonds. The safe list was now expanded. The Fed and its fellow federal regulators ruled that banks could hold as little as $5 on every $100 investment in loan pools.
409 The dangers of securitization were underscored the very next month by the collapse of energy giant Enron, which had abused the same accounting rules to conceal losses from investors. But in 2003, the board that writes accounting rules backed away from planned reforms after banks protested that Enron was an exception. The Fed sided with the industry, telling the board that securitization was safe and important to the economy, according to people familiar with the deliberations. Citigroup took grand advantage. By the end of 2006, the company had created pools holding more than $2 trillion in mortgage loans and other assets. The pools let Citigroup increase the assets it owned and controlled by 68 percent while increasing the size of its capital reserves by only 36 percent. Citigroup kept creating loan pools for a year after the housing market started to sour. One of the last, launched July 27, 2007, was named Bonifacius, after a general immortalized by the historian Edward Gibbon as "the last of the Romans" because he died as the empire was collapsing. By the early fall the new Bonifacius, along with the rest of the mortgage industry, was collapsing, too. Citigroup found itself unable to sell a huge supply of high-risk loans it had made and bought as stock for loan pools. It also held a vast portfolio of shares in loan pools. As borrowers defaulted, the value of these loans and investments plummeted. By the fall of 2008, Citigroup's spiraling losses had pushed it to the brink of collapse. The company held enough capital to meet the Fed's requirements; it just didn't hold enough to survive. The federal government raced to provide the company with a pair of taxpayer bailouts, effectively increasing its capital by $65 billion -- or 48 percent more than it held at the end of 2007. 'No substantial issues' In fall 2006, the Fed conducted a broad review of the nation's largest banks. The result was a picture of an industry in good health. The report, called "Large Financial Institutions' Perspectives on Risk," found "no substantial issues of supervisory concern for these large financial institutions" and that "asset quality . . . remains strong," according to a summary by the Government Accountability Office. The Fed declined to release the internal report. One bank given a clean bill of health was National City, a Cleveland company that had slowly built a regional presence in the Midwest and then quickly expanded into one of the nation's largest subprime mortgage lenders. The Fed had another look in August 2007 when National City applied for permission to buy a small bank in Chicago. Fed regulators looked at National City's books and its management and again found nothing amiss. In reality, the bank was ailing. Its subprime borrowers were starting to default on their loans. Less than two months after the Fed approved the merger, National City reported a third-quarter net loss of $19 million. The company never returned to profitability. The Fed's failure to see the rot inside National City resulted from the central bank's reliance on others to identify problems. In part this was a matter of policy. The Fed regulated National City, but the company's major subsidiary, a bank also called National City, was regulated by another federal agency, the Office of the Comptroller of the Currency. In 1999, Congress passed a law instructing the Fed to rely on the OCC "to the fullest extent possible."
410 The law clearly authorized the Fed to conduct its own reviews where necessary, but the Fed lacked an effective system for determining when it should look more closely, said Orice Williams, director of financial markets and community investment at the GAO. "If you aren't looking, how would you know there is a problem?" Williams said. The hands-off approach also was a matter of philosophy. Rather than scrutinize banks directly, the Fed decided to push them to appoint internal risk managers who imposed their own checks and balances. Regulators focused on watching the watchmen. Bernanke's predecessor, Alan Greenspan, said that banking was becoming too complicated for regulators to keep up. As he put it bluntly in 1994, self-regulation was increasingly necessary "largely because government regulators cannot do that job." Greenspan revisited the theme in a 2000 speech, saying, "The speed of transactions and the growing complexities of these instruments have required federal and state examiners to focus supervision more on risk-management procedures than on actual portfolios." Some experts say the reliance on others clouded the central bank's ability to see the trouble brewing on the balance sheets of large banks. Others argue that the Fed had a clear view of the problems; it simply underestimated the risk. Either way, the approach had dire consequences. By 2006, National City had become primarily a subprime mortgage lender, federal data show. Even as the Fed continued to regard National City as healthy, the company's executives were increasingly divided, with some warning that National City needed to pull back. The following year, the bank sold its subprime lending operation to Merrill Lynch, but by then it was too late to get rid of the loans. As defaults rose, so did losses, and the bank could no longer persuade investors to lend it the money it needed to survive. In fall 2008, regulators arranged for the company to be sold for a pittance to its Pittsburgh rival PNC. A warning ignored In January 2005, National City's chief economist had delivered a prescient warning to the Fed's board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages. The message wasn't well received. One board member expressed particular skepticism -- Ben Bernanke. "Where do you think it will be the worst?" Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists. "I would have to say California," said the economist, Richard Dekaser. "They have been saying that about California since I bought my first house in 1979," Bernanke replied. This time the warnings were correct, and the collapse of the California real estate market would bring down the nation's fourth-largest bank, the largest casualty of the financial crisis. Dekaser and Bernanke declined to comment on the exchange. The Obama administration wants the Fed to police financial risks to the broader economy, a job that entails sorting real threats from the constant false alarms. But in the dying days of the great moderation, the Fed repeatedly failed to discern which warnings were worth heeding.
411 In May 2006, the nation's fourth-largest bank, Wachovia, signed a deal to buy Golden West, one of the largest mortgage lenders in California. The Fed again was bombarded with warnings about California's housing bubble. A few even warned that the deal could endanger Wachovia. "Should Wachovia's acquisition be approved, no commercial bank in the country will be in a more potentially unsafe financial position," Robert Gnaizda, policy director for the Greenlining Institute, a fair lending group in California, wrote in an August 2006 letter to the Fed. The next month the board unanimously approved the deal. The Fed wrote in its approval that it had "carefully considered" the warnings about Golden West and concluded that Wachovia had sufficient capital to absorb losses and effective systems for assessing and managing risks. The Fed's power to reject the merger application was a potentially important check on the wave of mergers that created banks so large that their distress would threaten the economy. But from 1999 through last month, the Fed approved 5,670 applications to create or buy a bank and in that time denied only one. Fed officials note that 549 banks withdrew applications, in some cases under pressure from regulators. The Fed's confidence in Wachovia was misplaced. The company's executives would later concede basic errors in risk management. Wachovia concentrated lending in California's inland counties, where housing prices would fall more sharply than along the coast. The bank also continued to offer Golden West's signature product, a mortgage built like a credit card that allowed borrowers to pay less than they owed each month for the first several years of the loan. When the time came to start making full payments, many borrowers lacked the money. Consumer advocates described the loans as "time bombs." By fall 2008, the bombs were exploding and Wachovia's losses were rising rapidly. Two years after Wachovia closed its deal for Golden West, regulators told the company it could no longer survive on its own. A hasty sale to Wells Fargo was arranged with the help of billions of dollars in federal tax breaks. Trusting the banks Even on the verge of the financial crisis, the Fed continued to push for new international rules that would let many large banks hold less capital. Under the proposed rules, called Basel II after the Swiss city where they were drafted, regulators further increased their reliance on banks' risk assessments, which now for the first time would form the basis for determining how much capital they should hold. Not surprisingly, a test run conducted as part of the negotiations in 2005 found that the new rules would allow the 26 largest American banks to reduce their capital reserves by an average of 15 percent. A key reason: The rules let banks hold much less capital on mortgage loans, still regarded as safe by regulators blind to the impending crisis. The Fed presided over the international negotiations, but the skepticism of other U.S. regulators delayed the process and forced the Fed to limit how much capital banks could shed. As late as summer 2007, Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., warned that the new rules "come uncomfortably close to letting banks set their own capital requirements." Others warned that banks had no proven track record of measuring their own risks. Finally, in December 2007, after almost a decade of work, the Fed persuaded the other agencies to approve the rules, although implementation was again delayed by several years. One month later, Citigroup announced that it had lost $18 billion on mortgage-related investments. The former chief executive, Charles Prince, later told Congress that the company's
412 internal systems for measuring risk "were wrong." The company immediately raised $12.5 billion in new capital from private investors. It would eventually need much more. This is the second in an occasional series of articles about the record of the Federal Reserve. http://www.washingtonpost.com/wp- dyn/content/article/2009/12/20/AR2009122002580.html?wpisrc=newsletter
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Opinion
December 21, 2009 OP-ED COLUMNIST A Dangerous Dysfunction By PAUL KRUGMAN Unless some legislator pulls off a last-minute double-cross, health care reform will pass the Senate this week. Count me among those who consider this an awesome achievement. It’s a seriously flawed bill, we’ll spend years if not decades fixing it, but it’s nonetheless a huge step forward. It was, however, a close-run thing. And the fact that it was such a close thing shows that the Senate — and, therefore, the U.S. government as a whole — has become ominously dysfunctional. After all, Democrats won big last year, running on a platform that put health reform front and center. In any other advanced democracy this would have given them the mandate and the ability to make major changes. But the need for 60 votes to cut off Senate debate and end a filibuster — a requirement that appears nowhere in the Constitution, but is simply a self-imposed rule — turned what should have been a straightforward piece of legislating into a nail-biter. And it gave a handful of wavering senators extraordinary power to shape the bill. Now consider what lies ahead. We need fundamental financial reform. We need to deal with climate change. We need to deal with our long-run budget deficit. What are the chances that we can do all that — or, I’m tempted to say, any of it — if doing anything requires 60 votes in a deeply polarized Senate? Some people will say that it has always been this way, and that we’ve managed so far. But it wasn’t always like this. Yes, there were filibusters in the past — most notably by segregationists trying to block civil rights legislation. But the modern system, in which the minority party uses the threat of a filibuster to block every bill it doesn’t like, is a recent creation. The political scientist Barbara Sinclair has done the math. In the 1960s, she finds, “extended- debate-related problems” — threatened or actual filibusters — affected only 8 percent of major legislation. By the 1980s, that had risen to 27 percent. But after Democrats retook control of Congress in 2006 and Republicans found themselves in the minority, it soared to 70 percent. Some conservatives argue that the Senate’s rules didn’t stop former President George W. Bush from getting things done. But this is misleading, on two levels. First, Bush-era Democrats weren’t nearly as determined to frustrate the majority party, at any cost, as Obama-era Republicans. Certainly, Democrats never did anything like what Republicans did last week: G.O.P. senators held up spending for the Defense Department — which was on the verge of running out of money — in an attempt to delay action on health care. More important, however, Mr. Bush was a buy-now-pay-later president. He pushed through big tax cuts, but never tried to pass spending cuts to make up for the revenue loss. He rushed the nation into war, but never asked Congress to pay for it. He added an expensive drug benefit to
414 Medicare, but left it completely unfunded. Yes, he had legislative victories; but he didn’t show that Congress can make hard choices and act responsibly, because he never asked it to. So now that hard choices must be made, how can we reform the Senate to make such choices possible? Back in the mid-1990s two senators — Tom Harkin and, believe it or not, Joe Lieberman — introduced a bill to reform Senate procedures. (Management wants me to make it clear that in my last column I wasn’t endorsing inappropriate threats against Mr. Lieberman.) Sixty votes would still be needed to end a filibuster at the beginning of debate, but if that vote failed, another vote could be held a couple of days later requiring only 57 senators, then another, and eventually a simple majority could end debate. Mr. Harkin says that he’s considering reintroducing that proposal, and he should. But if such legislation is itself blocked by a filibuster — which it almost surely would be — reformers should turn to other options. Remember, the Constitution sets up the Senate as a body with majority — not supermajority — rule. So the rule of 60 can be changed. A Congressional Research Service report from 2005, when a Republican majority was threatening to abolish the filibuster so it could push through Bush judicial nominees, suggests several ways this could happen — for example, through a majority vote changing Senate rules on the first day of a new session. Nobody should meddle lightly with long-established parliamentary procedure. But our current situation is unprecedented: America is caught between severe problems that must be addressed and a minority party determined to block action on every front. Doing nothing is not an option — not unless you want the nation to sit motionless, with an effectively paralyzed government, waiting for financial, environmental and fiscal crises to strike. http://www.nytimes.com/2009/12/21/opinion/21krugman.html?_r=1&th&emc=th
December 20, 2009, 6:02 pm The WYSIWYG president There’s a lot of dismay/rage on the left over Obama, a number of cries that he isn’t the man progressives thought they were voting for. But that says more about the complainers than it does about Obama himself. If you actually paid attention to the substance of what he was saying during the primary, you realized that (a) There wasn’t a lot of difference among the major Democratic contenders (b) To the extent that there was a difference, Obama was the least progressive Now it’s true that many progressives were ardent Obama supporters, with their ardency mixed in with a fair bit of demonization of Hillary Clinton. And maybe they were right — but not on policy grounds. (I still remember people angrily telling me that if Hillary got in, she’d fill her economics team with Rubinites). So what you’re getting is what you should have seen. And exactly what should we blame Obama for? Here’s how I see it. I still believe that Obama could have gotten a bigger stimulus. Yes, he needed some Senate “centrists”, but my read is that they were determined to take a slice off whatever he proposed —
415 so he could have proposed more and gotten more. It was very different from health care, where it was really about policy rather than essentially arbitrary numbers. Obama could definitely have taken a harder line with banks. Obama could also have done a lot more to change the discourse — less hope and change and let’s end the partisan bickering, more conservatives have the wrong ideas and we need to undo the damage. But on health care, I don’t see how he could have gotten much more. How could he have made Joe Lieberman less, um, Liebermanish? And I have to say that much as I disagree with Ben Nelson about many things, he has seemed refreshingly honest, at least in the final stages, about what he will and won’t accept. Meanwhile the fact is that Republicans have formed a solid bloc of opposition to Obama’s ability to do, well, anything. Some of my commenters have argued that even with this bill Democrats may well lose seats next year — possibly even more than they would have without it. Definitely on the first point; on the second, I don’t think people realize just how damaging it would be if Obama didn’t get any major reforms passed. But in any case, that misses the point. The reason to pass reform, even inadequate reform, now isn’t to gain seats next year; it is to pass reform, which will do vast good, during the window that’s available. If it doesn’t pass now, it will probably be many nears before the next chance. But back to Obama: the important thing to bear in mind is that this isn’t about him; and, equally important, it isn’t about you. If you’ve fallen out of love with a politician, well, so what? You should just keep working for the things you believe in. http://krugman.blogs.nytimes.com/2009/12/20/the-wysiwyg-president/#more-6157 December 18, 2009, 1:10 pm Why economics is the way it is A number of people are linking to this reprinted critique of the work of the late Paul Samuelson. I could point out that the critique thoroughly misunderstands what Samuelson was saying about international trade, factor prices, and all that. But there is, I think, an interesting point to be made if we start from this complaint: Can it be “scientific” to promulgate theories that do not describe economic reality as it unfolds in its historical context, and which lead to economic imbalance when applied? Actually, there was a time when many people thought that institutional economics, which was very much focused on historical context, the complexity of human behavior, and all that, would be the wave of the future. So why didn’t that happen? Why did the model-builders, led by Samuelson, take over instead? The answer, in a word, was the Great Depression. Faced with the Depression, institutional economics turned out to have very little to offer, except to say that it was a complex phenomenon with deep historical roots, and surely there was no easy answer. Meanwhile, model-oriented economists turned quickly to Keynes — who was very much a builder of little models. And what they said was, “This is a failure of effective demand. You can cure it by pushing this button.” The fiscal expansion of World War II, although not intended as a Keynesian policy, proved them right. So Samuelson-type economics didn’t win because of its power to cloud men’s minds. It won because in the greatest economic crisis in history, it had something useful to say.
416 In the decades that followed, economists themselves forgot this history; today’s equation- mongers, for the most part, have no idea how much they owe to the Keynesian revolution. But in terms of shaping economics, it was the Depression that did it. http://krugman.blogs.nytimes.com/2009/12/18/why-economics-is-the-way-it-is/ December 18, 2009, 10:27 am Spain versus Florida Hey, this discussion of wages and employment is turning into a sort of Chatauqua on macroeconomics! So, another entry. In response to my post on Spain, and why it’s different from the United States, some commenters argued that individual US states or regions are in the same situation as Spain (or Ireland), so there really isn’t any difference.Shouldn’t Florida have its own currency? (I propose naming it the stucco). Well, not quite. First of all, beware the fallacy of composition: any one US state could gain jobs by cutting wages, but if all of them do it, it’s a wash. But second, we have a different way to adjust to regional shocks: migration. Actually, during the runup to the creation of the euro there was a very interesting academic literature comparing and contrasting the North American Monetary Union, also known as the United States, and the potential eurozone. Here’s one example. Probably the most important contribution came from Blanchard and Katz, who showed that in the United States workers move fairly expeditiously from high- to low-unemployment states. As a result, a state hit by an adverse shock tends to return to the average national unemployment rate within about 6 years, even if it never regains the lost jobs. Europe isn’t like that. The Single European Act offers freedom of movement, but the lack of a common language still poses major barriers, and proposals for a single language don’t seem to be making progress. Now, the housing bust has produced some European-style immobility even within the US. But there’s still a world of difference. So Florida isn’t Spain. http://krugman.blogs.nytimes.com/2009/12/18/spain-versus-florida/ December 18, 2009, 9:27 am The curse of Montagu Norman Ryan Avent is appalled, rightly, at Ben Bernanke’s response to a question from Brad DeLong, who asked why the Fed hasn’t raised its inflation target: The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. Let’s parse this. Right now, real interest rates are too high, on a PPE basis (that’s Proof of Pudding is in the Eating): the economy is clearly operating far below capacity due to insufficient demand. The cost
417 of that insufficient demand is enormous — not just in dollars of wasted output, but in severe social and psychological damage to the unemployed. While real interest rates are too high, however, the short-term nominal rate is as low as it can go. So there are only two ways real rates can be reduced. Either the Fed has to buy long-term assets, driving down the wedge between short and long rates — the Gagnon proposal, which comes out of Ben Bernanke’s own work — or it needs to raise expected inflation. Or it could and probably should do both. But it is, in fact, doing neither. Why? Because of fear that the Fed would lose credibility as a staunch inflation-fighter. Future economic historians will, I believe, see this as fundamentally absurd — as absurd as the inflation fears that paralyzed the Bank of England in the early 1930s even as the world went into a deflationary spiral. Yes, there may someday be a 1970s-type episode in which the Fed needs to fight inflation, not encourage it — but it’s a long way off. Furthermore, why on earth would we imagine that the Bernanke Fed, by showing itself willing to inflict gratuitous pain in 2010, would make it easier for whoever is running the Fed in, say, 2020 to control inflation then, let alone that the tradeoff of real pain now versus hypothetical pain much later, if it even exists, is worth making? Anyway, as far as I can see nobody is even trying to assess these alleged tradeoffs seriously. Instead, the notion of an unchanging inflation target — not to be revised even in the face of the worst slump since the Depression — has acquired a sort of mystical force; it has become identified with the notion of Civilization, in much the way that a previous generation assigned mystic significance to the gold standard. Ben Bernanke, we’re told, is a great admirer of Liaquat Ahamed’s Lords of Finance; so am I. All the more irony, then, that Ben has, without realizing it, turned into Montagu Norman. http://krugman.blogs.nytimes.com/2009/12/18/the-curse-of-montagu-norman/
POLICY BRIEF 09-22 The World Needs Further Monetary Ease, Not an Early Exit by Joseph E. Gagnon, Peterson Institute for International Economics December 2009 Governments and central banks around the world eased macroeconomic policies aggressively in response to the 2008 financial crisis, arguably forestalling a second Great Depression. More recently, however, policymakers have been talking about when to withdraw the stimulus. This focus on exit is misguided. Current forecasts show an extended period of economic stagnation in the developed world. We need additional stimulus now, argues Joseph Gagnon. In particular, central banks in the main developed economies should push long-term interest rates 75 basis points below the levels they would otherwise be by purchasing a combined $6 trillion in long-
418 term public and private debt securities. Relative to current forecasts, this policy action is expected to boost GDP 3 percent or more over the next eight quarters and to reduce unemployment rates by between 1 and 3 percent. Without additional stimulus, unemployment rates are likely to remain above equilibrium levels for many years at great cost to the world economy in terms of lost income and personal hardship. Moreover, with inflation rates already below desired levels, excess unemployment threatens to cause a fall in prices that would further damp recovery and retard the necessary process of deleveraging. In light of high and rising levels of public debt, additional monetary stimulus is preferable to additional fiscal stimulus. Indeed, monetary stimulus reduces the ratio of public debt to GDP by reducing interest expenses, increasing GDP, expanding tax revenues, and enabling an earlier start to fiscal consolidation. View full document [pdf] RELATED LINKS Article: The Dollar and the Deficits: How Washington Can Prevent the Next Crisis November 2009 Speech: Rescuing and Rebuilding the US Economy: A Progress Report July 17, 2009 Speech: Global Financial Surveillance and the Quest for Financial Stability June 15, 2009 Testimony: Needed: A Global Response to the Global Economic and Financial Crisis March 12, 2009 Testimony: A Proven Framework to End the US Banking Crisis Including Some Temporary Nationalizations February 26, 2009 Speech: Financial Regulation in the Wake of the Crisis June 8, 2009 Speech: Policy Responses to the Global Financial Crisis June 3, 2009 Testimony: Too Big to Fail or Too Big to Save? Examining the Systemic Threats of Large Financial Institutions April 21, 2009 Testimony: US Foreign Economic Policy in the Global Crisis March 12, 2009 Speech: The Economic Crisis and the Crisis in Economics January 7, 2009 Paper: World Recession and Recovery: A V or an L? April 7, 2009 Op-ed: Stopping a Global Meltdown November 12, 2008 Book: Banking on Basel: The Future of International Financial Regulation September 2008 Op-ed: The Policy Priority Is to Act Decisively October 9, 2008 Op-ed: Globalizing the Crisis Response October 8, 2008 Speech: Addressing the Current Financial Crisis October 7, 2008 Speech: Crisis Management and Global Markets September 18, 2008 Paper: The Subprime and Credit Crisis April 3, 2008 Book: Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies August 2004 http://www.piie.com/publications/print.cfm?researchid=1451&doc=int
419 Opinion
December 20, 2009 EDITORIAL Taming the Fat Cats
President Obama seems genuinely, if belatedly, upset about the way America’s voracious bankers leveraged hundreds of billions in taxpayer bailouts to line their pockets with multibillion-dollar bonuses while American businesses starve for credit. Before he gets over his anger, he might want to take a look at how the British found a way to realign the fat cats’ boundless greed with the public interest: slapping a hefty windfall tax on their bonuses. He still has time to push Congress to enact a similar levy here. Bankers have rushed to repay their bailout loans to the Treasury so they can avoid the constraints on compensation that came with the assistance. Unshackled, they are putting together bonus pools for 2009 that would rival the record-breaking packages of 2007 — the year before their foolhardy bets tipped the world into its worst economic crisis since the 1930s. The administration can make a very good case that the Treasury is entitled to much of this money. After all, what profits the banks have made over the last year were funded by oodles of cheap financing provided by the Federal Reserve. This is a windfall that they should not be allowed to keep. We can think of a lot of good ways to use the revenue from a windfall tax, starting with a more robust program to create jobs for out-of-work Americans. The British government expects to make nearly $1 billion from a 50 percent tax on bonuses above about $40,000. While this is not much, the financial sector in the United States is much larger. Moreover, a tax just might persuade banks to cut their bonuses and use the money to bolster their capital, which would make them more financially secure. Bankers are likely to scream — threatening to leave the country and arguing that such narrow taxation is unconstitutional. The best in the accounting business will undoubtedly be tasked with coming up with strategies to avoid taxation, by pushing bonuses back in time or with other ruses. No one should be intimidated. Threats to move overseas are empty. London is out of the picture. The French president, Nicolas Sarkozy, has said he would follow the British lead. Germany and other countries could be persuaded to impose taxes of their own. And it would make little sense for bankers to move halfway around the world to Singapore to avoid a one-off tax that would not affect future bonuses. Congress also has time to pass a tax on 2009 bonuses because most are expected to be paid in 2010. And the constitutional ban of bills aimed to punish a specific group — so-called bills of attainder — is unlikely to apply because a tax would not be aimed to punish named people but an economic class. A windfall tax on bankers’ bonuses would not be enough, but it would be a start. The government also needs to ensure that all banks reform their compensation practices to better align rewards with performance, good and bad. That is the best hope for curbing bankers’ unbridled appetite for risk. http://www.nytimes.com/2009/12/20/opinion/20sun1.html?ref=opinion
420 16 de Diciembre de 2009
ECONOMÍA El coup de whisky que provocó el crack del 29 Por Juan Ramón Rallo
Mayo de 1926. Inglaterra padece una de las mayores huelgas generales de su historia, cuyos coletazos se extenderán prácticamente hasta finales de año. La industria del carbón se paraliza durante meses, y el país pasa de
exportar a importar el mineral. La economía se encuentra postrada, con unos precios y costes internos artificialmente altos, que debían ajustarse en pro de la competitividad; pero los sindicatos no estaban por la labor.
Con tal de no molestar a las centrales sindicales, unas autoridades convencidas –como siguen convencidas hoy– de que la imperiosa necesidad de deflación puede sustituirse por una impetuosa inflación del crédito prefirieron presionar a los bancos para que proporcionaran crédito con el que comprar el carbón al resto del continente. Una operación financiera sin demasiado sentido que deterioró enormemente la salud de los bancos ingleses y los convirtió en deudores de Francia y Alemania, cuyos bancos centrales acumulaban grandes cantidades de libras esterlinas convertibles en oro. Años más tarde, en 1929, Sir Felix Schuster, uno de los principales banqueros de Inglaterra, resumiría los hechos de la siguiente manera:
Nuestra sensatez ha cedido ante las presiones del Gobierno y ante el sentimiento de Londres. Nuestra situación es alarmante.
Y tan pronto como la City comenzó a perder oro a finales de ese año, todas las alarmas saltaron. Se trataba de una situación incómoda para todas las partes implicadas: por un lado, el Banque de France y el Reichsbank consideraban que ya estaban demasiado expuestos a una moneda –la libra– que cada vez resultaba menos creíble, y además querían reconstruir sus reservas de oro para estabilizar sus respectivas divisas; por otro, el Banco de Inglaterra sabía que no tenía suficiente metal para seguir pagándoles, y que su única alternativa para proteger sus reservas –la única que habían tenido desde siempre los banqueros centrales en este tipo de situaciones– era subir el tipo de interés, medida que resultaba inaceptable para los propagandistas del dinero barato, como Keynes. Por este motivo, el gobernador del Banco de Inglaterra, el célebre Montagu Norman, solicitó auxilio al poderosísimo presidente de la Reserva Federal de Nueva York, aquel al que Milton Friedman calificaría años más tarde como "un hombre verdaderamente notable": Benjamin Strong. Norman y Strong eran amigos íntimos (Barry Eichengreen describe sus relaciones personales como "cálidas y de mutuo respeto"), y ambos estaban vinculados directa o indirectamente con JP Morgan. Strong estaba convencido de que los bancos centrales debían ser solidarios y ayudarse entre sí, motivo por el cual convocó a mediados de 1927 una reunión de gobernadores de bancos centrales en Long Island; "el club más exclusivo del mundo", como se dijo entonces. La reunión estaba claramente diseñada desde un principio para presionar a los bancos centrales de Francia y Alemania para que dejaran de exigir al de Inglaterra el pago en oro de sus deudas y se conformaran con libras esterlinas (algunos infelices todavía confunden hoy esta suerte de farsa monetaria con el patrón oro). Pero las cosas no salieron como Strong y Norman habían planeado. El gobernador del Reichsbank, Hjalmar Schacht, era un astuto negociador que no se casaba con nadie, y su homólogo francés, Émile Moreau, declinó asistir: en su lugar envió a uno de los economistas monetarios más brillantes del s. XX, Charles Rist.
421 Rist conocía perfectamente las intenciones del tándem Strong-Norman, pero antes de tomar una decisión prefirió consultar a otro de los grandes genios monetarios del s. XX, Benjamin Anderson, economista en jefe del Chase National Bank. Anderson acudió a la Reserva Federal de Nueva York con la intención de presentarse en el despacho de Rist, donde ambos tenían pensado discutir sobre la situación financiera internacional y cuál debía ser la política de los bancos centrales al respecto. Pero mientras deambulaba por los pasillos de la Fed, Strong se cruzó con Anderson y rápidamente trató de abortar la reunión entre ambos entrando primero en el despacho de Rist. En teoría, mientras Strong estuviera reunido con Rist, éste no podría atender a Anderson. Sin embargo, el economista en jefe del Chase National Bank era un hombre de gran paciencia, y ante las disculpas reiteradas del secretario personal de Rist, le advirtió de que estaba dispuesto a esperar "indefinidamente", hasta que Strong saliera. Finalmente, tras cerca de una hora, se le invitó a entrar… pese a que Strong todavía seguía dentro. Una vez se marchó éste, Rist y Anderson discutieron libremente sobre la gran expansión crediticia que había tenido lugar al amparo del patrón-divisa oro y de la muy delicada situación en que se hallaba el Banco de Inglaterra. Así, cuando Norman y Strong pidieron a Schacht y Rist que se olvidaran de demandar oro a Londres y que acometieran una política monetaria expansiva que aliviara aún más las tensiones sobre la City, ambos se negaron. Schacht fue rotundo: no quería bajar artificialmente los tipos para seguir inflando más el crédito: "No me deis un tipo de interés bajo. Dadme un tipo de interés verdadero y yo sabré cómo mantener mi casa en orden", les reprochó. Fue entonces cuando Strong desistió y advirtió de que, incluso si Francia y Alemania no colaboraban, Estados Unidos ayudaría a Gran Bretaña mediante una política de crédito barato, lo que de paso le serviría para "dar un pequeño coup de whisky a la bolsa estadounidense". Desde luego, Strong sabía de qué hablaba. No era la primera vez que le daba un empujoncito mediante la expansión artificial del crédito. En 1922, la Reserva Federal llevó a cabo la primera operación de mercado abierto de su historia (compras de deuda pública) y el Dow Jones se disparó de 70 puntos a más de 100. En 1923, Strong enfermó y el resto de miembros de la Fed, no demasiado de acuerdo con sus políticas inflacionistas, dejaron de expandir el crédito, con lo que el Dow Jones cayó a 90 puntos. Cuando Strong se reincorporó un año más tarde y se reanudaron estas operaciones, el Dow Jones se catapultó hasta los 160 puntos. En 1927 se trataba, pues, de meterle la última inyección energética. La conferencia de gobernadores no cristalizó en ningún acuerdo unánime demasiado concreto. Schacht y Rist se fueron con el compromiso de rebajar ligeramente su presión sobre el Banco de Inglaterra pero sin sumarse a la orgía inflacionista que estaba a punto de empezar. En cambio, Strong sí prometió a su buen amigo Morgan que la Reserva Federal prestaría 12 millones de libras en oro al Banco de Inglaterra, y que rebajaría los tipos de interés por debajo de los suyos para evitar que los inversores ingleses sacaran su oro del país a fin de depositarlo en los bancos estadounidenses. Dicho y hecho. En agosto de 1927 los tipos de interés caen medio punto, hasta alcanzar prácticamente su mínimo histórico, y, sobre todo, se duplica el volumen de las operaciones de mercado abierto (por las que se canalizaba el crédito a los bancos para que a su vez rebajaran los tipos de interés a sus clientes). Y, ciertamente, la borrachera bursátil respondió a las expectativas: entre agosto de 1927 y octubre de 1929, el Dow Jones se disparó de 170 a 380 puntos. No es extraño, vistas esas cifras, que la Reserva Federal se asustara del monstruo que ella misma había ayudado a crear. A finales de 1927, el gobernador Strong enfermó de nuevo y se retiró de la política activa (murió un año después), por lo que su sustituto, Roy Young, tuvo las manos libres para intentar revertir sus errores. Entre febrero y julio de 1928 los tipos de interés pasaron del 3,5 al 5%, pero aunque el ritmo de expansión crediticia se moderó, ya era tarde: el boom bursátil había empezado, y ni siquiera la Reserva Federal tenía capacidad para detenerlo. Se había creado demasiado crédito durante demasiado tiempo, y ahora era imposible de retirar. Ya lo decía con resignación Benjamin Anderson:
Cuando la bañera del piso de arriba se ha desbordado y ha estado vertiendo agua durante cinco minutos, no es complicado lograr que deje de hacerlo y aprovechar para fregar el suelo. Pero cuando ha estado vertiéndola en grandes cantidades durante muchos años, las paredes, los falsos techos y el suelo están echados a perder, y resulta muy costoso y complicado retirarla. Mucho después de que se haya cerrado el grifo, el agua seguirá rezumando por las paredes y el techo.
422 El exceso de crédito siguió ahí hasta que fue destruido, de manera desordenada y caótica, durante el proceso de quiebras bancarias que inauguró el crack bursátil de 1929. Ochenta años después, no está de más recordar que fueron las políticas inflacionistas de la Reserva Federal las que generaron ese auge artificial que inevitablemente terminó pinchando. Nuestro Strong fue Greenspan. Entonces como ahora, se dejaron los grifos abiertos y anegaron el sistema financiero. Entonces como ahora, se culpó al libre mercado de la negligencia de un monopolio público, el que rige sobre la emisión de moneda. Hay cosas que, por desgracia, no cambian. http://historia.libertaddigital.com/el-coup-de-whisky-que-provoco-el-crack-del-29-1276237295.html
1 de Diciembre de 2009
ECONOMÍA Los grifos abiertos de Greenspan Por Juan Ramón Rallo
Pese a que cada vez son más quienes –dentro y fuera de la Escuela Austriaca– reconocen la responsabilidad del anterior presidente de la Reserva Federal, Alan Greenspan, en la gestión del boom económico artificial que ha desembocado en la presente crisis, el Maestro y sus discípulos siguen defendiendo con uñas y dientes su actuación.
Los greenspanófilos sostienen que el haber mantenido los tipos de interés, como dice Lawrence White, "demasiado bajos durante demasiado tiempo" no pudo ser la causa de la burbuja inmobiliaria. Greenspan, por su parte, se escuda en que la demanda de hipotecas depende de los tipos de interés a largo plazo, mientras que la Fed sólo influye en los tipos de interés a corto: así pues, tuvieron que ser otros factores –el ahorro asiático, por ejemplo– los que presionaron a la baja los tipos hipotecarios y dieron pie al mayor endeudamiento familiar de la historia de EEUU. Sin embargo, conviene recordar que la estrategia financiera básica de la banca –que, dicho sea de paso, es la responsable de los recurrentes ciclos que sufrimos– consiste en endeudarse a corto plazo e invertir a largo. Dicho de otro modo: no fue un ficticio ahorro asiático lo que provocó las reducciones en los tipos de interés a largo plazo, sino la canalización por parte de la banca de las ingentes cantidades de fondos a corto plazo que Greenspan colocó en el mercado. Ahora bien, el ex presidente de la Fed también ha encontrado un argumento para esto: apela a un fenómeno que ya le desconcertó en su momento y que precisamente por ello recibió el nombre de "conundrum de Greenspan". Este misterioso acontecimiento se produjo en junio de 2004, cuando el ex presidente de la Fed dio por terminada la época de reducciones de tipos y comenzó a subirlos tímidamente: en un año pasaron del 1 al
423 3,25%. Sin embargo, al mismo tiempo que subían los tipos de interés de la Fed, los tipos a largo plazo continuaron cayendo: entre junio de 2004 y junio de 2005, el coste de la deuda pública a 10 años bajó del 4,7 al 4%, y el de las hipotecas a 30 años del 6,3 al 5,6%. Con estos datos en la mano,¿cómo puede afirmarse que fueron los recortes en los tipos de interés a corto plazo de la Fed los que condujeron a las no siempre correlativas caídas de los tipos de interés a largo? Para comprenderlo hay que recordar un cambio regulatorio que tuvo lugar el 28 de abril de 2004, apenas dos meses antes de que Greenspan comenzara a subir los tipos. Fue entonces cuando la SEC decidió que las unidades de corretaje de los cinco grandes bancos de inversión del momento (Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch y Morgan Stanley, todos desaparecidos a día de hoy de una u otra forma) pudieran incrementar a más del doble sus ratios de apalancamiento: hasta 2004 debían tener 1 dólar de fondos propios por cada 12 de deuda; a partir de entonces se les permitió poseer 40 dólares de deuda por 1 de fondos propios. En un momento de laxitud monetaria, pues, los intermediarios financieros pudieron demandar mucho más crédito en los mercados financieros para redirigirlo a los activos a largo plazo. Y las consecuencias no se hicieron esperar: los precios de estos activos continuaron subiendo (y, por tanto, los tipos de interés siguieron cayendo) hasta bien entrado 2005. He ahí el conundrum. El cambio normativo de la SEC le sirvió a Greenspan para ocultar su responsabilidad en la gestación de la burbuja, y a los más feroces críticos del mercado para resaltar las veleidades de la desregulación: si la SEC no hubiese reducido los requisitos del capital de estos grandes brokers, la expansión crediticia habría sido, con toda seguridad, considerablemente menor. Mucho me temo, sin embargo, que tanto Greenspan como los liberticidas cometen un error esencial: se fijan sólo en el lado de la demanda de crédito, no en el de la oferta. La reducción de las restricciones al apalancamiento de los bancos de inversión simplemente permite que éstos incrementen su demanda de crédito. Pero, en principio, un incremento en la demanda de crédito no tiene por qué generar un aumento de su oferta, ya que los prestamistas, especialmente los bancos comerciales, podrían haberse negado a extender aún más el crédito. Que opten por ello o, en cambio, por cerrar el grifo depende de cuál sea su posición en términos de liquidez, es decir, de su margen para continuar prestando. El problema está en que, en nuestro sistema financiero, la liquidez de los bancos comerciales no peligra mientras el banco central consiga expandir a su vez el crédito manipulando los tipos de interés a corto plazo. Por tanto, durante este período, más o menos prolongado, los bancos comerciales siempre estarán dispuestos a atender casi cualquier demanda de crédito. Así pues, si bien cabe atribuir la caída de los tipos a largo plazo al aumento del apalancamiento de los bancos de inversión, ese excesivo apalancamiento nunca se habría producido si la simple demanda de crédito por parte de los bancos de inversión no hubiese concurrido con la oferta absolutamente acomodaticia que desplegó Greenspan hasta bien entrado 2005. Como diría Fritz Machlup: "Allí donde la oferta de crédito bancario es perfectamente elástica, la demanda determina el volumen de crédito que se concede".
Greenspan debería haber subido en 2004 los tipos de interés más de lo que lo hizo para evitar el conundrum, después de que la SEC incrementara las ratios de apalancamiento máximas de los bancos de inversión. No lo hizo, y la expansión crediticia con origen en la Fed terminó multiplicándose al llegar a estos intermediarios financieros. Su responsabilidad sigue intacta, porque en ningún momento se preocupó seriamente por restringir el crédito. Por eso es absurdo culpar a esta desregulación de la crisis: el problema no es que se ampliase la libertad para que los agentes se endeudaran, sino que el endeudamiento estaba siendo artificialmente abaratado por los bancos centrales. ¿O es que la culpa de que se inunde una casa cuyo propietario ha dejado todos los grifos abiertos la tiene quien habilitó el suministro de agua?
http://revista.libertaddigital.com/los-grifos-abiertos-de-greenspan-1276237240.html
424
EU Stress Tests Dec 18, 2009 11:52:34 PM | Last Updated
ECB December Financial Stability Review: Increase in Expected Writedowns Stress Tests In Europe: Watch European Banks and Commercial Property Exposure to Dubai UK Bank Stress Testing: Gauging Exposure to Dubai How Healthy Are Spanish Banks? Hybrid EU Bank Capital: Twists of Regulators' Burden-Sharing Requirement Will Rising Loan-Losses Threaten the Creditworthiness of German Banks?
Overview: RGE expects total write-downs on securities and loans among eurozone banks to be around US$900 billion-1.2 trillion, including losses incurred abroad. Therefore, given the roughly US$350 billion in write-downs already recognized as of the end of June 2009 (according to IMF estimates), RGE expects losses of more than US$500 billion to materialize over the next few quarters. These loss estimates are broadly in line with the IMF’s October 2009 Global Financial Stability Report (GFSR) estimates of US$814 billion --“a useful guidance for the lower bound of potential loan losses in the euro area” in the IMF's own words. Background: EU Banking Troubles European governments approved US$5.3 trillion in aid in June 2009, compared to the US$12.8 trillion the U.S. government and Federal Reserve have spent, lent or committed, Bloomberg reported. A June 2009 European Central Bank financial stability review said the potential future losses of euro area banks could be around US$283 billion by the end of 2010, for a total of US$649 billion in cumulative loans and securities losses from 2007 through 2010. But the impact of these losses could be softened by provisions and retained earnings in the coming years. According to Fitch, European banks have US$1.3 trillion in claims on Central and Eastern European countries. Assuming that 20% of these loans turn bad, EU banks could incur some US$270 billion in Central-and-Eastern-Europe-related losses, with US$2,400 billion of which among eurozone banks. Goldman Sachs shows that according to BIS data, about 50% of U.S.-registered banks are foreign-owned. Of these, a majority (20% of the total) are eurozone-registered. If total U.S.-originated losses end up to be US$2 trillion, and losses are distributed evenly among domestic and foreign banks, then US$400 billion of these losses will wind up in the eurozone. Since only half of all losses are estimated to accrue to banks and the other half to non-banks, eurozone banks are set to incur about US$200 billion in losses from their U.S. subsidiaries. ASSOCIATED READINGS • Blogs RGE Analyst's EconoMonitor Eurozone Bank Loss Estimates - Overview • Analysis CEBS Committee of European Banking Supervisors Cebs’s Press Release On The Results Of The Eu-Wide Stress Testing Exercise • Analysis IMF Global Financial Stability Report Navigating the Financial Challenges Ahead • Analysis European Central Bank EU Banking sector stability - August 2009
425 • Analysis InvestorsInsight Europe on the Brink / And Then There Was Leverage • Analysis European Central Bank By Lucas Papademos ECB Financial Stability Review, June 2009 • Analysis Eurointelligence ECB gloomy about banking sector • News Financial Times Patrick Jenkins S&P report casts gloom on lenders in Europe • Analysis Wall Street Journal Simon Nixon European Banks Don't Seem Overstressed • News Bloomberg Meera Louis Bank Rescue Costs EU States $5.3 Trillion, More Than German GDP • Analysis Credit Agricole Banking systems: fluctuat nec mergitur • Analysis Goldman Sachs (scroll down for english) Natacha Valla Stress testing Euro-zone banks | An ECB roadmap for quantitative easing • Blogs Eurointelligence German toxic waste totals over €800bn • Analysis Fitch Ratings (free registration) Major Western European Banks’ Exposure to Eastern Europe and the CIS: Downside Risk Contained? • Analysis Danske Bank Frank Øland Hansen Euro area: Exposure to the crisis in Central and Eastern Europe ECB December Financial Stability Review: Increase in Expected Writedowns In its December 2009 Financial Stability Review, the ECB raised the amount of expected writedowns to €553 billion from €488 billion in June 2009 (+13%). The main factors contributing to the higher estimate are the deteriorating commercial real-estate performance and exposures to Central and Eastern Europe. Stress tests conducted by the Central Bank of Austria point to nonperforming loans of about 20% in Central and Eastern European countries. The ECB also notes that “the surge in government indebtedness” around the world is a risk to financial stability and that some European banks are still reliant on emergency funding." Analysis ECB Financial Stability Review December 2009 The ECB also questions the sustainability of recent trading gains once the record steep yield curve flattens and/or the tail risk insurance provided by governments around the world is gradually removed. Additional capital requirements envisaged by the new BIS standards will strain profitability further. Analysis ECB Lucas Papademos Presentation on the December 2009 ECB Financial Stability Review Elisa Parisi-Capone and Salman Ahmed of RGE estimate total potential writedowns among eurozone banks of US$900-1,200 billion, including domestic losses (about US$650 billion) plus those incurred by subsidiaries registered in the U.S. (up to US$300 billion) and in Central and Eastern Europe (US$75-240 billion) (October 2009). This compares to the IMF's lower-bound eurozone loss estimate of US$814 billion in its October Global Financial Stability Report and the ECB's June 2009 estimate of US$650 billion (including foreign branches but excluding foreign-registered subsidiaries). Analysis RGE Analysis Elisa Parisi-Capone and Salman Ahmed Eurozone Bank Loss Estimates (RGE Analysis) RGE's Parisi-Capone pulls the numbers from the national central bank statistics and shows that as of October 2009, the national banking systems borrowing more than their equity share with the ECB include Luxembourg, Ireland, Cyprus and Greece, in that order. Most of the Eurosystem lending occurs through
426 longer-term refinancing operations, thus forcing over-reliant institutions to find alternative sources of financing once the stimulus is withdrawn. At the ECB's latest one-year refinancing operation, eurozone banks requested funds in the amount of €97 billion, more than the expected €75 billion. Analysis RGE Analysis Elisa Parisi-Capone How Much Are Eurozone Banking Systems Borrowing from the ECB? On October 1, 2009, the Committee of European Banking Supervisors (CEBS), the cross-border EU banking supervisor, estimated a maximum €400 billion (US$581 billion) loss for European banks in 2009- 2010 in a worst-case scenario, including GDP growth of -5.2% in 2009 and -2.7% in 2010 and unemployment at 10% and 12.5%, respectively. As of the end of June 2009, eurozone bank writedowns amounted to US$350 billion compared to new capital of US$500 billion, according to Bloomberg data. Analysis CEBS Committee of European Banking Supervisors Cebs’s Press Release On The Results Of The Eu-Wide Stress Testing Exercise Further Reading News Bloomberg Gabi Thesing and Jon Menon ECB Raises Forecast for Euro-Region Writedowns by $268 Billion Analysis Danske Bank Frank Øland Hansen Euro area: Exposure to the crisis in Central and Eastern Europe Analysis European Central Bank By Lucas Papademos ECB Financial Stability Review, June 2009 http://www.roubini.com/briefings/10254.php#92763
427 dealbook.blogs.nytimes.com December 18, 2009, 10:05 am Another View: Forget Ideology. Let’s Fix the Economy. Albert A. Koch, who led the AlixPartners team that helped restructure General Motors and now runs “old G.M.,” argues that pragmatism, not philosophical purity, will drive recovery in the bankruptcy and distressed market space. Just over a year ago President George W. Bush said, “I have abandoned free market principles to save the free market system.” His words and actions as General Motors and the rest of the economy careened toward an abyss embraced a realistic, pragmatic approach that is essential to recovery. Government involvement — or if you prefer, “meddling” — often stirs up philosophical debate. But from where I sit, as one of the guys who helped G.M. live to fight another day, it is clear that pragmatism is still very much the order of the day. In the interest of full disclosure, I don’t like the government getting involved in the private business sector. But in this case, the government saved the domestic, and possibly the worldwide, auto industry. And that’s not hyperbole. Had G.M. and Chrysler gone down, I’m convinced that the global auto industry’s highly interdependent supply chain would have crashed as well, halting production lines for virtually all automakers for months or even years. The economic and social cost would have been catastrophic – and that’s not counting the potential domino effect on many other industries. Faced with an epic crisis, I’m glad the government realized it had no choice and acted. Clearly, its involvement has changed the rules of the game. And while it may seem like we’re playing on a field where someone forgot to paint in the yard markers and sidelines, it is critical to remember that the score is still being kept — and that the winners are the organizations that build (or at least salvage) value for investors. At this moment in time, the free market principles that form the foundation of our national economy may not apply as they did before, but now is the time to put ideology aside and focus on putting points on the board. Point one: You need good players to win. The Treasury Department’s appointments to its auto task force pointed the way to success: it was staffed with great people who were determined to bring order out of chaos. By the same token, experienced and knowledgeable players on both sides of the management-labor divide were also willing to put their philosophical differences aside to save the auto industry. In the face of the public’s current “urge to purge,” it is important to remember that leadership expertise and institutional knowledge are as vital to success as the need to jettison an ossified corporate culture or outmoded work rules. As shown by calls for salary and bonus caps in the financial industry, government intervention can make key employee retention problematic. Successfully addressing this issue remains a prerequisite to achieving strategic objectives and creating value. Point two: Be realistic.
428 The current environment is populist and debtor-friendly. Debt holders – bankers, hedge funds and other “speculators” – are being painted as the bad guys. This situation is unlikely to change anytime soon, and there is no denying that bankruptcy and restructuring, which were never easy to begin with, are tougher and more complicated now in part because of changes to the federal bankruptcy code in 2005. Today: • The time to reject or accept leases has been compressed. • The debtor’s period of exclusivity has been limited. • Key employee retention plans (KERPs) are all but gone. • Hedge funds have often replaced banks at the table. • Distressed-debt investors are bigger players. Given the public’s view of debt holders on the one hand and the industry’s complexity on the other, it is critical to take a page from the distressed asset community’s playbook and focus on finding practical solutions in order to drive a positive outcome. Point three: Fix the process; then guide the change. With regards to bankruptcy and restructuring, failure to realize positive outcomes invites further government intervention. If the distressed asset industry – or any industry for that matter – cannot effectively deal with the current, chaotic environment, the government will ramp up its intervention. Frankly, I don’t think the government wants to be in the private sector, but increased involvement is inevitable if the private sector can’t make their businesses work. As time passes and the economy recovers, new rules for navigating bankruptcy and distressed asset situations will emerge. They will reflect the experience of the current crisis and be shaped by the people who were able to turn dross into gold during the most turbulent economic period in decades. But, in the meantime, it is important to keep a sharp eye on well-defined, obtainable objectives. At old G.M. our task is clear: As part of the auto industry workout, we have to dispose of 16 auto plants and several office buildings with a combined square footage about the same size as the principality of Monaco; continue ongoing environmental remediation and prepare for a court- approved trust to take over remediation at end of the bankruptcy; and move toward an approved plan of reorganization, hopefully by mid-2010, with the goal of turning over all of the 10 percent of “new G.M.” we own to G.M.’s unsecured creditors. Doing all that in a still very challenging economic climate is the task at hand. Concerning ourselves with the policies and philosophies that brought us here will wait for another day. Al Koch is vice chairman of AlixPartners, a corporate consulting and turnaround firm, and the chief executive of the Motors Liquidation Company. http://dealbook.blogs.nytimes.com/2009/12/18/another-view-forget-ideology-lets-fix-the- economy/?ref=business
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El 'stock' seguirá ejerciendo presión El BBVA advierte que los pisos deberían abaratarse un 20% adicional • El último informe sobre coyuntura inmobiliaria elaborado por el BBVA no puede ser más explícito: oferta y demanda de vivienda no encuentran su equilibrio. Por eso, el banco advierte que para absorber el millón de casas en stock los precios deberían bajar un 20% adicional. Raquel D. Guijarro - Madrid - 16/12/2009 Justo cuando arrecian los informes que cuestionan la capacidad de la economía española para subirse al furgón de la recuperación, dado su elevado endeudamiento, el BBVA concluye en el último Situación Inmobiliaria que 2010 va a ser mejor que este ejercicio, aunque el PIB cerrará todavía en tasas negativas. No obstante, el estudio asegura que a España le resta concluir el ajuste inmobiliario vía precios. "Calculamos que la vivienda se ha abaratado hasta ahora un 10% en términos reales desde los niveles máximos, por lo que aún resta que se produzca un ajuste de precios significativo, que debería alcanzar el 30% en términos reales en los próximos años", explicó ayer en la presentación del informe Mayte Ledo, economista jefe de Escenarios Económicos y Financieros. Así, el banco apuesta por que este año finalice con una rebaja de precios real del 7% y otro 8% adicional en 2010. "Lo normal es ver caídas hasta 2012", añadió. Ante las afirmaciones que sostienen que la mayor parte del ajuste de precios ya se ha producido y que es imposible aplicar descuentos por encima del 20% porque entonces los promotores no podrían hacer frente ni al pago de los préstamos, el BBVA defendió que quienes marcan el precio en un mercado libre son la oferta y la demanda. Activos de los bancos En cuanto a la actitud que mantendrán las entidades financieras con importantes carteras de activos inmobiliarios, el BBVA recordó que no cree que su actuación sea determinante para el mercado. "Los bancos juegan un papel pequeño, está acotado y además, aunque sepamos a cuánto asciende el stock que poseen (se calcula que unas 100.000 unidades), no se conoce qué parte de esos activos la constituyen viviendas en construcción, qué porcentaje es suelo y cuántas son promociones ya terminadas", inciden en la entidad. En cualquier caso, el BBVA advierte que si el ajuste de precios no continúa, los recortes seguirán aplicándose en la ya lánguida producción de casas, con el consiguiente efecto perverso que ello genera en el empleo. En este sentido, el estudio insiste en cómo en los últimos meses el nivel de accesibilidad o el porcentaje de renta que destinan las familias al pago de la hipoteca ha mejorado, pero sólo por la rebaja que se ha producido en los tipos de interés. "Como nosotros no prevemos que los tipos suban ni en 2010 ni durante buena parte de 2011, la única vía que resta para que más hogares puedan adquirir casa es bajar los precios de los inmuebles", aseguró Ledo. Pese a estas advertencias, el informe no quiso incidir sólo en los aspectos más negativos que caracterizan al mercado inmobiliario. De hecho, el BBVA estima que cuando el ajuste finalice, España volverá a generar una demanda de vivienda nueva anual de unas 400.000 casas, pese a la
430 menor afluencia de inmigrantes y al hecho de que cada vez serán menos numerosos los grupos de población en edad de demandar piso. La rehabilitación y el crecimiento de otros sectores actuarán como soportes a corto plazo, dijo Ana Rubio, economista jefe del área de Análisis Sectorial del Servicio de Estudios del BBVA. Consulta el stock de vivienda de nueva construcción disponible en tu comunidad La UE insta al sector a recortar más los precios La Comisión Europea cree que la "recuperación total" del sector de la construcción en España no llegará hasta que los precios alcancen su nivel más bajo, algo que todavía podría tardar "varios años". Ésta es una de las conclusiones del análisis mensual sobre Empleo en la UE que presentó ayer el Ejecutivo comunitario y que en esta edición dedica un apartado especial a la evolución del sector de la construcción. Según el informe, la situación "difiere considerablemente" entre los estados miembros, aunque en general, el sector se caracteriza por su dependencia del acceso a la financiación, "lo que constituye la principal razón de su declive". En los estados que han puesto en marcha medidas para solucionar este problema y en los que no existía una "burbuja de precios" antes de la crisis - como Alemania o Austria-, la actividad "debería recuperarse con rapidez", afirma la CE. Sin embargo, donde el encarecimiento de la vivienda se aceleró en los últimos años, como España o Irlanda, la "recuperación total sólo es probable cuando los precios toquen fondo". Raquel D. Guijarro El 'stock' seguirá ejerciendo presión. El BBVA advierte que los pisos deberían abaratarse un 20% adicional16/12/2009 http://www.cincodias.com/articulo/economia/BBVA-advierte-pisos-deberian- abaratarse-adicional/20091216cdscdieco_4/cdseco/
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Germany: Economic Profile Dec 15, 2009 6:22:22 AM | Last Updated
German Business Sentiment Reaches 16-Month High: Is December the Peak? Fragile Investor Confidence: Is Germany's Economic Recovery Losing Momentum? Germany: Industrial Production Declines in October - Is the Economic Recovery Losing Momentum? German Central Bank Raises Germany's 2010 GDP Growth Forecast to 1.6% Germany: What Is the Outlook for Investment? What will be the Shape of the German Recovery? Will East Germany's Economy Ever Catch-Up with its Western Counterpart?
Overview: Germany is the fifth largest economy in the world and the largest in the European Union. Germany relies on the economic model of a social market economy which combines elements of market capitalism with a generous welfare state and strong labor protection. While Germany has an impressive economic track record, the German economy is also suffering from structural problems such as high unemployment, low GDP growth, a rigid labor market and an unsustainable welfare state. In addition, the economies of those states which used to represent East Germany are still underperforming. As a result of painful reforms implemented by former Chancellor Gerhard Schroeder, Germany was able to fully take advantage of a booming global economy after 2003. Germany’s strength lies in manufacturing and the economy depends excessively on exports as a result of which it is one of the most volatile in the world. Small and medium sized firms which specialize in niche products, rely on bank financing and are often privately owned make up the backbone of the German economy. These firms, which are highly dynamic and competitive, employ roughly two-thirds of the German workforce. Looking forward, Germany is facing strong economic headwinds. The economy which entered into a severe recession in the second quarter of 2008, is set to register one of the sharpest GDP declines in 2009 among industrialized countries despite a large fiscal stimulus package. While the German economy is in a good position to take advantage of a rebound in global growth it has been facing severe criticism for its export-dependent growth model and calls to rebalance the economy by relying more on domestic demand are growing louder. Furthermore, the recession will leave Germany with a much larger budget deficit which is already under pressure from ballooning social security spending, largely the result of an ageing society. German Business Sentiment Reaches 16-Month High: Is December the Peak? The economic research institute Ifo on December 18, 2009, announced further improvement in German business confidence, in line with expectations. According to the results of a survey of 7,000 executives, business confidence reached a 16-month high in December after increasing for nine consecutive months. While the survey results point to further economic expansion in H2 2009, the sustainability of the upswing remains in question. Recent Trends The index rose from 93.9 in November to 94.7 in December, its highest level since July 2008. Markets expected a rise to 94.5. Despite nine consecutive increases since April 2009, after hitting a 26-year low of
432 82.2 in March, the index is still below its long-term average of 96 points. While still posting positive monthly gains, the rate of increase has been slowing in recent months. The rise in December marks the smallest increase registered in 2009. The expectations index, which predicts the level of economic activity in six months, was largely responsible for the increase in the headline figure. The forward-looking sub-index of the Ifo survey, which has been increasing since January 2009, rose from 98.9 in November to 99.1 in December. The current situation index, on the other hand, remained at a subdued level, rising by 1.4 points to 90.5 in December. German business sentiment rose across all sectors. In manufacturing, as well as in industry and trade, the improvement was still much more noticeable than, for instance, in the construction sector. Comments and Forecasts UniCredit: "The upward trend in the forward-looking business expectations index remains intact at the end of 2009. Hence, an abrupt end to the current vibrant rebound in German industry is not in sight. The dynamic in GDP should remain solid at the change of the year. And the tailwind should persist until spring. Although business expectations face increasing headwinds, with strong temporary support factors increasingly fizzling out, we still see chances for a further moderate improvement at the beginning of 2010, underscored by the latest performance of the OECD leading indicator, which provided reliable signals for turning points in the past." (12/18/09) Analysis Unicredit Ifo concludes year on a sanguine note Danske Research: "Together with the upbeat PMI figures released yesterday this confirms the strength of the rebound in Germany. According to Ifo expectations, industrial production should simply rocket. Ifo expectations currently signal that industrial production growth rates should increase sharply from -15% y/y to around 1.5% y/y." (11/24/09) News Danske Markets Research Euroland: IFO climbs like a rocket Erste Bank: "German GDP should have increased for the second time in a row (q/q), mainly supported by special items (positive effects from the inventory adjustment cycle and the car scrap premium). For Q4, we expect a slowdown of the recovery. We will have to monitor how robust the end demand proves in the months ahead. Whereas the Ifo index was more or less in line with market expectations, the October PMIs for the manufacturing business were pretty strong, beating market forecasts." (10/23/09) News ERSTE Bank Germany: Ifo Index (October 2009) Hypovereinsbank: "What especially catches the eye is the fact that export expectations continued their upward trend despite a seemingly unstoppable euro exchange rate. We think that there are two major reasons for this pattern. First, new-order-to-inventory ratios in many countries are still at very favorable levels, thereby fueling export expectations. Second, sentiment in the euro zone as the most important German export market improved further. As indicated this morning, this is especially true for France. With a share of nearly 10%, it is the export market par excellence for German companies....If the euro exchange continues appreciating, this will hurt them in a few months' time. We stick to our general view that business expectations will peak in Q1 2010." (10/23/09) Analysis Hypovereins Bank Ifo: No signs of "euro-sclerosis" BNP: "If businesses forecasted an acceleration of the activity’s growth, they are, too, cautious. Firms have cut their inventories over the last months and now respond to demand, mainly to external demand, by increasing output. Nevertheless, it is a "technical rebound" and activity should strengthen only progressively." (10/23/09) Analysis BNP Paribas Catherine Stephan Germany: Slightly rise in the IFO business climate index at 91.9 in October Societe Generale Cross Asset Research: "Although fractionally below expectations, the Ifo index essentially supports the view that the return to growth which occurred in Q2 will be maintained in the second half of this year. However, the current level suggests--based on the historical relationship between
433 it and GDP--that output growth will be weak at around 0.5%. In our view, GDP growth in Q3 (of around 1% q/q) will have far exceeded what the Ifo index suggested, but notwithstanding a rising Ifo index, GDP is expected to expand more slowly in Q4 (0.5%)." (09/23/09) News Societe General Cross Asset Research Eco Analysis: German Ifo and PMI German surveys point to reasonable start into Q4 Economist Carsten Brzeski, ING: "German industry is bouncing back. Some sectors have already outweighed half of the crisis-related losses. The latest batch of sentiment indicators shows that the recovery will continue in the fourth quarter, mainly driven by exports and the catching up of industrial production." (via NYT, 11/24/09) News New York Times German Business Morale At 15 - Month High German Business Sentiment Reaches 16-Month High: Is December the Peak?, 18/12/2009 http://www.roubini.com/briefings/52156.php#71661
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REPORTAJE: DINERO & INVERSIONES Objetivo: resucitar el ladrillo La llegada de las SOCIMI en enero ofrece una alternativa a los fondos inmobiliarios PIEDAD OREGUI 20/12/2009 Suena bien pero tiene, como era de esperar, sus pegas. Hay que reconocer que el nombre es algo difícil y que más parece un festival de algo que un instrumento de inversión. Sin embargo, SOCIMI se corresponde con unas siglas completamente financieras: Sociedades Anónimas Cotizadas de Inversión en el Mercado Inmobiliario. Son una suerte de réplica de los ya muy extendidos y con cierta solera en otros mercados -nacieron en los años sesenta del pasado siglo en Estados Unidos- Real Estate Investment Trust (REIT). Las SOCIMI, que no podrán realmente constituirse hasta el próximo mes de enero de 2010, han encontrado su regulación en la Ley 11/2009, de 26 de octubre, publicada un día más tarde en el BOE. Allí se definen como sociedades cuya actividad principal es la inversión, directa o indirecta, en activos inmobiliarios de naturaleza urbana para su alquiler, incluyendo tanto viviendas como locales comerciales, residencias, hoteles, garajes, oficinas...Pueden también tener participaciones en el capital de otras SOCIMI o en el de otras entidades que tengan este mismo objeto social. Nacen teóricamente con el objetivo de proporcionar liquidez a las inversiones inmobiliarias, impulsar el mercado del alquiler en España y, muy especialmente, ofrecer al inversor una rentabilidad estable al obligar a estas empresas a distribuir obligatoriamente sus beneficios entre sus accionistas. Aunque suene parecido, no se trata en absoluto de fondos de inversión inmobiliaria. Son sociedades que deben tener un capital mínimo de 15 millones de euros; invertir al menos el 80% del valor de su activo en bienes inmuebles y, también al menos, lograr que el 80% de sus rentas, excluidas las derivadas de la transmisión de las participaciones y de los bienes inmuebles, procedan del arrendamiento de bienes inmuebles y de los dividendos o participaciones en beneficios procedentes de otras sociedades con el mismo objeto social. Obligatoriamente, si quieren beneficiarse de un régimen fiscal no sólo especial sino muy favorable -su tipo de gravamen en el Impuesto de Sociedades será del 18% y, entre otras cosas, estarán exentas en el 20% las rentas procedentes del arrendamiento de viviendas siempre que más del 50% de su activo sean viviendas-, estas sociedades tendrán que cumplir una serie de requisitos. El más importante para el bolsillo de los inversores es que las SOCIMI están obligadas a distribuir en forma de dividendos entre sus accionistas, al menos, el 90% de los beneficios que no procedan de la transmisión de inmuebles y acciones o participaciones; un mínimo del 50% de las ganancias derivadas de la transmisión de inmuebles y acciones o participaciones y el 100% de los beneficios procedentes de dividendos o participaciones. De esta forma, se pretende garantizar que los inversores obtengan rendimientos anuales relativamente constantes. La ley establece, además, que si quienes cobran estos dividendos, los particulares que tributan en el IRPF, directamente no tendrán que pagar nada por ellos al considerarlos rentas exentas. La ley actual señala que los dividendos -con una exención sobre los primeros 1.500 euros- tributan al 18% (19% hasta 6.000 euros y 21% para cantidades superiores a partir de enero de 2010). Hay
435 quien quiere ver en esta especial tributación un agravio comparativo con otros instrumentos de inversión y todo, dicen, porque el objetivo es beneficiar, a base de crear un producto ad hoc, a las entidades financieras que han visto aumentar de forma más que significativa sus carteras inmobiliarias a las que deben dar salida. El segundo de los requisitos principales es ya también objeto de alguna crítica y también de algún aplauso. Las acciones de las SOCIMI deberán estar admitidas a negociación en un mercado regulado español o en el de cualquier otro Estado miembro de la Unión Europea o del Espacio Económico Europeo de forma ininterrumpida durante todo el periodo impositivo. Se obliga, por tanto, a cotizar en un mercado grande (con los gastos que ello conlleva) y se ha dejado fuera de juego al MAB, el Mercado Alternativo Bursátil, dedicado a empresas de menor capitalización con costes y trámites más sencillos, lo que puede frenar a alguna compañía a crear su SOCIMI particular. La ventaja para quienes apoyan esta decisión no es sólo que se garantiza, en alguna medida, la liquidez diaria de las acciones -teóricamente no puede pasar lo mismo que con los fondos inmobiliarios que, al recibir una gran cantidad de solicitudes de reembolso se ven obligados, al no poder hacerlas frente, a cerrarlos temporalmente- sino que permite una mayor transparencia al estar las acciones cotizadas sujetas a las obligaciones que marcan los organismos reguladores del mercado. Comprar un producto financiero que cotiza en Bolsa tiene sus ventajas y sus riesgos. Se puede ganar dinero y también perder, algo que los posibles futuros inversores de las SOCIMI tienen que tener en cuenta, además de que son productos vinculados al sector inmobiliario, que al menos en España aún está tocado. La historia de los REIT, las sociedades extranjeras con esta misma filosofía, así lo avala. Durante la primera parte de los años 2000, la rentabilidad media (medida en términos de índices generales) de estos activos fue significativamente superior a la obtenida por sus índices bursátiles paralelos. A lo largo de 2007 y 2008 una gran parte de los REIT obtuvieron pérdidas tan o más abultadas que las acciones. En 2009, la situación ha pintado bien y, a falta de muy pocos días para cerrar el año, acumulan ganancias nada desdeñables. PIEDAD OREGUI Objetivo: resucitar el ladrillo La llegada de las SOCIMI en enero ofrece una alternativa a los fondos inmobiliarios 20/12/2009 http://www.elpais.com/articulo/dinero/inversiones/Objetivo/resucitar/ladrillo/elpepueconeg/2009 1220elpnegdin_1/Tes
436 Moody's abaisse à son tour la note de la Grèce [ 22/12/09 - 10H40 - actualisé à 11:55:00 ] L'agence de notation estime que les risques à long terme en Grèce perdurent malgré l'engagement du gouvernement à réduire son déficit public, attendu à 12,2% du PIB cette année. Dans le sillage de Fitch et Standard & Poor's, l'agence de notation Moody's a abaissé la note des obligations de l'Etat grec de A1 à A2 en raison de la dégradation de la situation financière du pays. Paradoxalement, le taux de rendement des obligations grecques sur 10 ans se détendait après l'annonce de Moody's, à 5,734% en milieu de matinée contre 5,940% hier en fin d'après-midi. Explication : le marché s'attendait en fait à une baisse de la note plus forte que celle finalement annoncée par Moody's, indique à l'AFP Ioannis Sokos, stratégiste obligataire à la BNP Paribas. D'autre part, les commentaires de l'agence sont très "doux" pour la Grèce, précise le stratégiste. De fait, si Moody's explique que les engagements du gouvernement grec à prendre à bras le corps le problème de sa dette colossale n'éliminent pas totalement les risques à long terme pour le pays, l'agence, qui avait placé la Grèce sous surveillance négative en octobre, écarte en revanche tout risque de manque de liquidité à court terme. La notation financière vise à estimer le risque de défaut d'un emprunteur. Une dégradation de cette note oblige l'emprunteur concerné à offrir des taux d'intérêt plus élevés lorsqu'il émet un nouvel emprunt. En d'autres termes, la Grèce devra payer plus cher pour financer son déficit budgétaire. Dans l'attente de l'annonce de Moody's, le rendement de l'emprunt grec flirtait hier avec le seuil de 6%, qu'il n'a pas dépassé depuis mars, tandis que la prime de risque du pays - mesurée par l'écart avec le taux allemand -atteignait 2,75 %. Les économistes estiment que le déficit budgétaire s'élèvera à 12,2% du PIB cette année et à 12,3% en 2010, tandis que l'endettement devrait atteindre 113% en 2009 et 123% lors du prochain exercice. Le gouvernement de Georges Papandréou s'est fixé pour objectif une réduction du déficit public à environ 4% du PIB en 2010. Le ministre des Finances, Georges Papakonstantinou, martèle que la Grèce ne fera pas faillite et ne cherchera pas à être renflouée par d'autres membres de la zone euro. La Banque centrale européenne (BCE) a d'ailleurs fait savoir hier qu'elle n'avait "aucune intention" de venir au secours de la Grèce, qui devrait "pouvoir remplir elle-même ses promesses" d'assainir ses finances. Les traités européens interdisent aux banques centrales et à la BCE d'accorder des crédits aux Etats membres. Mais la communauté financière reste sceptique sur la capacité du gouvernement à résorber le déficit public. Les mesures annoncées ne semblent pas à la hauteur. Exemple avec le gel des salaires : Marko Mrsnik, qui supervise les travaux de l'agence de notation Standard & Poor's (S&P) sur la Grèce, estime que "cette mesure, qui ne concerne que les fonctionnaires gagnant plus de 2.000 euros par mois, aura, en fait, un impact très limité". Un autre écueil menace le gouvernement, politique celui-là : la rue. Quelque 4.000 manifestants se sont réunis, le 17 décembre, à Athènes, pour le prévenir qu'ils refusaient de faire les frais des mesures de restrictions budgétaires qui se profilent. Des syndicalistes d'extrême gauche mais aussi des personnels de l'éducation ou des grands médias nationaux se sont rassemblés, scandant des slogans tels que " Georges, n'oublie pas qui sont tes alliés ". Ils craignent de voir le Premier ministre Georges Papandréou, socialiste, opérer un virage à droite, afin de donner aux marchés des gages d'orthodoxie financière. http://www.lesechos.fr/info/inter/300399223-moody-s-abaisse-a-son-tour-la-note-de-la-grece.htm
437 Allemagne : nouveau coup de blues des consommateurs [ 22/12/09 - 08H53 - actualisé à 08:53:00 ] AFP\- 220810 DEC 09 Pour le troisième mois d'affilée, le baromètre de l'institut GFK a baissé, ce qui augure d'une stagnation des dépenses de consommation l'an prochain. Le moral des consommateurs allemands a de nouveau accusé un repli, le troisième d'affilée, selon la dernière étude mensuelle publiée par l'institut GfK. Son baromètre, établi à partir d'un échantillon représentatif de quelque 2.000 particuliers, a baissé à 3,3 points pour janvier, après un indice révisé en légère baisse de 3,6 points le mois précédent. Ce nouveau coup de froid s'explique par un recul des intentions d'achat, lui-même provoqué par la perspective d'une montée des prix de l'énergie, explique l'institut. Les deux autres composantes de l'indice ont en revanche marqué des points. Les attentes de revenus se sont nettement améliorées grâce aux espoirs d'une détérioration moins sévère qu'anticipé du marché de l'emploi et au paquet d'allégement fiscal décidé par le gouvernement, qui devrait soulager les familles. Les attentes pour l'économie ont de leur côté légèrement progressé, les consommateurs s'étant contrairement au mois dernier laissé convaincre que la croissance serait bien au rendez-vous l'an prochain, même si elle s'annonce modérée. Alors qu'au plus fort de la crise, la consommation avait soutenu la première économie européenne, il ne faut pas en espérer la moindre aide en 2010, juge l'institut. Après une progression de 0,5% cette année, les dépenses des ménages sont appelées à stagner, laissant exportations et investissements - traditionnels moteurs de la croissance du pays - porter le plus gros de la reprise attendue. Les Echos (source AFP) http://www.lesechos.fr/info/inter/300399217-allemagne-nouveau-coup-de-blues-des-consommateurs.htm
Accès au crédit : l'industrie allemande se plaint de nouvelles restrictions [ 22/12/09 - 11H31 - AFP ] Les entreprises allemandes ont fait état de nouvelles restrictions des conditions de crédit en décembre, qui ont durement affecté le secteur du bâtiment et pourraient entraver la reprise, selon une étude publiée mardi de l'institut de conjoncture Ifo. En décembre, 44,3% des quelque 4.000 firmes interrogées se sont plaintes de restrictions de la part des banques, soit une hausse de 1,4 point de pourcentage comparé au mois précédent. Pour la première fois depuis plus de trois ans, plus de la moitié des entreprises de BTP (contre 47,4% en novembre) ont jugé la politique d'octroi de crédit des banques plus sévère, indique Ifo dans son sondage mensuel. La reprise "pourrait échouer en raison des obstacles au crédit rencontrés par le bâtiment, un des secteurs clés" de la première économie européenne, s'inquiète Ifo. La relance s'annonce déjà modérée l'an prochain, avec une croissance moyenne autour de 1,5% selon plusieurs prévisions d'économistes, après une récession de -5% attendue cette année. Elle reposera exclusivement sur l'industrie et le bâtiment, la consommation privée devrait de son côté au mieux stagner. Les craintes d'une pénurie du crédit généralisée en Allemagne restent vives. Le gouvernement a récemment nommé un médiateur du crédit chargé de régler les litiges entre banques et entreprises, surtout les PME, qui constituent le socle de l'économie allemande et ne peuvent pas recourir aussi facilement que les grands groupes aux marchés pour assurer leur financement. http://www.lesechos.fr/info/inter/afp_00216078-acces-au-credit-l-industrie-allemande-se-plaint-de- nouvelles-restrictions.htm
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Greek Banks: Troubles at Home and Abroad Overview: Stress tests conducted jointly by the Bank of Greece and the IMF suggest that the Greek banking sector has enough buffers to weather the expected slowdown. However, in the event of substantial economic deterioration in the region, bank portfolios could come under increasing pressure. The exposure of Greece’s four largest banks - National Bank of Greece (NBG), EFG Eurobank Ergasias, Alpha Bank and Piraeus Bank - to the deteriorating economies of South East Europe (SEE) raises worries about non-performing loans (NPLs) and a possible erosion of their capital base. Half of the claims in the SEE are denominated in foreign currencies, leaving unhedged borrowers vulnerable to currency swings. Stress tests conducted jointly by the Bank of Greece and the IMF suggest that the banking sector has enough buffers to weather the expected slowdown. However, in the event of substantial economic deterioration in the region, bank portfolios could come under increasing pressure. Moreover, bank shares came under particular pressure in Q4 2009 on fears the Greek government is not doing enough to reign in the spiraling budget deficit and news that the Central Bank of Greece had asked lenders to scale back their reliance on cheap funding from the ECB. Troubles At Home "With Greece’s budget deficit at record levels and the country’s banks exposed to troubles both at home and abroad, doomsayers are predicting that Greek banks will go the way of Iceland’s. Many investors clearly think their gloom is justified. Greek banks’ shares fell by a quarter in the four weeks to December 11 on the Athens stock exchange." (Financial Times, 12/15/09) Analysis Financial Times Patrick Jenkins Greece sees few glimmers of hope Citigroup: "Greece has one of the highest levels of government debt in Europe. This had led to a material spike in bond yields, which impacts earnings (higher funding costs), balance sheets (lower AFS) and stock valuations (higher COEs). We adjust our estimates and TP accordingly." (12/14/09) Analysis Citigroup Global Markets Greek Banks: Home Work Total lending by Greek banks to Eastern Europe is about 55 billion euros (US$70 billion), close to 22% of Greek GDP according to Oxford Analytica. The comparable figure for Austria is around 70%. Analysis Oxford Analytica Greece: Decelerating growth weighs heavily on banks In Q4 2008 and Q1 2009, most banks reported worsening asset quality, mainly from their retail loan books, and all of them expect a further deterioration in 2009 from their SME and corporate books. (Fitch) Analysis FitchRatings (free registration) Cristina Torrella and Christian Kuendig Major Greek Banks Annual Review and Outlook In Fitch's stress tests, the base case scenario shows that losses, should they materialize, would not erode the banks’ tier-one capital. In March 2009, Fitch placed the Long-Term Issuer Default Ratings of the country’s four major banks on negative outlook. The agency quoted risks stemming from slowing business volumes and significantly higher credit costs due to rising asset quality problems amid a deteriorating environment in the banks’ core markets in Greece, and most notably, the SEE. According to the IMF, the banking system appears to have enough buffers to weather the expected slowdown. Systemic risks appear contained and the profits of banks, capital cushions, and stepped-up provisioning should provide enough resources to absorb increased impaired loans. Analysis IMF Greece: 2009 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Greece
439 All four of Greece's biggest banks took part in the in the government's €28 billion (US$39.7 billion) bank support plan to boost liquidity in Greece’s economy News Reuters Greece extends part of bank aid scheme for six months How Exposed? The four largest Greek banks are roughly estimated to have combined market shares of 40% in Macedonia, 35% in Albania, 30% in Bulgaria and 20% in Romania. (Oxford) Analysis Oxford Analytica Greece: Decelerating growth weighs heavily on banks Greek banks' overall exposure remains largely domestic. The share of foreign assets (mainly loans) to group total assets was around 11% at Alpha, 11% at Piraeus, 25% at Eurobank and 30% at NBG. (Fitch) Analysis FitchRatings (free registration) Cristina Torrella and Christian Kuendig Major Greek Banks Annual Review and Outlook NPLs On the Rise? There are no detailed NPL figures as of yet, but the central bank governor reportedly estimated in February that loans in arrears to Greek commercial banks operating in the SEE had now reached 10% of their regional loan books. According to Deutsche Bank estimates, NPL ratios (non-performing loans to total loans) will peak only in H1 2010. NPL ratios will range between 15% and 20% in the SEE, slightly better than in the Baltic countries (15-25%), but sharper than in Central Europe (5-10%). Analysis Deutsche Bank Research Gunter Deuber and Marion Mu?hlberger Eastern Europe: Asset quality deterioration in Eastern Europe to continue until at least mid-2010 Stress Test Results Fitch put the four Greek banks with operations in SEE under four different stress test scenarios, including a non-performing loan ratio of 25% across all countries. Under the base case scenario, none of the four Greek banks would experience an erosion of tier-one capital. Under the other scenarios, the National Bank of Greece would experience a significant deterioration in core capital, but the other three banks would remain relatively unscathed. (See the Fitch report for more details) Analysis FitchRatings (free registration) Cristina Torrella and Christian Kuendig Major Greek Banks Annual Review and Outlook Cutting Funds To Subsidiaries? In January 2009, Greece warned its banks against transferring funds from a €28 billion government support package to their Balkan subsidiaries. News Financial Times Stefan Wagstyl and Kerin Hope Athens cautions banks on transfers to Balkans Oxford: Greek banks, worried by the general economic slowdown and possible foreign exchange risks, have been tightening their loan/deposit ratios and stiffening lending criteria. This has created an adverse climate for banks in the region and contributed to a vicious cycle of decelerating growth and lower profitability. Analysis Oxford Analytica Greece: Decelerating growth weighs heavily on banks http://www.roubini.com/briefings/92162.php#77184
440 TRIBUNA: WOLFGANG MÜNCHAU ¿Cómo terminará la tragedia griega? WOLFGANG MÜNCHAU 20/12/2009 Las tragedias griegas no terminan bien, y ésta tampoco lo hará. El muy anunciado plan de esta semana para la reducción del déficit presentado por George Papandreu, el primer ministro griego, ha sido una gran decepción. Les ha endilgado un 90% a las primas. No tengo nada en contra de un impuesto sobre las primas, pero esto no tiene nada que ver con la situación fiscal griega. También ha decidido recortar el número de directivos de las empresas públicas. Nuevamente, esto puede estar o no justificado, pero no tiene nada que ver con la crisis. Congelar los salarios de un pequeño grupo de funcionarios civiles bien pagados puede ser una cosa justa, o no. Pero no hará mella. Grecia tendrá un déficit presupuestario del 12,6% del producto interior bruto este año. La cifra real probablemente será mayor, porque el cálculo oficial se basa en algunos supuestos presupuestarios optimistas. Lo más seguro es que vayamos camino de un porcentaje cercano al 14. El organismo de clasificación Fitch ha calculado que, con las políticas actuales (y eso incluye el presupuesto de 2010 del Gobierno actual), Grecia va camino de una deuda como porcentaje del PIB del 130. Así que, a menos que Papandreu haga algo más radical que gravar las primas, hay muchísimas probabilidades de que el país experimente graves dificultades financieras. La intensa actividad en el mercado de los seguros en caso de incumplimiento -instrumentos financieros que aseguran frente al impago de alguna garantía subyacente- es señal de que los inversores están apostando por el impago. A medida que suban los precios de los seguros por impago griegos subirán los tipos de interés que el Gobierno de este país tendrá que pagar para financiar sus nuevas deudas. El impago puede convertirse rápidamente en una profecía que acaba haciéndose realidad. Ahora hay buenos argumentos en favor de ilegalizar esas apuestas. Soy receptivo a la idea de prohibir la comercialización de los seguros por impago para los que no hay garantías subyacentes. Pero mientras este régimen persista, Grecia se enfrenta a un peligro claro y presente. Para luchar contra la amenaza de la insolvencia del Estado, Grecia tendrá que adoptar tres estrategias paralelas. La primera y más importante es un recorte significativo del gasto público. Dentro de esa categoría, las dos medidas más importantes son un recorte (o como mínimo, una congelación nominal) de los costes salariales en el sector público, y una reforma de las pensiones. Grecia es el país con el sistema de pensiones menos sostenible de la Organización para la Cooperación y el Desarrollo Económico (OCDE). Sin esos recortes será difícil evitar la quiebra. La segunda prioridad debería ser la de ampliar la base imponible. Papandreu ha hablado de ello. Esto significaría que habría que pedir a 600.000 empresas cuyos propietarios declaran ingresos imponibles menores que los de sus empleados que aportasen un poco más a la sociedad. Y sí, hay mucha corrupción y evasión de impuestos, pero también es verdad que nunca es buena idea incluir los esperados ingresos de una campaña política contra el crimen en un plan presupuestario previsor. Es mejor tratarlos como una ganancia inesperada, si es que la situación mejora. La tercera prioridad es estimular el crecimiento mediante las reformas estructurales. Los buenos planes de reducción del déficit dependen tanto de los ahorros como de las medidas para estimular el crecimiento futuro. Naturalmente, la relación déficit/PIB sólo puede reducirse matemáticamente de dos maneras: bien con un déficit menor, o bien con un PIB mayor. Es más,
441 si el PIB aumenta, el Gobierno recibe más ingresos procedentes de los impuestos, los cuales reducirían aún más el déficit. Así que esto puede ser un círculo virtuoso. Papandreu ha dicho que quiere impulsar un diálogo sobre la apertura de las profesiones a una mayor competencia. Ésta es una buena idea, pero quiere hacerlo a través de los agentes sociales, lo cual significa que esas reformas sin duda se retrasarán, diluirán y bloquearán. Si Papandreu quiere impresionar a los inversores, los organismos de calificación y sus socios europeos, como mínimo tiene que presentar un plan probado para aumentar la posible producción. Grecia no está en situación de darse el lujo de optar entre esas tres estrategias, y recoger sólo los frutos políticamente aceptables. Tiene que poner en práctica las tres, en su totalidad. ¿Y qué va a pasar a continuación? Una posibilidad es que los mercados fuercen la situación y desencadenen un incumplimiento de pago por parte de Grecia. Otra es que presenciemos un juego de ping-pong institucional en el que Grecia presenta un plan para la reducción del déficit en enero, la Comisión Europea lo rechaza por ser insuficiente y se termina con un proceso de sanción en virtud del pacto de estabilidad y crecimiento. De una forma u otra, llegaremos a un punto en el que Grecia no estará en condiciones de financiar su desorbitado agujero presupuestario. Llegados a ese punto, el resto de la zona euro se verá forzado a echar un cable. Lo que no está claro es qué pasará entonces. ¿Pondremos, o debemos poner condiciones? ¿Cómo lo controlamos? ¿No desencadenará esto un peligro moral en otros lugares, puesto que otros países podrían sacar la conclusión de que a uno siempre se le rescata, haga lo que haga? Estamos en un buen lío, como solían decir el Gordo y el Flaco. - Traducción de News Clips. WOLFGANG MÜNCHAU¿Cómo terminará la tragedia griega? 20/12/2009 http://www.elpais.com/articulo/economia/global/terminara/tragedia/griega/elpepueconeg/200912 20elpnegeco_7/Tes
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ENTREVISTA: GIORGIOS PAPACONSTANTINU Ministro de Finanzas de Grecia "No hay plan B, Grecia tiene que salir de ésta por sus propios medios" ALICIA GONZÁLEZ - Madrid - 20/12/2009 Los inversores de medio mundo tienen su mirada puesta en Grecia y en su ministro de Finanzas. Giorgios Papaconstantinu (Atenas, 1961) acaba de estar de gira por las principales plazas financieras europeas para intentar, sin mucho éxito, calmar a los mercados. La conversación telefónica es fluida pero, consciente de la gravedad de la situación, mide cada una de sus palabras. Pregunta. Con tantos frentes abiertos, ¿cuál es el objetivo más urgente de su Gobierno? Respuesta. No quisiera señalar un único objetivo porque los esfuerzos para reducir el déficit y la deuda tienen que ir de la mano de medidas para sacar a la economía de la recesión. Pero está claro que tenemos un gran problema a corto plazo que es restaurar la credibilidad del país y eso es prioritario para evitar cualquier problema con los mercados de capitales y la financiación. P. ¿Ha hablado con sus colegas del eurogrupo acerca de un posible rescate si las cosas empeoran? R. No. No hemos hablado de un rescate. No hay plan B, la república helena saldrá de esta situación por sus propios medios y por sus propias decisiones. La peor señal que podríamos enviar en este momento es que estamos buscando algún tipo de ayuda. No es así. Vamos a hacer lo que toca y trabajar por cumplir las reglas de la eurozona. Punto y aparte. P. La credibilidad que menciona pasa por unas estadísticas fiables pero no es la primera vez que Grecia aborda este problema... R. En realidad, es la primera vez que un Gobierno griego aborda este tema. La Comisión Europea ha venido pidiendo una reforma en los últimos cinco años y el anterior Gobierno nunca la hizo. Nosotros hemos enviado una ley al Parlamento a los 15 días de asumir el poder. Pero una agencia de estadísticas independiente no es suficiente. Vamos a presentar una ley en 2010 para cambiar todo el proceso de elaboración presupuestaria y que incluya un mecanismo de doble contabilidad en los organismos públicos, como hay en otros países. P. Los inversores comparan las medidas de su Gobierno con el plan de ajuste de Irlanda, ¿en qué ganan y en qué pierden? R. Pues aquí el clima es mucho más cálido... No en serio. Uno debe tener mucho cuidado a la hora de comparar países. Irlanda tuvo un fuerte y rápido crecimiento, con notables subidas salariales en el sector público y con un sistema bancario expuesto a los activos tóxicos. Grecia tiene problemas distintos, de funcionamiento del sector público, de corrupción, de evasión de impuestos. Así que problemas distintos exigen soluciones distintas. P. Pero el mercado sí parece exigir similares recortes salariales. R. Es verdad, es un tema espinoso que parece centrar la atención de todo el mundo. Somos conscientes de que la factura salarial está creciendo con demasiada rapidez en el sector público y lo estamos abordando. Por un lado, congelando todas las contrataciones para 2010 y a partir de 2011 vamos a establecer un sistema para sustituir sólo una de cada cinco jubilaciones en el sector
443 público. En la parte salarial, hemos congelado los sueldos superiores a los 2.000 euros y recortado un 10% los suplementos salariales. Y éste es un aspecto importante porque en Grecia esos complementos pueden suponer entre un 30% y un 100% de la base salarial. Todo ello se traduce en una rebaja aproximada de los sueldos nominales del 3%. P. ¿Y cree que eso bastará para evitar otra rebaja de rating? R. Es posible que tengamos una rebaja por parte de Moody's [la única agencia que no lo ha hecho todavía]. No lo excluyo. Pero si no tuviéramos el problema de credibilidad que tenemos, el tipo de esfuerzo que estamos haciendo sería considerado muy importante. Un recorte del déficit de cuatro puntos en un año es una corrección muy importante. Una vez que la credibilidad sea evidente, en el primer trimestre de 2010, la prima de riesgo se acortará, la presión se reducirá y la segunda mitad de 2010 será mucho más fácil. P. ¿Le preocupan las dificultades que pueden tener los bancos si la actual calificación crediticia se mantiene y en un año no pueden acceder a la financiación del Banco Central Europeo (BCE)? R. Sí, sin duda. Ése es un tema que nos preocupa mucho. Los bancos griegos tienen una situación saneada, no están afectados por inversiones en activos tóxicos y están bien capitalizados. Al mismo tiempo, han dependido mucho del BCE, al obtener créditos baratos con los bonos del Estado como colaterales. Si a finales de 2010 las reglas del BCE cambian y el rating no ha mejorado, habrá un serio problema. P. ¿Cuándo podremos empezar a ver resultados? R. Hemos anunciado un plan general que ha ido seguido de acciones específicas de forma inmediata, como la reforma fiscal que anuncié ayer [por el viernes]. Eso es lo que vamos a seguir haciendo y esperemos que en el primer trimestre de 2010 el escenario sea muy distinto. P. ¿Teme revueltas sociales o divisiones en el partido [socialista] ante estas medidas? R. Tenemos una mayoría confortable en el Parlamento, un amplio respaldo social y también en el partido. Por supuesto que puede haber distintas opiniones pero el Gobierno habla con una sola voz, la del primer ministro, y ha sido muy claro. Cualquier cambio debe ser socialmente justo y eso nos obliga a reasignar recursos. Por ejemplo, reducimos el gasto militar y gastos corrientes y aumentamos la inversión pública y la inversión en educación. Eso refleja, también, nuestras prioridades sociales. P. Por cierto, ¿cree que las agencias de rating valoran peor a países como Grecia o incluso España y son más condescendientes con EE UU o Reino Unido? R. Mire, no quiero jugar el papel de criticar a las agencias de rating. Tengo mis opiniones. No comparto necesariamente algunos de sus argumentos pero tengo que vivir con ello. Las agencias están ahí y los inversores siguen hasta cierto punto sus valoraciones. Equidad no es una palabra muy útil cuando hablas de estos temas. P. ¿Pensó cuando aceptó ser ministro que iba a ser tan complicado?, ¿merece la pena? R. Pregúnteme dentro de un año... Lo que sí le puedo decir ahora es que sabía que iba a ser una tarea dura pero no imaginaba que el punto de partida iba a ser tan difícil. Alicia González Entrevista: Giorgios Papaconstantinu Ministro de Finanzas de Grecia "No hay plan B, Grecia tiene que salir de ésta por sus propios medios"20/12/2009 http://www.elpais.com/articulo/economia/hay/plan/B/Grecia/tiene/salir/propios/medios/elpepuec o/20091220elpepieco_11/Tes
444 La deuda mete en cintura a Europa Los Gobiernos suben impuestos y reducen gasto público ante el alza del coste del endeudamiento - Sólo Alemania y Francia mantienen los planes de estímulos - Madrid - 20/12/2009 Hasta hace bien poco, el club de valedores del gasto público estaba atestado. La máxima de que sólo un gigantesco esfuerzo coordinado de los Gobiernos evitó que la Gran Recesión fuera a más ha prendido. El acuerdo era mantener ese esfuerzo en 2010, pero el crecimiento de la deuda pública y la presión de los mercados lo hacen cada vez más difícil. Hasta hace bien poco, el club de valedores del gasto público estaba atestado. La máxima de que sólo un gigantesco esfuerzo coordinado de los Gobiernos evitó que la Gran Recesión fuera a más ha prendido. El acuerdo era mantener ese esfuerzo en 2010, pero el crecimiento de la deuda pública y la presión de los mercados lo hacen cada vez más difícil. Sobre todo en Europa, donde el alza de impuestos, la rebaja de sueldos a los funcionarios y las privatizaciones ganan terreno. Los Gobiernos de las dos grandes economías mundiales, Estados Unidos y China, sí seguirán pisando el acelerador el próximo año. El país asiático tiene un mullido colchón de reservas para financiar su plan de inversiones públicas, aún más ambicioso en 2010. Y la Administración de Barack Obama, con un déficit cercano ya al 12% del PIB de EE UU, sólo amaga con medidas de contención a partir de 2011. El Ejecutivo japonés, más preocupado por sortear la deflación, tampoco flaquea. Acaba de lanzar su cuarto plan de estímulo fiscal, pese a que la deuda pública supera el 200% del PIB, un caso extremo entre los países avanzados. La enorme propensión al ahorro de los japoneses y el reiterado superávit exterior disipa cualquier duda sobre la solvencia de las finanzas públicas japonesas. El panorama cambia de forma radical cuando se acerca la lupa a los países europeos. Lo que debía ser una transición coordinada hacia el ajuste presupuestario a partir de 2011, se parece cada vez más a una retirada en desbandada. La nueva prioridad es evitar que el coste de la deuda pública se dispare. Y la manera más directa es dar señales a los inversores de que se está dispuesto a meter la tijera en el presupuesto, pese a las consecuencias sociales. "No creo que los Estados europeos vayan a tener problemas para pagar la deuda, pero si el coste sube, eso te dificulta la recuperación a medio plazo", explica José Carlos Díez, economista jefe de Intermoney. En el caso español, el pago de intereses por la deuda pública colocada (más de 20.000 millones) es ya la tercera partida presupuestaria, sólo detrás de las pensiones y las prestaciones por desempleo. "La intervención de los Gobiernos ha servido para poner en marcha la recuperación, ahora la prioridad debe ser sujetar el diferencial de la deuda pública", añade el economista de Intermoney. En el caso europeo, ese diferencial se calcula respecto al rendimiento del bono a 10 años alemán y marca la prima de riesgo que tienen que afrontar los Gobiernos para colocar sus títulos. "La deuda pública, al ser un activo de refugio para los inversores durante la crisis financiera, ha tenido un año de gracia y ha permitido a los Gobiernos colocaciones masivas a costes bajos, pero eso no va a seguir así, los inversores discriminarán cada vez más", advierte Marian Fernández, responsable de estrategia en Inversis.
445 En realidad, los inversores empezaron a diferenciar hace ya casi un año. El primer caso fue el de Islandia, donde las cuentas públicas tuvieron que soportar el coste de nacionalizar los principales bancos y asumir buena parte de sus compromisos de pago. Los países escandinavos, la UE y el FMI apoyaron al Gobierno, que debió iniciar un plan de ajuste, que persigue reducir en un tercio el gasto público y bajar las pensiones para asegurar que podrá hacer frente al pago de intereses. Las exigencias de ajustes presupuestarios empezaron a menudear en los bordes de la zona euro, con especial incidencia en los países bálticos. El Gobierno letón se vio obligado a subir el IVA, bajar un 20% el sueldo de los funcionarios y cerró un centenar de escuelas. Como en Islandia y Letonia, las protestas sociales se sucedieron en Lituania, Estonia o Hungría, donde también se ha reducido el sueldo de los trabajadores públicos o se ha encarecido el coste de matrículas universitarias y consultas médicas. En todos ellos, las movilizaciones dieron pie a vuelcos electorales. Los países de la zona euro han evitado hasta ahora las situaciones de emergencia, que llevan a la petición de créditos multilaterales vinculados a estrictos ajustes presupuestarios. Pero lo que sí empieza a abundar son los movimientos de anticipación, más o menos forzados por el mercado, para evitar una penalización al coste de la deuda. Los casos más extremos vuelven a situarse en la periferia, aunque esta vez dentro de la zona euro. Irlanda, que ha llegado a gastarse más de un 30% del PIB en el rescate de su sector financiero, bajará el sueldo de los funcionarios, aunque insiste en mantener su baja imposición fiscal. El nuevo Gobierno griego, tras reconocer que el déficit alcanzará el 12% este año, sí subirá impuestos y reducirá un 10% el gasto social. Además, pretende abordar la privatización de varias empresas públicas para generar ingresos. Mientras Francia y Alemania mantienen el estímulo fiscal, otros como Bélgica y Reino Unido se suman al alza de impuestos. El Gobierno español, con la ministra Elena Salgado en la tarea, también ha enfilado el camino de la restricción presupuestaria. Además de iniciar una moderada subida de impuestos, las medidas anticrisis apenas llegarán en 2010 a una quinta parte de lo presupuestado este año. Y el Ejecutivo promete insistir en el recorte del gasto en lo queda de legislatura. ALEJANDRO BOLAÑOS La deuda mete en cintura a Europa Los Gobiernos suben impuestos y reducen gasto público ante el alza del coste del endeudamiento - Sólo Alemania y Francia mantienen los planes de estímulos, 20/12/2009 http://www.elpais.com/articulo/economia/deuda/mete/cintura/Europa/elpepueco/20091220elpepi eco_1/Tes
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Los empresarios no creen en una mejora rápida de la economía. El 93% del colectivo es pesimista, según Metroscopia 20/12/2009 EL PAÍS - Madrid - 20/12/2009 Si buena parte de la evolución de la economía depende de las expectativas, España tiene un serio problema. Los empresarios españoles son pesimistas sobre el futuro. Así lo pone de relieve una encuesta de ámbito nacional realizada entre el 24 de noviembre y el 9 de diciembre por Metroscopia para la Fundación José Ortega y Gasset con 500 empresarios de compañías con 10 empleados o más. Si buena parte de la evolución de la economía depende de las expectativas, España tiene un serio problema. Los empresarios españoles son pesimistas sobre el futuro. Así lo pone de relieve una encuesta de ámbito nacional realizada entre el 24 de noviembre y el 9 de diciembre por Metroscopia para la Fundación José Ortega y Gasset con 500 empresarios de compañías con 10 empleados o más. De acuerdo con dicha encuesta, el 93% de los empresarios cree que aún falta tiempo para que la economía española empiece a mejorar definitivamente. Sin embargo, se muestran más confiados en la evolución de la economía mundial: el 61% considera que la economía globalizada está a punto de empezar a mejorar. Así pues, las expectativas de los empresarios españoles son malas o muy malas. Sea cual sea el sector que se analice y con la construcción a la cabeza. En este último sector, el 90% de los empresarios consideran que su empresa ha sufrido mucho o bastante. Lo mismo cree el 87% de los empresarios de la industria y el 78% de los comerciantes. Los más animosos, si se atiende al menor porcentaje, son los empresarios del sector servicios, con un 76%. Los empresarios, subraya María Josefa García Grande, subdirectora del Instituto Universitario de Investigación Ortega y Gasset "coinciden mayoritariamente en señalar que si 'la sequía' de crédito se mantiene, la reactivación económica tardará en llegar: la inversión se verá negativamente afectada y lo mismo ocurrirá con el empleo". Por si fuera poco, "tampoco confían en la revitalización del consumo interno o de la demanda externa". El toque de esperanza está en un detalle: los empresarios tienen mayor confianza en el retorno de la economía mundial a la senda del crecimiento. "Tal vez por ahí nos venga el alivio" asegura García Grande. Porque la mejora de la competitividad será difícil. En opinión de los empresarios, imposible a corto plazo. La probabilidad de que se incrementen parámetros como inversiones, exportaciones, resultados o plantillas se puntúa muy bajo, por debajo de cuatro en una escala de 0 a 10 en todos los casos. Y ¿cómo ve la clase empresarial la gestión política de la crisis? En línea con el pesimismo manifestado: mal. La vicepresidenta segunda y ministra de Economía y Hacienda, Elena Salgado sólo consigue una puntuación media de 2,5 puntos. Y es que 7 de cada 10 empresarios creen que pagan impuestos excesivos y el 39% llega a decir que paga más incluso que sus vecinos europeos. Por supuesto, una amplia mayoría (80%) cree que la anunciada subida de impuestos está injustificada. La crítica a la actuación de los políticos es general. El 76% de los empresarios desaprueban la gestión de Rodríguez Zapatero. Y el mismo porcentaje la gestión del presidente del PP, Mariano Rajoy. http://www.elpais.com/articulo/economia/empresarios/creen/mejora/rapida/economia/elpepueco/ 20091220elpepieco_12/Tes
447 TRIBUNA: coyuntura nacional ÁNGEL LABORDA Precios, salarios y empleo: triángulo descompuesto ÁNGEL LABORDA 20/12/2009 La información más relevante esta semana se ha dado en el ámbito de los precios: el IPC de noviembre y la Encuesta de Costes Laborales del tercer trimestre. La nota más destacada del IPC es que, tras ocho meses en zona negativa, la inflación anual ha pasado a positiva, un 0,3%. Además, la variación respecto a la tasa del mes anterior (-0,7%) ha sido muy importante, mucho más de lo que suelen ser las variaciones de esta tasa entre un mes y otro. Aunque el dato no ha sorprendido a los analistas, al haber coincidido prácticamente con las previsiones, seguro que para el ciudadano no experto sí que plantea unas cuantas preguntas interesantes: ¿a qué se debe este brusco cambio en un solo mes?, ¿se ha acabado el periodo de deflación?, ¿es bueno o malo?, ¿qué cabe esperar para diciembre y para 2010?
El 90% del aumento de la inflación cabe atribuirlo al componente de productos energéticos, cuya tasa ha pasado de -6,6% a 1,9%. Fundamentalmente porque en noviembre de 2008 bajaron fuertemente los precios del petróleo respecto al mes anterior, mientras que ahora están subiendo. El repunte de la inflación de estos productos explica, a su vez, que el diferencial de inflación con la zona euro, que llegó a situarse en junio en casi un punto porcentual a favor de España, se haya reducido ahora a sólo una décima [gráfico superior derecho]. El IPC sin energía y alimentos no elaborados explica la otra décima parte del aumento de la inflación en este mes, al pasar su tasa interanual del 0,1% al 0,2%. Pasar de una inflación negativa durante nueve meses a positiva no debe interpretarse como el fin de los temores deflacionistas, simplemente porque, en sentido estricto, nunca se pudo decir que la economía española estuviera en deflación. Las tasas negativas del IPC se debían a la caída del precio del petróleo, materia prima que no se produce en España y se importa. Pero la inflación
448 subyacente no cayó a zona negativa y ahora parece apuntar moderadamente al alza. Por eso mismo no se puede decir que este cambio sea positivo. Al contrario. En mi opinión hubiera sido mejor para los bolsillos de los españoles que el petróleo se hubiera mantenido en los 40 dólares el barril de finales de 2008 en vez de los 75 dólares de ahora, aunque ello hubiera supuesto prolongar unos cuantos meses más la inflación negativa. Las previsiones para los próximos meses apenas cambian [gráfico superior izquierdo]. Bajo el supuesto de que el precio del petróleo se mantenga aproximadamente en los niveles actuales, la inflación continuará al alza hasta el 0,9% en diciembre y 1,5% en el segundo trimestre de 2010. Ahí, o algo por debajo, se hubiera estabilizado en la segunda mitad de ese año. Ahora bien, en julio subirá el IVA y puede suponer un aumento progresivo de los precios durante tres o cuatro meses hasta completar cinco o seis décimas más de inflación, con lo que el año podría terminar rozando el 2%. Con ello, la media anual de 2009 se habrá situado en -0,3% y la de 2010, en el 1,6%. Medio punto por debajo evolucionará la inflación subyacente, que es la que definitivamente debería usarse para conformar las expectativas inflacionistas. Respecto a los costes laborales, su aumento interanual por trabajador se situó en el tercer trimestre en el 3,3%. A su vez, y dado que las horas trabajadas cayeron un 0,8%, el coste laboral por hora aumentó un 4,2%. Estas subidas son claramente inferiores a las de trimestres anteriores, pero siguen siendo inexplicablemente elevadas en la actual coyuntura. ¿Alguien se ha parado a pensar cuántos trabajadores están ahora en el paro como consecuencia de estas subidas? Alguien dirá que las mismas se están compensando con aumento de la productividad. Pero eso no nos debiera dejar tranquilos. Son los aumentos salariales excesivos los que hacen que las empresas pongan a más trabajadores en la calle, subiendo de esta forma la productividad. El PIB generado por las empresas no financieras está cayendo, según la central de balances del Banco de España, hasta el tercer trimestre un 13,1% y los gastos de personal, un 1,1%, debido a la fuerte destrucción de empleo. Como consecuencia, el resultado ordinario neto se reduce un 21,8%, tras haber caído otro 22,1% en 2008. ¿Cómo van a invertir y crear empleo las empresas? Esperemos que todo eso se tenga en cuenta en las anunciadas reformas laborales.
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Sorpresas positivas Otros datos de interés conocidos en la semana última han sido las cifras de negocios de la industria y los servicios y las entradas de pedidos de la industria, todos ellos de octubre. Las tasas interanuales siguen siendo muy negativas: -15,6% y -7,9% las cifras de negocios a precios corrientes de la industria y los servicios, respectivamente, y -14,6% las entradas de pedidos industriales. Ahora bien, estas tasas se deben a las profundas caídas que registraron estos indicadores un mes sobre el anterior en los últimos meses de 2008 y primera mitad de 2009. Si analizamos las tasas intermensuales de las series corregidas de estacionalidad y calendario laboral, nos llevamos sorpresas, ya que desde hace cuatro o cinco meses dichas tasas son positivas. Así, la media de los tres últimos meses sobre la media de los tres meses anteriores da un crecimiento del 8% y 7,9% para las cifras de negocios de la industria y los servicios, respectivamente, del 13,5% para los pedidos industriales. La recuperación parece estar en marcha en estos dos importantes sectores. ÁNGEL LABORDA Precios, salarios y empleo: triángulo descompuesto, 20/12/2009 http://www.elpais.com/articulo/economia/global/Precios/salarios/empleo/triangulo/descompuesto /elpepueconeg/20091220elpnegeco_4/Tes
450 ANÁLISIS: Empresas & sectores Financiación frente al cambio climático GEORGE SOROS 20/12/2009 Ahora es generalmente aceptado que los países desarrollados tendrán que hacer una contribución financiera significativa para que el mundo en desarrollo pueda encarar el cambio climático. Se necesitan fondos para invertir en nuevas fuentes de energía bajas en carbono, reforestación y protección de las selvas tropicales, cambios en el uso del suelo, así como adaptación y mitigación. No obstante, no existe el mismo consenso en cuanto a la fuente de este financiamiento. Los países desarrollados son reacios a asumir compromisos financieros adicionales. Sus deudas nacionales acaban de experimentar un aumento importante, y aún tienen que estimular sus economías internas. Esto influye en sus actitudes. Parece que lograrán improvisar un "fondo de arranque" de 10.000 millones de dólares anuales durante los próximos años pero sus presupuestos nacionales no pueden abarcar más. Es poco probable que esto sea suficiente para los países en desarrollo. Pienso que esta cantidad podría por lo menos duplicarse y garantizarse por un periodo más largo. Los gobiernos de los países desarrollados están partiendo de la idea errónea de que los fondos deben salir de sus presupuestos nacionales. Sin embargo, eso no es así. Ya tienen el dinero. Está guardado sin usar en sus cuentas de reservas en el Fondo Monetario Internacional. Gastarlo no aumentaría el déficit fiscal de ningún país. Lo único que tienen que hacer es disponer del dinero. En septiembre de 2009, el FMI distribuyó a sus miembros 283.000 millones de dólares en Derechos Especiales de Giro (DEG), un instrumento financiero arcano, pero que en esencia constituye divisas adicionales. Estos derechos pueden utilizarse sólo para convertirlos en una de cuatro divisas, tras lo cual empiezan a generar intereses a una tasa combinada de los bonos del tesoro de esas cuatro divisas. En estos momentos, la tasa es inferior al 0,5%. De los 283.000 millones de dólares recientemente distribuidos en DEG, más de 150.000 millones se destinaron a las 15 economías desarrolladas más grandes. Estos DEG estarán en gran parte sin utilizarse en las cuentas de reserva de estos países, que en realidad no necesitan de ninguna reserva adicional. Propongo que los países desarrollados -además de crear un fondo rápido de arranque de 10.000 millones de dólares al año- unan fuerzas y presten 100.000 millones de dólares en DEG a 25 años para crear un fondo ambiental especial para el mundo en desarrollo. El fondo ayudaría a poner en marcha proyectos de silvicultura, agricultura y uso del suelo -áreas que ofrecen un gran potencial para reducir o mitigar las emisiones de carbono, y que podrían producir ganancias sustanciales en los mercados de carbono. Las ganancias que esos fondos podrían generar van mucho más allá del tratamiento de las emisiones de carbono. Las ganancias por los proyectos del uso del suelo, por ejemplo, también podrían incluir el potencial para crear medios de vida rurales más sustentables, producir cosechas agrícolas mayores y más resistentes y generar empleo rural. Ésta es una idea simple y práctica que ya tiene precedentes. El Reino Unido y Francia prestaron 2.000 millones de dólares en DEG cada uno a un fondo especial del FMI para apoyar los préstamos en condiciones favorables a los países más pobres. En ese momento, el FMI asumió la responsabilidad por el capital y los intereses de los DEG. Lo mismo podría hacerse en este caso.
451 También propongo que los Estados miembros acepten usar las reservas en oro del FMI para garantizar el pago de intereses y el reembolso del capital. El FMI posee mucho oro -más de cien millones de onzas- que figura en libros a costo histórico. Por lo tanto, con los actuales precios del mercado, se cotiza a más de 100.000 millones de dólares por encima de su valor contable. Ya se ha decidido utilizarlo en beneficio de los países menos desarrollados. El fondo ambiental propuesto cumpliría este requisito. Esto quiere decir que los países desarrollados que presten DEG no asumirían gastos por concepto de intereses ni responsabilidades por el reembolso. Hay algunos problemas técnicos serios en lo relativo a la compensación de los gastos por intereses con los ingresos por intereses, en particular en Estados Unidos, pero el efecto neto sería neutro. Estas dificultades técnicas ya han obstaculizado intentos anteriores de dar un uso práctico a los DEG, pero no es el caso del fondo ambiental propuesto. Hay tres argumentos poderosos a favor de esta propuesta. Primero, el fondo ambiental podría ser de carácter autofinanciable o incluso rentable; se usaría muy poco oro -si acaso- del FMI. Segundo, los proyectos producirán ganancias sólo si los países desarrollados cooperan en el establecimiento del tipo correcto de mercados de carbono. La creación del fondo ambiental supondría implícitamente un compromiso para ello al poner en riesgo las reservas de oro del FMI. Finalmente, este dinero estaría disponible ahora y ayudaría a poner en marcha proyectos de ahorro de carbono. Por todas estas razones, los países desarrollados deberían aceptar mi propuesta. La cuestión fundamental es que se puede aumentar significativamente el monto disponible para luchar contra el calentamiento global en el mundo en desarrollo utilizando las asignaciones existentes de DEG y garantizando el pago de los intereses con las reservas de oro del FMI. Lo único que hace falta es la voluntad política. El simple hecho de que utilizar los DEG requiere la aprobación del Congreso en Estados Unidos garantiza que nada sucederá si no hay presión pública -incluyendo la presión de los países en desarrollo-. No obstante, podría significar la diferencia entre el éxito y el fracaso en cumbres como la de Copenhague. http://www.elpais.com/articulo/empresas/sectores/Financiacion/frente/cambio/climatico/elpepuec oneg/20091220elpnegemp_11/Tes
452 ENTREVISTA: Empresas & sectores JEAN-PIERRE LAURENT "El coche eléctrico va a cambiar el modelo de negocio" Presidente de Renault España RAMÓN CASAMAYOR 20/12/2009 Lleva 22 años en España y no sólo ha aprendido un correcto uso del castellano, sino a tocar las teclas necesarias como para poner de acuerdo a un importante número de personas -con intereses enfrentados en algún caso- y alcanzar un objetivo tan importante como el de mantener viva una planta de montaje de automóviles. La fabricación actual del Clio y el Modus en Valladolid tenía los días contados. Estaba previsto su cierre entre 2011 y 2012. Sin embargo, a partir de esas fechas saldrá de sus líneas de montaje el primer coche eléctrico que se va a fabricar en España, Twizy, junto a un nuevo modelo de combustión tradicional. Las inversiones son importantes, así como el esfuerzo de los sindicatos y los empleados y, desde luego, el apoyo de las dos Administraciones, central y autonómica. Pregunta. De un tiempo a esta parte se está incrementando considerablemente el apoyo público a esta industria. ¿No cree que corre el riesgo de convertirse en algo estructural, con las correspondientes distorsiones del mercado? Respuesta. En este caso, la alternativa era cerrar Valladolid. Estaba decidido. Ni siquiera pensamos en las ayudas públicas, pero después de estudiarlo detenidamente y ver que había otras posibilidades he apostado por ello y hemos trabajado con todas las partes implicadas. Teníamos que ponernos de acuerdo el Gobierno socialista, una comunidad del PP, una empresa que había decidido cerrar la sede, unos sindicatos que no querían bajo ningún concepto revisiones salariales por debajo de la inflación y cada año pedían trabajar menos días y una empresa que necesitaba cambiar todo. Ese hecho de trabajar juntos bien es el diferencial de Renault respecto al sector. Lo llevamos en los genes. Tratamos de estar cerca de los trabajadores, de los clientes, los proveedores... un trato con más corazón, más proximidad, más entusiasmo... P. Han tenido que cruzar compromisos de todo tipo. R. Yo me comprometí inicialmente con el Ministerio de Industria y la Junta de Castilla y León. Hemos trabajado también con los mandos de la fábrica para reducir de forma drástica la estructura, y esto quiero subrayarlo porque no se comenta lo suficiente. Y después nos faltaba alcanzar un convenio de competitividad que ha sido una revolución, pero sin sangre, sin cortar cabezas, trabajando juntos. Creo que hemos marcado un modelo que puede servir a otros sectores y a otras empresas. P. El presidente de su grupo, Carlos Ghosn, y el de la patronal europea ACEA, entre otros, auguraban recientemente la desaparición de algunas marcas en Europa. ¿Sigue en pie esa amenaza? R. No creo que vayan a desaparecer empresas... Volvo y Saab son buenos ejemplos. No desaparecerán, pero sí creo que a medio plazo cambiarán las cartas. China está intentando entrar en los mercados americano y europeo, y lo hará de una manera u otra. No les interesa producir directamente en Europa, pero sí comprar una marca y comprometerse a no cerrar una fábrica. P. Se eternizará entonces el exceso de producción instalado... R. Ése es, efectivamente, el problema. De momento, en Europa y América del Norte, y puede que dentro de 10 años pase lo mismo en China. Europa estaba en 13 millones de automóviles al año y ha bajado a 11. Tres millones de coches son 15 plantas de 200.000 coches, que es la media, por ejemplo, de Valladolid y Palencia. Quince plantas en Europa son 3.000 concesionarios
453 grandes, a 1.000 coches por concesionario. Por lo que si esta caída del mercado es de dos o tres años, puede aguantarse, pero si se tarda cinco en recuperarse, ya es un problema grave. De momento, un competidor acaba de anunciar el cierre de una planta en Brasil, y creo que todas las marcas europeas van a tener que reducir la capacidad. P. ¿Hasta qué punto puede ser un revulsivo y qué consecuencias puede tener la aparición del coche eléctrico en ese panorama? R. Va a cambiar completamente el modelo de negocio. Las relaciones entre el fabricante y el proveedor serán totalmente distintas. De entrada, nos encontramos con que la batería, que es elemento clave, está alquilada. Tiene una vida distinta de la del coche. Después de, por ejemplo, siete años de funcionamiento, puede hacerlo a mitad de rendimiento para almacenar energía, y eso supone todo un nuevo negocio con parques de baterías usadas, de manera que un fabricante de energía eólica la almacene durante la noche y luego un operador tira de ella por la mañana cuando hay más demanda. Un operador comprará las baterías usadas... Y luego está el chatarrero, con otro negocio después de reciclaje. Todo ello requiere servicios, financiación... El segundo elemento importante es que el motor eléctrico es mucho más sencillo que el de combustión interna. Y, de momento, la producción es artesanal. El vehículo eléctrico no va a tener un volumen importante al principio, por lo que interesará fabricar de forma mancomunada. En ese sentido, la alianza Renault-Nissan va a invertir en Reino Unido, Francia y Portugal en plantas de baterías que también venderemos a otras marcas. Y lo mismo con el grupo propulsor. También estamos trabajando varias marcas para tener el mismo enchufe. La mejor manera de repartir riesgos es ampliar las cooperaciones, y eso supone que las cartas se van a redistribuir de otra manera. P. De momento, no hay economías de escala... R. Todavía no, y dependerá de cómo se conforme el tejido del proveedor. Luego, la carrocería será también otro negocio totalmente distinto del actual. Puede haber un operador fuerte con motores y baterías a nivel mundial como nosotros, o General Motors, o el grupo Volkswagen, pero también se puede pensar en unas escuderías que hacen el chasis, y otras, el motor... La evolución que tenemos por delante es bastante interesante y puede cambiar totalmente el panorama. P. Parece que el Gobierno español está decidido a no perder este tren tecnológico. ¿Qué posibilidades tiene habida cuenta de que los centros de decisión siguen fuera? R. En España se ha avanzado bastante y va a ser clave la presidencia durante el primer semestre de 2010, que intentará poner en marcha un programa global... Hay ya un calendario preparado con tres reuniones en marzo, abril y mayo, y ese mes la Comisión anunciará su plan global y España debe tenerlo cerrado antes, por lo que estoy convencido que aquí se alcanzará en marzo. P. ¿Quién va a pagar todo ese proceso de adaptación? R. Todos. Nosotros ya hemos invertido mucho, las eléctricas, las compañías de infraestructuras..., y el Gobierno apoyará la compra con cifras semejantes al resto de los países europeos entre 5.000 y 6.000 euros. Y sobre todo los ayuntamientos, permitiendo que los coches eléctricos entren en zonas prohibidas al resto, aparcamiento gratuito, postes de recarga... Desde la alianza Renault-Nissan tenemos un objetivo claro, que es poner la movilidad sostenible al alcance de todos y lo más rápidamente posible. Y ése será uno de los eslóganes de Renault. Hoy ya te puedes comprar un coche eléctrico, pero cuestan más de 40.000 euros. Nosotros pretendemos que tengan el mismo precio que los diésel. - http://www.elpais.com/articulo/empresas/sectores/coche/electrico/va/cambiar/modelo/negocio/el pepueconeg/20091220elpnegemp_5/Tes
454 ANÁLISIS: Empresas & sectores ¿Se deberían pagar impuestos por consumir productos financieros? CARLOS ARENILLAS 20/12/2009 El debate sobre si debe ponerse un impuesto a las transacciones financieras está en la agenda internacional. Desde que Keynes lo propuso durante la Gran Depresión y posteriormente el premio Nobel de Economía James Tobin rescató la idea en la década de los setenta del siglo pasado, nunca se había planteado esta idea en la agenda política internacional con tanta fuerza como ahora. Lo que muchos políticos y economistas plantean ahora es que ha llegado el momento de tasar todos los valores financieros que se negocian en los mercados, sean estos instrumentos de capital, de deuda, divisas o los múltiples derivados de todos ellos. El FMI, por encargo de algunos miembros del G-20, está estudiando una tasa de este tipo, entre otras alternativas, con el objetivo de financiar las deudas generadas por la crisis del sector financiero y para mejorar la arquitectura financiera global. Un sistema financiero demasiado grande, hiperactivo e inestable Han cambiado mucho las cosas desde que Tobin planteó su tasa. El número y tipo de instrumentos, intermediarios y mercados financieros ha aumentado mucho en los últimos 20 años, convirtiendo los mercados en algo muy complejo. Estos mercados complejos y globalizados están en el origen de la crisis actual. El coste de salvar el sistema financiero, rediseñarlo y evitar que la economía se precipitara en una depresión está siendo muy elevado, tanto en dinero como en esfuerzo público. Una comprensible indignación se ha extendido en los ciudadanos de todo el globo, que han visto cómo las tasas de desempleo se disparaban y los niveles de deuda pública aumentaban a ritmos nunca vistos, a excepción de los periodos de las dos guerras mundiales. Desde mediados de 1980, el sector financiero empezó a expandirse de una manera que desafía el sentido común. La relación entre activos financieros y PIB de las economías avanzadas pasó de representar poco más del 50% del PIB en 1980 al 350% en 2006. En EE UU, como en muchos países desarrollados, los beneficios de la industria financiera pasaron del 10% del total de los beneficios en la renta nacional en la década de 1950 al 22% en la de 1980 y a un increíble 34% en 2005. Y el volumen de las transacciones financieras mundiales en 2007 llegó a ser 73 veces el PIB nominal mundial, cuando en 1990 era de 15 veces. En definitiva, una hipertrofia e hiperactividad financiera que poco aporta a la sociedad y sí puede generar episodios de inestabilidad financiera de consecuencias severas para el crecimiento económico y el empleo, como hemos comprobado en los últimos años. ¿Cuáles son los argumentos a favor y en contra de un impuesto sobre las transacciones financieras? A favor de un impuesto sobre las transacciones financieras se han pronunciado prestigiosos economistas y relevantes figuras de la política y de la supervisión financiera de Alemania, Reino Unido, China, EE UU o Francia. En contra también hay voces, como la del secretario del Tesoro de EE UU, Timothy Geithner. De forma muy sintética podemos destacar los siguientes argumentos a favor: - Existe una excesiva actividad en los mercados de activos financieros porque predomina la especulación a corto plazo. Las sobrerreacciones, al alza o a la baja, de los precios de los diversos activos denotan una "preeminencia de la especulación sobre la actividad real
455 empresarial" -en palabras de Keynes en 1936- y afectan al crecimiento económico y al empleo. Los movimientos bruscos y continuos generados por la especulación a corto plazo alejan en exceso y de una forma volátil los precios de sus niveles fundamentales de equilibrio. - Un impuesto sobre las transacciones financieras (ITF) uniforme aumentaría los costes de las transacciones especulativas tanto más cuanto más a corto plazo sean éstas o más apalancadas estén. Así, un ITF tendría un efecto estabilizador sobre los precios de los activos financieros y mejoraría el crecimiento económico y el empleo. - Un ITF compensaría la distorsión causada por el hecho de que los servicios financieros están exentos del IVA. Además, proporcionaría a los Gobiernos y a las autoridades multilaterales unos ingresos considerables que podrían ser utilizados para paliar los desequilibrios fiscales y/o para financiar importantes objetivos sociales y de política económica a nivel global. Los argumentos en contra podríamos resumirlos así: - El elevado volumen negociado en los mercados financieros no es más que la liquidez necesaria para que los procesos de descubrimiento y fijación de precios funcionen suavemente y los precios de los activos financieros se muevan en torno a su precio de equilibrio fundamental. - Un ITF incrementaría los costes de transacción y reduciría la liquidez, lo que provocaría un aumento de la volatilidad a corto plazo de los precios de los activos financieros. - Un ITF sería difícil de gestionar, y los participantes en los mercados financieros encontrarían formas de evadirla. Los argumentos a favor y en contra derivan de dos interpretaciones muy diferentes del concepto de eficiencia de los mercados, muy dañado a raíz de la crisis. ¿Cómo podría ser la tasa y cuánto se podría recaudar? La clave del éxito de la tasa depende de su diseño. El objetivo de un ITF es doble: reducir la hiperactividad e hipertrofia de los mercados financieros y recaudar fondos. Definir a quién afecta la tasa (sujeto pasivo), qué se grava (hecho imponible) y quién recauda es clave. Además, habría que decidir a qué se destinan los fondos recaudados. Para ser eficiente, un ITF tiene que ser global, porque los mercados financieros son globales. Un acuerdo sobre un ITF en el G-20, implicando al FMI, reduciría el riesgo de evasión o arbitraje casi a cero, puesto que los países representados suponen el 90% de las transacciones realizadas en los mercados financieros. Por otro lado, las transacciones financieras dejan siempre un rastro. Se realizan a través de un mercado organizado o de un intermediario financiero, y generalmente se compensan y liquidan en alguna cámara. Es más fácil que haya -que la hay- evasión en el IVA que en un ITF. Las propuestas coinciden en muchos puntos, pero no son iguales, y algunas están aún poco elaboradas. Un ITF debería aplicarse a todas las operaciones financieras con valores, sean estos negociados en mercados organizados o no (OTC). Por valores entiendo acciones, bonos, divisas y todos sus derivados, derivados sobre las materias primas, índices y ETF de todo tipo. Quedan abiertas algunas preguntas, como, por ejemplo: ¿deberían estar sujetas al ITF las operaciones con valores de los bancos centrales con el sistema financiero? El sujeto pasivo serían todos los consumidores finales de productos financieros: hogares, empresas e intermediarios financieros. Una parte de estos últimos es la más activa; en algunos casos parecen adictos compulsivos al consumo de productos financieros. ¿Cuál es la función económica real de comprar y vender mediante sofisticados programas de ordenador el x% de una empresa varias veces a la hora? Los encargados de recaudar el impuesto serían los intermediarios financieros y/o las Bolsas y/o las cámaras de compensación y registro, que después lo abonarían a los diferentes Gobiernos. El
456 reparto de estos ingresos a nivel nacional y/o internacional es uno de los puntos que debe formar parte del diseño de un ITF. El nivel de la tasa que se está planteado está entre el 0,05% y el 0,01% del valor de las transacciones (en lo referente a los derivados se utiliza el valor nocional del activo subyacente). Esto produce cifras muy elevadas. Una tasa del 0,01% es razonable. Se estima que un ITF de este tipo podría suponer el 0,6% del PIB mundial, suponiendo que la aplicación del ITF implique una reducción del 25% en los volúmenes negociados. Para España, estaríamos hablando de cifras del entorno de los 6.000 millones de euros anuales, lo que coincide con el 0,6% del PIB que mencionábamos. Si parece mucho, compárese con el monto total de sueldos, bonos, pensiones y beneficios del sector financiero, no sólo de los bancos. Conclusiones Reconducir el sistema financiero para que sea más estable y eficiente y preste un mejor servicio a la sociedad implica actuar en varios frentes: mejorar los requerimientos de capital de los diversos intermediarios financieros; establecer sistemas de seguro bancario financiados por los que generan riesgo; mejorar la transparencia y solidez de los mercados y de los productos que en ellos se negocian; mejorar la supervisión y gobierno del sistema financiero, y aumentar la educación financiera de hogares y empresas. Todo esto es compatible con un ITF correctamente diseñado y universal que permita reconducir el tamaño y la actividad del sistema financiero global, así como obtener unos fondos que, dado el tamaño del esfuerzo público realizado para rescatar el sistema financiero, asignen parte de los costes a aquel sector que ha contaminado. Dado que un ITF sólo es eficiente si es global, un acuerdo de este tipo debe ser tomado por el G-20 en colaboración con el FMI. La inmensa mayoría de los ciudadanos entendería un acuerdo de este tipo como una magnífica señal de que no es imposible un gobierno global. Y, por qué no decirlo, como consumidores de productos financieros aceptaríamos pagar un pequeño impuesto que, en el caso de los consumidores compulsivos, sería significativo. Si se acertara en el destino de los fondos recaudados, la decisión resultaría excelente. - CARLOS ARENILLAS¿Se deberían pagar impuestos por consumir productos financieros? 20/12/2009 http://www.elpais.com/articulo/empresas/sectores/deberian/pagar/impuestos/consumir/pro ductos/financieros/elpepueconeg/20091220elpnegemp_3/Tes
457 Laboratorio de ideas - Breakinviews.com BONUS BANCARIOS Una respuesta predecible20/12/2009 PETER THAL LARSEN / NICHOLAS PAISNER 20/12/2009 Parece que Alistair Darling ha fracasado. El ministro de Hacienda británico pensaba que su superimpuesto sobre los bonus obligaría a los bancos a reducir las remuneraciones. Pero ni siquiera una tributación punitiva y la ira generalizada de los ciudadanos han disuadido a los bancos de repartir grandes primas en 2009. El impuesto británico parece que no es más que un coste añadido de la actividad. Es deprimente pero predecible. La mayoría de los bancos de inversión tienen fondos mundiales de bonus e intentan igualar las remuneraciones de empleados de nivel similar, con independencia de dónde trabajen. A consecuencia de ello, es difícil reducir las primas sólo en el Reino Unido. Los bancos temen que si hacen lo que Darling quiere, algunos rivales no lo harán. Como resultado, todos van a pagar. Es un resultado humillante para el Gobierno británico, pero tiene su lado positivo. Si los bancos siguen adelante con la idea de abonar bonus, los ingresos fiscales serán mucho más altos de lo esperado. De hecho, sólo el 50% del fondo de primas de Goldman Sachs para el Reino Unido cubriría con creces los 550 millones de libras que la Hacienda pública espera recaudar con el impuesto. La cuestión más acuciante es cómo distribuir los costes del impuesto sobre los bonus. En principio, los bancos deberían deducir realmente el impuesto añadido en el Reino Unido del fondo total para bonus. De ese modo, el coste se divide entre todos sus trabajadores en todo el mundo. El peligro, sin embargo, es que los bancos dejen de reconstruir su capital. Éste sería un resultado verdaderamente perverso. Los reguladores no deben permitir que los bancos usen el impuesto británico como excusa para replantearse sus planes de capitalización. Los inversores, entretanto, también deberían ponerse en guardia. Corren el peligro de soportar la carga, en forma de disminución de dividendos. Los bancos no dudarán en sostener que reducir los bonus los pondrían en desventaja competitiva y que eso perjudicaría en última instancia a los inversores. Pero éstos deberían mantenerse firmes. Los accionistas de los bancos de inversión son históricamente socios menores de los trabajadores. Ahora es un buen momento para empezar a restablecer el equilibrio. - Peter Thal Larsen / Nicholas Paisner Bonus Bancarios Una respuesta predecible20/12/2009 http://www.elpais.com/articulo/primer/plano/respuesta/predecible/elpepueconeg/20091220elpneg lse_8/Tes
458 TRIBUNA: Laboratorio de ideas CARMEN ALCAIDE No pequemos de optimismo CARMEN ALCAIDE 20/12/2009 Al terminar 2009 la economía española se encuentra todavía en el punto bajo del ciclo económico. La crisis dura ya dos años y la duda se centra en si hemos tocado fondo y en cuántos trimestres tardaremos en obtener tasas intertrimestrales positivas, como ya han iniciado otros países desarrollados: EE UU, Japón, Alemania y Francia. El Gobierno se empeña en presentar una versión optimista confiando en una recuperación del crecimiento de la economía en el corto plazo, aunque admite que tardará más en llegar la creación de empleo. Sin embargo, las instituciones y los analistas internacionales y nacionales, no sitúan el inicio de la recuperación española hasta el segundo semestre de 2010. Recientemente la empresa de raiting Stándar and Poors ha rebajado la calificación de la deuda del Estado español señalando el problema de sobreendeudamiento que padecemos. Aunque la OCDE, en su reciente informe de otoño del mes de noviembre, parece haber aceptado las previsiones del Gobierno español del crecimiento del PIB en 2009 (-3,6%) y 2010 (-0,3%), avisa sobre la tardía recuperación respecto a la zona euro que en 2010 presentará crecimiento del +0,9% y recomienda el inicio de reformas estructurales que permitan recuperar el crecimiento dentro de un marco de estabilidad presupuestaria. De momento sus previsiones reflejan la salida de la recesión en España en el último trimestre de 2010 con una tasa interanual del +0,4%. Las opiniones de los analistas integrados en "Consensus Forecast" del mes de noviembre son algo más pesimistas respecto a las previsiones para España en el 2010. La media se sitúa en tasa del -0,5% aunque los más negativos superan el -1%. En conjunto esperan la salida de la crisis en el segundo semestre del 2010 con tasas positivas también entre el tercer y cuarto trimestre. Los últimos resultados de la contabilidad trimestral (CNTR) publicados por el INE son del tercer trimestre de 2009 . En contra de lo ocurrido en Alemania, Francia e Italia que ya han presentado tasas intertrimestrales de crecimiento del PIB positivas en el tercer trimestre, señalando lo que es el primer signo del fin de la recesión, en España dicha tasa continúa siendo negativa por lo que se distancia de los países de la zona euro, reflejando su mayor lentitud en la salida de la crisis. Para evitar equívocos hay que aclarar que todos los países de la zona euro continúen con datos interanuales negativos en 2009 y que España (-4%) no es de los que presentan peores resultados: conjunto de la zona euro (-4,1%) Alemania (-4,8%) e Italia (-2,6%). Pero el PIB español presenta tasas interanuales negativas durante los tres trimestres del año (-3,2,-4,2 y -4,0) y lo único positivo es que en el último trimestre se ha desacelerado la caída y podría significar el suelo de la desaceleración. Los motivos han sido una menor contracción de la demanda nacional, todavía muy negativa (-6,5) donde el consumo y la inversión mejoran levemente sus tasas muy negativas (-5,1 y -16,2) y el único crecimiento positivo se da en el consumo público (+4.9), incidiendo en el aumento del déficit. Los indicadores disponibles para el último trimestre, también avalan la tesis del cambio de tendencia aunque con tasas interanuales todavía muy negativas en lo que puede considerarse tocar fondo en la recesión. Efectivamente, tanto los indicadores de confianza de empresarios y consumidores como los de actividad muestran un cambio de tendencia. Pero los datos del mercado laboral continúan mostrando el aspecto más negativo de esta crisis con pérdida de 1,4 millones de puestos de trabajo y una tasa de paro que se acerca al 18%. Sin embargo, tanto la EPA como la CNTR del tercer trimestre muestran una ralentización en la destrucción de empleo
459 con cierta recuperación de los autónomos y de los temporales probablemente como consecuencia del plan de ayuda del Gobierno a los ayuntamientos. Se aprecian algunos aspectos positivos en los ajustes de desequilibrios como el endeudamiento interior y exterior y la evolución de los precios, aunque falta todavía un mayor ajuste del mercado inmobiliario. Los principales problemas de la economía española siguen siendo la falta de creación de empleo y el elevado endeudamiento de las empresas y las familias. Tanto las instituciones internacionales como los analistas coinciden en que, para restablecer la confianza y alcanzar una senda de crecimiento sostenible, es necesario iniciar reformas especialmente en el mercado laboral y en las administraciones públicas. También sería necesario terminar con los ajustes del sector financiero especialmente las cajas de ahorro. Por otra parte, existen riesgos importantes en este retraso en la salida de la crisis si cambia pronto la política monetaria del BCE, en una situación ya muy crítica de las finanzas públicas que dificultaría más la situación crediticia de las empresas y las familias y la financiación de la deuda pública del Estado y de las Comunidades Autónomas. Del cambio actual de tendencia de los indicadores y de las opiniones de los analistas podría esperarse que en el segundo semestre de 2010 las tasas de variación del PIB español comiencen una senda de recuperación, pero esto no puede confundirse con alcanzar un clima favorable de crecimiento hasta que se mejore la situación del mercado laboral y se recupere la confianza y mientras tanto deben ponerse los medios para después poder alcanzar tasas de crecimiento sostenibles. http://www.elpais.com/articulo/primer/plano/pequemos/optimismo/elpepueconeg/20091220elpne glse_5/Tes
460 TRIBUNA: ANTONI ESPASA Y EMILIANO CARLUCCIO La economía española en 2010 ANTONI ESPASA Y EMILIANO CARLUCCIO 20/12/2009 La economía estadounidense y las principales economías de la zona euro están saliendo de la recesión con crecimientos trimestrales positivos en los últimos dos trimestres, pero siguen destruyendo empleo y no se espera en el periodo 2009-2010 una mejora significativa del mercado laboral en ninguna de estas regiones. La recuperación de la economía española está siendo más lenta y los datos sobre PIB publicados por el INE el pasado 18 de noviembre han confirmado un nuevo descenso intertrimestral del 0,4%, ligeramente más acentuado que el avanzado en las últimas predicciones del Boletín de Inflación y Análisis Macroeconómico (BIAM) de la Universidad Carlos III. Es muy probable que el retraso de la economía española se mantenga durante todo 2010. En una estimación mensual del PIB realizada en el BIAM (véase gráfico adjunto) no se predicen tasas de crecimiento anual positivas hasta el mes de octubre de 2010.
Los riesgos principales en las perspectivas internacionales de crecimiento económico para 2010 son financieros, y si se acabaran plasmando, las perspectivas de moderada recuperación para dicho año se debilitarían notablemente. En la economía española estos riesgos están acompañados por una situación interna especialmente difícil. El nivel de paro es muy elevado, así como el crecimiento del déficit público y su proyección en el futuro inmediato. El déficit es problemático si no se puede financiar o ha de hacerse con tipos de interés elevados. Si esto ocurre, la recuperación económica en España se verá muy comprometida. Las cotizaciones recientes de la deuda pública griega nos enseñan que la protección del euro es efectiva sólo hasta cierto punto. Asimismo, asegurar la deuda española a cinco años es ya más caro que asegurar la deuda italiana y la de cualquier otro país de la zona euro con la excepción de Irlanda y Grecia. Los mercados podrían estar considerando un nivel de incertidumbre importante sobre las perspectivas de
461 crecimiento a medio plazo de la economía española. Conviene también recordar que para que las subidas de impuestos ayuden realmente a contener el déficit se requiere que el nivel de fraude fiscal no aumente con dichas subidas y que no tengan un efecto detractor significativo sobre la demanda. El problema importante en la economía española no es un posible retraso de unos trimestres en salir de la recesión, sino la posibilidad de no lograr un crecimiento sostenible a medio plazo. Esto requiere un cambio en la estructura productiva que genere mayor valor añadido. Para dicho cambio se necesita explotar de forma eficiente las ventajas comparativas existentes en la economía española y una dinámica empresarial que sepa buscar y desarrollar proyectos competitivos y rentables. Esto último requiere que existan las infraestructuras socioeconómicas y físicas pertinentes, la disponibilidad de mano de obra apropiada y el acceso a la financiación de los proyectos. La duda sobre la disponibilidad de mano de obra adecuadamente formada para las nuevas estructuras productivas no está despejada, y éste puede ser un cuello de botella importante para el desarrollo económico futuro, por lo que medidas educativas y sobre la investigación parecen urgentes. En la creación de las infraestructuras físicas necesarias posiblemente se está procediendo de forma razonable. En cuanto a las infraestructuras institucionales, el mercado de trabajo necesita una consideración particular. La creación neta de puestos de trabajo es difícil que se produzca en 2010. Parece, pues, necesario reformar la institución del mercado de trabajo de forma ambiciosa, consensuada y relativamente rápida. Las reformas necesarias para reactivar el mercado de trabajo son inevitablemente el resultado de un proceso de negociación. Sin embargo, hay algunos hechos que no pueden ignorarse en dicho proceso. 1. El deterioro del mercado laboral se ha centrado en la parte meridional de la Península, donde la tasa de paro en algunas provincias se sitúa cerca del 30%. En cambio, en la parte septentrional, las tasas de paro se sitúan en niveles superiores pero no distantes del promedio de la zona euro. Por tanto, es necesario incentivar la movilidad de capitales y mano de obra dentro de España. 2. El global de los trabajadores españoles están asistidos por el subsidio de paro, pero no todos están igualmente protegidos frente a la pérdida del puesto de trabajo. Los asalariados con contrato indefinido, la única categoría que dispone de una protección activa de su puesto de trabajo, sólo representan el 50% de la población activa, porcentaje muy inferior al europeo. La reforma del mercado laboral requiere medidas que favorezcan la creación de empleo y que al mismo tiempo introduzcan hacia el futuro mayor homogeneización de las diferentes categorías de empleo. 3. La mayoría de trabajadores que ha perdido su puesto de trabajo en los últimos dos años ha sido expulsada de sectores sobredimensionados cuya recuperación a medio plazo es muy improbable. Se necesita un gran esfuerzo de recalificación de esta mano de obra que, para tener éxito, no puede ser genérico, sino que tiene que pasar por la creación de incentivos reales y efectivos tanto para los trabajadores como para las empresas. Otro elemento de incertidumbre en la rentabilidad de los proyectos empresariales necesarios para salir de la crisis actual se refiere a la dinámica de precios y salarios. En cuanto a la inflación, que alcanzará un nivel anual medio negativo sobre el 0,3% en 2009, se espera que su tasa anual siga el repunte comenzado en el mes de noviembre y crezca lentamente durante 2010, proyectándose hacia una tasa media anual del 1.7%. En cuanto a los salarios nominales, se ha observado en 2009 una moderación pequeña en comparación con la magnitud de la crisis. En términos reales (ajustando los salarios con un índice de precios como el deflactor del PIB), el crecimiento de los costes laborales tanto por persona como unitarios se encuentra en los máximos de los últimos años, por lo que es necesaria una moderación de precios y salarios que no induzca en el corto plazo subidas apreciables de los salarios reales. En conclusión, se espera que la economía española tenga una recuperación más lenta que el conjunto de la zona euro, pudiendo volver a tasas anuales de crecimiento positivas a finales de 2010. Esta tenue recuperación no será por sí sola garantía de un crecimiento sostenido posterior y posiblemente no será suficiente para generar confianza en los mercados internacionales. Existe un elenco de medidas y de reformas pendientes como las mencionadas anteriormente que no pueden posponerse. Antoni Espasa y Emiliano Carluccio La economía española en 201020/12/2009 http://www.elpais.com/articulo/economia/global/economia/espanola/2010/elpepueconeg/200912 20elpnegeco_2/Tes
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18.12.2009 Angela Merkel has secured a majority for her stimulus
Even though the Christian Democrat/Liberal government has a solid majority in both chambers of the German parliament, there were doubts whether the government could its new stimulus programme through, as some of the centre-right governed Lander threatened to vote against the law, as it puts their own finances under pressure. Der Spiegel has the story that Merkel managed to persuade the local PM to support her. The new stimulus brings relief to families with children, and formed a central part of Merkel’s electoral programme.
Dollar hits three months high The exchange rate is back to $1.43 to the euro. The FT says one of the reasons for yesterday’s rally was that investors were squaring position ahead of the year-end. The Fed’s clear signal that interest rates will remains extremely low for an extremely long time also appeared to have impressed the markets. But the main reasons seems to be that investors covered short positions they had built up against the currency in recent months (which means it is just a technical correction that could quickly reverse again). One factor weighing on the euro are the peripheral downgrades for Greece, Spain etc.
Greece attacks S&P The downgrade of Greek sovereign debt by S&P has really rattled the Greek government, as it interfered so badly with the current PR offensive by the finance ministry. Finance minister George Papaconstantinou said the rating failed to reflect the government’s efforts to step up deficit cutting. The FT said analysts criticise the lack of detail of the package to bring down the deficit from 12.7% this year to 8.7% in 2010. The spread between Greek and German bonds continues to deteriorate. It rose from 250 to 267 points. See the FT for more. Barroso says something sensible According to Les Echos, Jose Manuel Barroso yesterday called on MEPs to re-adjust the EU’s new rules on banking regulation and supervision, after the Commission’s proposals were completely castrated by the Ecofin – to the effect that any micro-level co-ordination is effectively
463 suspended. Paul Krugman on Spain If you think of Paul Krugman as being on the left, you should read this column about Spain. He is advocate a cut in wages. Here is what he writes in his blog. “We — that is, the United States — have a floating exchange rate. Spain, however, being part of the euro zone, does not. Its wages are too high compared with those of other eurozone members, now that the housing boom and massive capital inflows are over. If Spain still had a peseta, I’d say devalue it; since it doesn’t, wages have to give.” He does not advocate a cut in wages for the US, or in general. He is very interesting article on the subject of the cutting the minimum wage would raise US unemployment. His answer is no.
Using inflation to reduce public debt Writing in Vox, Joshua Aizenman and Nancy Marion write about inflation. As the US debt-to- GDP ratio rises towards 100%, policymakers will be tempted to inflate away the debt. They examine that option and suggest that it is not far-fetched. US inflation of 6% for four years would reduce the debt-to-GDP ratio by 20%, a scenario similar to what happened following WWII. (We hear lots of US economists talk in those terms. Ken Rogoff has made a similar argument. To us, the question whether the US would choose this policy option if it were availalbe. The answer is undoubtedly yes. The question is whether the US can generate sufficient inflation.) http://www.eurointelligence.com/article.581+M5ce7c351bfb.0.html#
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Greetings from Roubini Global Economics! (18/12/2009 9:01) Check out all of the RGE Analysis and EconoMonitor contributions that were published this past week on roubini.com and RGE’s Nouriel Roubini's Global EconoMonitor, RGE Analyst’s EconoMonitor, Finance & Markets Monitor, Peterson Institute for International Economics Monitor, Global Macro EconoMonitor, U.S. EconoMonitor, Emerging Markets Monitor, Asia EconoMonitor, Latin America EconoMonitor and Europe EconoMonitor. Here are some of the highlights from RGE Analysis: Nouriel considers whether the recent rise of gold prices is justified by fundamentals. Please see The New Bubble in the Barbarous Relic that is Gold. [Available only to RGE clients] Rachel Ziemba argues that despite the capital injection from Abu Dhabi this week, Dubai Inc. is not out of the woods. Now that immediate debts have been paid off, it may be even more difficult to convince other creditors to take a haircut on the rest of debt coming due. See Abu Dhabi Delivers the Funds: What Next? [Available only to RGE clients] In Ukraine-Russia Winter Gas Showdowns: No Money, No Gas, Jelena Vukotic looks at the possibility of a gas crisis occurring in Europe in 2010. On January 7, Ukraine’s bill to Russia for natural gas comes due, but with its IMF loan frozen and divisive presidential elections looming, Ukraine may not be able to pay it. [Available only to RGE clients] In China Macro: 5Qs for 2010, Adam Wolfe and Rachel Ziemba tackle the most important questions surrounding China’s economy in the coming year, including inflation, non- performing loans and commodity demand. [Available only to RGE clients] On Nouriel Roubini's Global EconoMonitor, Mikka Pineda considers the eerie resemblance in the psychological and economic backdrop of the mid-1930s and 2009— both historic junctures when recovery was thought to have begun— which raises concerns that the U.S. could be on the edge of a double-dip. Read Wednesday Note – Déjà Vu: Will the U.S. Undergo a Reprise of 1937? On the RGE Analyst’s EconoMonitor, Rachel Ziemba considers some of the accomplishments from the climate talks in Copenhagen despite the road blocks and what is still possible as the talks come to a close. See Copenhagen’s Eleventh Hour. On the Finance & Markets Monitor, discussion continues on how to handle financial regulation and reform. Please read: The House Solution to Private Firms that are Too-Big-to-Fail is to Make them Public Government Sponsored Enterprises by Joseph Mason Investors Should Control Financial Regulation by Ann Lee Paul Volcker wants tough constraints on banks and their activities. See: Wake Up, Gentlemen by Simon Johnson We Face a Real Challenge in Dealing with that Feeling that the Crisis is Over by Mark Thoma
465 Also on the Finance & Markets Monitor: Matt Taibbi: Obama’s Big Sellout by Edward Harrison FDIC Bank Failures by Barry Ritholtz On the Global Macro EconoMonitor, as global leaders meet in Copenhagen to discuss climate change, Mark Thoma and Jeffrey Frankel offer their analysis. Please see: Progress on Global Warming is not yet in Evidence in Copenhagen by Jeffrey Frankel Defining Success for Climate Negotiations in Copenhagen by Mark Thoma In Exit Strategy? Eastbound, Roberto Tamborini cautions that the fuel for the next big fire is public debt in the more advanced countries, and he offers a systemic approach to the systemic problem. Also on the Global Macro EconoMonitor: U.S. FDI, Growth, and the Capital Stock Abroad by Rebecca Wilder Drug Money Saved Banks in Global Crisis? By Yves Smith On the U.S. EconoMonitor, Robert Reich and James Kwak discuss health care, while James Hamilton looks at the evolving role of the Fed and Mark Thoma considers progressive taxes. Read: How a Few Private Health Insurers Are on the Way to Controlling Health Care by Robert Reich A Few Words on Health Care Reform and Medicare Buy-In by James Kwak Should the Fed be the Nation’s Bubble Fighter by James Hamilton Should Taxes Be Progressive? by Mark Thoma Also on the U.S. EconoMonitor: Too Big to File Suit by Mark Thoma Obama and the Fat Cat Bankers by Edward Harrison The Final Days of the Great Liquidity by James Picerno Better News on the Jobs Front: Layoffs Down, Temp Hiring Up by Laurel Graefe and Menbere Shiferaw On the Emerging Markets Monitor, China Economist is not surprised by reported bank fraud in China. See China Bank Fraud Shock – Not. On the Asia EconoMonitor, Michael Pettis argues that despite the positive numbers reported by China, nothing has really changed. Real change, according to Pettis, will come through structural change and not through urban migration. See Is Urban Migration the Solution to China’s Problems. In Consequences of Exposure to Violence, Ajay Shah considers India’s sustained peace and the benefits of avoiding exposure to violence. On the Europe EconoMonitor, massive public debt and a bank collapse in Austria is cause for alarm- where is it heading? Please read: That Which the ECB Hath Separated, Let No Man Join Together Again! by Edward Hugh Greece Risks Financial Armageddon while Ireland Makes Cuts by Edward Harrison Greece Should Seek a Precautionary Standby…Now! by Models & Agents How do the Baltic Countries Cope? by Karsten Staehr Italy vs. Greece: The Public Debt Race by Paolo Manasse Bank Collapse in Austria Brings Debt in Eastern Europe Center Stage by Edward Harrison Is Austria set to Join the Honourable Company of PIIGs? by Edward Hugh
466 Econbrowser
Analysis of current economic conditions and policy by James Hamilton
December 13, 2009 Should the Fed be the nation's bubble fighter? That's a question recently taken up by the Wall Street Journal. Here are my thoughts. Before we can discuss this issue, we'd need to agree on what we mean by a "bubble". Here's one definition that a lot of people may have in mind: a bubble describes a condition where the price of a particular asset is higher than it should be based on fundamentals and will eventually come crashing back down. If that's what you believe, then there's a potential profit opportunity from selling the asset short whenever you're sure there's a bubble. And if that's the case, my question for you would be, why don't you do put your money where your mouth is instead of telling the Fed to do it for you? Your answer might be that it could take years for the bubble to pop, and you're not willing to absorb the risk in the interim. Or maybe you don't have the capital to cover the necessary margin requirements while you're shorting the bubble on the way up. Even so, posing the statement in this way should bring a dash of humility to those currently claiming to see a plethora of bubbles that the Fed supposedly needs to fight. What exactly persuades them that they are right and all the other players in the market are wrong? How much of their personal wealth are they staking on the strength of their convictions? And even if you're absolutely sure you know how to identify bubbles, raising interest rates as a response is, as Tim Duy observes, "a rather blunt weapon that kills indiscriminately".
Indexes of house prices in the U.S. and Canada. Source: MacGee (2009). Another concept of a bubble that some people may instead have in mind is one involving the fundamentals themselves, in the form of temporarily and unsustainably low interest rates that are causing the temporarily and unsustainably high asset price. Professor James MacGee of the
467 University of Western Ontario had an interesting discussion (hat tips: Marginal Revolution and reader Robert Bell) of why house prices in the U.S. overshot their long-run values by so much more than those in Canada. MacGee notes that the Bank of Canada, like the U.S. Federal Reserve, had lowered interest rates quickly in 2001-2002, though it did not follow the U.S. quite as far down in 2003-2004.
Interest rate targets for the U.S. Federal Reserve and Bank of Canada. Source: MacGee (2009).
The Canadian path for interest rates is closer to the one that Stanford Professor John Taylor has suggested that the U.S. should have followed.
Source: Taylor (2007).
468 MacGee argues, and I agree, that weak underwriting standards in the U.S. were a bigger problem than the low interest rates. And we share Tim Duy's assessment that better regulation would have been more important than getting the interest rate right. Nevertheless, I am also sympathetic to Taylor's suggestion that the exceptionally low U.S. interest rates in 2003-2004 were pouring fuel on the fire. It is hardly the role of the Fed to be deciding that it knows better than the market what the price of every asset should be. Nevertheless, I think it is necessary for the Fed at least to be forming an opinion about what's driving asset prices as one input into the Fed's decision making. Booming U.S. real estate prices were accurately signaling that there was a problem with both the interest rate target and financial supervision, and it's desperately important to ensure that this same mistake is never repeated. Of course, it's easy enough to say what should have been done in 2004. but the real challenge is figuring out what to do in 2010. Are commodity prices experiencing a bubble right now, and if so, is it something the Fed needs to stop? To me, the evidence suggests that U.S. interest rates are an important factor in recent movements in relative commodity prices. I also believe that further big increases in commodity prices could be destabilizing for the real economy. Nevertheless, other economic objectives take precedence at the moment, and it is too early to start raising rates yet. But it is not too early to remember that there are limits to how much you can help the U.S. economy by keeping interest rates low. I suggest watching commodity prices in the months ahead as one practical guide for acting on that wisdom. Posted by James Hamilton at December 13, 2009 11:37 AM James Hamilton Should the Fed be the nation's bubble fighter? at December 13, 2009 http://www.econbrowser.com/archives/2009/12/should_the_fed_1.html Tim Duy's Fed Watch
02/12/2009 Bubbles and Policy
The Wall Street Journal carried a front page article today detailing changing views at the Federal Reserve regarding the policy treatment of emerging bubbles of speculative activity. Much of the ground has been well tread. Is monetary policy or regulatory policy the best mechanism to address bubbles? I tend to favor the latter category, should we have a regulatory environment that is not essentially captured by those policymakers are supposed to regulate. Interest rate policy is a rather blunt weapon that kills indiscriminately. For instance, I am sympathetic with the view that interest rates were not necessarily too low during the build up of the housing bubble. Indeed, relatively low rates of investment (equipment and software) growth suggests that real rates were actually too high. But capital flowed to housing instead of more productive investment activities because that was the path of least resistance. Policymakers could have chosen to put some grit on that path by, for example, aggressively evaluating lending standards with regards to products such as "Liar's Loans," etc., but chose to follow a hands off approach.
What caught my attention in the article was this passage:
469 Yet the question of whether and how to tackle bubbles before they burst is becoming a growing concern amid fears of new bubbles developing in commodities markets and in emerging economies. Gold prices are up more than 50% in a year's time. China's Shanghai Composite stock index is up more than 75% this year. Stocks in Brazil are up even more. Oil prices have rebounded. They remain far below last year's peaks but a return to those highs could fuel inflation in goods and services more directly than tech stocks or housing did. I think it is important to recognize what bubbles should be the focus of Federal Reserve concerns. After all, the Fed is charged with maintaining price stability and maximum sustainable employment in the United States. Why should the Fed be concerned with housing prices in Hong Kong or stock prices in Brazil and China? Don't those bubbles fall under the responsible of foreign central banks? It seems clear that in such cases, the extent of the Fed's concerns should be limited to the regulatory arena. Are US based banks lending into those bubbles, thereby setting the stage for negative feedback loops? If so, raise capital requirements on that lending, tighten underwriting standards, etc. Just don't derail the US recovery by raising rates to pop a bubble in Brazil. I will admit that oil prices can be a bit more tricky. The gains in oil prices seem silly given ongoing evidence that the world is awash in oil. From the WSJ: Café owner Ken Kennard sees the glut in the global oil market as a potential environmental threat to this sleepy seaside tourist hub. Mr. Kennard is worried about a fleet of oil tankers -- almost 40 in all, each packing hundreds of thousands of barrels of crude and oil-derived products -- that have anchored several miles off the coast of southeast England in recent months. The heavy traffic stems from a near-record excess oil supply, a byproduct of the recession, that is prompting producers to stash oil offshore until they can find customers. The excess supply hasn't stopped oil prices from surging almost 80% this year and padding the pockets of big oil producers like Royal Dutch Shell PLC and the Organization of Petroleum Exporting Countries. To be sure, some of the rise in the price of oil is attributable to the decline in the Dollar, a natural consequence of low US interest rates and an important channel for the transmission of monetary policy. But it is not clear that higher oil prices necessarily yield additional core inflationary pressure given the current institutional arrangements between labor and management. The recent experience has been that individuals were not able to convert high inflation expectations in 2008 into higher wages. Instead, the opposite occurred as consumption sunk and unemployment skyrocketed. All which means the Fed would need to think long and hard about leaning against the oil price increase if that entailed contractionary monetary policies; the costs are potentially high relative to the benefits. Here again, though, regulators need to be carefully evaluating the nature of lending into the oil space. My views on this topic have shifted somewhat over the past two years. In early 2008, I was concerned that the Fed's rush to lower rates was contributing to destructive oil price bubble. But, in retrospect, nations that pegged to the Dollar and thus imported the Fed's easy policy were just as much, if not more, to blame, as those central banks failed to maintain policies appropriate for domestic conditions. In short, the Fed does need to be aware of the full set of consequences of their policy stance. But bubbles abroad should not prevent the Fed from adopting the right policy stance for the US economy. Indeed, many of the bubbles discussed now clearly should not be the responsibility of the Fed. http://economistsview.typepad.com/timduy/2009/12/bubbles-and-policy.html TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00d83451b33869e20120a7019e44970b
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Opinion
December 18, 2009 OP-ED COLUMNIST Pass the Bill By PAUL KRUGMAN A message to progressives: By all means, hang Senator Joe Lieberman in effigy. Declare that you’re disappointed in and/or disgusted with President Obama. Demand a change in Senate rules that, combined with the Republican strategy of total obstructionism, are in the process of making America ungovernable. But meanwhile, pass the health care bill. Yes, the filibuster-imposed need to get votes from “centrist” senators has led to a bill that falls a long way short of ideal. Worse, some of those senators seem motivated largely by a desire to protect the interests of insurance companies — with the possible exception of Mr. Lieberman, who seems motivated by sheer spite. But let’s all take a deep breath, and consider just how much good this bill would do, if passed — and how much better it would be than anything that seemed possible just a few years ago. With all its flaws, the Senate health bill would be the biggest expansion of the social safety net since Medicare, greatly improving the lives of millions. Getting this bill would be much, much better than watching health care reform fail. At its core, the bill would do two things. First, it would prohibit discrimination by insurance companies on the basis of medical condition or history: Americans could no longer be denied health insurance because of a pre-existing condition, or have their insurance canceled when they get sick. Second, the bill would provide substantial financial aid to those who don’t get insurance through their employers, as well as tax breaks for small employers that do provide insurance. All of this would be paid for in large part with the first serious effort ever to rein in rising health care costs. The result would be a huge increase in the availability and affordability of health insurance, with more than 30 million Americans gaining coverage, and premiums for lower-income and lower- middle-income Americans falling dramatically. That’s an immense change from where we were just a few years ago: remember, not long ago the Bush administration and its allies in Congress successfully blocked even a modest expansion of health care for children. Bear in mind also the lessons of history: social insurance programs tend to start out highly imperfect and incomplete, but get better and more comprehensive as the years go by. Thus Social Security originally had huge gaps in coverage — and a majority of African-Americans, in particular, fell through those gaps. But it was improved over time, and it’s now the bedrock of retirement stability for the vast majority of Americans. Look, I understand the anger here: supporting this weakened bill feels like giving in to blackmail — because it is. Or to use an even more accurate metaphor suggested by Ezra Klein of The Washington Post, we’re paying a ransom to hostage-takers. Some of us, including a majority of senators, really, really want to cover the uninsured; but to make that happen we need the votes of
471 a handful of senators who see failure of reform as an acceptable outcome, and demand a steep price for their support. The question, then, is whether to pay the ransom by giving in to the demands of those senators, accepting a flawed bill, or hang tough and let the hostage — that is, health reform — die. Again, history suggests the answer. Whereas flawed social insurance programs have tended to get better over time, the story of health reform suggests that rejecting an imperfect deal in the hope of eventually getting something better is a recipe for getting nothing at all. Not to put too fine a point on it, America would be in much better shape today if Democrats had cut a deal on health care with Richard Nixon, or if Bill Clinton had cut a deal with moderate Republicans back when they still existed. But won’t paying the ransom now encourage more hostage-taking in the future? Maybe. But the next big fight, over the future of the financial system, will be very different. If the usual suspects try to water down financial reform, I say call their bluff: there’s not much to lose, since a merely cosmetic reform, by creating a false sense of security, could well end up being worse than nothing. Beyond that, we need to take on the way the Senate works. The filibuster, and the need for 60 votes to end debate, aren’t in the Constitution. They’re a Senate tradition, and that same tradition said that the threat of filibusters should be used sparingly. Well, Republicans have already trashed the second part of the tradition: look at a list of cloture motions over time, and you’ll see that since the G.O.P. lost control of Congress it has pursued obstructionism on a literally unprecedented scale. So it’s time to revise the rules. But that’s for later. Right now, let’s pass the bill that’s on the table. http://www.nytimes.com/2009/12/18/opinion/18krugman.html?_r=1&th&emc=th
December 17, 2009, 6:08 pm Dining room tables and minimum wages Oy. Rajiv Sethi tries to make sense of the arguments of Bryan Caplan and Tyler Cowen. So I went and looked — and what’s immediately clear is that Caplan, at least, is simply assuming that a rise or fall in nominal wages is equivalent to a rise or fall in real wages. This was exactly Keynes’s starting point: as he said, by taking it for granted that the bargain over nominal wages sets real wages for the economy as a whole, classical economists had “slipt into an illicit assumption.” And look: if you work through my little AD/AS exercise it should be immediately clear that in the case I was concerned with, changes in W lead to equal changes in P, so that real wages don’t change. Simple microeconomic logic doesn’t help here at all. Rajiv Sethi is more polite than I am. Frankly — Barney Frankly — I feel like I’m arguing with a dining room table. December 17, 2009, 2:11 pm Pain in Spain And yet more on wages and employment. In response to this post, one commenter asks why I say that wages need to fall in Spain. The answer lies in point (3):
472 3. What about international competitiveness? We have a floating exchange rate. An across-the-board wage cut should be reflected in an equal rise in the dollar, wiping out any competitive gain. We — that is, the United States — have a floating exchange rate. Spain, however, being part of the euro zone, does not. Its wages are too high compared with those of other eurozone members, now that the housing boom and massive capital inflows are over. If Spain still had a peseta, I’d say devalue it; since it doesn’t, wages have to give. http://krugman.blogs.nytimes.com/2009/12/17/pain-in-spain/
December 16, 2009, 6:06 pm Minimum wages — a few clarifications Some of the commenters on my earlier post have raised question about the analysis. Just a quick response to three of the most common: 1. Why did I go from minimum wages to overall wages? Clearly, a cut in minimum wages –which only apply to some workers — can raise the employment of those workers at the expense of other workers. But the advocates of a cut are claiming that they can raise overall employment. The only way that can happen is if a reduction in average wages raises employment. 2. Doesn’t Economics 101 say that the wage cut has to work? No. It says that a fall in real wages increases employment — but the whole point is that reducing all money wages doesn’t necessarily reduce real wages. And for what it’s worth, the little AS-AD analysis I linked to is Econ 101, at least if you use a good textbook. 3. What about international competitiveness? We have a floating exchange rate. An across-the- board wage cut should be reflected in an equal rise in the dollar, wiping out any competitive gain. Update: Rajiv Sethi: What I cannot understand is why people of considerable intelligence persist in conducting a partial equilibrium Walrasian analysis of the labor market, as if we were dealing with the market for oranges. Please stop it. But they won’t. http://krugman.blogs.nytimes.com/2009/12/16/minimum-wages-a-few-clarifications/
December 16, 2009, 9:04 am Would cutting the minimum wage raise employment? It seems that more and more Serious People (and Fox News) are rallying around the idea that if Obama really wants to create jobs, he should cut the minimum wage. So let me repeat a point I made a number of times back when the usual suspects were declaring that FDR prolonged the Depression by raising wages: the belief that lower wages would raise overall employment rests on a fallacy of composition. In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary. Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.
473 But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that? Well, the textbook argument — illustrated in this little writeup — runs like this: lower wages lead to a lower overall price level. This increases the real money supply, and therefore liquidity. As people try to make use of their excess liquidity, interest rates go down, leading to an overall rise in demand. Even in this case, it’s hard to see the point of cutting wages: you could achieve the same effect, much more easily, simply by having the Fed increase the money supply. But what if we’re in a liquidity trap, with short-run interest rates at zero? Then the Fed can’t achieve anything by increasing the money supply; but by the same token, wage cuts do nothing to increase demand.* Wait, it gets worse. A falling price level raises the real value of debt. To the extent that debtors are more likely to cut spending in such a case than creditors are to increase it — which seems likely — the effect of the wage cuts will actually be a fall in demand. And one more thing: to the extent that people expect further declines in wages and prices, this raises real interest rates, which is even more contractionary. So proposing wage cuts as a solution to unemployment is a totally counterproductive idea. Not that I expect any of this discussion to make any impact on those proposing it. * Somebody is going to ask, what about the real balance effect? Doesn’t a falling price level make people wealthy, by raising the real value of the money they hold. The answer is, consider the magnitudes. Before the crisis, the monetary base — the system’s “outside money” — was around $800 billion. (It’s a much more confusing situation now, so I won’t try to parse the current numbers here). This means that even a 10 percent fall in the price level, which is very hard to achieve, would raise real wealth by only $80 billion. Compare this with the effects of the decline in housing and stock prices, which reduced household wealth by $13 trillion in 2008. The real balance effect is totally trivial. http://krugman.blogs.nytimes.com/2009/12/16/would-cutting-the-minimum-wage-raise- employment/
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Ireland's Economy Exits Recession: GDP Grows 0.3% Q/Q in Q3 More Problems for Ireland as Fitch Downgrades Ireland: Does EMU Membership Hinder Competetiveness?
Overview: Following a decade of strong economic growth, Ireland was among the countries hit hardest by the global economic and financial crisis. Internal imbalances, present in particular in the construction and the financial sectors, increased Ireland's vulnerability to a slowdown in global economic activity. Despite posting positive quarterly growth in Q3 2009, the effects of the recession are expected to be longlasting. Ireland is one of the few eurozone countries in which GDP is expected to contract for three consecutive years. With tax revenues slowing down and the need for extensive banking sector aid, Ireland's government finance deteriorated dramatically, leading to several sovereign credit rating downgrades. ASSOCIATED READINGS Analysis IMF Ireland: 2009 Article IV Consultation - Staff Report; and Public Information Notice on the Executive Board Discussion Analysis FinFacts Ireland ESRI says Irish Economy to shrink 9.2% in 2009 - - sharpest fall in an industrialised country since Great Depression; Employment to plunge by 187,300 Opinions Economist Intelligence Unit Ireland economy: The D-word News Bloomberg Ireland Loses AAA Rating at S&P on Deficit, Slump News AFP Irish economy to shrink 6pc, says central bank governor John Hurley News Financial Times John Murray Brown Ireland scrambles to limit borrowing Analysis Davy Research Rossa White Irish economy to decline again in 2010 Analysis Economist Intelligence Unit Ireland economy: Deeper and deeper News Financial Times Ralph Atkins and John Murray Brown Ireland first in eurozone to hit recession Analysis Global Insight Ireland in Recession as GDP Contracts in Q2 Opinions Financial Times Marc Coleman The Celtic tiger can come roaring back Research IMF Daniel Kanda Spillovers to Ireland Ireland's Economy Exits Recession: GDP Grows 0.3% Q/Q in Q3 On December 17, 2009, the Irish Statistical Office, CSO, announced that the Irish economy grew 0.3% q/q in Q3 2009. While on an annual level Irish GDP was still 7.4% y/y lower in Q3 compared to the same period in 2008, the data release represents one of the first signs that the
475 Irish economy is starting to heal following a severe economic contraction. Ireland was one of the first eurozone countries to slip into recession on the back of falling demand for Irish exports. Despite the positive news, a swift recovery is not in the cards as the Irish government forecasting a further decline in Irish GDP in 2010. Growth Q3 2009, 0.3% q/q (-7.4% y/y); Q2 2009, -0.6% q/q (-7.9% y/y); Q1 2009, -2.1% q/q (-9.1% y/y) Annual growth in 2008: -3.0% European Commission Economic Forecast, November 2009: -7.5% in 2009; -1.5% in 2010 Irish Government Forecast, December 2009: -7.5% in 2009; 1.25% in 2010 OECD Economic Forecast, November 2009: -7.5% in 2009; -2.3% in 2010 IMF Economic Forecast, October 2009: -7.5 in 2009; -2.5% in 2010 Consumer Sentiment KBC Ireland/ESRI Consumer Sentiment Index: In November the index fell from 54.2 to 53.6 in October with respondents still voicing significant concern about the current economic situation and in particular rising unemployment. The survey reached its all time low in July 2008 at 39.6. Private Consumption Q3 2009, -0.7% q/q (-7.3% y/y); Q2 2009, 0.9% q/q (-6.9% y/y); Q1 2009, -8.0% q/q (-5.6% y/y) The volume of retail sales decreased 10% y/y in September 2009. Investment Q3 2009, -9.9% q/q (-35% y/y); Q2 2009, 0.5% q/q (-26.9% y/y); Q1 2009, -12.6% q/q (- 33.4% y/y) Government Q3 2009, -0.9% q/q (-2.0% y/y); Q2 2009, -1.4% q/q (-1.3 y/y); Q1 2009, 0.1% q/q (1.6% y/y) The Irish budget deficit is expected to reach -10.1% of GDP in 2009 and -11.5% in 2010 according to estimates by the European Commission. Analysis European Commission Autumn forecast 2009-2011: EU economy on the road to a gradual recovery International Trade Exports: Q3 2009 -0.6% q/q (-2.6% y/y); Q2 2009, 0.1% q/q (-2.5% y/y); Q1 2009, -0.8% q/q (-3.0 y/y) Imports: Q3 -4.5% q/q (-11.9% y/y); Q2 2009, 0.1% q/q (-7.1% y/y); Q1 2009, -3.1% q/q (- 10.6% y/y) Sovreign Debt Ratings Moody's: In July 2009, Moody's downgraded Ireland's sovereign credit rating to Aa1 with a negative outlook. Moody's downgraded Irish sovereign debt twice in 2009.
476 S&P: In June 2009, S&P lowered Ireland's credit rating to AA with a negative outlook, its second downgrade of Irish sovereign debt in less than one year. Fitch: For the third time in 2009, Fitch lowered Ireland's credit rating in November 2009 to AA- with a negative outlook. Inflation October 2009, CPI: -0.2% m/m; -6.6% y/y September 2009, CPI: -0.4% m/m; -6.5% y/y Unemployment Unemployment stood at 12.5% in November 2009. In Q2 2009, unemployment stood at 11.6%. In November 2008, the unemployment rate reached 8.2% The European Commission expects the annual unemployment to come in at 11.7 in 2009 and 14.0% in 2010. Analysis European Commission Autumn forecast 2009-2011: EU economy on the road to a gradual recovery http://www.roubini.com/briefings/42640.php#92624
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Boletín de Universia-Knowledge@Wharton http://www.wharton.universia.net 16 - 29 Diciembre, 2009 Las bolsas latinoamericanas triunfan en 2009, ¿pero mantendrán su atractivo en 2010? Las economías emergentes se han visto menos afectadas que las desarrolladas por la crisis financiera que ha azotado el planeta desde finales de 2007. Sus bancos estaban menos expuestos a productos como las hipotecas basura o subprime estadounidenses que desataron los problemas, y sus economías se han visto dañadas por la falta de financiación en un grado muy inferior al de las grandes potencias. Esta situación ha provocado que los inversores se fijaran en estos mercados como una posibilidad de lograr ganancias en un momento en el que las pérdidas se agolpaban en sus carteras. Esto ha ocasionado que las bolsas de los países en vías de desarrollo hayan registrado, sobre todo en 2009, unas revalorizaciones importantes y muy por encima de las de las principales potencias mundiales. El índice general de la bolsa de Shangai gana en lo que va de año más de un 78%, según datos de la agencia de comunicación financiera Bloomberg. Al margen de China, la región que más atenciones está acaparando es Latinoamérica. Allí, el índice Merval de la Bolsa de Buenos Aires se ha revalorizado desde enero más de un 100%, el Bovespa brasileño un 80% y el Chile Stock MKT Select un 44%. Estas subidas son muy importantes si se comparan con las que han experimentado los índices de las economías más importantes del mundo. El EUROSTOXX 50, el índice de referencia en la Eurozona, ha ganado en lo que va de año casi un 13%, el FTSE 100 de Londres algo más de un 15%, el Dow Jones de Nueva York un 16% y el Nikkei de Tokio apenas un 11%. ¿Seguirán subiendo los mercados de la región en 2010? Los expertos consultados por Universia Knowledge@Wharton señalan que estos mercados seguirán creciendo el próximo año, pero probablemente no lo harán al mismo ritmo. Temor a una burbuja Las rentabilidades ofrecidas por los mercados emergentes ha llevado a pensar a algunos gurús internacionales de los mercados que se estaba formando una burbuja en estos países. El economista jefe del Fondo Monetario Internacional (FMI), Olivier Blanchard, declaró a finales de noviembre que algunas economías emergentes están en riesgo de unos movimientos de capital incontrolables, de sufrir unas burbujas y la acumulación de reservas. “Estos países tienen tipos de interés más altos que los desarrollados y una presión mayor en los tipos de cambio”, expresó en una entrevista publicada en el periódico francés Le Monde. “Los mercados emergentes, en general, y los Latinoamericanos en particular, están viviendo unas muy fuertes revalorizaciones, pero no sé si en estos momentos se puede hablar de una burbuja”, comenta Juan Carlos Martínez Lázaro profesor de economía del IE Business School. Martínez cree que la fuerte afluencia de capital a algunas de las economías del subcontinente está justificada y sustentada en argumentos sólidos como que la región “está sorteando la crisis mucho mejor que en otras ocasiones” y sus “expectativas de crecimiento son muy grandes”. “Desde el
478 año 2003 han vivido un ciclo económico muy bueno y estable en el que se redujeron los desequilibrios, se aplicaron políticas fiscales realistas y se creó empleo y crecimiento sostenible”, destaca. Para Vitória Saddi, profesora de Economía del Insper (Instituto de Ensino e Pesquisa) en Sao Paulo, Brasil, en cambio, “la burbuja en los mercados emergentes es una realidad, ya que los países desarrollados han reducido sus tasas de intereses a casi cero. Al mismo tiempo que se producía una baja rentabilidad en Estados Unidos e Inglaterra, por ejemplo, se impulsaba la rentabilidad en los países considerados emergentes, inclusive Brasil, Turquía o Chile. Basta ver la evolución vivida en el índice Bovespa, impulsado, sobre todo, por la caída del dólar en el mercado mundial”. Saddi añade que “la burbuja puede, sin embargo, representar sólo un flujo de capital, o sea, el capital está donde está la rentabilidad. El problema es que la burbuja puede explotar, el dólar recuperarse y los efectos de esa explosión pueden ser devastadores para algunos países. No es el caso de Brasil, porque el sector no está en auge única y exclusivamente a causa de la crisis económica mundial, ya que cuenta con una política económica estructurada”. Y es justamente el caso brasileño el que hace pensar a Robert Tornabell, profesor del Departamento de Control y Dirección Financiera de ESADEBusiness School, que lo que está ocurriendo en los mercados emergentes “no es una burbuja”, ya que considera que lo que ha habido es “una gran influencia de la llegada de capitales a estos países”. “La revalorización de índices como el Bovespa no es extraordinaria ya que a Brasil se le puede considerar el milagro económico de este año”, argumenta. En medio de la crisis, Brasil ha sido el primer país de América Latina en dar signos de recuperación- en el segundo trimestre de este año- y se espera que crezca entre un 5% y un 5,5% en 2010, según diversas fuentes. Factores claves para 2010 Con el actual ejercicio prácticamente visto para sentencia, los inversores comienzan a planificar sus estrategias para el año que viene y una de las preguntas que les ronda la mente es si los mercados latinoamericanos serán capaces de mantener el actual ritmo de revalorizaciones, o incluso, simplemente, si serán lo suficientemente atractivos como para apostar por ellos los próximos meses. Dos factores podrían tener las respuestas a estas preguntas, uno de carácter más ocasional y otro más estructural. El elemento circunstancial que ha desatado grandes dudas sobre el futuro de los países emergentes ha sido el problema financiero del Emirato Árabe de Dubai, cuyo holding inmobiliario Dubai World causó una conmoción en los mercados al pedir una moratoria de la deuda, que asciende a unos 60.000 millones de dólares. Esta semana, el emirato de Abu Dhabi salió al rescate de su vecino al pagar 10.000 millones de dólares para evitar su impago. Martínez cree que este hecho podría haber influido en el resto de emergentes, como ocurrió en la crisis financiera asiática de 1997, que comenzó en Tailandia. “Pero esta vez hay que separar lo ocurrido en el Emirato con el resto de emergentes ya que la crisis financiera ha afectado a los sistemas más ricos y los emergentes no se han visto tan tocados”, explica. Para Saddi, el impacto del impago de la deuda de Dubai se habría eliminado. “La versión de que los inversores abandonarán todos los mercados emergentes a causa de un único mercado no me parece factible”, indica. El segundo factor que marcará el devenir de los mercados Latinoamericanos será la evolución del dólar, de sus propias monedas y de las materias primas. En opinión de Saddi, “la caída del dólar está indicando la pérdida de confianza de los inversores. El crecimiento de la deuda norteamericana ya es insostenible. Una situación fiscal más que suficiente para que las agencias de riesgos rebajen el rating de un país. Es natural que la caída del dólar provoque el aumento de las materias primas, ya que cotizan en la moneda norteamericana. Y no hay duda que ese flujo
479 sólo tiende a favorecer a las económicas latinoamericanas, principales exportadores de materia primas”. Martínez argumenta que “las materias primas tienen un recorrido al alza propio gracias a la recuperación industrial mundial, a lo que hay que sumarle la gran especulación que hay en sus mercados -donde los grandes fondos de inversión toman posiciones continuamente- y la depreciación del dólar”. El lado negativo que ve este profesor de IE Business School a la caída del dólar respecto a la moneda de los países latinoamericanos es que “frena las exportaciones a Estados Unidos, su principal socio comercial”, y apuesta por que monedas como el real brasileño “sigan apreciándose contra el billete verde por la llegada de flujos de capital extranjero al área”, aunque ve “difícil” que esas apreciaciones mantengan el ritmo de estos últimos años. Ganancias menores y mayor estabilidad En este contexto, Tornabell espera de cara a los próximos meses que las principales bolsas latinoamericanas sufran una pequeña corrección, para después retomar la línea ascendente. “Seguirán creciendo, pero no a los ritmos actuales, ya que la velocidad de la subida ha sido muy grande”, prevé. Este catedrático apuesta especialmente por el Bovespa. “México me da mucho miedo por sus problemas sociales y porque se están agotando sus recursos petrolíferos. Me inclino por Brasil y no por México”, manifiesta. De hecho, el 14 de diciembre, Standard & Poor’s rebajó el rating de México, como consecuencia de “la caída de la producción de petróleo y las débiles perspectivas de crecimiento”, según el Financial Times. En cuanto a Chile, cree que su mercado de valores es “más estable y menos explosivo que el del país presidido por Felipe Calderón, pero más seguro”. Martínez cree que “las bolsas tenderán a estabilizarse, pero hay que recordar que índices como el Bovespa todavía están por debajo de los máximos que lograron en 2008, aunque no creo que alcancen los ritmos de revalorización de este año”. Al mismo tiempo, espera que el interés por los países latinoamericanos se mantendrá en 2010. “En Brasil hay mucha euforia con las inversiones que se tienen que realizar para los Juegos Olímpicos de 2016, de lo que se pueden aprovechar las empresas locales”, destaca. Pero al margen de este tipo de hechos puntuales, cree que algunas naciones del área, como el propio Brasil o Chile “se han ganado el respeto y el reconocimiento de los inversores internacionales con políticas económicas serias y fiables”. En la misma línea, Saddi también cree que “en algunas economías el interés tiende a permanecer” y también destaca el ejemplo de Brasil, “cuyo atractivo es anterior a la crisis”, según asegura. Desde 2006, año de la reelección de Luiz Inácio Lula da Silva y del fin de la deuda de 15.570 millones de dólares con el FMI –se pagó anticipadamente a finales de 2005-, “el país ha sido reconocido como seguro para los inversores por la estabilidad de su mercado y de su política, pero principalmente por las condiciones macroeconómicas sostenibles. Además, cuenta con un sistema financiero sólido, comparado incluso con el de China. En Brasil, la situación no es coyuntural”, afirma. En cuanto a la evolución de las bolsas de la región, esta profesora del Insper cree que si los bancos centrales de los países europeos y norteamericano asumen el compromiso de mantener cierta estabilidad en los tipos de interés por lo menos hasta el primer trimestre de 2010, las bolsas latinoamericanas mantendrían una estabilidad. “No apuesto por un una alza, pero sí por una estabilidad. Si subieran las tasas, incumpliendo lo esperado, podrá haber una salida ordenada de capital, además de frenar una mayor entrada de capital en los países emergentes”, prevé. http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1822
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Alemania, la locomotora europea, enciende el motor de Europa El pasado 9 de noviembre, la locomotora europea festejaba por todo lo alto el vigésimo aniversario de la caída del muro de Berlín, un momento histórico en Europa, ya que significó “el primer paso para la democracia y la economía de mercado en Europa del Este, y sentar con ello las bases para la ampliación de la Unión Europea (UE)”, tal y como recordaba Financial Times con motivo del aniversario. Coincidiendo con esta celebración, se inició un goteo de buenas noticias económicas, que han devuelto al país germánico su sobrenombre de locomotora europea. En septiembre, por segundo trimestre consecutivo, la economía alemana vertió cifras positivas del crecimiento intertrimestral del PIB (Producto Interior Bruto), lo que consolidaba su salida de la recesión, al tiempo que animaba al resto del Viejo Continente. El aumento del 0,7 de su PIB, unido al incremento del 0,3% francés, ha inyectado gasolina a la eurozona, hasta conseguir sacarla de la recesión, con un aumento medio de su riqueza de 0,4%, según datos de la oficina comunitaria de estadísticas Eurostat. “Es la economía más potente, la que más tira de Europa. Es también la que más compra y, por tanto, gran parte de los países europeos tenemos como principal cliente a Alemania”, dice Rafael Pampillón, profesor de Economía de IE Business School. Y no sólo eso, también es una máquina de producir y vender, dos pilares que han vuelto a fortalecerse. Según datos de la Oficina Federal de Estadísticas del país, las exportaciones alemanas se incrementaron un 2,5% en octubre, respecto a septiembre, y consolidaron su tendencia de crecimiento; mientras que la inflación se ha incrementado un 0,4% en noviembre, el primer dato positivo –señal de que se estaría activando el consumo interno- desde junio, según la misma fuentes. Pero en el país más poblado de la UE, con 82 millones de habitantes, también se mira con lupa la evolución del resto de potencias, ya que necesita de ellos para consolidar sus exportaciones, de ahí la importancia que tiene para Alemania el dato de que la eurozona ha salido de la recesión. Dependencia del modelo exportador Alemania, que cuenta con un enorme abanico de producción industrial con sectores tan destacados como el automóvil, los aparatos de precisión, los equipos electrónicos y las telecomunicaciones, así como los productos químicos y farmacéuticos, “ha basado su recuperación en lo que ellos son fuertes, en las exportaciones”, señala Pampillón. Y ahora, como constatan los datos de los últimos meses, está empezando a recoger los frutos. Federico Steinberg, investigador principal de Economía y Comercio Internacional del Real Instituto Elcano, comenta que el derrumbe del comercio internacional derivado de la crisis económica tuvo un fuerte impacto en la economía germana, que le llevó a cerrar el tercer trimestre de 2008 con una caída del PIB del 2,4%. “Pero ahora que la economía mundial empieza a despertar, y sobre todo por el incipiente tirón de las ventas de los bienes de capital y maquinaria pesada de los emergentes asiáticos, la demanda externa vuelve a tirar fuerte de Alemania”, señala. Del primer dato que respalda sus palabras son los dos trimestres de crecimiento que registra la locomotora europea. El investigador añade que el país está saliendo de la crisis por la vía
481 exportaciones, gracias a una estructura productiva distinta de la de otros países de Europa, que ha permanecido invariable durante la crisis. “Esta estructura está orientada a las exportaciones, porque tienen unos niveles de productividad y competitividad muy altos, que se remontan a los años 90, después de la reunificación, cuando se hicieron unos ajustes estructurales importantes para bajar los costes laborales unitarios y aumentar la competitividad externa de las exportaciones. Y, a pesar de la crisis, el país no cambió las bases de su patrón de crecimiento”. Algo que ahora agradece la economía germana. Aunque este modelo exportador esté dando frutos positivos, un editorial publicado por Financial Times Deutschland, tras el aniversario de la caída del muro, lo tachaba de enfermo y “no sustentable para el futuro”. En el diario se explicaba que, a pesar de las positivas cifras actuales, es demasiado pronto para interpretarlas como una señal de que Alemania ha recuperado su lugar como nación exportadora por excelencia. Sobre todo, después de que China le haya arrebatado el liderazgo mundial en el primer semestre de 2009. “Hasta ahora los números no reflejan si el aumento de la demanda de nuestros productos será constante o sólo es una reacción precipitada por la crisis”, además de sugerir que en lugar de consolidar exclusivamente el sector exportador, deberían hacer esfuerzos para seguir reactivando la demanda y el consumo internos. ¿Es exportable el modelo alemán? La industria automovilística alemana es una de las claves del resurgir germánico. Robert Tornabell, profesor de Finanzas de Esade, destaca “la eficacia de los incentivos introducidos para la compra de coches no contaminantes por parte del Gobierno para el relanzamiento del sector”. Durante 2009, el país ha conseguido mantener activa una de sus principales industrias y compensar la caída de las exportaciones (en torno al 19%) gracias al plan de canje y desguace del Gobierno, consistente en dar 2.500 euros por su viejo modelo a cualquier comprador de un vehículo nuevo o con una antigüedad inferior a doce meses, que cumpla al menos la norma Euro4 (establece un límite a las emisiones contaminantes). Esto ha permitido incrementar un 25% las ventas respecto a 2008, según datos de la Asociación Alemana de la Industria del Automóvil (VDA). Este mismo organismo prevé que, en 2010, las exportaciones se incrementen entre un 1% y un 3%, lo que ayudará a equilibrar las cuentas de importantes fabricantes como Porsche, Volkswagen o Mercedes. Pampillón añade que “ahora mismo estos incentivos están tirando de la economía europea, también de la alemana, que produce coches, pero veremos que este sector tiene un exceso de capacidad de aproximadamente el 20%, por eso hay que achatarrar y reconvertirlo”. En su opinión, al sector del automóvil podría pasarle “algo similar a la industria textil de hace años, cuando los países emergentes empezaron a producir textiles y arruinaron a la industria europea porque dejamos de ser competitivos”. Tornabell señala que este incipiente crecimiento vía exportaciones ha tenido un efecto dominó positivo “sobre la creación de empleo -tres de cada cinco puestos dependen de las exportaciones- , y el consumo interno del país”. Pero quizás el logro más destacable de Alemania haya sido mantener bajo control las tasas de desempleo, del 7,6% en noviembre, según datos de la Agencia Federal de Empleo germana, en comparación con la mayoría de sus socios comerciales como Francia, del 9,1%, o España, del 19,3%, en medio de la crisis. La clave del llamado Kurzarbeit o 'modelo alemán', en el que otros países se están fijando para frenar el paro, es la flexibilidad, que permite la suspensión temporal de los empleos excedentes de una empresa y la reducción de jornada laboral. Este modelo evita despidos al combinar prestaciones por desempleo con jornada reducida para cubrir las horas perdidas de trabajo, además de compensar las cotizaciones sociales de las
482 empresas con una aportación del Estado. El modelo cubre el 60% que dejan de percibir los empleados en las horas no trabajadas (un 67% si tienen hijos) y les permite tener otros trabajos, además de pagar parte de las cotizaciones sociales de la empresa. En España, se está estudiando con detalle el modelo del gigante alemán, dada la rigidez de su sistema laboral y la oposición de sindicatos y Gobierno para acometer una reforma estructural que conllevara un abaratamiento del despido. Los expertos consultados creen que podría aplicarse en territorio español, pero con matices. Steinberg comenta que “si se tiene un shock temporal de la demanda externa, que se va a recuperar, tiene sentido, a fin de no destruir capacidad productiva, repartir el trabajo y aguantar un poco hasta vender lo que se vendía con anterioridad”, tal y como sucede en Alemania. “En España es distinto, porque la crisis va a forzar ciertos cambios en el patrón de crecimiento (hasta ahora muy dependiente del inmobiliario). Por ejemplo, no tiene mucho sentido repartir el trabajo en el sector de la construcción, porque después de la crisis no vamos a seguir con el mismo nivel de producción. En el sector del automóvil se podría hacer, pero en el de la construcción, no. Habría que ir caso por caso”, añade Steinberg. El sistema, señala Tornabell, es ventajoso, porque “permite la formación de los trabajadores, lo que mejora la productividad, y contribuye además a que la mano de obra siga vinculada a la empresa”. El profesor señala que el contrato alemán llegará a España a principios del año próximo, tal y como están sugiriendo los políticos en los medios, pero aún están por discutir los detalles de cómo se trasladará el modelo a España. La vía política La recuperación también viene apoyada por la vía política. En opinión de los expertos, el nuevo Gobierno de coalición de la Unión Cristiano Demócrata de la canciller Angela Merkel y el Partido Liberal de Guido Westernelle, que llegó al Gobierno el pasado mes de septiembre, envía mensajes muy positivos al sector empresarial. “La gente confía en un Gobierno que va a animar la inversión privada y que va ser pro mercado, esto da confianza a los empresarios. La certidumbre en un marco de relaciones institucionales estables va a generar, sin duda, crecimiento económico”, dice Pampillón. Y señala que “aunque ahora los socios de coalición estén en confrontación, porque están intentando resolver los desencuentros lógicos en este tipo de coaliciones en temas como la sanidad, educación, impuestos, etc. esto se pasará, porque es un matrimonio que se quiere y ahora está peleándose”. Pampillón destaca, además, la figura de Ángela Merkel, “una persona tranquila, que genera consenso”, como una de las principales bazas para resolver sus problemas. Tornabell también destaca la figura de la canciller, a la que califica de líder de Europa durante la crisis, en cuanto a iniciativas y coraje. “Fue muy valiente y reaccionó muy bien en los primeros momentos de incertidumbre (acerca del sistema financiero). Ella dijo que el Estado aseguraba el dinero que todos los ciudadanos –no empresas- tuvieran en el banco”, calmando de esa manera los ánimos. Aún así, esta Ejecutiva deberá seguir peleando por salir de la crisis y calmar las voces críticas. Una de ellas procede del Tribunal de Cuentas alemán, que durante la presentación de su reciente informe anual ha criticado la política fiscal y presupuestaria del nuevo Gobierno, además de haberle acusado de carecer de “una estrategia clara que conduzca a una reducción de la deuda”, añadiendo que, en estos momentos, “no hay margen para bajadas de impuestos”. El Gobierno de Merkel ha puesto en marcha una amplia reforma fiscal que persigue aliviar la carga tributaria en unos 24.000 millones de euros anuales a partir de 2011. Desde enero, se aplicarán ayudas inmediatas a las familias, que pretenden aumentar la cantidad desgravable por cada hijo de 6.024 euros a 7.008 euros, así como aumentar el subsidio familiar hasta un máximo de 215 euros. La pretensión del Gobierno es fomentar la demanda interna como instrumento para combatir la
483 crisis. Otro reto que tiene por delante Merkel está relacionado con el déficit público. La agencia de rating Standard & Poor's (S&P) estima que alcanzará el 3% en 2009, después de un presupuesto equilibrado en 2007 y 2008, una cifra favorable en comparación con la de la mayoría de los países con rating 'AAA', donde los aumentos del déficit han sido más pronunciados y podrían persistir durante más tiempo. No obstante, el déficit alemán podría alcanzar su máximo, en torno al 5% del PIB el próximo año, debido a que el desempleo seguirá creciendo (a pesar de que, hasta ahora, el impacto de la recesión ha sido moderado), a la debilidad cíclica de los ingresos fiscales y a una serie de medidas de estímulo fiscal, según la misma firma, que prevé que la carga de la deuda del Gobierno alemán alcanzará un máximo del 80% del PIB en 2011, frente al 66% el año pasado, antes de que tienda de nuevo a la baja. A pesar de estas reflexiones, S&P ha mantenido la calificación crediticia de AAA (sobresaliente) a largo plazo, mientras que a corto le mantiene la nota de A-1+, lo que significa que su capacidad para cumplir con los compromisos financieros es extremadamente fuerte. Porque, aunque la locomotora lleva dos trimestres vertiendo datos positivos, todavía debe recuperarse del duro primer semestre de este año, cuyos malos resultados han llevado al Bundesbank, en la última edición de su informe de perspectivas económicas, a prever una contracción de su economía para todo el año 2009 del 4,9%, aunque, a cambio, estima que el país crecerá un 1,6% en 2010. No obstante, estas cifras pueden terminar quedándose cortas. Al menos, eso es lo que piensa el profesor Tornabell: “Si el comercio mundial sigue ganando fuerza es posible que Alemania cierre el año mucho mejor”, señala. En su opinión, el resto de Europa está esperando que se produzca el efecto locomotora. “Si Alemania se recupera arrastra a Francia, y los dos, a los otros. El Gobierno español espera que ellos (las grandes economías europeas) nos saquen del pozo (la economía española experimentó una contracción intertrimestral del 0,3%), porque nuestros principales clientes, a parte de Reino Unido, son fundamentalmente Alemania y Francia”. Por el momento, sus previsiones se están cumpliendo, tal y como señalan los últimos datos de crecimiento de PIB alemán y de la eurozona. Y concluye con un deseo de cara al próximo año: “¡Que la locomotora nos arrastre pronto!”. http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1823&language=Spanis h
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¿Quiénes son los responsables de la crisis financiera? La crisis financiera global ha estado marcada por una escasa supervisión, una inexistente diligencia debida, una falta de fortaleza moral y una grave carencia de sentido común. En la actualidad, aproximadamente dos años después de la explosión de la burbuja inmobiliaria y el colapso de los mercados bursátiles, posiblemente lo único que quede por hacer es señalar con el dedo a los culpables. “El tema de señalar a los culpables ha estado en la mente de muchas personas”, afirmaba el decano de Wharton, Thomas S. Robertson, al presentar el panel “Responsability and the Financial Crisis of 2008” (“Responsabilidad y la crisis financiera de 2008”). Todos los intentos para determinar quién o qué causó la crisis económica global suelen incluir una larga lista de sospechosos: la Reserva Federal, los reguladores gubernamentales, las agencias de calificación crediticia, la SEC (Securities and Exchange Commission), las entidades que concedieron créditos subprime y también los que los pidieron. Incluso las escuelas de empresa se han visto detrás del dedo acusador. “Independientemente de que tengan alguna responsabilidad o no, tenemos la obligación de responder a la siguiente cuestión: Y después de esto, ¿hacia dónde nos dirigimos?”. Los profesores de Wharton y de la Universidad de Pensilvania que participaron en el panel no dudaron en repartir responsabilidades. Los posibles culpables identificados han incluido desde los desequilibrios globales de capital hasta las obsoletas estructuras reguladoras. Algunos echaban la culpa al sector privado y a la avaricia de Wall Street mientras otros sostenían que en realidad al gobierno no se le había responsabilizado por sus fallos. Tal vez lo único en lo que todos estaban de acuerdo era que no existían soluciones sencillas. La simplificación en exceso de problemas complejos es algo muy peligroso –advertían algunos-, y podría haber contribuido en sí misma a la crisis. Según el profesor de Finanzas de Wharton Franklin Allen, no se han estudiado bien las causas reales de la crisis financiera, que en su opinión tiene su origen en una política monetaria demasiado flexible y en los desequilibrios globales de capital. “El sector público ha hecho un buen trabajo echando la culpa al sector privado”, afirmaba. “Así, existe por ejemplo mucho debate sobre la protección de los consumidores, pero no sobre la Reserva Federal… Apenas se habla de reformar el sistema financiero global”. La causa inmediata de la crisis claramente fue la burbuja inmobiliaria, decía Allen. Desde 1890 a 1996 los precios reales de la vivienda crecieron un 27%, mientras que entre 1996 y 2009 aumentaron un 92%. “Casi el triple. Y ese es el problema”. La cuestión más importante es qué fue lo que causó la burbuja. En opinión de Allen, no se debe echar la culpa a las hipotecas subprime, ya que otros países sin este tipo de hipotecas también padecieron sus propias burbujas inmobiliarias. El problema más bien fue que la Reserva Federal mantuvo los tipos de interés demasiado bajos durante demasiado tiempo y los desequilibrios en los flujos globales de capital permitieron a la gente pedir prestadas grandes cantidades a bajos tipos. “El arbitraje se convirtió en algo muy atractivo para pedir prestado dinero y adquirir casas”, decía Allen. Para explicar los desequilibrios globales, Allen se remontaba a los Acuerdos Bretton Woods de 1944 y la crisis financiera asiática de 1997. Desde que Bretton Woods suavizó los conflictos
485 financieros después de la Segunda Guerra Mundial, el sistema financiero mundial ha estado dominado por Estados Unidos y Europa. En consecuencia, cuando se desencadenó su crisis financiera en 1997, Asia tenía muy poca representación en el Fondo Monetario Internacional. Incapaces de conseguir los préstamos que necesitaban durante la crisis, posteriormente los países asiáticos acumularon 4 billones de dólares en ahorro en forma de divisas extranjeras, dinero que acabó invirtiéndose en deuda estadounidense y contribuyendo al desastre inmobiliario. Estados Unidos ahora es el país que más dinero pide prestado al mundo, señalaba el profesor de Gestión de Wharton Mauro F. Guillén, que también considera los desequilibrios globales de capital como una de las causas de la crisis. Guillén sostenía que la crisis “debería verse en un contexto más amplio, teniendo en cuenta lo que está pasando en el mundo”. Por ejemplo, desde un punto de vista regulador, uno de los factores que contribuyeron a la crisis fue la dura competencia entre los mercados financieros de Londres y Nueva York para relajar sus regulaciones, algo que Guillén denomina “carrera hacia mínimos” en términos reguladores. Londres empezó a competir agresivamente en los 80 para que las firmas financieras volviesen a Inglaterra. Estados Unidos respondió suavizando su regulación financiera en los 90 y revocando en 1999 la Ley Glass-Steagall, una ley que databa de la era de la Gran Depresión y que prohibía a los bancos comerciales realizar actividades propias de la banca de inversión. Pero en Estados Unidos la flexibilización legislativa no incluía reforma alguna de su estructura reguladora, que seguía siendo un potpurrí de agencias heredadas de la Gran Depresión. El resultado fue la “fragmentación reguladora”, explicaba Guillén. “Ninguna agencia disfrutaba de una visión de 360 grados”. El autoseleccionado grupo de Wall Street Larry Zicklin, profesor de Ética Empresarial de la Escuela Stern de la Universidad de Nueva York y miembro senior de Wharton, adoptó un enfoque diferente de la crisis, echando la culpa a Wall Street y al sector privado a partes iguales. “En mi opinión, la avaricia se puso por encima de la diligencia debida”, decía Zicklin, el cual señalaba que los sistemas de incentivos acabaron fuera de control. “Wall Street es un grupo de autoseleccionados. ¿Quién va a Wall Street? La gente que quiere ser rica”. Mientras se pudo ganar dinero en el mercado inmobiliario se permitió el apalancamiento. Las casas se vendían a gente que no podía permitírselas; se suponía que los precios seguirían subiendo. “Lo importante era la remuneración; el riesgo ni se mencionaba”, comentaba Zicklin. “Las grandes firmas como Lehman se olvidaron de quiénes eran y qué tenían que hacer supuestamente”. Tal vez la avaricia haya jugado un papel importante en la crisis, pero centrarse demasiado en las retribuciones de los “codiciosos ejecutivos” simplemente distrae la atención de los temas más serios, sostenía la profesora de Derecho y Ética Empresarial Diana C. Robertson. “¿Tenemos suficiente evidencia empírica como para sugerir que los paquetes retributivos de los ejecutivos condujeron a una adopción excesiva de riesgos, tal y como se suele sostener? ¿Seguiríamos teniendo una crisis financiera si los esquemas retributivos hubiesen sido diferentes? Es difícil saberlo. ¿No hubiese sido mejor centrarse en el propio riesgo, en el apalancamiento, en los modelos utilizados y en las responsabilidades? Si cambiamos los esquemas retributivos sin cambiar todo esto probablemente acabaríamos en otra crisis financiera. En cuanto al debate sector público-sector privado, “la crisis financiera revela una curiosa asimetría de nuestras respuestas a Wall Street y al gobierno”, explicaba la profesora de Derecho y Ética Empresarial de Wharton Amy Sepinwall. “Ambos han fracasado estrepitosamente, pero en el caso de Wall Street, el fracaso se considera un fallo esperado, mientras en el caso del gobierno se considera una desastrosa decepción”.
486 Sepinwall sugería que los inversores individuales son tan responsables de la crisis como Wall Street. “El negocio de Wall Street consiste en exponerse a los riesgos, y Wall Street está en este negocio porque los inversores en general se lo han encomendado”, decía Sepinwall. “Los individuos prefieren gastar en lugar de consumir, y en consecuencia demandan esa especie de alquimia financiera que puede transformar tu casa en un cajero virtual, o tus modestos ahorros en un colchón fiscal que pueden proporcionarte una confortable y larga jubilación. Los gestores de fondos están dispuestos a hacerlo… El riesgo por tanto es el precio inevitable de nuestras preferencia por el placer frente al trabajo, por el consumo frente al ahorro”. El profesor de Derecho y Ética Empresarial de Wharton David Zaring considera que la crisis es “un fallo de las instituciones. En un mundo global, cabría pensar que la respuesta también fuese global” ante una crisis, pero la mayoría de las redes financieras mundiales fallaron. Por ejemplo, el Comité de Supervisión Bancaria de Basilea, un foro global creado para mejorar la cooperación y la supervisión bancaria a nivel mundial, “no dijo literalmente nada en respuesta a la crisis financiera. Siempre que se ha visto alguna respuesta global, ésta procedía de los políticos”. Tanto el sector público como el privado tienen su parte de culpa en la crisis, sugería William W. Bratton, profesor visitante en la Escuela de Derecho Penn de la Universidad de Georgetown. “No se trató de la impredecible tormenta perfecta”, decía Bratton. En su opinión, tanto el presidente de la Reserva Federal Alan Greenspan como los bancos que concedieron préstamos arriesgados podían ver que se avecinaba la crisis. “En los años previos a la crisis, cada vez eran más los individuos inteligentes que, tanto del ámbito público como privado, observaban fijamente los riesgos sistemáticos. ¿Por qué no hubo nadie que mirase los mercados y conectase los puntos”?, preguntaba Bratton. “En parte fue debido a que en el centro de todo estaban los productos financieros, que supuestamente hacían al sistema más seguro, dispersando el riesgo en lugar de concentrarlo; y en parte fue debido a que no había nadie que dispusiese de toda la información para poder conectar los puntos. Y creo que también se debió a que los responsables estaban muy contentos de poder operar bajo una política económica que descansaba en la idea de que los mercados son mejores que el gobierno en el control de las empresas”. Según el profesor de Gestión de Wharton Witold Henisz, estas ideas tan simplistas podrían haber contribuido por sí mismas a la crisis financiera. “La responsabilidad de la actual crisis y sus predecesoras reside en una doctrina política -o dogma- excesivamente simple. Aunque necesaria para conseguir los apoyos políticos para llevar a cabo las reformas necesarias para salir de la crisis, dicha doctrina siguió adelante en su carrera de auto-purificación de modo tal que plantó las semillas de su propia desaparición”. Las respuestas políticas sencillas, como por ejemplo “los mercados funcionan”, o “los mercados necesitan ser controlados o regulados por el gobierno”, no tienen en cuenta la complejidad, contingencias e incertidumbre propias de la realidad. Al final, la arrogancia e ignorancia acaban estableciéndose a medida que los responsables de las políticas económicas, los académicos y los oyentes se van creyendo dichas respuestas. En pocas palabras, los responsables del diseño de las políticas económicas acaban creyéndose y tragándose su propia medicina”. Es un hecho cada vez más aceptado que “algunos de los supuestos fundamentales empleados en nuestros modelos de mercado no representan con precisión las decisiones de los individuos”, decía Henisz. “Tal vez podamos ignorar el papel de la astucia, las tramas, la envidia, el hacinamiento, el miedo, la aversión al riesgo, la justicia, la reciprocidad o la justicia procesal; pero a la hora de pensar en la … crisis financiera, me atrevería a afirmar que estos comportamientos deben dejar de ser mencionados únicamente en los discursos electorales, en las semanas finales de clase o al final de la asignaturas para pasar a ocupar un lugar destacado
487 tanto en temas de formación como de investigación”. El profesor Guillén no podría estar más de acuerdo. No existen soluciones sencillas a la crisis ni un único chivo expiatorio. “Te estás engañando a ti mismo si piensas que puedes encontrar una solución para que esto no vuelva a suceder de nuevo. Tenemos que aprender a dirigir con incertidumbre”. Publicado el: 16/12/2009 http://www.wharton.universia.net/index.cfm?fa=printArticle&ID=1819&language=Spanish
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Habitat pide una quita del 50% a cambio de beneficios
LLUÍS PELLICER - Barcelona - 18/12/2009 La inmobiliaria catalana Habitat, que protagonizó el segundo mayor concurso de acreedores de esta crisis, tiene perfilada la propuesta que llevará al juez antes del 23 de diciembre para pagar la deuda. Según fuentes financieras, la promotora que preside Bruno Figueras ha planteado esta semana a las 39 entidades acreedoras una quita del 50% a cambio de participar en los beneficios que generen los activos de la compañía en el futuro. La empresa tiene un pasivo de 2.807 millones. Habitat ha formulado dos propuestas a los bancos. La primera consiste en una quita del 56% y pagar el 44% restante en ocho años. La segunda opción contempla que le condonen la mitad de la deuda y abonar el otro 50% en nueve años. Según estas fuentes, la inmobiliaria, además, ha ofrecido una "retribución parciaria" para los acreedores que accedan a esta rebaja. Esta fórmula supone que éstos tendrán derecho sobre los activos de la sociedad en caso de que ésta salga a flote. Si, tras el concurso, Habitat vuelve a registrar fondos propios negativos, la inmobiliaria pide que la banca lo compense convirtiendo parte de los créditos en participativos. Seis de los ocho grandes bancos, según estas fuentes, están de acuerdo con la propuesta, que cuenta con las reticencias de Caja Madrid y Banco Santander. http://www.elpais.com/articulo/economia/Habitat/pide/quita/cambio/beneficios/elpepueco/20091218elpepieco_4/Tes
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A fondo La poderosa Bolsa secreta de la gran banca El 40% de la negociación de renta variable en Europa no está regulada Fernando Martínez - 17/12/2009 Un 40% de la negociación de acciones cotizadas que tiene lugar en Europa discurre a través de circuitos privados, ajenos a cualquier requisito de transparencia, divulgación de información sobre precios o supervisión por parte de las autoridades públicas. Es lo que se conoce como mercado OTC (over the counter), un negocio teóricamente bilateral, entre compradores y vendedores específicos. Pero oculta dentro de este maremágnum OTC navega toda una Bolsa organizada con operaciones multilaterales de compraventa de valores. En el argot del mercado se denomina a estas plataformas oscuras de negociación como crossing networks y su volumen es difícil de precisar ya que los implicados no tienen obligación legal de divulgar cifras. Desde la Federación Europea de Bolsas (FESE) se estima que el tamaño de estas redes ocultas es "considerable", tanto que podría representar incluso la mitad del volumen negociado en el mercado OTC, esto es un 20% de toda la intermediación de valores que tiene lugar en Europa. ¿Un negocio siniestro e ilegal? Nada de eso. Detrás de los crossing networks está la gran banca internacional, que reconoce sin empacho los hechos, aunque cuestiona las cifras. El lobby bancario, encabezado por la británica LIBA (London Investment Banking Association), admite sin discusión que un 40% de la negociación europea es efectivamente OTC y que también es cierto que hay crossing network, pero que éste representa sólo un 4% o un 5% de toda la operativa. Para la FESE, el hecho crucial no es la cifra en sí, sino que hay un volumen sustancial del negocio que pasa a diario sin luz ni taquígrafos... y fuera de los mercados organizados. Las Bolsas tradicionales quieren que la Comisión Europea y los supervisores tomen cartas en el asunto. El quid de la cuestión radica en la directiva MiFID (Markets in Financial Instruments Directive) que entró en vigor a finales de 2007. Entre otras cosas, la MiFID ordenó la negociación de valores y abrió la puerta a la competencia bursátil. Bajo el paraguas de la directiva MiFID están autorizadas dos tipos de plataformas multilaterales de negociación: los mercados regulados -léase Bolsa tradicional- y los llamados MTF (Multilateral Trading Facilities), tipo Chi-X o Turquoise. Existen unos MTF particulares, con ciertas licencias a la hora de divulgar información, pero sometidas en cualquier caso a regulación y supervisión; algunos ejemplos son Baikal, Liquidnet o Posit. Estos MTF reciben el evocador nombre de Dark Pool (piscina oscura). El mejor resultado conseguido por el conjunto de las MTF ha sido el de llegar a canalizar un máximo de un 8% de la negociación. La MiFID acepta la operativa OTC, pero ha de ser bilateral, esporádica y nunca una actividad recurrente, unas condiciones que las crossing networks no cumplen. FESE quiere, ya que ellos han abierto sus puertas a la competencia, que todo el mundo pase por el aro y los crossing networks pasen a ser MTF sujetos a supervisión. Los bancos, que también son accionistas y clientes de las Bolsas, no parecen estar por la labor. El asunto va para largo. http://www.cincodias.com/articulo/mercados/poderosa-Bolsa-secreta-gran- banca/20091217cdscdimer_5/cdsmer/
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17.12.2009 Is Greece already defaulting?
The FT leads with the story that European pharmaceutical companies have complained about non-payment for drugs and other medical products of up to €7bn from the Greek public health system. We have learned only this week that there is no such thing as double-entry booking in Greek hospitals for example. The article said no regular payments had been received from the Greek health ministry since 2005, when a settlement was reached on outstanding bills from earlier years. Last spring, the Greek government actually asking the drug companies for further loans to tide them over, rather than offer repayment. Finance minister George Papaconstantinou started a road show in European capitals to sell his government’s consolidation plan. Just as left, S&P followed Fitch into downgrading Greek sovereign bonds to BBB+, negative outlook, reflecting continued market scepticism of the Greek consolidation programme, according to the FT.
Estonia to join euro area in 2011 Bloomberg (hat tip Credit Writedowns) reports that Estonia is well on the way to achieve the target to join the euro area in 2011, citing Joaquin Almunia, the EU’s economics commissioner. Estonia’s central bank said that the country will next year meet all the entry criteria required. The Commission will make its official assessment in May, and a final decision could be taken around June or July. ECB’s 12-m LTRO attracts almost €100bn in demand Not quite what happened in the summit, but still uncomfortably high. Banks have demanded €97bn in the ECB’s last 12-month long-term finance operation, which is the less than the €440bn in the June LTRO, but still more than forecasters had expected. And it is higher than the €75bn allotted in September. Also, the average bid size increased, the FT reports, which possibly reflects a still acute demand for emergency liquidity. German 2011 budget will have to be tougher FT Deutschland quotes budget experts in the Bundestag as saying that the 2011 will have to be tougher than what finance minister Wolfgang Schauble is indicating at the moment. The €8.5bn stimulus for 2011, which goes to the Bundesrat tomorrow, plus the €20bn tax reform for 2011,
491 plus promises of higher spending for education will need to be refinanced. Schauble had put the cost of structural adjustment from 2011 at Schauble had put the cost of structural adjustment from 2011 at €10bn, but some of the CDU’s own budget expert say the real number will be much higher – with estimates of up to €30bn. Fed to end currency swaps in February The FT reports from Washington that the Fed plans to end the currency swap lines with foreign central banks on February 1, and it also affirmed that it plans to terminate most of its special domestic liquidity programmes on the same date. On interest rates, the message remain unchanged: exceptionally low for an extended period, i.e. no rise in 2010. Karl Whelan on the Irish credit crunch We are detecting some parallels here breach the Irish Nama bad bank scheme and the German scheme. Karl Whelan writes in the Irish Times that the Nama programme was never likely to get credit flowing. For a start the ECB has signalled that banks should reduce their exposure to ECB liquidity, and so the idea of Irish banks post Nama bonds as collateral to obtain new liquidity for loans is not realistic. He says Nama is not a solution to the country’s banking problems, as it does not address the issue of the banks’ undercapitalisation. He says by the spring, nationalisation may be the only option left. In the Irish economy blog he makes some further observations, including that journalists have little appetite for admitting the true state of the Irish banks. http://www.eurointelligence.com/article.581+M58d2d259b6b.0.html
ECB calls time on 12-month liquidity offer By Ralph Atkins in Frankfurt and Stanley Pignal in Brussels Published: December 16 2009 11:25 | Last updated: December 16 2009 18:53 The European Central Bank moved closer to weaning eurozone banks off its emergency funding operations after a final offer of 12-month liquidity on Wednesday. But it faced fresh evidence that inflation will remain stubbornly below its target. A third and last ECB offer of unlimited one-year loans attracted the lowest number of bidders yet, and the almost €100bn ($146bn, £89bn) provided was far lower than the €442bn allocated in June – highlighting how financial market conditions have calmed since the ECB started providing longer-term liquidity when the global economic crisis was at its most intense. Money supply blog: Out with a whimper? - Dec-16 Eurozone services growth hits two-year high - Dec-16 'Constructive ambiguity' has taken effect - Dec-16 ECB spurns IMF with early exit strategy - Nov-29 Earlier this month Jean-Claude Trichet, ECB president, confirmed that such operations would end as part of an “exit strategy” unwinding actions taken since the collapse of Lehman Brothers late last year.
492 The interest paid on liquidity provided on Wednesday will vary according to any changes in the ECB’s main interest rate, rather than being fixed at 1 per cent as previously. But Mr Trichet has stressed that the steps being taken by the bank did not signal a tightening of its monetary policy. While the relatively modest demand in Wednesday’s operation may be seen by the ECB as a positive signal, the €96.9bn allotted was higher than the €75.2bn provided in September. Moreover, the average bid per bank was the highest yet. That could have reflected a still-acute demand for emergency liquidity by some ailing banks. “Part of the eurozone banking system remains worryingly dependent on ECB liquidity,” said Marco Annunziata, chief economist at Unicredit. Strengthening the case for the ECB maintaining an ultra-loose monetary policy, eurozone inflation remains exceptionally weak, according to separate official figures on Wednesday. The headline annual rate rebounded to 0.5 per cent in November, compared with an initial estimate of 0.6 per cent and up from minus 0.1 per cent in October. But the latest figure remained well below the ECB’s target of an annual rate “below but close” to 2 per cent. Moreover, the rise in the headline rate – largely the result of oil price movements over the past year – masked a further weakening in underlying inflation pressures. Core inflation, excluding volatile energy, food, alcohol and tobacco prices, fell in November to a nine-year low of 1 per cent. Underlying inflation pressures eased following the collapse in eurozone economic activity late last year and earlier in 2009. But eurozone purchasing managers’ indices on Wednesday suggested that the more recent economic recovery was gaining strength, underpinned by growth in France and Germany. The composite index, covering manufacturing and services, rose from 53.7 in November to 54.2 in December, the highest for more than two years, and marking the fifth consecutive month of expanding private-sector economic activity. The data raised hope of a second consecutive quarter of economic growth in the eurozone, perhaps marginally higher than the 0.4 per cent recorded in the third quarter. Labour markets also showed signs of stabilisation, said Chris Williamson, chief economist at Markit, which produces the survey, “as the rate of job losses eased to the weakest for 14 months”. Ralph Atkins and Stanley Pignal ECB calls time on 12-month liquidity offer December 16 2009 http://www.ft.com/cms/s/0/8d3f356c-ea30-11de-aeb6-00144feab49a.html
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17.12.2009 How will Greek tragedy end? By: Wolfgang Münchau
Greek tragedies do not end well, and this one won't either. This week's much trumpeted deficit-reduction plan by George Papandreou, Greek prime minister, was a huge disappointment. He slapped a 90 per cent on bonuses. I have no problem with a bonus tax, but this has nothing to do with the Greek fiscal situation. He also decided to cut the number of board members in public companies. Again, this may or may not be justified, but it has nothing to do with the crisis. Freezing the wages of a small group of well-paid civil servants may be a just thing to do, or not. But it won’t make a dent. Greece will have a budget deficit of 12.6 per cent of gross domestic product this year. The actual number will probably be higher, because the official estimate is based on some optimistic budgetary assumptions. We are more likely heading for a number near 14 per cent. The rating agency Fitch has calculated that on present policies – that includes the 2010 budget of the present government – Greece is headed for a debt-to-GDP ratio of 130 per cent. So unless Mr Papandreou does something more radical than impose a bonus tax, there is a very high probability that the country will experience financial distress. The strong activity in the market for credit default swaps – financial instruments that offer insurance against the default of some underlying security – is an indication that investors are betting on default. As the prices of Greek CDS increase, so do the interest rates the Greek government will have to pay to finance its new debts. Default can quickly become a self-fulfilling prophecy. Now there is a case to be argued that such betting should be outlawed. I am actually sympathetic to the notion of a ban of CDS trades, for which there are no underlying securities. But as long as this regime persists, Greece is facing a danger that is both clear and present. To combat the threat of state insolvency, Greece will need to adopt three strategies in parallel. The first, and most important, is a significant cut in public spending. Within that category, the two most important items is a cut – or at the very least a nominal freeze – in wage costs for all public sector workers. Another measure is pension reform. Greece is the OECD country with the least sustainable pension system. Without those cuts, bankruptcy is hardly avoidable. The second priority should be to widen the tax base. Mr Papandreou has talked about that. It would mean that 600,000 companies, where the owner is declaring smaller taxable revenue than his employees will have to be asked to contribute to society a little more. And yes, there is plenty of corruption and tax evasion, but then it is never a good idea to put the hoped-for
494 receipts from a political campaign against crime into a forward-looking budget plan. It is best to treat it as a windfall, if and when the situation arises. The third priority is to stimulate growth through structural reforms. Good deficit reductions plans rely both on savings as well as policies to stimulate future growth. Naturally, a deficit- to-GDP ratio can be reduced mathematically in only two ways – either through a smaller deficit, or larger GDP. Furthermore, if you increase your GDP, the government receives more tax revenues that would reduce the deficit further. So this can be a virtuous process. Papandreou said he wanted to encourage a dialogue about opening up the professions to more competition. This is a good idea, but he wants to go through the social partners, which means that reforms are certain to be delayed, watered down and blocked. If Mr Papandreou wants to impress investors, rating agencies and his European partners, at the very least, he needs to produce a verifiable programme to increase potential output. Greece is not in a position where it has the luxury to choose between those three strategies, and pick some politically acceptable berries. It needs to implement all three, in full. So what is going to happen next? One scenario is that the markets force the issue, triggering a payment default by Greece. Alternatively, we might go through a game of institutional ping- pong, with Greece submitting a deficit-reduction plan in January, the European Commission rejecting it as insufficient, culminate in a penalty procedure under the stability and growth pact. One way or the other, we will get to the point where Greece will not be in a position to fund its extravagant budget gap. At the point, the rest of the euro area will be forced to bail out. The uncertain thing is what will happen then? Will we, and should we impose conditions? How do we monitor this? Will this not trigger moral hazard elsewhere, as other countries might draw the lesson that you always get bailed out, no matter what? This is a fine mess, as Laurel and Hardy used to say. http://www.eurointelligence.com/article.581+M5ca2cfe07b9.0.html
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House passes temporary measures to end 2009 By Paul Kane and Perry Bacon Jr. Washington Post Staff Writer Thursday, December 17, 2009; A04 The House pushed through a last-minute flurry of legislation Wednesday, including a $636 billion Pentagon funding bill, a short-term rise in the nation's debt limit, and an extension of unemployment and health benefits for millions of jobless Americans. But Democrats put off until next year some of the thorniest political issues facing the chamber. While the House passed on party lines a largely symbolic $150 billion job-creation bill, that legislation has virtually no chance of seeing action in the Senate this year and was a reflection of Democrats' belief that addressing the nation's unemployment crisis will have to be their top priority when they return to business in January. Likewise, the vote to temporarily raise the debt limit by $290 billion allowed House leaders to kick down the road tougher questions about deficit spending that have become a focal point for Republican attacks. As the Senate struggled to bring the debate over health care to a close and turned temporarily to consideration of the must-pass Pentagon bill, the House effectively finished its business for the year. Speaker Nancy Pelosi (D-Calif.) said she told her colleagues at a morning gathering that the legislative decks were almost cleared so Democrats could focus on the economy next year to gear up for the 2010 midterm elections. "I don't know if you've noticed, but I'm in campaign mode," Pelosi told reporters at a year-end briefing in her office suite overlooking the Mall. Pelosi said she does not think "there's any risk" that Democrats could lose their House majority, currently set at 258 Democrats to 177 Republicans, but acknowledged a tough campaign ahead because "unemployment is big" and recent electoral successes have placed many Democrats in politically conservative terrain. "It's really challenging to sustain, but that's our goal, to sustain our majority, and we'll have a strong majority," she predicted. Congressional Republicans continued their criticism of the Democratic stewardship of the economy. Republicans called for using the leftover funds from the financial bailout to pay down the national debt, which has climbed to more than $12 trillion this year. "Democrats in this new stimulus bill are simply voting to extend policies that have failed to create jobs, failed to get the American economy back on its feet," said Rep. Mike Pence (R-Ind.), who ranks third in the House GOP leadership. The window to pass major legislation usually narrows in an election year as incumbents demand more time back home to campaign. This leaves Democrats just a few months in 2010 to prioritize their agenda, which will be topped by putting the final touches on health-care legislation and ongoing economic recovery efforts. The narrow timeframe -- and the political calculus involved with such controversial items -- could jeopardize efforts to curb global warming and a push by liberals to change immigration laws to allow some illegal immigrants a pathway to citizenship. On the economy, Democrats remain divided. Aides said Senate Democrats will construct an alternative early next year to the $154 billion House stimulus package approved Wednesday.
496 Even though it was little more than an opening ante in the fight ahead, the House plan barely passed, 217 to 212, as 38 Democrats joined Republicans in opposition. The Pelosi-backed bill would provide aid to states to prevent them from having to lay off teachers and other public employees and billions to support rebuilding highways and other infrastructure projects. The lingering jobs debate reflects the length and depth of the recession, as Congress heads into its third-straight winter of debating a 12-figure attempt to boost to the economy. The first stimulus bill, passed in an unusually bipartisan atmosphere in February 2008, cost $152 billion, followed by the February 2009 bill carrying a tab of $787 billion, which gained little Republican support. If approved, the current House legislation would push congressional stimulus efforts to more than $1 trillion in two years. The politics of debt played out in the House on Wednesday when the chamber agreed to lift the federal debt ceiling by $290 billion, setting a new threshold of $12.4 trillion in government borrowing. The bill also passed narrowly, 218 to 214, as 39 Democrats opposed the provision along with all 175 Republicans who voted. "Let's get really serious about cutting spending, and the way we start is by saying no to increasing the debt limit," said House Minority Leader John A. Boehner (R-Ohio). That measure still needs to be approved by the Senate, which may be forced into a rare session between Christmas and New Year's Day because the health-care debate could consume all of next week. Congressional Democrats said increasing the ceiling is necessary to keep the government going. The move came after Democratic leaders this week discarded a plan that would have increased the debt limit by more than $1.8 trillion. Pelosi abandoned the long-term debt increase in the face of pressure from conservative Democrats who had been demanding a law that would bar Congress from new spending or tax cuts unless the cost was offset by spending cuts or revenue increases. The final battle is likely to play out in February, when the debt limit is likely to be bumped up against again, requiring another fix. The defense spending bill -- which includes more than $100 billion for wars in Iraq and Afghanistan -- also included temporary extensions of several provisions that were due to expire at the end of the year, including unemployment and health-care benefits for the jobless and provisions of the Patriot Act. http://www.washingtonpost.com/wp-dyn/content/article/2009/12/16/AR2009121604127_pf.html House passes temporary measures to end 2009 December 17, 2009 http://www.washingtonpost.com/wp- dyn/content/article/2009/12/16/AR2009121604127.html?wpisrc
497 US Fed signals pullback in liquidity supports By Krishna Guha in Washington Published: December 16 2009 19:30 | Last updated: December 16 2009 23:26 The Federal Reserve on Wednesday upgraded its assessment of the US economy and highlighted its intention to shut down most of its crisis-fighting liquidity facilities in early 2010. The statement came ahead of a scheduled vote on Thursday on the Senate banking committee over Ben Bernanke’s nomination for a second term as Fed chairman. The committee is expected to vote in favour of Mr Bernanke but there could be an unusually high number of dissents. John Gapper: How America let banks off the leash - Dec-16 Fed narrows its range of tools - Dec-16 FT Alphaville: QE coming to a close… - Dec-16 Short View: Oil and inflation - Dec-16 Money Supply: Fed exit strategy - Dec-15 US consumer prices rise in November - Dec-16 The US central bank said it would close the existing currency swap lines with foreign central banks by February 1. It also affirmed that it plans to terminate most of its special domestic liquidity programmes on that date and others a few months later. But the Fed gave no hint of inflation concerns that could lead to it raising interest rates from their current level of nearly zero any time soon, and left the discount rate at which it lends directly to banks unchanged. The bank said it continued to expect to keep interest rates at “exceptionally low levels” for an “extended period” – commonly understood to mean rates near zero for at least another six months. The Fed also said it was sticking to its existing plan to taper off and complete its scheduled $1,425bn purchases of securities issued by Fannie Mae and Freddie Mac, the government- sponsored mortgage giants, by March 31. Meanwhile, data showed housing starts surged in November while headline inflation rose 0.4 per cent on higher energy prices. But the underlying core rate was flat, with higher vehicle and tobacco prices offset by falling housing costs. Stocks eased slightly after the Fed statement, while the yield curve in the bond market steepened. Additional reporting by Michael Mackenzie Krishna Guha Fed signals pullback in liquidity supports http://www.ft.com/cms/s/0/12630e50-ea75-11de-a9f5-00144feab49a.html
498 Eurozone services growth hits two- year high By Stanley Pignal in Brussels Published: December 16 2009 12:22 | Last updated: December 16 2009 12:22 The economic recovery in the eurozone is gaining strength, according to a closely watched survey of economic activity, underpinned by growth in France and Germany. For the fifth consecutive month, Markit’s purchasing managers’ composite index rose, hitting 54.2 in December, the highest level in more than two years, reflecting improved trading and brighter prospects among a growing margin of the 4,500 businesses polled. Sunnier view on Europe’s ‘weather map’ - Aug-19 Interactive feature: Europe’s economic weather forecast - Dec-14 Tough words and and hard budgets for eurozone - Dec-09 The data raised the hope of a second consecutive quarter of economic growth in the eurozone, perhaps marginally higher than the 0.4 per cent recorded in the third quarter. The eurozone figure was slightly higher than expected by economists, aided by continued bullishness in France, where the index remained near the 37-month high reached last month. German manufacturing grew strongly, aided by rising export orders, but disappointment over the anaemic amount of new business in the services sector will raise concern about the medium-term prospects for the eurozone’s largest economy. The latest bounce in the index, which is up from 53.7 in November, brings it back to the middle of the 50-to-60 range it occupied before the downturn, after dipping to below 40 this time last year. Both services and manufacturing posted improved prospects, with services benefiting from an acceleration in new orders and reduced pressure on output prices.
Marco Valli, economist at Unicredit, said: “Growth momentum continues to recover but the pace of improvement is levelling off and we don’t see much upside potential from the current level.” Also of concern is continuing weakness in the jobs market. German manufacturers continued to shed jobs in spite of an extension to a government scheme that subsidises companies willing to keep redundant workers on their books. Company restructuring plans extended a 19-month contraction in the French labour market, albeit at a slower pace. Industrial production figures out earlier this week sparked hope of a more sure-footed economic recovery, but highlighted widening divergence in the performances of eurozone member states, complicating the task facing policymakers as they prepare to implement an "exit strategy" from the exceptional measures taken to combat the global financial crisis. http://www.ft.com/cms/s/0/7eae0b86-ea30-11de-aeb6-00144feab49a.html
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Federal Reserve edges away from crisis measures By Neil Irwin Washington Post Staff Writer Thursday, December 17, 2009; A01 The Federal Reserve said Wednesday that it will shut down some of the emergency triage measures it put in place at the height of the financial crisis but will leave interest rates near zero out of continuing concern about the weak U.S. economy. The decision reflects steady improvement in the functioning of financial markets. In recent months, the Fed's emergency programs to support money-market mutual funds, short-term corporate lending, investment banks and overseas banks had gotten little use, and major banks have begun to repay their government bailout money. Even the troubled auto giant General Motors recently said it plans to return some federal assistance next year. Still, the central bank's plans to terminate its unconventional lending programs on Feb. 1 will present a new test for the financial industry. There have been waves of worry in global markets in recent weeks, particularly in Europe and the Middle East, and losses on commercial real estate could endanger many smaller U.S. banks in the coming year. The programs being wound down were major parts of the Fed's efforts to aid the broken-down financial system by directing cash into dysfunctional private markets, using its own ability to create money and an obscure provision in the Federal Reserve Act allowing loans to almost any entity under "unusual and exigent circumstances." With private markets improving and the central bank's programs increasingly having fallen into disuse, the Fed is looking to pull away its supports. "They're saying that these extraordinary life-support programs are becoming increasingly unnecessary and could be counterproductive," said Stuart Hoffman, chief economist at PNC Financial Services Group. "Like any good doctor, they're laying out a treatment plan, saying they'll unhook the financial system from these machines over the next few months." The decision came on the same day that Fed Chairman Ben S. Bernanke was named Time magazine's Person of the Year for efforts -- including the creation of the soon-to-be-shelved programs -- that helped prevent a collapse of the financial system. A Senate committee will vote Thursday on whether to forward his name to the full Senate to be confirmed for a second four-year term. The Fed is gradually returning its policymaking apparatus to normal, using a meat-and-potatoes response to the recession: When the unemployment rate is high, low interest rates help create jobs by boosting growth, and the Fed is likely to raise rates only once the economy is on more solid footing or inflation threatens to get out of hand. That's why the Fed, after a two-day policymaking meeting, left its target interest rate near zero and said it will probably keep it very low for an "extended period," reflecting the deep economic hole the nation has yet to climb out of. At the same time, the central bank said it would unwind its more unconventional programs. The Fed had already said it will complete $1.25 trillion in purchases of mortgage-backed securities by the end of March, and it completed purchases of $300 billion in Treasury bonds in October. Next in line: An alphabet soup of programs designed to pump cash into the financial system, known by acronyms like PDCF (Primary Dealer Credit Facility) and TSLF (Term Securities Lending Facility). Both
500 will be allowed to expire Feb. 1, as will the money-market support, the program for short-term corporate lending and swap lines designed to pump dollars into foreign banks.
The Fed's signature program to support consumer and business lending, the Term Asset Backed Securities Loan Facility, has a bit longer to live: The program mostly winds down March 31, but it can support commercial real estate lending until June 30. Fed policymakers appear to be encouraged, but hardly buoyant, over the recent spurt of good news about the economy. In the statement after their meeting, they noted that "deterioration in the labor market is abating," reflecting a recent report that the unemployment rate ticked down in November and job losses came to a near halt. But the overall tone suggested that they are far from confident about the recovery. That, combined with subdued inflation worries, indicates that increases in the Fed's target interest rate remain far off. It repeated language from recent Federal Open Market Committee statements that "economic activity is likely to remain weak for a time." Just Wednesday, the Labor Department said that consumer prices rose 0.4 percent in November, though excluding volatile food and energy prices, the consumer price index was unchanged. Over the past year, prices are up 1.8 percent. Housing starts rose 8.9 percent in November, according to a separate report from the Commerce Department. "They did give a real indication they are focused on the labor market and remain committed to the idea that inflation will remain subdued," said Dan Cook, senior analyst at IG Markets. The final meeting of the Fed policymakers for 2009 came at a sensitive time for the institution. Congress is weighing legislation that could strip the central bank of its powers to supervise banks and reduce its independence in setting monetary policy. And Bernanke's future is still being determined. Assuming that the Senate Banking Committee votes Thursday to bring his nomination to the floor of the Senate, Bernanke will need 60 votes to be confirmed for a second term. His current one ends Jan. 31. Banking Committee Chairman Christopher J. Dodd (D-Conn.) said Wednesday that he expects the full Senate to confirm Bernanke in January. Although he has received a mixed reception on Capitol Hill, Bernanke's Fed colleagues have been more supportive. When he entered the policymaking meeting Wednesday morning, he was greeted with a standing ovation over his recognition by Time. According to a witness, Bernanke took his seat with an embarrassed grin on his face. "Those of us in the market are just hoping he'll be Time Person of the Year in 2010, too, by getting the economy going but not letting inflation take root," said economist John Canally of LPL Financial.
Neil Irwin Federal Reserve edges away from crisis measures December 17, 2009 http://www.washingtonpost.com/wp-dyn/content/article/2009/12/16/AR2009121600255.html
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The Washington Post/ABC News Poll Americans hold a gloomy outlook on the economy, despite positive indicators.
SOURCE: | Jennifer Agiesta And Jon Cohen/The Washington Post - December 17, 2009
Americans hold a gloomy outlook on the economy, despite positive indicators.D ecember 17, 2009
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503 Press Release
Release Date: December 16, 2009 Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. http://www.federalreserve.gov/newsevents/press/monetary/20091216a.htm
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16.12.2009 Financial markets give thumbs down to Papandreou
“A step in the right direction”, is what Joaquin Almunia called the Greek deficit reduction plan, which is another way of saying that the plan has to go further to be acceptable. Financial markets continued to hammer Greece, as CDS rose 25.5 basis point to 245.5 yesterday, in response to Papandreou’s speech on Monday night. At the moment, the only real plan that is both new and visible is the fight against corruption, of which Kathimerini has the details this morning. This would normally be a little bit too detailed for us, but it is somewhat of an eye opener where the country stands. Papandreou’s position is that corruption is the root cause of Greece’s dysfunctional system, and requires priority treatment. (It may be politically necessary to frontload his agenda with this subject, before moving on to deficit cutting, but it is already apparently from negative financial market reaction to his speech on Monday night that this is a risky strategy). His proposals include: more transparency in the funding of political parties, an independent audit office, to reduce election expenses, and to harden the laws against false declarations by public officials. The article also includes a list by opposition leader Antonis Samaris. A change in liability law, disclosure of the costs of large government procurement projects, more powers to the Inspector General of Public Administration, financial independence of local authorities, online government services, and, get this, the introduction of double-entry book keeping in places such as hospitals and local governments. This list tells us that Greece is lacking some basic administrative infrastructure, which is obviously necessary for any long-term deficit reduction plan to stick. Bloomberg reports that Greece sold floating rate notes of €2bn in a private placement to five banks, including four Greek banks. The securities mature in 2015, and were offered at a yield of 250bp over 6-m Euribor. The article also gave a good flavour of the disappointed market reaction. It quoted the head of credit strategy at Barclays Capital in London as saying that Papandreou had delivered an “unconvincing speech”. The finance minister George Papaconstantinou said his government’s ability to solve the problem will become visible to everybody within a few months. El Pais also carries the story, but adds an infuriating detail. Jose Manuel Barroso used the opportunity of the Greek crisis to rule out the creation of a single European bond on the
505 grounds that it convey the wrong message. (What message a common bond would convey depends entirely on how it is constructed. We have yet to meet a politician with such reliably poor instincts on macroeconomics as Barroso. He persistently misjudged the financial crisis. Now he is misjudging the Greek crisis.)
Le Monde on the euro area This is a very hard, but also very appropriate comment by Le Monde. It said Greece was not ready for EU membership when it joined, and this is a reminder of the country’s premature accession. The editorial said it was time for the world oldest democracy to grow up. As the for the euro area, the editorial says, the crisis shows the euro area’s institutional set-up as insufficient in dealing with a crisis. Munchau on a bailout rule Wolfgang Munchau, writing in FT Deutschland, proposes a transparent bailout rule attached to the stability pact – clearly setting out conditions when and when not to bail out. This would have four advantages. First, it would give Papandreou an incentive to produce real reforms. The penalty for pseudo-reforms (the ones we are now getting) is No Bailout. Second, it would avoid contagion by definition. If you have a rule, and Greece does not follow it, but Spain does, then the bailout guarantee extends to Spain, but not to Greece; third, this would fix the stability pact, by replace the defunct penalty with a real, and positive incentive. And fourth, in the unlikely event of a default under such a rule, there is a clearly set out procedure for the affected country to get back under the protection umbrella. It avoids the politically damaging situation for the EU having to impose policies in a member state. De Grauwe on a bailout rule Paul De Grauwe, Writing in Vox, ask whether the Greek crisis the beginning of a deeper sovereign debt crisis that could destabilise the Eurozone? He argues the Eurozone is no closer to a debt crisis than the US, but some members are getting close. EU governments could bailout Greece and, to avoid having to do so, they should clarify their stance on the matter.
Dullien and Schwarzer on a bailout rule Writing in Handelsblatt, Sebastian Dullien and Daniela Schwarzer make the case that a clear rule should be established on the conditionality of support. The rule should forsee that the country temporarily loses sovereignty over fiscal policy to the European Commission or the eurogroup, which should be given a veto power over national budget for a specified post-crisis period. Swedes favour euro entry We picked this up from the Irish Independent (hat tip Edward Harrison) that a Swedish poll showed for the first time that a majority would be ready to adopt the euro. Of those polled, 43.8% would vote in favour, according to the poll published by Statistics Sweden on its Web site. That compares with 42.1% in the same poll in May. 42% want to keep the krona. Statistics Sweden surveyed 6,398 people between October 28 and November 25. The margin of error was 1.2 points. The krona has lost 12% against the euro since March after risk-averse investors turned to bigger markets with greater liquidity. Sweden turned down the euro in a September 2003 referendum, with 54.6% voting against.
Financial markets give thumbs down to Papandreou16.12.2009 http://www.eurointelligence.com/article.581+M5a4ad55c7d3.0.html#
506 vox Research-based policy analysis and commentary from leading economists Greece: The start of a systemic crisis of the Eurozone? Paul De Grauwe 15 December 2009
Is the Greek crisis the beginning of a deeper sovereign debt crisis that could destabilise the Eurozone? This column argues the Eurozone is no closer to a debt crisis than the US, but some members are getting close. EU governments could bailout Greece and, to avoid having to do so, they should clarify their stance on the matter. The Greek crisis has led to fears that this is only the beginning of a deeper sovereign debt crisis that could ultimately destabilise the Eurozone. Are these fears exaggerated? How to deal with these problems? These are some of the questions many observers have been asking themselves. Origins of the present crisis It is useful to start out with the origins of the present crisis. Figure 1 provides a useful way to organise our thoughts. It shows the average yearly changes (in percent of GDP) of private and public debt in the Eurozone. The period 1999-2009 has been organised in periods of booms and busts: the boom years were 1999-2001 and 2005-07; the bust years were 2002-04 and 2008-09. One observes a number of remarkable patterns. • First, private debt increases much more than public debt throughout the whole period (compare the left hand axis with the right hand axis). • Second, during boom years private debt increases spectacularly. The latest boom period of 2005-07 stands out with yearly additions to private debt amounting on average to 35 percentage points of GDP. • During these boom periods, public debt growth drops to 1 to 2 percentage points of GDP. The opposite occurs during bust years. Private debt growth slows down and public debt growth accelerates. Again the last period of bust (2008-09) stands out. Public debt increases by 10 percentage points of GDP per year, mirroring the spectacular increase of private debt during the boom years (but note that the surge of public debt during the bust years of 2008-09 are dwarfed by the private debt surge during the preceding boom years). The following picture emerges. During boom years the private sector adds a lot of debt. This was spectacularly so during the boom of 2005-07. Then the bust comes and the governments pick up the pieces. They do this in two ways. • First, as the economy is driven into a recession, government revenues decline and social spending increases. • Second as part of the private debt is implicitly guaranteed by the government (bank debt in particular) the government is forced to issue its own debt to rescue private institutions.
507 Thus the driving force of the cyclical behaviour of government debt is the boom and bust character of private debt. This feature is particularly pronounced during the last boom-bust cycle that led to unsustainable private debt growth forcing governments to add large amounts to its own debt.1 Figure 1
Source: ECB, Quarterly Euro Area Accounts. Note: 2009 is until second quarter Is the public debt sustainable? Financial markets now ask the question of whether the addition of government debt is sustainable. Clearly the rate of increase of the last two years is unsustainable. But with Eurozone government debt standing at 85% of GDP at the end of 2009, the Eurozone is miles away from a possible debt crisis. Things are different in some individual countries, in Greece in particular, a country with a weak political system that has been adding government debt at a much higher rate than the rest of the Eurozone and that in addition has a debt level exceeding 100% of GDP. So, while the Eurozone as a whole is no closer to a debt crisis than is the US, some of its member states have been moving closer to such a crisis. Is it conceivable that a debt crisis in one member country of the Eurozone triggers a more general crisis involving other Eurozone countries? My answer is that yes, it is conceivable, but that it can easily be avoided.2 A debt crisis is conceivable Let’s start with the first part of the answer: It is conceivable. Financial markets are nervous and the most nervous actors in the financial markets are the rating agencies. One thing one can say about these institutions is that they systematically fail to see crises come. And after the crisis erupts, they systematically overreact thereby intensifying it. This was the case two years ago when the rating agencies were completely caught off guard by the credit crisis. It was again the case during the last few weeks. Only after Dubai postponed the repayment of its bonds and we had all read about it in the FT, did the rating agencies realise there
508 was a crisis and did they downgrade Dubai’s bonds. Credit rating agencies playing catch-up Having failed so miserably in forecasting a sovereign debt crisis, they went on a frantic search for possible other sovereign bond crises. They found Greece, and other Eurozone countries with high budget deficits, and started the process of downgrading. This in turn led to a significant increase in government bond rates in countries “visited” by the agencies. Add to this that the ECB is still using the ratings produced by the same agencies to accept or refuse collateral presented by banks in the Eurozone, and one can see that all the elements are in place to transform a local crisis into a crisis for the system as a whole. A systemic crisis can be avoided It does not have to be that way, however. A systemic crisis can be avoided. Let’s start with Greece again. Although an outright default by the Greek government remains a remote possibility it is good to think through what the other Eurozone countries can and will do in that case. They can easily bail out Greece. It does not cost them that much. In the unlikely event that Greece defaults on the full amount of its outstanding debt, a bail-out by the other Eurozone governments would add about 3% to these governments’ debt – a small number compared to the amounts added to save the banks during the financial crisis. A Eurozone bailout is likely The other Eurozone governments are also very likely to bail out Greece out of pure self-interest. There are two reasons for this. • First, a significant part of Greek bonds are held by financial institutions in Eurozone countries. These institutions are likely to pressure their governments to come to their rescue. • Second, and more importantly, a failure to bail out Greece would trigger contagious effects in sovereign bond markets of the Eurozone. Investors having lost a lot of money holding Greek bonds would likely dump government bonds of countries, like Spain, Ireland, Portugal, Belgium that they perceive to have similar budgetary problems. The local sovereign debt crisis would trigger an avalanche of other sovereign debt crises. I conclude that the Eurozone governments are condemned to intervene and to rescue the government of a member country hit by a sovereign debt crisis. Are bailouts illegal? It is sometimes said that bail-outs in the Eurozone are illegal because the Treaty says so (see Wyplosz 2009 on this). But this is a misreading of the Treaty. The no-bail-out clause only says that the EU shall not be liable for the debt of governments, i.e. the governments of the Union cannot be forced to bail out a member state. But this does not exclude that the governments of the EU freely decide to provide financial assistance to one of the member states. In fact this is explicitly laid down in Article 100, section 2.3 Eurozone governments have the legal capacity to bail out other governments, and in my opinion they are very likely to do so in the Eurozone if the need arises. Financial markets today do not seem to believe this conclusion. If they did, they would not price the risk of Greek government bonds 250 basis points higher than the risk of German government bonds. The scepticism of the financial markets has much to do with the poor communication by the EU-authorities that have given conflicting signals about their
509 readiness to give financial support to Greece if a sovereign debt crisis were to erupt. Conclusion All this leads to the conclusion that the Eurozone governments should make clear where they stand on this issue. Not doing so implies that each time one member country gets into financial problems the future of the system is put into doubt. References Reinhart, C., and Rogoff, K., (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press, 496pp. Eichengreen, B., (2007), The euro: love it or leave it?, VoxEU.org, 19 November. Wyplosz, C., (2009), Bailouts: the next step up?, VoxEU.org, 21 February.
1 For a fascinating historic analysis of public and private debt see Reinhart and Rogoff(2009). 2 See also Eichengreen(2007) on this issue. 3 Here is the text: “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned”. Paul De Grauwe Greece: The start of a systemic crisis of the Eurozone? 15 December 2009 http://www.voxeu.org/index.php?q=node/4384
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Research-based policy analysis and commentary from leading economists Charles Wyplosz Bailouts: the next step up?
Charles Wyplosz 21 February 2009
Some European governments are contemplating bailouts of other European governments. This column argues that violating the Eurozone’s no-bailout clause this soon would be a mistake. Much as it was necessary to let Lehman Brothers go down before bailing out the remaining banks, it may be necessary to let a profligate government default and ask for IMF assistance. A few months ago, we were anxiously discussing whether governments should bail out banks. They did. And then they went into the business of bailing out car companies, just as central banks – a branch of government – started to lend directly or indirectly to the private sector. And now we start discussing whether governments should bail out… governments within the euro area. Should some governments bailout other governments in Europe? This is less revolutionary than it seems. After all, this is exactly what the IMF does and there is a long history of bilateral aid, some of it in emergency conditions. What is striking is that government bailouts are explicitly banned in the Maastricht Treaty. Of course, any piece of legislation can be circumvented and, surprising as it may be, rumor has it that the German government is already exploring clever ways to do so. When we remember that the no-bailout clause of the Treaty was a German request, we realize how desperate the situation is. Should we, indeed, cut our right arm after having cut the left one? It may be surprising that governments – which routinely help each other via the IMF, the World Bank and other international organizations – have found it necessary to introduce the no-bailout clause within the euro area. One could have imagined the opposite, that intra-European solidarity is upped as the European Union becomes “ever closer”, in particular as countries decide to share the same currency. In some way it did, through the development of the Regional Funds, explicitly designed to redistribute income from richer to poorer regions. So, why then, the ban on mutual government assistance? The logic of the no-bailout clause The answer is pretty obvious: moral hazard. If a government knows that, under some circumstances, part of its expenditures will be paid for by other governments, then sooner or later it will take advantage of the arrangement. Given European governments’ long history of dubious fiscal discipline, there is every reason to imagine that this would happen sooner rather than later. The seriousness of the moral hazard issue is hardly controversial. Indeed, all international loans are subject to strict conditions or rules designed to mitigate moral hazard. But that does not explain why the situation is so acute within the euro area that it requires a special clause. The answer must be that moral hazard is compounded by the sharing of a currency. The fear is that a country’s default would trigger a number of particularly harmful reactions that would spare no other euro area member country. For example, a default by the Greek government could lead international investors to run on other government debts. In fact lists are already widely discussed in banking circles, spilling into the media and blogs the world over. A default, or a
511 string of defaults, could lead to massive capital outflows, weakening the euro and creating the risk of inflation at a time when the ECB is fighting the recession. Already fragile banks may suffer significant losses and tilt over into outright bankruptcy themselves, dragging each other below the floating line. But bankrupt governments cannot bailout bankrupt banks, even less carry on counter-cyclical policies. The only solution, then, would be massive money creation and its eventual outcome, massive inflation. Since price stability is a fundamental objective of the Single Currency, this scenario was felt as impossible to even contemplate, hence the no-bailout rule. Rules and discretion: Should we violate the no-bailout rule? As is well-known from the rules vs. discretion literature, any black-and-white rule runs the risk of being extremely counter-productive under some circumstances. When the unexpected happens, the temptation to renege becomes huge. Here we are. The question, then, is whether the costs of reneging exceed the costs of upholding the rule. The answer is by no means obvious. Bailing out one or more governments does not have to be financially costly to the lenders if they charge the market rate. This, presumably, is what lies behind the idea of issuing EU bonds. The cost, therefore, comes mainly from the moral hazard side. This would undoubtedly require the adoption of a strong version of the Stability and Growth Pact, since the current one, which replaces a previous version that failed, clearly did not succeed in pushing many countries toward fiscal discipline. Given the many limitations of the pact, strengthening it would be a real cost in the aftermath of the crisis. To realize how counterproductive the pact can be, it is enough to observe how the Commission is too paralyzed by its desire to uphold the pact to play any constructive role in encouraging a coordination of fiscal policies. Better solutions, which focus instead on national institutions, are possible but unlikely to be considered after a bailout. The alternative to a strengthened pact is exacerbated moral hazard, which could eventually sap the monetary union. Letting member-state governments default could create havoc of untold proportions, as noted above. Or could it? When they wrote the no-bailout clause, the Maastricht Treaty Founding Fathers were clearly impressed by the New York City affair of the 1970s. The City informed the State of New York that it was about to declare bankruptcy and would do so unless bailed out. The State informed the Federal Government that it too would default unless bailed out, which could destroy Wall Street and the US financial system. The Federal Government responded to the State of New York “please default”, a message that was then passed on to the Mayor. No one defaulted. And then, after the City had made substantial progress, the Federal Government provided a loan on which it subsequently made good profit. Even better, the City of New York has since become fiscally disciplined. The no-bailout clause is much better than the Stability and Growth Pact provided that it is enforced when it is needed. T’is the time. Let one of the profligate governments default Much as it was necessary to let Lehman Brothers go down the pipe before bailing out the remaining banks, it may be necessary to let a profligate government default and ask for IMF assistance before punching a hole in the no-bailout clause. Editors' note: This column is a Lead Commentary on Vox's Global Crisis Debate where you can find further discussion, and where professional economists are welcome to contribute their own Commentaries on this and other crisis-linked topics. Charles Wyplosz Bailouts: the next step up? 21 February 2009 http://voxeu.org/index.php?q=node/3110
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House Democrats discard larger debt limit By Paul Kane Washington Post Staff Writer Tuesday, December 15, 2009 House Democratic leaders, bowing to their party's deficit hawks, will move the year's final must- pass piece of legislation without a long-term increase to the national debt and without a large boost in infrastructure funding that was aimed at creating jobs. Majority Leader Steny H. Hoyer (D-Md.) said Monday evening that last week's proposal to increase the debt limit by more than $1.8 trillion had been discarded in favor of a more politically acceptable plan to give the Treasury Department a two-month extension on its current limit of $12.1 trillion, which is expected to be hit by New Year's Eve. The plan calls for raising the cap by $300 billion, to $12.4 trillion, according to a source familiar with the decision. "We're working towards a short-term debt extension," Hoyer told reporters as he emerged from an hour-plus meeting in the office of House Speaker Nancy Pelosi (D-Calif.). Conservative House Democrats had been demanding, in exchange for their votes to support a large debt-limit increase, a new pay-as-you-go law that would bar Congress from increasing spending or cutting taxes unless the cost is offset by spending cuts or revenue increases elsewhere. Fiscal conservatives in the Senate, meanwhile, led by Budget Committee Chairman Kent Conrad (D-N.D.), had been seeking the creation of a bipartisan commission with authority to force spending cuts or tax increases through Congress. It was unclear how those concerns would be addressed. Senate aides said talks of a deficit- reduction commission were still going on, particularly with the White House, which could offer to create such a panel by executive order. House sources said Pelosi was still open to a larger increase in the debt limit if the matter could be worked out in the Senate. Aside from the Senate's health-care debate, the final legislative wrangling of the year is over the annual funding bill for the Defense Department, which is slated to receive $626 billion for fiscal 2010, and what measures to attach to that bill. The debt limit increase had become one of the most controversial add-ons, after the annual deficit topped $1.4 trillion for 2009 and after months of criticism from Republicans of Democrats as the party of big government spending. Rep. Louise M. Slaughter (D-N.Y.), chairman of the House Rules Committee, said she expects her panel to consider soon the defense spending measure, along with some pieces that have garnered broad agreement among Democrats on both sides of the Capitol. Sources familiar with the talks suggested that this package would include the defense bill, a one-year extension of the estate tax at current levels, a two-month extension of the debt limit and an extension of unemployment benefits. The House could vote by Wednesday. Meanwhile, eager to show movement on addressing the bleak employment picture, House Democrats will move a separate legislative package later this week that will include tens of billions of dollars in infrastructure spending and other items designed to create more jobs. But the bill is not expected to even be considered in the Senate.
513 Senate Democrats have indicated they will take up jobs legislation in January after they finish considering health-care reform. With federal funding for the Pentagon set to expire Friday night, the House will probably pass a short-term resolution that keeps funds flowing at current levels so the Senate can stay focused on health care, possibly finishing over the weekend, and then take up the defense spending bill early next week. The Senate, with its super-majority rules, has proved the highest hurdle in the legislative endgame. Hoyer said his leadership team's motivation is based almost entirely on one objective: "what we can get through the Senate." Staff writer Lori Montgomery contributed to this report. Paul Kane “House Democrats discard larger debt limit”, December 15, 2009 http://www.washingtonpost.com/wp- dyn/content/article/2009/12/14/AR2009121403933.html?wpisrc=newsletter
514 United States: External Sector TIC Data and the U.S. Current Account Deficit: Still Buying Treasuries According to the Treasury Department's monthly data on capital flows to the U.S., foreign investors have continued to buy U.S. government debt since the end of Q2 2009, matching the return to reserve accumulation. The share of total treasuries held by foreign investors has fallen as the U.S. savings rate rose. The fall in the current account deficit (led by a collapse of imports) means the U.S. requires less foreign investment, even as the financing needs of the government have climbed. Most Recent Data (October 2009) Net foreign inflows to the U.S. (including short- and long-term flows and bank deposits of foreigners) were positive US$21.6 billion in October (from US$128billion in September) as foreign purchases of long-term U.S. securities offset a decline in short-term assets like treasury bills. News U.S. Department of the Treasury Treasury International Capital Data for October 2009 Purchases of long-term securities decreased to US$43.4 billion (from US$55.7 billion in October). Private investors accounted for US$28.8 billion, foreign official institutions (central banks) acoounted for US$14.6 billion. The net long-term inflows were well above the level the U.S. needs to finance its deficit. Foreign holdings of short-term debt (less than one year to maturity) fell by US$43.9 billion in October as investors continued to sell off some of the record purchases of short-term debt acquired since the Lehman bankruptcy. On net, foreign buyers added US$38.9 billion in long-term treasuries (US$44.7 billion in September) sold US$5.6 billion in agencies (-US$1.8 billion in September) sold US$0.5 billion in corporate bonds and added US$10.6 billion in equities. (all data from the U.S. Treasury) As of October, China was the largest foreign holder of treasuries, at about US$799 billion in U.S. assets, falling slightly from US$800 billion in July 2009. China has been shifting back to purchases of longer-dated treasuries after buying more T-bills in late 2008 and early 2009. Japan sold US$19 billion in U.S. securities in October after adding US$26 billion September. After buying US$22 billion in long-term treasuries in September, Japan sold US$5 billion in October, it also reduced its agencies and corporate bond holdings in October, but added to its U.S. equities. Michael Woolfolk of BNY: "The most noteworthy feature of today's [September] TICS report is the unexpected rebound in demand for USD deposits and short-term US securities on behalf of foreign investors in September. While the net outflow seen in the wake of the Lehman Crisis has been dropping steadily in recent months, the renewed demand on behalf of foreign investors was surprising given the continued rally in global equities and improvement in risk appetite." Analysis Bank of New York Mellon Michael Woolfolk US Treasury's TICS Report, September 2009 Implications of Recent Trends RGE's Rachel Ziemba notes that in Q2 2009, purchases of U.S. long-term Treasurys were much higher than needed to finance the U.S. current account deficit, and it was the first quarter of significant reserve accumulation of the last year. In June, Net foreign purchases of long-term U.S. securities were US$123.6 billion, up from US$7.9 billion in May and much higher than the January-May 2009 average. Earlier in 2009, many foreign investors shifted to the short end of the Treasury curve. Analysis RGE Monitor Rachel Ziemba The July TIC Data: In for the Long Term? Brad Setser of CFR notes that in 2009, "the rise in China’s Treasury holdings was modest. China’s overall U.S. portfolio isn't rising at anywhere like the pace it did in 2006, 2007 or even 2008." He suggests that this trend is healthy "the more unwanted dollars China ends up holding, the bigger the ultimate risk of a disruptive shift out of the dollar." (06/15/09) Blogs Follow the Money Brad Setser Three quick points on the April TIC data The U.S. Department of the Treasury noted that "financial development combined with sound macroeconomic policies and open markets should lead to an increased international role for emerging market currencies and a greater
515 diversification of foreign currency reserves. Nevertheless, as long as the United States maintains sound macroeconomic policies and deep, liquid, and open financial markets, the dollar will continue to be the major reserve currency." (October 2009) Analysis U.S. Department of the Treasury An Historical Perspective on the Reserve Currency Status of the U.S. Dollar Monthly TIC data tracks capital flows to and from the U.S., including the net purchases and sales by foreigners of U.S. financial assets, government and private debt and equity. It thus provides an indication of whether such inflows cover the U.S. current account deficit, though it does not include FDI and some other flows. Federal Reserve Economist Carol Bertaut: Recent record foreign inflows into U.S. securities "have not, in fact, materially changed the relative allocations between U.S. and other foreign securities in their portfolios in recent years." Most countries continue to be more underweight in U.S. assets, according to the standard model of international asset allocation. (October 2008) Research Federal Reserve Board Carol C. Bertaut Assessing the Potential for Further Foreign Demand for U.S. Assets: Has Financing U.S. Current Account Deficits Made Foreign Investors Overweight in U.S. Securities? Further Reading Research MIT, Berkeley and NBER Ricardo J. Caballero, Pierre-Olivier Gourinchas and Emmanuel Farhi An Equilibrium Model of “Global Imbalances” and Low Interest Rates Analysis Wachovia Jay H. Bryson The United States is (and Has Been) a Net Debtor. So What? Analysis NYU Stern School of Business Nouriel Roubini and Brad Setser The US as a Net Debtor: The Sustainability of the US External Imbalances Blogs RGE Editor Blog Christian Menegatti Should Foreigners Investing in the U.S. Be Worried About Capital Losses? Makin v. Warnock http://www.roubini.com/briefings/48105.php#65556
United Kingdom: Banking Sector, Risk Management and Financial Regulation RGE Strategy Flash: Elections and Banker Compensation in the UK Both sides of the coin are understandable: psychologically, taxpayers want to see banks pay penance for the public’s involuntary largesse; politically, authorities need to be seen making efforts to ameliorate what is patently a socialization of losses and a privatization of gains. On the other hand, it seems fundamentally wrong to inflict a tax on an isolated section of the populace, and without due warning. A significant portion of a banker’s compensation is derived from the year-end bonus so proposing this tax over halfway through the tax year seems rather underhanded as it does not allow individuals in the financial industry to adjust their behavior ex ante, the purported function of this “super-tax.” Of course, employers can get around this; Barclays will likely defer 60% of bonuses, Goldman Sachs will not pay cash bonuses to its top executives; and Tullett Prebon, a UK-based interdealer broker, has offered its entire brokerage staff the option to relocate. Tullett Prebon’s posturing, echoed throughout the financial community, may merely be sabre-rattling. While a growing tax burden may compel some emigration, such moves are merely part of an ongoing transition in positioning toward emerging markets and, for former bank employees, financial institutions with less onerous regulatory burdens. Additionally, it will take time to build up the infrastructure that supports the financial industry and relocate clients away from the traditional financial centers. Putting aside such considerations, what is the point of this latest move by the UK? According to an aide to the chancellor quoted by the Financial Times, “this tax is about changing [banks’] behavior, not raising revenue.” But how does a one-time tax that could be circumvented effectively change behavior? A sustained high tax on bonuses may reduce the attraction of banking as a career but it could be partially offset by higher base salaries, relocation, and no doubt other innovative compensation/employment structures. In the end, the aggregate level of risk in the
516 system remains unchanged. Furthermore, if we assume this is not purely a campaign ploy, there is a certain amount of buck passing between the regulator to the Treasury. Is fiscal policy now a bank regulatory tool? The FT writes that Darling expects the regulator to step in if banks flouted the proposal and paid large bonuses, presumably due to the potential impact on capitalization. There is an implicit raising of capitalization standards here, suggesting that authorities feel banks are still generally undercapitalized according to current regulatory standards. Given how little this proposal appears to accomplish and the perceived ease with which it can be circumvented, the “super-tax” seems little more than Labour party campaigning. But such distractions are great for banks, which likely prefer short-term pain associated with political flogging to root-and-branch reform. Changes that constrain banking activities are on their way: UK authorities have developed a special resolution regime and have been proactive in liquidity and capitalization reform; the U.S. House of Representatives has just passed HR 4173, the Wall Street Reform and Consumer Protection Act, to the Senate. However, the more the regulatory narrative is politicized and shaped by issues and proposals that fundamentally change nothing, the lower the likelihood we will emerge from this crisis with the tools needed to stem another financial crisis. http://www.roubini.com/briefings/42352.php#92165
Germany: Economic Profile Fragile Investor Confidence: Is Germany's Economic Recovery Losing Momentum? On December 15, 2009, the economic expectations survey conducted by the ZEW center for Economic Research in Mannheim in November registered its third consecutive decline. The index which is based on the views of 288 analysts and institutional investors reached a three-year high in September 2009, still the rate of increase slowed down during the past months. The index's weak performance in recent months raises concerns about the sustainability and strength of the German economic recovery. Recent Trends The headline expectations index fell from 51.1 to 50.4 in December. This is the indicators third consecutive fall. The ZEW index reached its cyclical low point of -63 in October 2008. Despite the fall in the headline index, the December reading is well above the expectation index's historical average of 26.9. Consensus forecasts expected a reading of 50.0 for the month of December The current conditions sub-index increased in December by 5 points to -60.6, its ffifth consecutive monthly rise. The index is still close to its recent low of -92.8 in May 2009. Comments and Forecasts "However, today’s data might start to signal that the recovery is beginning to lose momentum. Car incentive schemes, which boosted activity in the automotive sector over recent months, has run out of steam, and the technical rebound due to the destocking processes will not last either. While the external sector could continue to sustain activity in the near term, domestic demand should remain subdued. German labor market conditions have deteriorated less than in the other eurozone countries due to measures which resulted in a decline in hours worked per employee rather than in total employment. Nevertheless the significantly drop in hours worked could limit wage growth and spending." (BNP; 12/15/2009) Analysis BNP Paribas Clemente De Lucia Germany: ZEW expectations index down to 50.4 in December "There can be little – if any – doubt that the ZEW growth expectations passed their peak. (...) We think there are three reasons for this pattern. First, share prices took a breather, thereby weighing on the mood of asset managers participating in the survey. (...) Second, economists probably started pricing in the end of the inventory cycle in spring 2009. (...) Third, and in addition, the majority of fiscal stimulus packages around the world may fizzle out at the summer of next year at the latest. This in turn will have a severely negative impact on the export-dependent German economy." (UniCredit; 11/10/2009) Analysis ZuniCredit ZEW: Passed the peak!
517 "The setback in ZEW expectations is an early warning that although the euro area is experiencing a strong rebound in Q4 and Q1 2010 driven primarily by the inventory cycle and exports there is a notable risk of a slowdown thereafter. We expect to see more modest growth as the temporary drivers disappear, but the labor market stabilization should create the conditions for more sustainable growth going forward." (Danske; 12/15/2009) News Danske Markets Research Euroland: ZEW losing altitude "The latest decline in the ZEW doesn't mean a quick end to the current recovery. This is backed by the sector outlook and the latest impressive broad-based rebound in new manufacturing orders. Orders in August/July were up a hefty 7.8% compared to the second quarter, the strongest dynamic since reunification after already +5.5% q/q in 2Q. The outlook for a solid export-driven recovery until spring definitely remains intact. But the leveling off of the growth expectations together with the relatively weaker expectations performance for the auto and construction sector reminds us, that strong temporary factors are at work, which should increasingly fizzle out and partly become a drag in the course of next year." Analysis Hypovereins Bank Germany: ZEW - First signs for leveling off "We are still at the bottom of a recession. Next year, we will see a recovery, but not an economic upswing. The recovery is mainly driven by exports. How strong investments will contribute to economic growth in 2010, depends on bank lending. Banks, however, still face the difficult task to clean up their balance sheet", says ZEW President Prof. Dr. Dr. h.c. mult. Wolfgang Franz. News ZEW ZEW Indicator of Economic Sentiment - Nearly Unchanging Economic Expectations (December 2009) The ZEW’s gain “may be less than expected, but it’s still good news,” said Klaus Baader, chief European economist at Societe Generale in London. “It does however show that the pace of the upswing can’t be maintained. Next year is going to be more difficult with unemployment rising and government stimulus petering out.” News Bloomberg Gabi Thesing German Investor Confidence Rises to Three-Year High http://www.roubini.com/briefings/52156.php#62219
United States: Industrial and Corporate Sector U.S. Industrial Production: Expansion at a Slow Pace Industrial production rose 0.8% m/m in November 2009, after remaining flat in October. The increase was driven by a 1.1% m/m rise in manufacturing, following a 0.2% m/m contraction in October. Utilities, which had shown a gain of 1.7% in October, fell 1.8% m/m in November. Mining output rose 2.1% m/m in November after falling 0.2% in October. Among durable manufacturing industries, the production of autos and parts rose 1.8% m/m (and fell 6.9% y/y) in November after falling 1.8% m/m in October. Production of furniture and related products rose 2.9% m/m (and fell 13.4% y/y), while that of mineral products rose 2.9% m/m (and fell 10.9% y/y). Electrical equipment production fell 0.5% m/m in November Non-durable manufacturing contracted 0.2% m/m in November. (Federal Reserve Board, 12/15/09) Industrial production is still down 5.1% y/y, while manufacturing output is down 4.9% y/y. In Q3 2009, industrial production rose 6.1% q/q, the first quarterly gain since Q1 2008. (Federal Reserve Board, 12/15/09) The contraction in industrial activity in the current cycle, which was as severe as that in the 1970s, slowed in Q2, and industrial production turned positive in Q3. The ISM Index bottomed in December 2008 and has been recovering since then, reaching expansion territory in August 2009. After an aggressive inventory cutdown in H1 2009, firms have been destocking inventories at a slower pace in H2. Recent numbers suggest that a sharp reduction in the pace of inventory drawdown in Q4 2009 will boost Q4 GDP growth. As firms begin rebuilding inventories in 2010, industrial activity will pick up. However, the extent of improvement in industrial activity and its sustainability in 2010 are uncertain, given growing yet sluggish consumer spending and retail sales. The inventory-to-sales ratio is declining, but there remains further room for correction in the manufacturing sector, since sales rose slower than cutback in inventories. While manufacturing was boosted by the auto sector between July and September, production slowed in autumn. The New York Fed Empire State manufacturing index shows manufacturing activity eased in December 2009, following four months of improvement. The business activity index fell 21 points to 2.6 in December from 23.5 in November (positive values indicate growth). The new orders and shipment indexes also showed moderation. The new orders index fell 14 points in December to reach 2.2. The shipments index fell about 7 points to 6.3 in December. The prices paid index rose 9 points to 19.7, while the prices received index continued to contract, indicating ongoing pricing pressure. Indexes for both employment and the
518 average workweek slipped back into negative territory after moderating in November following a strong gain in October. (Federal Reserve Bank of New York, 12/15/09) Analysis Federal Reserve Bank of New York Empire State Manufacturing Survey December 2009 The ISM manufacturing index showed expansion in manufacturing activity for the fourth consecutive month in November 2009, after declining for 18 consecutive months through July. However, the pace of expansion eased in November, with the manufacturing index falling to 53.6 from 55.7 in October. (Readings above 50 signal expansion.) Twelve of the 18 industries included in the survey showed expansion in November, driven by strength in new orders, which rose to 60.3 from 58.5 in October, while exports rose to 56 from 55.5 in October. Production continued to expand at a slower pace, with a reading of 59.9 in November. The index for employment showed expansion for the second consecutive month in November after 14 consecutive months of decline, though the pace of expansion moderated in November. Inventories contracted at a faster pace, while the strength in prices paid eased significantly in November, falling to 55 from 65 in October. (Institute for Supply Management, 12/01/09) Analysis Institute for Supply Management November 2009 Manufacturing ISM Report On Business: PMI at 53.6% Nicole Ball, Evan F. Koenig and Max Lichtenstein, Federal Reserve Bank of Dallas: "The various ISM sub-indexes provide valuable advance information on the near-term course of important segments of the economy. Movements in the New Orders index from the ISM’s manufacturing survey, for example, lead swings in equipment and software investment, changes in the growth rate of industrial output and changes in the rate of job growth in the goods-producing sector of the economy." (08/24/09) News Federal Reserve Bank of Dallas National Economic Update: A New Beginning? The Chicago Business Barometer's seasonally adjusted three-month average continued to show expansion in November 2009, rising to 56.1 from 54.2 in October. (Readings above 50 signal expansion.) The seasonally adjusted index for production stood at 57.6, indicating a slower pace of expansion after soaring to 63.9 in October. The new orders index remained strong at 62.8 in November, the highest level since June 2007. Inventories continued to shrink for the 13th consecutive month. November marked two years of the employment index showing contraction, though the pace of contraction eased. The prices paid index moved into expansion territory in November. (Kingsbury International/Institute for Supply Management-Chicago, 11/30/09) Analysis Institute for Supply Management-Chicago/ Kingsbury International The Chicago Report, November 2009: Chicago Business Barometer Expanded The Richmond Fed regional manufacturing index continued to indicate expansion in manufacturing activity in November, though activity for the month remained virtually flat on balance, as the index fell to 1 in November from 7 in October 2009. (Positive values indicate expansion.) Shipments and new orders tapered off in November, and employment entered negative territory. Optimism regarding new orders, shipments and growth in capacity utilization six months ahead remained steady in November, while hiring plans stayed weak. (Federal Reserve Bank of Richmond, 11/24/09) Analysis Federal Reserve Bank of Richmond November 2009 Richmond Fed Manufacturing Survey: Manufacturing Activity Flat on Balance The Chicago Fed Midwest manufacturing index increased 1% in September 2009 to reach 82.3, after rising 1.6% in August, but remains depressed by 17.5% y/y. The regional auto sector showed the largest gain, while steel and resources output also rose and machinery output declined in September. (10/26/09) Analysis Federal Reserve Bank of Chicago Chicago Fed Midwest Manufacturing Index: Midwest Manufacturing Output Increased in October The Philadelphia Fed regional business activity index showed expansion in manufacturing activity for the fourth consecutive month in November 2009. The index of current activity rose to 16.7 from 11.5 in October. (Positive values indicate an improvement in activity.) The new orders index rose 9 points to remain positive in November, while the shipments index rose 12 points. The pace of contraction in employment eased, with the employment index just below zero in November, from -6.8 in October, while the workweek index rose 7 points in November to reach its first positive reading in 23 months. Firms continued to report pricing pressures, saying that they were paying higher prices for inputs, while the prices received index remained in negative territory. Fifty-eight percent of surveyed firms indicated a current capacity utilization rate below 70%. On average, firms indicated that capacity utilization would have to reach at least 84% before they would increase capex spending. (Federal Reserve Bank of Philadelphia, 11/19/09) Analysis Federal Reserve Bank of Philadelphia Philadelphia Fed Business Outlook Survey November 2009 A large auto inventory drawdown in Q2 2009 and an increase in auto demand from the "cash for clunkers" program will boost auto production in H2 2009. Most analysts expect this to boost auto-related inventories, investment and consumer spending and retail sales, and contribute 2%-4% to GDP growth in Q3. The boost to GDP growth might be smaller in Q4 as the "cash for clunkers" impact fades. However, some analysts argue that after selling cars in Q3, auto companies will rebuild inventories in Q4, which might add to GDP growth in Q4. According to the Institute for Supply Management (ISM) Semiannual Economic Forecasts in December 2009, supply managers were positive about growth prospects in 2010, with representatives from 13 of the 18 industries surveyed expecting higher revenues in 2010. Manufacturers expect that employment in the sector will rise by 1.5% in 2010, while capital expenditures are expected to decline by 4% in 2010, compared to 7.8% reported for 2009. Manufacturers expect to continue reducing inventories in 2010. Prices paid are expected to rise by 2.6% in 2010.
519 Scotiabank analyst Gorica Djeric says there is a growing debate over the sustainability of the renaissance in production activity, once inventories are replenished and fiscal stimuli start expiring. The weak profile of the U.S. consumer implies considerably more weight toward exports in maintaining the revival of production (08/28/09). Alliance Bernstein's director of global economic research, Joseph G. Carson, says a reduction in the leakage of U.S. consumer spending abroad and an increase in U.S. manufacturers’ global market share could result in strong growth for the U.S. economy, if consumer spending grows slowly. Factors that favor a resurgence in U.S. manufacturing are the lowering of wage costs and improving productivity in the U.S. relative to other industrialized countries, the depreciation of the U.S. dollar and lower natural gas prices relative to oil prices. (08/28/09) Analysis AllianceBernstein Joseph G. Carson Manufacturing Will Determine The Speed of the Recovery Analysis Scotiabank Adrienne Warren et al Weekly Trends: Canada - Welcome Back, Consumer | United States - The Revival Of Industrial Production | Mexico - Balance Of Payments & Exchange Rate Behaviour | ... Capacity Utilization Industrial capacity utilization rose to 71.3% in November 2009 from 70.6% in October. Industrial capacity utilization remains 9.6% below the 1972-2008 average of 80.9%. Manufacturing capacity utilization rose to 68.4% in November from 67.6% in October, 11.2% below the 1972-2008 average of 79.6%. (Federal Reserve Board, 12/15/09) Analysis Federal Reserve Statistical Release U.S. Industrial Production and Capacity Utilization November 2009 The decline in capacity utilization has been sharp during this cycle. As U.S. consumers deleverage and consumer spending remains subdued, capacity utilization will recover at a sluggish pace over the next two to three years. The lower share of consumption (to GDP) in the economy going forward implies that some capacity destruction will be permanent, especially in the goods-producing and auto sectors. Lex, FT: Since 1972, overall utilization has averaged 81%. The level of capacity utilization consistent with stable inflation is around 80%. Slack in the economy suggests that companies won't rush to buy new machines at the first sign of growth. (05/19/09) Opinions Financial Times Lex: US capacity utilisation John Mauldin, Thoughts from the Frontline:"We simply built too much productive capacity to be utilized in the New Normal. One way of dealing with too much capacity is to simply close the plants. That is what is happening in the paper and memory-chip industries. Other industries are engaging in mergers to reduce or 'rationalize' capacity. While that process is a good thing, it does mean that unemployment rises or stays higher longer." (08/21/09) http://www.roubini.com/briefings/47767.php#18280
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16/12/2009
Today we look at the links between the current economic conditions and those of the 1930s, another era where the threats of sovereign defaults and inflation worries loomed large. A lengthy recent analysis by RGE’s Mikka Pineda identifies striking similarities in U.S. inflation attitudes between the mid-1930s, when the U.S. began to show signs of recovery from the Depression, and 2009. Americans during the Great Depression voiced the same concerns about excess bank reserves, budget deficits, competitive devaluations and commodities speculation as they do today. Even dissenting arguments followed the same script in both eras. The eerie resemblance in the psychological and economic backdrop of the mid-1930s and 2009—both historic junctures when recovery was thought to have begun—raises concerns that the U.S. could be on the edge of a double- dip.
A stroll through the archives of TIME magazine and The New York Times reveals other similarities in the reactions of Americans today to fiscal and monetary easing and the reactions of their forebears of the mid-1930s. When the U.S. economy began to recover from the Great Depression, widespread fear of credit inflation, currency inflation and public debt inflation drove the Federal Reserve Board to hike reserve requirements by 50% and prompted Congress to slash spending. A premature retraction of economic stimulus, among other things, pushed the U.S. back into recession.
In terms of GDP growth, there was a brief recession lasting only about a year from autumn 1937. Business leaders at the time called it a mere “business recession” to whittle down excess capacity and high inventories built up in response to rising commodity prices. To everyone else, particularly those laborers considered “excess capacity,” the economy's fragile recovery took a big step back. Deflation took hold of the country for another two years and unemployment spiked to 20% and didn't drop below 15% until 1940. Property prices and stock markets languished below their pre-1929 levels until World War II shocked production back to life. Today the U.S. is experiencing a similar situation with hawks calling for the immediate exit from both loose fiscal and monetary policy even amid high unemployment. Though past is not prologue, learning from past mistakes can make a considerable difference. • Further reading: “Deja Vu: Will the U.S. Undergo a Reprise of 1937?” ; “Comparing Three Crises”
521 United States: Monetary Policy Exit Strategy United States: Monetary Policy Exit Strategy
Dec 08, 2009 3:52:12 PM | Last Updated
How Will the Fed Exit Loose Monetary Policy? When Will the Fed Exit Loose Monetary Policy? When Will the Fed Hike Rates? Paying Interest on Reserves: The Ace in the Fed's Exit Strategy? Fed Balance Sheet Size: Outright Asset Purchases Rise to the Surface Fed Balance Sheet Composition: Need for Quality Control?
Overview:
The Federal Reserve balance sheet has expanded in size and deteriorated in quality, raising concerns about the difficulty of rolling back the Fed's monetary easing—particularly as its asset purchases overtake temporary credit on the asset side of its balance sheet. Worse yet, many of these asset purchases have long maturities. Despite the sharp rise in reserves deposited at the Fed and lower market interest rates, private-sector credit growth remains stagnant. Given current economic conditions, the time to tighten monetary policy might not be here yet. The risk could be a reprisal of 1937, when premature fiscal and monetary tightening pushed the U.S. back into a recession during the Great Depression. Balance Sheet Size The Fed balance sheet has begun to expand again after shrinking in June and July to below US$2 trillion on declining demand at lending facilities. Asset purchases have begun to offset the decrease in lending and drove the expansion. Excess reserves continue to grow while private sector lending continues to slow, suggesting banks are hoarding liquidity and would rather deposit funds at the Fed and earn interest at a rate below the fed funds rate than lend out the funds. At 14% of GDP, the Fed balance sheet is at an historically unprecedented height, even after a decline from its December 2008 peak. Balance Sheet Composition While increasing in size, the Fed balance sheet will decrease in quality as the Fed purchases more risky and less liquid securities. Outright securities holdings ballooned to 70% of the Fed’s assets as of August 2009, of which agency debt and MBS approached half. With 90% of the Fed’s planned Treasury purchases completed, but only 59% and 50% of agency debt and MBS completed, respectively, the riskier, less liquid securities will dwarf Treasuries if the Fed does not modify its purchasing program. Adding to the Fed balance sheet’s risk and illiquidity is the lengthening maturity of its assets. As of end-August 2009, 73% of the Fed’s assets held a maturity of more than 5 years, all of which were permanent purchases. MBS maturing in more than ten years had the largest footprint, accounting for more than US$600 billion or 31% of the balance sheet. Exit Strategy While the balance sheet will shrink automatically with demand at temporary lending facilities set to expire in 2010, the long-term assets bought directly by the Fed may be difficult to wind down. Unlike lowering or raising interest rates (on Federal Funds, on loans at the Fed's discount window, or on excess reserves deposited at the Fed), asset sales are not as quick and easy a way to shrink the Fed balance sheet and absorb liquidity in the financial system. If
522 asset sales fail, the Fed will be stuck with MBS, Agency debt and Treasuries, many of which do not reach term for upwards of ten years. In any case, image control will be of utmost importance to the Fed to keep inflation expectations from driving up interest rates too high, too soon. Given the unprecedented and unorthodox measures taken, the Fed must manage inflation expectations by setting up a sound exit strategy. The Fed alone may not be enough to maintain price stability though. Financial regulation might also be needed to keep asset inflation under control. Timing the Exit Timing the exit will be another tricky problem. On one hand, removing accommodation too early would stifle the recovery. Despite the sharp rise in reserves deposited at the Fed and the return of market interest rates to pre-crisis levels, private sector credit growth has continued its descent because the banking system’s health remains fragile. Given current economic conditions, it is not yet time to tighten monetary policy lest the Fed risk a reprisal of 1937 when premature fiscal and monetary tightening pushed the U.S. back into a recession during the Great Depression. http://www.roubini.com/briefings/51966.php#52323 How Will the Fed Exit Loose Monetary Policy? Reverse repo or sale of securities: The Fed can conduct reverse repurchase agreements against its long-term securities holdings to drain bank reserves or, if necessary, it could choose to sell some of its securities. In October 2009, the Fed began conducting reverse repurchases in the tri-party market to test its effectiveness in tightening the money supply. Using the tri-party market will allow the Fed to extend its cash-draining operations beyond the usual primary dealers to the rest of the financial system, particularly money market mutual funds. Deborah Blumberg of Wall Street Journal reports that "The Fed is expected to do about $500 billion in total in reverse repos during 2010. The Fed likely has to drain a total of around $1 trillion from the market." (10/09/09) Analysis Financial Times Michael Mackenzie Fed confirms reverse repo tests News Wall Street Journal Deborah Lynn Blumberg Fed Has Run Tests For Reverse Repos -Source Raise Target Fed Funds Rate and Discount Rate: The Fed can raise its target rate for the interest charged on federal funds and discount window loans. Banks normally arbitrage the actual Fed funds rate back up to the rate the Fed pays. But hikes in the fed funds and discount rate targets can be ineffective if banks do not arbitrage. Hence, PIMCO Managing Director Paul McCulley believes "Simply hiking the rate the Fed pays on excess reserves is the cleanest way to hike the Fed funds rate...By hiking the rate it pays on excess reserves, the Fed now has the ability to enforce a rising Fed funds rate target – even before it 'unwinds' its bloated balance sheet. The Fed can tighten the fed funds rate even if there are still large excess reserves in the system." (06/17/09) Blogs Paul Krugman The Madness of The Inflation Hawks Analysis PIMCO Paul McCulley Exit Strategy: It’s About Hiking the Fed Funds Rate, Not Soaking Up Excess Reserves Raise interest rate on reserves: Raising the interest rate paid on excess reserves will encourage depository institutions to hold excess reserves with the Fed, rather than lending them into the federal funds market at a rate below the rate paid on reserves. Thus, the interest rate paid on reserves will tend to set a floor on the federal funds rate, according to Bernanke. The problem with this strategy is that it raises the reserve tax on the banking system as well as the amount of money taxpayers pay to banks. Time commitment: The Fed needs to issue a pronouncement to assure the public that there is no need for concern about inflation after the recovery and to reaffirm its historical commitment to stable and low inflation(Woodward/Hall). Blogs Financial Crisis and Recession Robert Hall and Susan Woodward The Fed Needs to Make a Policy Statement Set up a term deposit facility to encourage depository institutions to make deposits at the Fed for a term longer than overnight. These deposits will not count towards reserve requirements though. Wait for demand to wane: Many Fed lending programs extend credit primarily on a short-term basis and thus could be wound down relatively quickly. In addition, since the lending rates in these programs are typically set above the rates that prevail in normal market conditions, these facilities should shrink automatically as demand for them wanes (Bernanke). Opinions Federal Reserve Board Ben S. Bernanke Semiannual Monetary Policy Report to the Congress: Economic and Financial Developments in the First Half of 2009
523 Supplemental financing from Treasury: Some reserves can be soaked up by the Treasury's Supplementary Financing Program. However, the Treasury announced in September 2009 that it would wind down its program to repay maturing debt and avoid hitting the debt ceiling. Raise reserve ratio: The Fed could increase liquidity requirements up to the point where excess reserves are fully sterilized. Once this is done, the money supply can be expanded as much as needed to reactivate the economy via open market purchases or by allowing financial institutions controlled access to the rediscount window (Cottani/Cavallo). Blogs U.S. EconoMonitor Joaquin Cottani and Domingo Cavallo How to Deal with the Monetary Overhang Issue debt: The Economist suggested, "The Fed could issue its own bills, as other central banks do. It could rely on a wider variety of investors, not just primary dealers, to manage its balance sheet. It would restrict the maturity of such bills to less than 30 days to avoid interfering with Treasury's longer-dated issuance. The hitch is that Congress has to authorize it." Analysis Economist Central banks' exit strategies: This way out Wait for asset markets to correct themselves: Risky assets - such as commodities, corporate bonds and equities - rallied this year on 'green shoots' but may correct their overshoots when it becomes clear that the economic rebounds around the world were inventory-driven and a recovery in global demand growth has not yet begun. Further Reading News Reuters FACTBOX-Potential Fed exit strategy tools Analysis Natixis Fed: What strategies can it use to exit from its current policy? Analysis Federal Reserve Bank of New York Speech by William C. Dudley The Economic Outlook and the Fed's Balance Sheet: The Issue of "How" versus "When" Analysis BBVA Jose Luis Escrivá Zero interest, quantitative easing: Appropriate for now, but where is the exit? Analysis Morgan Stanley David Greenlaw United States: Fed Exit Strategy: When and How? Analysis Federal Reserve Board Federal Reserve announces extensions of and modifications to a number of its liquidity programs Analysis Natixis Discipline has to be reasserted in the global money supply or: Help, bubbles are back! Opinions Financial Times Alan Greenspan Inflation - the real threat to sustained recovery Analysis BNP Paribas Options for the Fed | Autumn: Euro’s Crunch Time? Analysis Nomura Securities Charles Diebel et al Markets underestimating Fed’s options on QE | ECB’s 1-year repo may extend steepening bias Analysis Mitsubishi UFJ Naomi Hasagawa Multiple Issues Surround Exit Strategy from Exceptional Monetary Policies Research BIS Quarterly Review, June 2009 Kazuo Ueda and Robert N McCauley Government debt management at low interest rates Analysis Morgan Stanley Joachim Fels and Manoj Pradhan Global: QExit Blogs U.S. EconoMonitor Rebecca WilderThe Fed can handle it Analysis IRA Institutional Risk Analytics Chris Whalen Pento on Bernanke's Permanently Expanded Balance Sheet Analysis Federal Reserve Ben S. Bernanke The Federal Reserve's Balance Sheet Analysis J P Morgan Michael Feroli US: Reserves, Exit Strategies, and Expansion Strategies When Will the Fed Exit Loose Monetary Policy? Future Rollbacks Effective January 14, 2010, the Fed will reduce the maximum maturity of primary credit loans at the discount window for depository institutions to 28 days from 90 days. News Bloomberg Fed to Cut Maximum Maturity of Discount Window Loans to 28 Days
524 The Fed will slow the US$1.25 trillion purchases of mortgage backed securities and US$175 billion purchases of agency debt but will extend the purchases until Q1 2010. AMLF, CPFF, TSLF, PDCF and the swap lines with foreign central banks were extended to February 1, 2010. TALF for ABS and legacy CMBS were extended to March 31, 2010 and for newly-issued CMBS to June 30, 2010. TALF was previously scheduled to expire on December 31, 2009. Past Rollbacks November 4, 2009, the Fed reduced the size of its agency debt purchase program slightly to US$175 billion from the previously announced maxiumum of US$200 billion. MMIFF and purchases of Treasury securities were not extended past October 30, 2009. Effective with maturity of outstanding June TOP options, the frequency of Schedule 2 TSLF auctions was reduced to one every four weeks and the offered amount was reduced to US$75 billion. Effective July 1, 2009, TSLF Schedule 1 auctions and TSLF Options Program auctions were suspended due to weak demand. Effective September 2009, the size of TAF auctions were reduced for the third time in 2009 from US$100 billion to US$75 billion due to demand undershooting the offered amount. Concerns Morgan Stanley analysts Richard Berner and David Greenlaw believe, "In the end, it's certainly conceivable that the Fed could delay exit longer than it should (just as it is possible that it moves too soon). But we are convinced that if the Fed was to wait too long, it would be because it misread the economy, not because of political influences." (10/28/09) Analysis Morgan Stanley Richard Berner United States: Fedspeak: Roadmap for the Exit Thomas F. Cooley, professor and dean of the NYU Stern School of Business: "The optimal policy for a central bank is to commit to achieving low and stable inflation. But if the central bank is also concerned with maintaining low unemployment, as is true in the United States, then that commitment to low inflation is not really fully credible. If the Fed is to face a choice between lowering our soaring unemployment rates and raising interest rates, or decreasing reserves as the economy is expanding, then the commitment to low inflation is likely to be sacrificed...one can push the idea of time-consistent policies too far." Opinions Forbes.com Thomas F. Cooley The Museum Of Clear (Economic) Ideas: Time-consistency and the challenge for the Fed. When Will the Fed Hike Rates? The Federal Open Market Committee (FOMC) decided at its November 2009 meeting to keep the Federal Funds Rate target range unchanged between 0% and 0.25% and made no change to its asset purchase programs. The FOMC stated it "continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period." The FOMC made only a slight change in its statement to emphasize the importance of labor market slack to its decision. Opinions Federal Reserve Board FOMC Statement, November 4, 2009
Policy Outlook With the target Fed Funds Rate (FFR) already at 0%-0.25%, the Fed will conduct monetary policy through alternative means, such as credit easing and outright asset purchases, to give an amount of stimulus equivalent to an interest rate below zero. The Fed may enter into interest rate swaps with the Treasury or issue its own debt, some of the strategies Fed Chairman Ben Bernanke suggested in 2003-04 to fight deflation. News Federal Reserve Board FOMC Statement - September 23, 2009 The Fed will slow the US$1.25 trillion purchases of mortgage backed securities and US$200 billion purchases of agency debt but will extend the purchases until Q1 2010. The program to purchase Treasuries expired in October 2009. Contrary to market expectations, many believe the Fed is unlikely to begin rate normalization until 2010 or 2011 due to a negative output gap and stubbornly tight credit.
525 Goldman Sachs analysts Jan Hatzius and Ed McKelvey noted that, in past cycles, the Fed never started raising rates before unemployment had peaked. "If our economic forecast is broadly correct, the federal funds rate is likely to stay at 0% in 2010 and, more likely than not, in 2011 as well. First, core inflation of 1% or less coupled with unemployment of 10% or more justify very expansionary policies. Second, "risk management" considerations argue for erring on the side of later rate hikes. Third, gradual tightening in fiscal policy and a cessation of Fed asset purchases are likely to substitute for - and hence delay - an increase in the funds rate to some degree." (12/07/09) Blogs Wall Street Manna Jan Hatzius Federal Funds Rate - How Low for How Long News Goldman Sachs Jan Hatzius and Ed McKelvey et al The Outlook for Fed Policy Lex, FT: "Talk about rate rises is premature. The Federal Reserve is far more concerned with the long end of the curve...as it struggles to keep mortgage costs down. So far, this is proving quite a challenge." (06/08/09) Analysis Financial Times Lex: Talk of rate rises is premature as Fed struggles to keep mortgage costs down Morgan Stanley chief U.S. economists Richard Berner & David Greenlaw: "Reflecting a sustainable recovery and a bottoming in inflation by mid 2010, we expect the Fed to begin raising rates in 3Q 2010. But instead of continuing to raise rates, we now expect the Fed to pause early in 2011, after lifting the funds rate to 2% early in the year. Among the reasons: improved productivity growth, correspondingly more slack in labor markets, and a lower 2010 inflation trajectory...Given our outlook, even the move to 2% would keep the real federal funds rate at or below zero through 2011, which we think of as exceptionally low." (11/12/09) Analysis Morgan Stanley Richard Berner and David Greenlaw US Economic and Interest Rate Forecast: Hiring Still Poised to Improve Early in 2010 Access to credit remains uneven and somewhat restrained, while the rise in investor confidence has yet to spill over to businesses and consumers. Initial rate hikes may not require steep declines in the jobless rate but are unlikely before there are compelling signs that recovery will be sustained and that financial conditions are normalized. Citigroup's base case is that the US is likely to hike rates in Q2 2010. Analysis Citigroup Michael Saunders et al US and China likely to hike rates in Q2-2010, ECB around end-2010, BoJ even later Michael Feroli, JPMorgan: The Fed will stay in its quarter-point corridor for all of 2009 and probably will not make its first hike until 2011. The deposit rate for interest paid on reserves was set to 25 basis points, ensuring that banks will receive the upper end of the range. However, with no ready solution to the problem of government- sponsored enterprises lending into the Fed funds market, the effective funds rate will likely continue to trade well below the deposit rate. (04/24/09) Analysis J.P. Morgan Michael Feroli US: when will the Fed hike rates again? Goldman Sachs estimated the neutral rate at -6% in 2010, according to the Taylor Rule. Blogs Across the Curve John Jansen Goldman Sachs on Timing of Federal Reserve Tightening Process The National Bank of Canada estimated the neutral rate at somewhere between -6.1% and -5.2%, assuming unemployment peaks in the vicinity of 9.5% in early 2010 and core personal consumption expenditure (PCE) remains in the range of 1.0%-1.7%. Paying Interest on Reserves: The Ace in the Fed's Exit Strategy? In Q4 2008, the Fed finally received authority from Congress to pay interest on commercial bank reserves deposited at the Fed, after a century of rejections. The Fed hoped interest payments would put a floor under the effective Fed funds rate, but this has not completely worked because not all depositors are eligible for interest payments. At the very least, the payment of interest on reserves will help the Fed shrink its balance sheet without a fire sale of its assets. When it's time to tighten up the money supply, the Fed can raise the interest it pays on reserves to discourage banks from lending too much and fanning high inflation. How Will Interest on Reserves Serve as an Exit Strategy from Monetary Easing? William Dudley, President of the Federal Reserve Bank of New York: "In a world where banks could not be paid interest on excess reserves...persistent high reserve balances would indeed have the potential to prove inflationary. But that is not the world in which we now live. Because the Federal Reserve now has the ability to pay interest on excess reserves, it also now has the ability to prevent excess reserves from leading to excessive credit creation."
526 Analysis Federal Reserve Bank of New York Speech by William C. Dudley The Economic Outlook and the Fed's Balance Sheet: The Issue of "How" versus "When" Bernanke: "Should economic conditions warrant a tightening of monetary policy...we have a number of tools that will enable us to raise market interest rates as needed. Perhaps the most important such tool is the authority...to pay interest on balances held at the Fed by depository institutions. Raising the rate of interest paid on reserve balances will give us substantial leverage over the federal funds rate and other short-term market interest rates, because banks generally will not supply funds to the market at an interest rate significantly lower than they can earn risk-free by holding balances at the Federal Reserve." (Federal Reserve Board) Opinions Federal Reserve Board Ben S. Bernanke Semiannual Monetary Policy Report to the Congress: Economic and Financial Developments in the First Half of 2009 Paying interest removes the opportunity cost of holding reserves so that the Fed can expand its balance sheet (to offset the contraction in private-sector credit) without changing monetary policy targets (since policy rates are already at their nominal lower bound). The interest rate puts a floor under the Fed funds rate (FFR), so that liquidity-enhancing measures cannot drive the effective FFR more than 75 basis points from the target FFR. (Goldman Sachs, not online) The Fed can now conduct quantitative easing to stimulate the economy through the "portfolio balance" channel-- affecting the relative supply of non-money assets in a way that raises prices and reduces yields on those assets. (JPMorgan, not online) What Is the Interest Paid on Reserves? As of November 5, 2008, required reserves would be paid the average Federal Open Market Committee (FOMC) target funds rate during a reserve maintenance period--instead of the previous 10 basis points below the average target--and excess reserves would be paid the lowest FOMC target rate during a reserve maintenance period, instead of the previous 35 basis points below the lowest target. These changes were aimed at getting effective Fed funds to print closer to the FOMC target rate. Since the FOMC cut the target rate to 1.0%, the effective Fed funds rate has averaged 0.25%. (JPMorgan, not online) The lower limit on the amount of interest that can be paid on reserves is the deposit rate, or the operational cost of money market funds, otherwise the Fed will end up sucking money out of those funds. The upper limit on effective Fed funds is the discount rate. Why Did the Fed Start Paying Interest on Reserves? Analyst Michael Feroli of JPMorgan pointed to the September 29, 2008, increase in the size of the Term-Auction Facility (TAF) and the swap lines being much more than the Fed could sterilize through sales of Treasuries from the System Open Market Account (SOMA). Allowing the Fed to pay interest on reserves removes the Fed's balance- sheet constraints and effectively absorbs excess liquidity through the deposit facility. (Across the Curve, John Jansen) Blogs Across the Curve John Jansen JPMorgan Re Interest on Reserves Timeline October 22, 2008: The Fed raised interest paid on reserves to make room for further balance-sheet expansion. October 9, 2008: The Fed began paying interest on reserves. October 3, 2008: TARP-II passed and was signed into law, raising the government debt ceiling and allowing the Fed to pay interest on bank reserves held at the Fed. September 17, 2008: The Treasury set up the Temporary Supplemental Financing Program (TSFP) to finance the Fed by selling US$40 billion in 35-day Treasury bills. The immediate impact was to drain reserves that enter the banking system from the various Fed liquidity measures and bailouts, obviating the more pressing need to drain these reserves by selling Treasuries out of the SOMA.
1929: President Herbert Hoover rejects the Fed's proposal to pay interest on reserves.
527 Fed Balance Sheet Size: Outright Asset Purchases Rise to the Surface Overview: The Fed balance sheet has begun to expand again after shrinking in June and July to below US$2 trillion on declining demand at lending facilities. Asset purchases have begun to offset the decrease in lending and drove the expansion. Excess reserves continue to grow while private sector lending continues to slow, suggesting banks are hoarding liquidity and would rather deposit funds at the Fed and earn interest at a rate below the fed funds rate than lend out the funds. At 14% of GDP, the Fed balance sheet is at an historically unprecedented height, even after a decline from its December 2008 peak. How big is the Fed balance sheet? The Fed balance sheet rose back above US$2.0 trillion as of August 26, 2009 due to increased purchases of MBS. About half of the US$1.25 trillion MBS purchase program has been completed. The Fed balance sheet is still smaller than its peak in December 2008, but TALF and QE may eventually lead the balance sheet to surpass that peak. In 2008, the Fed balance sheet exploded c. 2.5x from roughly US$900 billion in August 2008 to US$2.5 trillion by December 31. Blogs WSJ Real Time Economics Phil Izzo A Look Inside Fed’s Balance Sheet — 7/16/09 Update How much bigger will the balance sheet get? As of March 18 2009, the Fed committed to expanding its balance sheet by up to US$1.15 trillion. The implementation and expansion of TALF and MMIFF and continued MBS purchases in 2009 will more than offset any shrinkage in the balance sheet due to declining USD demand from foreign central banks that have swap lines with the Fed. (Merrill Lynch) The decline in borrowing demand at liquidity facilities (PDCF, TAF, CPFF) is also likely temporary. Fed will purchase long-term Treasury and agency debt and possible issue interest-bearing bills and/or enter interest rate swaps with the Treasury to enable further monetary expansion without encouraging increases in excess reserves. Analysis Merrill Lynch - Bank of America Drew T. Matus et al Macro Viewpoint: Not peak liquidity yet What is driving balance sheet growth? Since 2008, the largest increase in liabilities was the deposits of depository institutions, primarily excess reserves - accounting for more than half of balance sheet growth. The growth in deposits was triggered by the Fed's authorization to pay interest on reserves. In Q4 2008, the balance sheet grew from the US$1.6 trillion of new credit extended to illiquid firms. Some 53% (US$857 billion) was financed by quantitative easing (an expansion in the monetary base) and 47% via qualitative easing (sterilizing, or swapping good bonds for bad). (DBS Bank) Growth in holdings of the CPFF, PDCF, ABCP, and discount window slowed have slowed since 2008. Analysis DBS Bank US Fed: The quantity / quality split Is the quality of the Fed balance sheet's composition deteriorating? Fed has been raising agency debt relative to its Treasury holdings and adding MBS holdings. There may be a deterioration in quality as the Fed purchases GSE debt, but other liquidity operations are not permanent purchases that would constitute a long-run increase in credit risk. http://www.roubini.com/briefings/51966.php#52323
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Commodities
Nov 10, 2009 7:41:20 PM | Last Updated
Showing 1–5 of 6<
Are Regulators Losing Their Resolve to Curb Speculation in Commodities?
Is a Commodity Supply Crunch Looming Or Is the Super-Cycle Dead?
How Do the U.S. Dollar and Commodity Prices Affect Each Other?
Roll Yield Squeeze: Are Commodity Markets Crowded?
How Do Contango and Backwardation in Commodity Futures Affect Spot Prices?
Rising Debt: Did Commodity Producers Actually Benefit from the Commodity Boom?
Overview:
Commodity prices have rallied since February on the belief that putative "green shoots" around the world validate a V-shaped economic recovery in 2009. Commodity prices will likely snap back to reality before resuming a more moderate uptrend in line with a U-shaped global growth path. Regulatory crackdown on speculation in commodities may also send commodity prices into another downswing. Fearing position limits from the CFTC, ETFs have begun suspending new share issues. Outlook
• 2 factors to mitigate global slowdown impact on commodities: 1) Growth to continue to be strongest in EM economies whose consumption is most commodity-intensive and 2) Investment to raise production capacity takes time - investment cuts and delays due to lower prices may lead to supply crunch in the future. • 'Green shoots' merely signal the stabilization of economic activity at low levels, rather than a return to trend growth. Even if GDP growth around the world has bottomed, growth will continue to be negative or sluggish until 2011. As such, commodity price gains are a false sign of economic recovery. The strong uptrend in commodity prices has been propelled more by technicals (investment demand - arbitrage, opportunistic stockpiling at low prices) than fundamentals (real growth in physical demand and production). • UniCredit: Despite current correction, the secular trend remains upward due to tight supply/demand fundamentals. In the medium term though, focus will be on global slowdown, easing inflationary pressures, dollar recovery, and credit tightening - all bearish for commodities. • Danske: There is a risk that some commodity markets have decoupled from fundamentals. The fundamental outlook represented by e.g. stocks for aluminium, nickel and lead has not changed significantly in the last
529 month. Demand for oil in the US is also still pretty weak. It seems that the commodity market has run a bit ahead of the fundamental picture. Both base metals and oil are quite vulnerable if we get a set-back in risk sentiment. • UBS: Supply has been a big support for industrial metals. Demand destruction has led to a correction in energy prices. Agricultural prices have corrected significantly based on improved crop conditions and concerns regarding increased regulation of commodities markets in the US. Prospects for higher inflation has been muted by the correction in energy and has depressed the gold price. • Citi: There is only so much demand to accommodate price increases amid tightening in credit markets, falling asset prices and slowing nominal incomes. Maintaining the bull run in commodities in the face of sharply slowing US demand will require that decoupling theories hold. Performance Review
• August 18, 2009: Commodities have been strong this year, led by industrial metals and some agriculturals. Industrial metals have seen a rise due to Chinese buying and stockpiling. Copper jumped 95.64% ytd and nickel has gained 58.33% ytd. Sugar reached a 28-year high with a gain of 61.50% ytd on crop failures in India and Brazil. Livestock has been the weakest area of commodities with a fall of 42.83% for lean hogs due to swine flu concerns. • Worst annual performance: Reuters/Jefferies CRB Index of 19 raw materials fell 36% in 2008, the most since the gauge debuted in 1956, to 229.54. It rose to a record 473.97 on July 3, then dropped to the lowest since August 2002 on December 5. • Biggest 1-day drop since 1956: September 29, Reuters/Jefferies CRB Index fell 21.35 points or 5.8% to 343.2 after the House voted against US bailout plan. • Steepest monthly drop since 1980: In July, CRB Index fell 12%.
• Sectoral performance: Traditional sectors (metals, energy) remain fundamentally cyclical as they are more closely tied to industrial production than agriculturals. Agricultural commodity prices tend to be supply driven.
ASSOCIATED READINGS
Analysis TD Waterhouse Quarterly Commodity Price Report: Supply Glut to Limit Rebound in Commodity Prices in 2010
Analysis Danske Bank Arne Lohmann Rasmussen and Christin Kyrme Tuxen Commodities Monthly: Recovery in OECD demand the next theme
Blogs FT Alphaville The great commodity ETF unwind
Analysis Reserve Bank of Australia Conference: Inflation in an Era of Relative Price Shocks Pierre Siklos Relative Price Shocks, Inflation Expectations, and the Role of Monetary Policy
Analysis Reserve Bank of Australia Conference: Inflation in an Era of Relative Price Shocks Jeffrey Frankel and Andrew Rose Determinants of Agricultural and Mineral Commodity Prices
Analysis Citigroup Alan Heap and Alex Tonks Commodity Heap: Production Restarts
Analysis UniCredit Global Research Jochen Hitzfeld Financial crisis triggers shrinking demand for commodities
530 Are Regulators Losing Their Resolve to Curb Speculation in Commodities?
September 2009: CFTC expanded its Commitment of Traders report to cover swap dealers and managed money in addition to producers and 'other reportables'. The expanded report provided inconclusive evidence that speculators drive commodity markets, thus undermining the case for imposing position limits on energy and metals futures. Blogs FT Energy Source Kate Mackenzie New commodity trader categories: What do they tell us about speculators?
Analysis Commodity Futures Trading Commission (CFTC) / Securities and Exchange Commission (SEC) Gary Gensler, William Brodsky and Craig Donohue et al Joint Meeting on harmonization of Regulation CFTC Headquarters -- September 2, 2009
News Financial Times Gregory Meyer Setback for US crackdown on oil speculation
Analysis Economist Speculators and the oil price: Data drilling
News Economist A new sheriff: Gary Gensler at the CFTC
August 2009: The CFTC revoked Deutsche Bank's commodity investment unit's exemptions for speculative limits in agricultural futures. News Fox Business Network Laura Mandaro CFTC Withdraws Hedging Exemption of Deutsche Fund
August 2009: Federal Trade Commission slapped a penalty on petroleum market manipulation of US$1 million per violation per day. News Federal Trade Commission New FTC Rule Prohibits Petroleum Market Manipulation
July 2009: The CFTC began conducting hearings to assess the extent and impact of speculation in energy markets and whether the CFTC should extend position limits beyond agricultural futures to energy futures. 2009: House leadership will consider the Speculation Bill approved by the House Agriculture Committee. The bill establishes tougher disclosure rules and position limits. Analysis Commodity Futures Trading Commission (CFTC) Gary Gensler et al Hearing on Speculative Position Limits in Energy Futures Markets, August 5, 2009
Analysis CFTC Commodities and Futures Trading Commission Hearing on Speculative Position Limits in Energy Futures Markets, July 28, 2009
Analysis Commodity Futures Trading Commission CFTC Staff Report on Commodity Swap Dealers and Index Traders with Commission Recommendations
June-July 2008: The CFTC amended ICE and DME's "no-action" letters to require them to follow position limits on speculation, provide an audit trail, be monitored for market manipulation and pay higher penalties for market manipulation or excessive speculation. News CFTC CFTC Amends No-Action Letter Issued to the Dubai Mercantile Exchange
2008: Both Houses voted in favor of the Food, Conservation and Energy Act/CFTC Reauthorization Act of 2008 with a veto-proof majority of 318-106 in the House and 81-15 in the Senate. Legislation to close the Enron Loophole was packaged into this so-called U.S. Farm Bill, which authorized the CFTC to regulate OTC markets and implement a system of large trader reporting to enhance monitoring. News Trading Markets Farm Bill Includes Feintein-Levin-Snowe Measure to Close Enron Loophole
2008: The CFTC instituted position limits on wheat and some agricultural commodities but granted some exceptions. There are still no position limits on energy commodities. http://www.roubini.com/briefings/53721.php#54749
531
United States: Labor Market
Dec 11, 2009 7:00:00 PM | Last Updated
Showing 1–5 of 7<
Overview:
Since the beginning of the recession in December 2007, job losses in the U.S. economy have crossed seven million and the unemployment rate has risen steadily. The pace of job losses has eased in H2 2009 and jobless claims have shown a marked improvement since Q3 2009. During this recession, the average workweek has fallen sharply and wages have declined as firms seek to cut costs, increasingly relying on part-time workers. Weak sales, uncertainty about the recovery, and tight borrowing constraints, especially for smaller firms, imply that firms will continue to shed jobs. It may take several quarters or years to recover the jobs lost during this recession, especially in sectors such as housing, autos, retail and financial services. Wage-bargaining power will also weaken, implying another jobless and wageless recovery. As job losses will continue to put pressure on consumer spending, signals of sustainable health in the economy can be expected to first emerge in the labor market. http://www.roubini.com/briefings/47208.php
The White House and Congress Debate Stimulus Measures to Help the Unemployed
United States: Labor Market RGE Dec 11, 2009http://www.roubini.com/briefings/47208.php
On December 8, 2009 President Barack Obama outlined proposals to step up job creation in the economy, emphasizing measures directed at small businesses such as a tax cut to encourage job creation and elimination of the capital gains tax on small businesses for one year. The president proposed to direct the remainder of TARP funds to facilitate lending to small businesses. The job creation proposals also include investment in upgrading infrastructure, such as transportation and communication networks, and measures such as rebates for boosting home energy efficiency, which would promote the creation of "clean energy" jobs. News The Brookings Institution An Address on Jobs and the Economy by President Barack Obama
532 President Obama's proposals to boost infrastructure spending and lending to small businesses are largely enhancements of measures included in the initial US$787 billion stimulus plan. The new measures among the proposals include the tax credit for small businesses towards job creation and rebates to boost home energy efficiency. According to the WSJ, measures such as food-stamp payment increases, subsidies for health-care purchases by the unemployed and the extension of unemployment insurance benefits, amounting to US$100 billion, would be attached to a spending bill in the coming weeks, while a jobs bill pushing Obama's announced initiatives, estimated at about US$70 billion, wouldn't be on the table before early next year. News Wall Street Journal Jonathan Weisman Obama Pushes New Job Stimulus
Robert Reich, professor, University of California at Berkeley: "We need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large...Obama's 'new' stimulus, announced today, is about all we have, and it's not nearly enough." The government should bail out state and fiscal governments, renew unemployment and COBRA benefits, increase spending on infrastructure and if necessary target direct hiring. While the President's proposals involve spending of about US$70 billion from the remainder of the TARP funds, "the package should be US$400 billion over two years...the President's small, calibrated attempt to balance a stimulus with deficit reduction will in fact make the deficit worse over the long haul." (12/09/09) Blogs Robert Reich's Blog Robert Reich The President's Job's Initiative Doesn't Measure Up
At President Obama's "Jobs Forum" in December 2009, policymakers discussed measures to help the unemployed. The White House, concerned about the high fiscal deficit, is inclined to adopt targeted measures such as wage subsidies or tax credits to encourage businesses to increase hiring. In the past, the administration has stressed retraining and education programs for the unemployed to help reallocate workers to other sectors, as well as measures to create jobs in the green energy sector. But the administration is increasingly challenged by the stimulus and fiscal deficit trade-off. The administration has signaled using some of the Troubled Asset Relief Program (TARP) funds (created in 2008 to help troubled financial institutions) to finance the jobs stimulus to prevent a negative impact on the fiscal deficit. News Wall Street Journal Neil King Jr. and Naftali Bendavid TARP Cash Targeted in Jobs Push
U.S. House Democrats are proposing tax credits for small businesses to encourage hiring, providing additional aid to state governments, and increasing funding for highway construction to stimulate construction employment. The Democrats support extending the unemployment benefits and health insurance tax credits for unemployed workers beyond their expiration date of December 31, 2009. The unemployment benefits will expire for around 1 million workers in January 2010. Extending these safety nets through 2010 will cost over US$100 billion. The U.S. House plans to finance these measures by using US$150 billion of TARP funds. In 2010, Congress will go into midterm elections with over an unemployment rate of over 10% and a fiscal deficit of over US$1 trillion. This will raise the political pressure to dole out additional fiscal stimulus. The Republicans are opposed to tax credits and are instead proposing payroll tax cuts, as such tax cuts would be easier to implement and would boost workers' income. News Wall Street Journal Neil King Jr. and Naftali Bendavid TARP Cash Targeted in Jobs Push
News New York Times Jobless Benefits Will Expire Unless Congress Acts
The Economic Policy Institute (EPI) recommends the 'American Jobs Plan' that is forecast to create 4.6 million jobs in 2010 and cost US$400 billion in 2010. The plan includes extending the unemployment benefits and health insurance coverage for the unemployed; giving an additional US$150 billion in aid to the state and local governments (which is expected to create 1-1.4 million jobs); increasing investment in education and transportation; creating public sector jobs; and offering tax credits for firms, non-profit organizations and state and local governments equal to 15% of the increase in total payroll expenditure (by hiring, increasing hours and raising wages) in the first year and 10% in the sceond year (which is expected to create 1.4-2.8 million jobs in 2010 and slight less number of jobs in 2011). The EPI recommends financing the plan by imposing a financial transaction tax on the sale of stocks and other financial assets over the next ten years. (via EPI; 10/09) Research Economic Policy Institute A Five-Point Plan to Stem the U.S. Jobs Crisis American Jobs Plan: A Five- Point Plan to Stem the U.S. Jobs Crisis
In the week ending November 6, 2009, Congress extended unemployment benefits for over 1 million workers by 14 weeks (up to 20 weeks in states with unemployment rates of over 8.5%). With this measure, unemployed workers will receive benefits for up to a total of 99 weeks depending their state. The cost of extending the benefits (US$2.4 billion) will be financed by the surcharge on employers. This is the fourth extension of the duration and value of benefits under unemployment claims since June 2008. (via WSJ, 11/05/09) However, the Economist argues that benefits keep unemployment high by reducing incentive among the jobless to look for work.
533 News Wall Street Journal Corey Boles Congress Extends Jobless Benefits, Home-Buyer Credit
The Congressional Budget Office (CBO) estimates that as of September 2009, with the stimulus an additional 6,000,000 to 1.6 million people were employed. Th estimates are based jobs created by employers who received ARRA funding directly or by their immediate subcontractors but exclude estimates of job created via indirect impact of the stimulus on the economy and via tax cut and transfer payments. (CBO; 11/09) Research Congressional Budget Office Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output as of September 2009
The U.S. administration estimated in October-end 2009 that fiscal stimulus has "created or saved" 640,000 jobs at the federal and states levels so far, mostly in education. However, critics argue that most of these jobs were "saved" rather than "created" and were not "new jobs." The administration aims to create or save 3.5 million jobs by the end of 2010. News Wall Street Journal Elizabeth Williamson and Louise Radnofsky Stimulus Created 640,000 Jobs, White House Says
According to the NYT on October 6, 2009, some economists are suggesting giving a US$3,000 two-year tax credit to companies that increase headcount or work hours. "Employers would receive a credit worth twice the first- year payroll tax for each new hire, amounting to several thousand dollars, depending on the new worker’s salary." News New York Times Catherine Rampell Support Builds for Tax Credit to Help Hiring
Timothy J. Bartik and John H. Bishop of the Economic Policy Institute propose giving a tax credit for private, non-profit and state and local government firms that hire workers or increase work hours during 2010-11. Several congressmen have voiced support for this proposal. The government will provide 15% of the net incease in firms' payroll costs during 2010 (which is equivalent to US$6,500 in tax credit for every hiring) and 10% during 2011. They estimate the measure will lead to an additional 2.8 million in hiring by 2010 and by a slightly smaller amount in 2011. The program would cost US$28 billion in 2010 and US$26 billion in 2011, but the cost will be partly offset by lower spending on unemployment insurance, Medicaid spending and other safety net programs, and increased consumer spending among the hired workers. They argue that the measure is more effective than other tax breaks for businesses that have low multiplier effects. (10/20/09) Analysis Economic Policy Institute John H. Bishop and Timothy J. Bartik Complementing recovery policies with a jobs creation tax credit
Dean Baker, Center for Economic and Policy Research: A job sharing tax credit for firms to shorten the workweek while keeping the pay constant will help create 1.3-2.7 million jobs. (10/09) Analysis Center for Economic and Policy Research Dean Baker Job Sharing: Tax Credits to Prevent Layoffs and Stimulate Employment
Critics argue that giving tax credit to firms to boost employment just shifts job creation forward and some of the jobs would be created anyway as the economy recovers. Jobs created under this measure may not be permanent. Given weak consumer spending and tight credit access, companies don't have the incentive to hire workers or undertake capex, especially small businesses. Over US$6.0 billion in tax incentives for firms under the first stimulus package (implemented in February 2009) to hire disadvantaged workers have done little to boost hiring so far. On the other hand, economists supporting the measure argue that such tax credits will stimulate hiring among small and medium enterprises (the major sector for job creation), the sector that has witnessed immense job losses and tight credit conditions during this recession. The measure will also ease the risk of a jobless recovery. Since measures to indirectly boost hiring (such as tax benefits for households and businessnes) haven't been effective in creating jobs, economists are arguing for policy measures to directly target job creation. Opinions Wall Street Journal David Wessel Taking Sides Over Need for Jobs Bill
FT: Tax credits to hire new workers will encourage firms to lay-off existing workers and hire new ones. Giving tax credit for firms increasing payrolls will benefit growing industries rather than the struggling ones. A better option is "an additional subsidy for low-paid workers – an extended earned-income tax credit, a scheme already in place, which is well targeted on poverty and the insecurely employed. It permanently increases the demand for labor at the bottom of the income scale." Extending the unemployment benefits will help those who are more likely to spend than save. Tax credits for hiring should be based on growth in the firms' total payroll cost and should target low- wage workers. Any further stimulus measures should be "temporary" to prevent raising the fiscal deficit. (10/08/09 and 11/18/09) Opinions Financial Times Editorial US Fiscal Fightback
534 Opinions Financial Times US jobs subsidies
Len Burman, professor at Syracuse University: Despite the tax credits, business won't have the incentive to hire until the economy and demand recover and credit access improves. A temporary cut in payroll taxes is a better option as it will boost companies’ cash flow, raise workers' after-tax income, induce hiring, and ease layoffs. (via National Journal, 11/20/09) Opinions National Journal.com John Irons, Gary Burtless and Len Burman Tax Cuts for hiring
Gary Burtless, Chair in Economic Studies, Brookings Institution: The tax credit for business in 1977-78 shows that several firms didn't qualify for the credit or were unware of such an incentive; the design of the prgram was ineffective in stimulating hiring relative to its negative impact on the fiscal deficit. Some of the hiring would have occured anyway, so the government subsidy only hastens some hiring. (via National Journal; 11/20/09) Opinions National Journal.com John Irons, Gary Burtless and Len Burman Tax Cuts for hiring
John S. Irons, research and policy director, Economic Policy Institute: The measures passed by Congress so far— tax benefits for businesses and extension of unemployment benefits—have done little to stimulate hiring. (via National Journal, 11/20/09) Opinions National Journal.com John Irons, Gary Burtless and Len Burman Tax Cuts for hiring
Paul Krugman, professor at Princeton University, argues that due to the anemic economic recovery, unemployment will remain high for a few years. The long-term unemployed will lose their skills and face challenges in finding employment during the economic recovery while graduating students will face lower earnings. Instead of indirect measures to boost GDP growth and job creation, policy measures should directly target the unemployment problem—by inducing hiring, preventing layoffs, encouraging firms to reduce work hours rather than fire workers, providing more aid to state and local governments to prevent job cuts in government and public services, creating employment in the public sector, and giving tax incentives for businesses to hire workers. Risks of high long-term unemployment outweigh concerns about the fiscal deficit and intervening in the flexible U.S. labor markets. (via NYT, 11/12/09 and 11/29/09) Opinions New York Times Paul Krugman The Jobs Imperative
Opinions New York Times Paul Krugman Free to Lose
Alan Blinder, professor at Princeton University: Given the complexities involved in designing and implementing tax credits, measures to create jobs in public services are more attractive. "As long as the new government jobs do not compete with the private sector, the net job creation should be one-for-one. So hire people to repair parks, not shopping malls. And if we restrict ourselves to low-wage jobs, the cost will not do grievous harm to the budget." (via WSJ, 11/15/09) Opinions Wall Street Journal Alan Blinder How Washington Can Create Jobs
Gary Becker, professor at the University of Chicago: Subsidies for firms to encourage hiring will lead companies to fire workers and rehire new ones, and will influence job search among the unemployed workers. The better alternative is to cut taxes on corporate income tax and taxes on capital to stimulate investment and therefore hiring in the economy. (via The Becker-Posner Blog; 11/29/09) Blogs The Becker-Posner Blog Gary Becker How to Increase Employment- Becker
Jeffery Sachs, professor at Columbia University: Increasing spending on education and job retraining will help reduce unemployment among the less-skilled, less-educated and younger workers. Moving to a "low-carbon economy" will also help create jobs. (via FT; 11/10/09) Opinions Financial Times Jeffrey Sachs Obama Has Lost His Way on Jobs
535
Deja Vu: Will the U.S. Undergo a Reprise of 1937?
Mikka Pineda 11/16/2009 12:00:00 AM | Last Updated This RGE Analysis is the property of Roubini Global Economics, LLC for the internal use of RGE clients. Any redistribution, including summarizations or synopses, is expressly prohibited without prior agreement from RGE. A stroll through the archives of TIME magazine and The New York Times reveals striking similarities in the reactions of Americans today to fiscal and monetary easing and the reactions of their forebears back in the mid- 1930s. When the U.S. economy began to recover from the Great Depression, widespread fear of credit inflation, currency inflation and public debt inflation drove the Federal Reserve Board to hike reserve requirements by 50% and Congress to slash spending. A premature retraction of economic stimulus, among other things, pushed the U.S. back into recession.
In terms of GDP growth, it was a brief recession lasting only about a year from autumn 1937. Business leaders at the time called it a mere “business recession”[1] to whittle down excess capacity and high inventories built up in response to rising commodity prices. To everyone else, particularly those laborers considered “excess capacity,” the economy's fragile recovery took a big step back. Deflation took hold of the country for another two years and unemployment spiked to 20% and didn't drop below 15% until 1940. Property prices and stock markets languished below their pre-1929 levels until World War II shocked production back to life.
Today the U.S. is experiencing a similar situation with hawks calling for the immediate exit from both loose fiscal and monetary policy even amid high unemployment. Though past is not prologue, learning from past mistakes can make all the difference. In this report, RGE illuminates between 2009 and the mid-1930s in public attitudes towards inflation and its various potential catalysts (for instance, private sector credit, public debt, currency and goods/commodities).
Fear of Credit Inflation From High Excess Bank Reserves
EXCESS BANK RESERVES: "Excess reserves must promptly be reduced "in order to obviate the probability of an undue and dangerous credit inflation." Sound familiar? This statement from the Federal Advisory Council is from the 1930s[2], although it could just as well have been issued today. Over 600 articles published between 1935 and 1937 in The New York Times alone marked concern over the inflationary potential of 'excessive' excess bank reserves. Here is a smattering of them, alongside their substantive parallels from 2009. Mid-1930s 2009 "Winthrop W. Aldrich, head of Chase National Bank, the largest banking institution in the country, recently "Rates are going to stay too low for too long and the described these excess reserves as so much ‘explosive excess bank reserves that are the aviation fuel of the material awaiting the match.’ He declared that they inflationary firestorm to come are going to keep on invited 'a far wilder speculative abuse of credit than that rising." -Tom Stevenson, The Telegraph, October 24, which culminated in 1929.'" -Elliott V. Bell, The New 2009 York Times, December 29, 1935 "The $3,400,000,000 of excess reserves estimated by Aug. 15 could form the basis for an expansion of "[A]fter the Lehman Brothers collapse, it took Bernanke's $34,000,000,000 in commercial bank deposits, swelling Fed only 112 days to double the size of U.S. bank bank credit to about double what it was in 1929; reserves. The bulk of those reserves are readily available financing a more delirious inflation (in theory at least) to start multiplying through lending — and to set off an than has ever been seen ... So long as the banks have uncontrollable vicious cycle of too much money chasing excess reserves over and above their legal requirements too few goods." -Martin D. Weiss, Jutia Group, October they are not merely free to expand credit, but are under a 19, 2009 strong profit incentive to do so." -Elliott V. Bell, The New York Times, July 19, 1936
536 "Look ahead, 1936 to 1939 or 1940: These four or five "If the Fed can't keep those excess reserves under control, years probably will be years of business activity and it would likely have to raise the Funds rate faster and prosperity...There may be danger ahead in 1939 or higher than it would prefer, threatening the recovery or, 1940—a reaction from the inflation, another quite likely, triggering yet another recession. So far, depression...Two forces are working simultaneously for banks appear content to keep vast reserves at the Fed, enormous credit inflation: 1) the business cycle's normal earning a modest return. As the recovery takes hold and upswing and 2) a Government deliberately and avowedly the interest rate structure starts to rise, the rate the Fed doing everything in its power to inflate. What is more, it pays will have to rise, as well. In theory, the increase in has already succeeded in no small measure. Financing of the rate paid on reserves should work, and as it does the Federal deficits by swapping Government bonds for inflation expectations should remain contained. Given the bookkeeping credits has helped raise bank demand events since the collapse of Bear Stearns, one 'in theory' deposits $6,000,000,000 in less than two years to almost and two 'shoulds' is asking for a lot of faith." -J.D. Foster, the all-time 1928 high." -Willard Monroe Kiplinger, Heritage Foundation, August 10, 2009 TIME, March 4, 1935 CREDIT EXPANSION UNNECESSARY: The reasons for discounting the need for further credit expansion differed between the time periods. Anti-inflationists in the 1930s pointed to the ample private sector savings that could fund consumption, whereas present-day anti-inflationists point to the country's need to reduce debt and rebalance the economy away from consumption. The difference in motive arises from circumstances unique to each time period: In the 1920s and 1930s, the U.S. was a net creditor to the rest of the world (it had a current account surplus), while nowadays it is a net debtor (it has a current account deficit). Furthermore, most U.S. debt in the 1930s was held domestically as Americans saved more back then; nowadays it's in foreign hands, some of which have begun reducing the share of U.S. debt holdings in their portfolio.
Mid-1930s 2009 "America's consumption binge drew support from two "Mr. Aldrich declared that the great volume of idle major asset bubbles—property and credit...America does deposits in the hands of both business corporations and not need to perpetuate its unsustainable consumption individuals could bring about increased purchases without binge; it needs to save and recycle its savings into any further expansion of bank credit being needed." –The investments in infrastructure, alternative-energy New York Times, December 9, 1936 (Paid Archive) technologies, and human capital." -Chairman of Morgan Stanley Asia Stephen S. Roach, February 26, 2009 DEFLATION: A few people argued against the idea that inflation was imminent despite the spike in excess bank reserves. As it turned out, the Depression-era soothsayers were right: No credit boom materialized in the 1930s, only modest credit growth.
Mid-1930s 2009 "There are several good reasons to believe that inflation is not an immediate risk to the U.S. economy and that the Federal Reserve would be ill-advised to prematurely exit from its easing policy. First, one would think that the "The inflation of war days was due to the fact, it is very large gaps presently characterizing the U.S. labor argued, that there was an acute scarcity of goods and that and output markets will continue to exert downward governments in all parts of the world were frantically pressure on wages and prices...Second, it would seem bidding for this scarcity. No such condition exists at more than likely that any recovery from the present present. On the contrary, many industries are still running economic recession will be unusually weak, which will at part time, with millions of workers unemployed, and only further increase the size of those labor and output the prospect of a new "farmer surplus" remains an acute market gaps in 2010...Third, one would think that banks and painful problem." -Charles Merz, New York Times, are very unlikely to draw down their excess reserves at February 2, 1936 (Paid Archive) the Federal Reserve until they have repaired their own balance sheets and until households and corporations increase their loan demand." -Desmond Lachman, American Enterprise Institute, August 10, 2009 "How is it possible to have inflation when men are idle "One of the more common beliefs about the operation of and plants are idle? There can be speculative excesses the U.S. economy is that a massive increase in the Fed's when surplus funds bid up stocks or real estate, but balance sheet will automatically lead to a quick and inflation in the generally accepted sense can come about substantial rise in inflation. An inflationary surge of this only by increasing means of payment...faster than we can type must work either through the banking system or increase production. The volume and velocity of money through non-bank institutions that act like banks which must be related to the volume of actual and potential are often called ’shadow banks‘. The process toward
537 production of real wealth...What is meant [by talk of inflation in both cases is a necessary increasing cycle of dangerous inflation] is not inflation...but a stock market borrowing and lending. As of today, that private market inflation."...said [Fed] Governor [Marriner] Eccles, "...the mechanism has been acting as a brake on the normal rise in security prices has not been financed by bank functioning of the monetary engine. Thus, even if Fed credit. The securities are being bought mostly for actions could shift the aggregate demand curve outward, cash...There is no speculative use of bank credit in the which it cannot do under present circumstances, inflation present situation." - TIME, December 2, 1935 would still be a long way down the road." -Economist Lacy Hunt, Van Hoisington Management, July 13, 2009 "[Japanese academic] Yoneo Arai, has made some interesting comparisons of the present situation in the "It may be possible for private banks to hold enough United States with that in Great Britain, and particularly liquid assets (government debt, effectively) on their with that during the post-war inflationary period in balance sheets to survive even a major liquidity crunch France. He concludes from these comparisons that if an without recourse to the central bank. But that would be inflation of the currency type occurs in the United States socially inefficient. Banks are meant to intermediate short it is at least not likely to come within the next two or liabilities into long-term assets, and frequently into long- three years. He believes, on the other hand, that there is a term illiquid assets. It's what their raison d’être definite danger of credit inflation, but even that is not is...Providing liquidity is what God made central banks likely to take place, in his opinion, until after a substantial for." -Willem Buiter, London School of Economics recovery in business gets under way." -New York Times, professor, October 6, 2009 September 24, 1935 (Paid Archive) EXIT STRATEGIES: Experts suggested means to reduce excess bank reserves that are still available to the Federal Reserve today, such as raising reserve requirements, allowing bank holdings of short-term government securities to run off at maturity, conducting asset sales or regulating the collateral used for bank loans on securities. Commentators in both time periods warned that sales of central bank assets would be fraught with difficulty due to the enormous capital losses that may ensue.
Mid-1930s 2009 "Informed sources said emphatically that should the present board take any action to reduce the surplus of idle money, it was not likely to follow the government bond "Economically, there will be costs to selling some sale method. The reason was given that such a move securities and incurring capital losses (that is, on the ones might impair the government bond market at a time when the Fed has been propping up by buying), and the Fed several billions of new offerings must be floated before may not want to incur large capital losses for political the end of the present fiscal year and that government reasons." –Prof. Charles Calomiris, Columbia University, bonds represent virtually the only earning assets the August 10, 2009 Reserve Banks now have in their portfolios." -New York Times, February 13, 1936 (Paid Archive)
Fear of Public Debt Inflation from Fiscal Stimulus
CENTRAL BANK INDEPENDENCE: Commentators during the 1930s Great Depression and the current “Great Recession” worried the Federal Reserve would lose independence to the government. Politicians could then task the central bank with keeping inflation high to reduce the real value of the nation's public debt.
Mid-1930s 2009 "Ogden L. Mills, former Secretary of the Treasury ... "More broadly, given the huge and expanding deficit, the asserted that ‘deficit financing not only supplies the Fed will come under increasing political pressure to tinder for the conflagration but puts our fire-fighting permit inflation to rise, and this is a more likely outcome apparatus out of business.’...The authority granted the in a Fed that has seen a substantial deterioration in its Federal Reserve System over the money market, for independence as the result of its participation in credit example, he said, was nullified by the new, ‘immense support and bailout policies and the related political powers" granted to the Secretary of the Treasury’." -New battles those have entailed." –Prof. Charles Calomiris, York Times, January 19, 1936 (Paid Archive) Columbia University, August 10, 2009 "...[T]he bill before Congress ... would not only make all "Under the banner of increasing Federal Reserve members of the Board appointees of the President, but transparency, Congressman Ron Paul has sponsored a bill three of them would be direct representatives of the that would subject the Fed's monetary policies to an audit Administration in power. . [Treasury] Secretary by the Government Accountability Office (GAO). The Morgenthau let the hot biscuit out of his mouth by bill is a veiled attempt to undermine the Fed's declaring flatly that he favored Government ownership of independence. If it passes, it will cripple policy making—
538 the Reserve banks. ... Winthrop W. Aldrich, chairman of particularly when it comes to inflation. ...What's more, it the Chase National Bank, went before the Senate is highly doubtful that the GAO has the technical Committee and roundly damned the combination of huge competence to evaluate monetary policy. If it did try to new powers for a politically controlled Reserve Board. conduct these audits, at best it would merely rehash Particular danger that he spotlighted was giving the known information. At worst, the GAO would generate Reserve Board power to make the Reserve banks buy confusion by offering its own analysis." -Anil K. Government bonds and issue Federal Reserve notes Kashyap and Frederic Mishkin, Wall Street Journal, against them. This was the means of both the German and November 9, 2009 French inflations..." -TIME, May 27, 1935 TAX CUTS: Opponents of the New Deal and TARP offered the same alternative to their government's fiscal policy: Cut taxes on corporate profits and high income individuals. Mid-1930s 2009 "Mr. Aldrich declared that "we have felt right straight "Obama should go the other direction, striking a blow for along that the ultimate result of [undistributed earnings simplicity and jobs by reducing the corporate income tax tax] would be a recession in business, because it had a rate from its current 35% to 25%...Such a drop would tendency to prevent the building up of reserves and the further reduce incentives for corporations to contort reinvestment of capital in enterprise."" –The New York global investment decisions in an effort to avoid taxes." - Times, January 15, 1938 (Paid Archive) Michael Mandel, BusinessWeek, May 6, 2009 "[Research on ancient Babylonia revealed that] because "Higher taxes at the top end would severely damage of excessive taxation, the prices of farm lands rose savings and investment. Under the Piketty plan, the abruptly, farmers lost their property, much of which was American who earns $10m would have her tax rate above turned over eventually to grazing. Urban rents rose as the $1m jump from 35 to 80%, thus reducing her annual price of farm lands went up... The prices of slaves and earnings by $4m. That would mean less money for other commodities followed the upward trend. Dr. consumption, but the more important effect is that it Olmstead attributed this condition to the fact that, while would reduce savings. High-earners save a higher share more and more money was being exacted from the of their income than lower earners. When they save, their population, the precious metals were hoarded by the money goes to work for all of us because it flows through government instead of being turned again into to businesses for capital investment." -Chris Edwards, circulation." –The New York Times, January 26, 1936 Cato Institute, April 15, 2009 (Paid Archive) STIMULUS SPENDING: While aware that high budget deficits might provoke incursions on central bank independence, some commentators nonetheless defended public spending to forestall further economic decline in the medium-term. They believe the restoration of economic growth is the only way to raise tax revenues and reduce budget deficits.
Mid-1930s 2009 "Is it 'waste' to have the government, by borrowing from the commercial banks, replenish the supply of bank deposits which contracted by one-third because of debt "Under more normal conditions the conventional view of liquidation during the deflation, and put this newly stimulus is more or less right. But we're in liquidity-trap created money to work providing employment...? Is it conditions now, and will be for a long time if official 'waste' for the government to expend these newly created projections are at all right. So what does that imply? First and otherwise idle funds for ... things that are needed by of all, as I and others have pointed out, fiscal expansion the community but are not supplied by private enterprise? does not crowd out private investment — on the contrary, Are these ... more 'wasteful' than the expenditures in the there's crowding in, because a stronger economy leads to late twenties, based upon private debt, whereby billions more investment. So fiscal expansion increases future of dollars were diverted to uncollectible foreign loans and potential, rather than reducing it. ... Crowding in raises to build at inflated prices huge skyscrapers, office future GDP — which raises future tax revenues. And the buildings and apartment houses, many of which never rise in revenues relative to what they would have been have been sufficiently occupied to maintain the otherwise offsets at least some of the burden of debt investment? Do you think it was 'natural forces' that service." -Paul Krugman, The New York Times, produced the recovery after 1933? Only ... by restoration September 29, 2009 of national income, can we reach and maintain the balanced budget..." -Marriner Eccles, Chairman of the Federal Reserve, December 26, 1938 (Paid Archive)
Fear of Currency Inflation from Competitive Devaluations
THE DOLLAR AS SAFE HAVEN: As in late 2008 and early 2009, the most intense period of the current financial
539 crisis, foreign investors fled to U.S. dollar assets as “safe havens”' during times of heightened risk aversion in the 1930s[3].
Mid-1930s 2009 "In a press conference given just before sailing for South America, President Roosevelt expressed concern over what he called ‘hot money’—foreign capital temporarily "The "quality" of the financial flows into the U.S. seeking refuge in the U. S. during troubled times at home. consequently bears watching. A modest revival in foreign Britain was the biggest buyer on balance ($341,000,000), demand for longer-dated U.S. assets would be a positive followed by Switzerland ($153,000,000), The sign. To date, the sale of US assets abroad and a scramble Netherlands ($130,000,000), France ($59,000,000). As for liquid dollar assets has provided the U.S. with more was expected, the capital imported in the form of security than enough financing to sustain its deficit. Those flows investments was exceeded by that in short-term banking though may not continue." -Brad Setser, Council on funds ($1,353,000,000). This is the hottest type of hot Foreign Relations, March 18, 2009 money because it can be withdrawn the quickest." -TIME, December 7, 1936 "The U.S. has a deep short-term government bond market, making it easy to park dollars and maintain "It is recognized that foreign money has come here in the tremendous liquidity if need be. ... There is no question past year principally for two reasons: Fear of a possible that recently (since the fall of '08) the dollar has become devaluation of the French franc and other European the equivalent of a money market fund in the universe of exchanges and belief that this country offered a greater currency investment choices. It's a temporary place to opportunity for profitable investment." -New York Times, park your money to wait for each mini-storm to blow January 19, 1936 (Paid Archive) over, before putting the money back to work." -Walter Kurtz, Seeking Alpha, September 15, 2009 "The International Monetary Fund signaled record low "The U.S. gets no lasting benefit from these gold receipts, U.S. interest rates are funding global ‘carry trades’ and for the capital may be withdrawn as rapidly as it was the dollar is still overvalued as concerns mount that new sent," said National City Bank in its monthly trade & financial imbalances are forming. With investors able to finance review. "In fact, [the gold] is a menace borrow at near-zero rates in the U.S., some economists since...additions to the gold stock only increase the are concerned that markets may become distorted as temptation and the pressure to put it to inflationary uses." traders plow those funds into riskier assets." -John Fraher -TIME, October 7, 1935 and Shobhana Chandra, Bloomberg, November 9, 2009 DEVALUATION: In the mid-1930s, hot money inflows stirred paranoia over another possible dollar devaluation, following the one made in 1934[4], to prevent economic overheating[5]. In 2009, commentators feared the government would resort to dollar devaluation - or engineer its effective equivalent by keeping interest rates low - to finance budget deficits and raise export competitiveness.
Mid-1930s 2009 "[T]he sole U. S. market for gold is the Treasury, and the Treasury may pay any price it pleases. Thus if the Treasury one fine day decided to offer $20.67 per oz. for gold instead of $35, the dollar, for all practical purposes, which means in foreign exchange, would be right back "The U.S. must accept that it will not be possible to where it started in 1933. devalue its way out of its savings problem, as it will undermine global confidence in the dollar as a reliable Any reduction in the Treasury's gold price would be: 1) store of value and the bedrock of the multilateral trading directly deflationary and 2) a quick method of halting the system." - Benn Steil, Council on Foreign Relations, flow of foreign funds to the U. S. Since the intertwined Financial News, October 19, 2009 problems of inflation and ‘hot money’ are very much on the Administration's mind, last week's rumor about price- cutting in gold seemed by no means fantastic." -TIME, April 19, 1937 “In place of paper, under the operation of our new "I still contend that we are headed for a massive dollar monetary policy, we have been receiving large shipments devaluation, regardless of the means--whether it is of gold and silver. Various economists will tell you that planned and accomplished by central banks, or by the this policy is likely to end our foreign trade; that it first markets reacting to huge government money printing that will strip the world of gold and then our foreign trade force the devaluation. ...With the devaluation of the dies. Objection to our course is sometimes based upon the dollar, asset prices will re-inflate. Real estate will again
540 assertion that we would bring vast quantities of the be worth more than the underlying mortgages. ...The world's gold and silver here, only to be locked up in the weaker dollar will make U.S. manufacturers more United States Treasury. ... So far from engaging in a competitive overseas... At the same time, it means competitive devaluation race with other nations, we hold stronger consumers for foreign goods. Interest rates will out to them a currency of such steadiness that the normal rise, giving fixed-income investors a better return." – tendency may very well be for the rest of the world to Frank Beck, Capital Financial Group, Forbes, March 24, move gradually toward practical exchange stabilization..." 2009 -Treasury Secretary Morgenthau, TIME, May 20, 1935 "Though no informed businessman, economist or "Every day it seems more likely that we are destined – or politician in the U. S. gave credence to the notion, should one say doomed? – to replay the disastrous Europeans of high & low station suddenly became economic history of the 1930s. Now we have the dreaded convinced that the recent U. S. efforts to stimulate spectre of competitive devaluation. The Bank of England business would shortly be climaxed by further is not exactly discreetly encouraging the pound to fall. devaluation of the dollar in order to raise internal And just last week the Swiss National Bank intervened in commodity prices just as Brazilian coffee has lately risen the foreign exchange market to push down the franc. Will internally on a depreciated milreis." -TIME, November Japan, the United States and China be long to follow?" - 15, 1937 Prof. Barry Eichengreen, UC Berkeley, March 18, 2009 EXCHANGE RATE STABILIZATION: Economists in both periods believed a sustained global economic recovery could only come about via exchange rate stabilization.
Mid-1930s 2009 "Great Britain had withdrawn from the world and set up "World economies would surely benefit from currency an empire preferential system...[which] was setting up stability, and so would the United States. Indeed, what international frictions as nations find their access to raw some call "bubbles" are nothing more than currency materials blocked, not because they are not able to buy mistakes created by the U.S. Treasury, and some would but because they are not able to sell. The solution ... say, the Fed. If the dollar were replaced, or better yet, cannot be any rearrangement of political boundaries or forced into stability thanks to currency competition from the wholesale transfer of colonies, but an organized and elsewhere, this would bring amazing benefits to our workable international monetary system." –Prof. Alvin H. economy." -John Tamny, H.C. Wainwright Economics, Hanson, University of Minnesota, via New York Times, April 7, 2009 April 3, 1936 (Paid Archive) "The existing system, with the U.S. dollar as reserve currency, is fraying. The dollar has been volatile. There "[Princeton professor of economics] Dr. Kemmerer told are increasing worries about future inflationary risks. At the importers that very little enduring recovery in the the same time, putting so much money aside every year world's foreign trade can be expected until the world to protect countries against the risks of global instability again gets back to the gold standard." -New York Times, creates a downward bias in – aggregate demand – April 17, 1936 (Paid Archive) weakening the global economy." - Joseph Stiglitz, The Guardian, March 27, 2009
Fear of Goods Inflation from Commodity Speculation and Underinvestment COMMODITY SPECULATORS: Yes, even during the Great Depression can one find accusations of commodity market speculation for the unseemly rise in goods prices. Mid-1930s 2009 "In the past few months the steadily mounting level of "Currently, financial speculation is pushing commodity prices has become the most significant sight energy higher than the fundamental justify, and this will on the broad business horizon. It is certainly a portent of work its way into the agricultural sector soon enough." - boom, perhaps of real inflation." -TIME, December 28, Michael Swanson, Wells Fargo, June 2009 1936 "Daily the spread between the income of non-agricultural "Funds, not fundamentals, are driving commodities prices workers and wholesale commodity prices is narrowing. higher... Still, many brokers have attributed the rise to ..[I]t is felt all around that speculative forces are playing bullishness of hedge funds and investment banks, rather too large a part in the present trend." -Felix Belair, Jr., than to underlying factors." -Andrea Hotter, Wall Street New York Times, January 10, 1937 (Paid Archive) Journal, August 19, 2009 “Certain basic commodity prices were rising too rapidly "While market fundamentals obviously and, as Mr. Wallace put it, threatened ‘a flash-in-the-pan played a role in the general run-up in boom that might come to a sudden end.’ This view was the oil prices from 2003 on, it is fair elaborated upon by the career economists of various to conclude by looking at a variety of
541 government departments..." -Elliot V. Bell, New York indicators that speculation drove an oil Times, March 21, 1937 (Paid Archive) price bubble in the first half of 2008." -Mohsin S. Khan, Peterson Institute for International Economics, August 2009 "There is proof that the sharp advances in commodity and "But despite the fact that global demand remains quite metal prices is due to wild speculation and not war weak across the base metals complex, and most markets preparation buying. Those who analyze situations show are facing a large supply overhang, prices have managed that if war-minded countries were the real buyers, the to rise further, propped up by actual and potential supply demand for nickel would be unusually large. But it isn't... disruptions, and a surge in investment demand...Indeed, International Nickel practically controls the world supply. with prices rising alongside inventories, it appears as That's where speculators are stymied. ... International though prices have gotten well ahead of the Nickel's officials want a stable price structure based on fundamentals..." –Dina Cover, TD Waterhouse , October supply and demand." -Evening Independent, March 17, 2, 2009 1937 COMMODITY REGULATION: Increases in wholesale commodity prices fanned fears of inflation, inspiring calls for regulators to curb speculation[6].
Mid-1930s 2009 "Having piled up excessive inventories as prices rose, woolmen for the past year have been selling ardently, "Absent reregulation of the energy futures markets, buying cautiously... Ignoring this obvious reason why aggressive government efforts to restore liquidity and present wool sales are few & far between, hard-pressed unfreeze the credit markets will give new life to the Wall dealers in Boston and Providence last week suddenly Street financial speculators, ushering a return to an came out flat-footed against the wool tops futures energy commodity speculative bubble... Stronger exchange. Not only did they yammer about the 10¢ price regulations over energy trading markets would reduce the differential between wool tops futures and raw wool, but level of speculation and limit the ability of commodity they claimed that wool tops margins are too low, traders to engage in anti-competitive behavior that is speculation too rife. The Providence Journal announced contributing the record high prices Americans face..." - that a group of dealers this week will ask the Senate Tyson Slocum, Director of Public Citizen's Energy Wool Investigating Committee to suspend trading in Program, February 3, 2009 wool tops futures." -TIME, December 6, 1937 "The ability of these dealers to hedge heating fuel costs for products such as heating oil, propane and kerosene ... "On the Chicago Board of Trade, grains frequently is now being undermined by an erratic market, jumped the full day's limit long before the close of questionable investment tactics and purely speculative trading, and speculation became so rampant that market forces. And I bring with me a message from those conservative commission houses forehandedly raised home owners and businesses – please do everything in their margin requirements." -TIME, July 20, 1936 your power to fix these broken markets." - Cota & Cota Inc President Sean Cota, CFTC hearing July 28, 2009 "Unfortunately, commodity markets do not have the same "A general strengthening of the Commodity Exchange kinds of protections against fraud and manipulation that Act to provide more intensive regulation of the grain govern the function of the stock market. We strongly trade and reinforcement of antitrust laws to prevent support the administration's efforts to harmonize the legal further concentration of corporate power in a relatively and regulatory structures governing the commodity and few concerns was recommended to Congress today in a the stock markets, and to harmonize the authority of the report by the Federal Trade Commission." -New York SEC and the CFTC." -Ben Hirst, Delta Airlines, July 28, Times, March 3, 1937 (Paid Archive) 2009 UNDERINVESTMENT IN PRODUCTION CAPACITY: Others felt the rise in commodity prices was not solely due to market manipulation but had a real economic underpinning. They believed underinvestment in the expansion of commodity production capacity would result in a supply shortage and, later, higher prices for commodities and the consumer goods into which they are processed.
Mid-1930s 2009 "In so far as we are threatened with a rise in the price of "We have long emphasized that the commodity problem consumer goods, one of the most effective ways of is, at heart, a supply shortage due to decades of averting such a rise is to increase the production of such suboptimal investment...we expect a redux of 2008 when goods; but that cannot be done in certain lines until we severe supply constraints forced the rationing of demand have increased the productive capacity for such goods..." through sharply higher prices to keep the markets -New York Times, April 3, 1937 (Paid Archive) balanced." -Goldman Sachs analysts, August 5, 2009
542
GOODS PRICES: Rising commodity prices did not immediately translate into sustained, high inflation in goods prices though. Overcapacity in industrial production undercut the inflationary power of commodities.
Mid-1930s 2009 "From the standpoint of prices, there seems little cause "The risk of deflation may have abated but it has certainly for alarm. Wholesale prices have gone up sharply, but are not disappeared. It is clear that companies are finding it still below their 1929 levels; stocks have risen increasingly difficult to raise prices. Core producer prices spectacularly, but are only back to about 1931 levels; were up just 1.8% -- the slowest increase in two years, retail prices are higher than they were a few years ago, and about a third of the rate seen in the autumn of 2008. but a cup of coffee costs no more and a suit of clothes not The cost of finished consumer goods has sunk more than much more." -Elliot V. Bell, New York Times, March 1, 6%, with home electronics down 7.7%." -Christopher 1936 (Paid Archive) Swann, Reuters, October 20, 2009 ‘U’ OR ‘V’?: There was also skepticism over the strength of the budding recovery.
Mid-1930s 2009 "[According to the annual report of the International Institute of Agriculture:] It would appear that we are "...[T]he recent optimism that ‘green shoots’ of recovery confronted with the coexistence of more or less isolated will lead to the recession to bottom out by the middle of processes of revival in a very large number of countries this year and that recovery to potential growth will rather than with a world economic revival in the sense rapidly occur in 2010 appears to be grossly misplaced. A this expression would have under the competitive careful assessment of the data suggests that rather than system." -New York Times, September 2, 1937 (Paid green shoots there are plenty of yellow weeds both in the Archive) short term and in the medium term." -Nouriel Roubini, Roubini Global Economics, May 19, 2009
"General [Hugh S.] Johnson asserted that none would deny that recovery was underway. At the same time, he said, it must be admitted that "it is full of artificialities "The Moody's Economy.com baseline economic and uncertainties. Recovery cannot be considered outlook—the middle of the distribution of possible complete ... while there remain from 8,000,000 to economic outcomes—is for a U-shaped recovery. In this 10,000,000 unemployed, and while nearly one-third of scenario, the economy comes back from the Great the population is destitute or living on a shoe string." - Recession, but it doesn't come roaring back. There are too New York Times, December 9, 1936 (Paid Archive) many impediments to growth." - Mark Zandi, Moody's, August 17, 2009
SUPPLY OVERHANG: Nonetheless, in the mid-1930s, some non-farm businesses responded to the nascent recovery in commodity prices and raised production or retail prices. Consumers couldn't absorb the production increases or the higher costs. By the fall of 1937, growing production surpluses caused businesses to pull back on industrial activity, helping tip the economy back into recession. In 2009, the U.S. suffered a similar fate through an excess inventory of houses. The spring rally of commodity prices proved to be a false measure of consumer vigor.
Mid-1930s 2009 "If the recession is due chiefly to overstocking and special "Housing might be in worse shape than we think. There instances where costs and prices are out of line, it will be is probably even more excess housing inventory of an intermediate character, and precedents suggest gumming up the market than current statistics indicate, strongly that it is of that type." -National City Bank, New thanks to a wave of foreclosures that has yet to hit the York Times, November 1, 1937 market." -Les Christie, CNN Money, January 23, 2009 "There is no wholly painless cure for overproduction. The "Despite this decline in new construction activity, home pain may be eased, the operation speeded. But to try to vacancies have continued to increase, and the substitute opiates for the surgeon's knife is false homeowner vacancy rate has been above 2 ½ percent for humanitarianism...Regimenting the farmer and subsidizing the last two-and-a-half years. Clearly, a substantial his surplus acres may be necessary as a stop-gap but is no overhang of surplus housing inventory remains." - permanent American solution." -Frank Cist, New York Federal Reserve Bank of Richmond President Jeffrey Times, December 4, 1938 (Paid Archive) Lacker, May 4, 2009 Conclusion
A swirl of fears over potential credit inflation, public debt inflation, currency inflation and goods inflation enveloped
543 Americans during the Great Depression as much it does today. That the history of ideas seems to have come full circle between the 1930s economic crisis and the current one suggests that inflation fears once again threaten the incipient economic recovery. Fortunately, policymakers today have the benefit of hindsight to avoid costly policy mistakes at such similar junctures in history. “Similar” does not mean “identical,” though. There are certain constraints on policymakers today that did not exist in the 1930s:
1) The U.S. is highly indebted to foreigners, quite the opposite of the situation back in the 1930s. 2) The U.S. dollar is currently the world's main reserve currency, whereas the British pound held that distinction in the 1930s. 3) High excess bank reserves in the 1930s were created by bank purchases of government debt issued to finance budget deficits and to purchase gold flowing into the country. In 2009, excess bank reserves grew through banks' preference for liquid assets and the certain, though low, interest earned by deposits at the Federal Reserve.
These constraints set up a situation where the Federal Reserve and Treasury must consider the ramifications of their loose monetary and fiscal policies on the rest of the world. Foreign governments' desire to maintain the status quo of financing the U.S. deficit to prop up the U.S. as the world's top destination for consumer imports may crumble with a perceived devaluation of the U.S. dollar and/or deterioration in the United States' ability to repay its debt. The higher risk premium that would be demanded by foreign investors could cause interest rates to rise in the U.S. and endanger the U.S. recovery. For the time being, foreign governments have opted to preserve the status quo but this risks overheating and asset bubbles in their economies if they maintain inappropriately low interest rates in order to keep their currencies undervalued versus the U.S. dollar. The Federal Reserve and Treasury may face a hard choice between domestic economic recovery and responsible stewardship of the world's global reserve currency and hence global financial stability.
[1] The New York Times reported on November 1, 1937 that National City Bank issued a letter saying: "Many studies have indicated that almost half of American business is normally in the capital goods industries, including housing, and these industries depend upon savings and investment. They are not over-expanded; they will keep going if the necessary conditions are fulfilled, and if they do the business recession will not be prolonged."
[2] This Federal Advisory Council statement appeared in a New York Times article on December 29, 1935. The Federal Advisory Council is a group of bankers, one from each Federal Reserve district,that advises the Federal Reserve Board on monetary policy.
[3] Shortly after the U.S. suspended the gold standard in 1933, the president signed the Gold Reserve Act of 1934 to set the price of gold to $35 per ounce. The guaranteed price for gold sparked inflows of gold into the country. Investments also flooded in from foreign investors seeking assets denominated in a currency secured against gold and thus offering a more stable store of value.
[4] The U.S. government reduced the exchange rate of the dollar against gold by 41% from US$20.67 per ounce of gold to US$35.
[5] The surge of capital inflows into the U.S. alarmed policymakers due to their potential destabilizing effects. First, excess bank reserve were already high. Second, the shot of liquidity into securities markets could pump up prices, which would provide false signals of economic recovery and spur production increases devoid of demand growth. Once it became clear that the rallies in asset prices lacked any real economic backing, the foreign funds could then leave the U.S. in a hurry, inducing the collapse of asset bubbles and a sharp economic contraction. In 1936, the Treasury took action by issuing debt to buy all gold imported into the U.S. to keep it out of the private money supply and thus “sterilize” its inflationary effect and maintain the purchasing power of the dollar domestically.
However, the specter of further competitive devaluations by foreign countries loomed, threatening the competitiveness of U.S. exports and further capital inflows into the U.S. Exchange rate instability led France, Britain and the United States - the world's largest holders of gold at the time - to forge some sort of order. In September 1936, they signed the Tripartite Agreement under which they would coordinate the value of their currencies against gold on a daily basis. Devaluations were only allowed with the agreement of all parties. [6] In 1936, Roosevelt signed the Commodity Exchange Act to regulate commodity markets, particularly grains. All rights reserved, Roubini Global Economics, LLC. Mikka Pineda http://www.roubini.com/analysis/85897.php
544 RGE ANALYSIS Comparing Three Crises Mikka Pineda 9/9/2009 12:00:00 AM | Last Updated This RGE Analysis is the property of Roubini Global Economics, LLC for the internal use of RGE clients. Any redistribution, including summarizations or synopses, is expressly prohibited without prior agreement from RGE. Introduction Though they emerged from very different economic environments, the recent U.S. credit crisis, Japan's "Lost Decade" in the 1990s, and the U.S. Great Depression were each prompted by a bursting asset bubble. So far the economic losses of the credit crisis have been milder than those during Japan s Lost Decade or the Depression. Yet in some ways the economic environment in the United States at the start of the credit crisis appears worse than that in Japan at the cusp of the Lost Decade or that in the United States at the start of the Depression. Fortunately, U.S. policymakers learned from some past mistakes and responded more forcefully and promptly to the current credit crisis—though it remains to be seen whether financial stabilization will be followed by prudential or structural reform. The danger of a second Great Depression has diminished, but a reform-less recovery would be fragile, prone to reversals and marked by an extended period of weak growth, if Japan's case serves any warning. Below I compare several economic indicators before, during and after the financial crises in U.S. and Japan. Summary tables and timelines are provided at the end. Before the Crises All three crises held in common a time of easy money that drove strong growth in the economy and asset prices— particularly in stocks before the Great Depression, real estate before the current U.S. crisis, and both stocks and real estate before Japan s Lost Decade. In each case, central banks kept interest rates too low for too long because goods inflation—their primary concern—remained low even as asset prices skyrocketed. Consequently, policymakers initially did nothing to prevent the asset bubbles. Only when asset prices soared to unprecedented heights did monetary authorities grow nervous enough to pull the trigger on monetary tightening through hikes in interest rates or reserve requirements. Financial innovation and a lag in regulatory reform were also common to all three crises. This enabled conflicts of interest and information asymmetries that would later damage investor confidence as well as public confidence in authorities. There are, however, some notable differences between the backgrounds to each crisis: 1) The U.S. dollar supplanted the British sterling as the world's top reserve currency during the Great Depression, whereas the current credit crisis is threatening the U.S. dollar's supremacy. 2) Households had a higher saving rate in Japan prior to its Lost Decade and in the U.S. prior to its Great Depression than in the U.S. prior to its current credit crisis. 3) Outstanding public debt, both overall and as a share of GDP, was much lower in the U.S. prior to the Great Depression and in Japan prior to the Lost Decade than in the U.S. prior to its current credit crisis. 4) Wages rose faster than the cost of living in the U.S. during the 1920s. Goods prices underwent deflation in the few years before 1929. 5) The auto sector was the strongest sector in the U.S. economy before the Great Depression, whereas nowadays it is a drag on the economy. 6) Japan and the U.S. were net exporters before entering the Lost Decade and Great Depression, respectively. The U.S. had turned from the world s top exporter by value before the Great Depression into the world s top importer before the present U.S. credit crisis. The following are some further background details on each crisis.
545 Pre- Great Depression In the run-up to the Great Depression, the U.S. was moving off the gold standard. The effective suspension of the gold standard during World War I made its restoration after the war very difficult, if not impossible, as the notes and coins in circulation had quietly expanded faster than the supply of minted gold. Rather than reverse currency inflation and imperil the fragile recovery of trade, the League of Nations opted to allow central banks to keep all or part of their reserves in paper currency. Thus began the rising flexibility of the U.S. and world monetary system and the transformation of the U.S. dollar into the world's main reserve currency. Gold gradually moved out of circulation and became concentrated in the vaults of a few central banks—particularly the U.S. Federal Reserve. While central banks made a run for gold in a last ditch effort to restore an exchange rate fixed to the price of the metal, private sector gold holdings decreased. Commercial banks added more credit to the money supply than they could possibly redeem through gold deposits. Aside from the loosening gold standard, the Fed cut interest rates in 1927 to stimulate the U.S. economy out of a slowdown (induced by Ford Motor Company's temporary shutdown to retool for a new product, alongside depressed agricultural prices) and to help strengthen European currencies. The Fed again eased rates in 1928 to lower the cost of government debt. Lax credit conditions helped fuel an urban building boom, a bull market in stocks, and purchases of consumer durables. But credit alone does not explain the frenetic activity of the "Roaring Twenties." Also playing a part: 1) Pent-up demand for housing after World War I and enthusiasm for new technologies such as radios and vacuums. 2) An expanded U.S. financial structure that included more consumer finance companies—especially in auto finance—and investment trusts that allowed more retail investors to participate in the stock market. 3) Financial innovations such as installment loans for purchases of consumer durables fanned growth in household debt while low margin requirements propelled margin debt for stock purchases. Farmers took on debt to cope with falling prices for agricultural goods. 4) Conflicts of interest, which abounded with real estate developers sitting on the boards of financial intermediaries. Though not as popular as the stock market boom, property prices were also on a tear. The Federal Reserve index of residential construction contract values rose sevenfold from 1920 to its peak in 1928. 5) A strong post-war recovery in industrial production, which drove earnings growth and attracted investors. High and rising capital gains and dividends then attracted a herd of speculators to the stock market. The promise of new network technologies elicited premature exuberance despite the lack of demonstrated profitability. The Fed inadvertently encouraged the rally in risky but higher-yielding assets by cutting its interest rate in 1928. Pre- Lost Decade In the run-up to the Lost Decade, a domestic savings glut raised the availability of credit. Japanese policymakers encouraged households to save so banks could channel their savings to strategic industries. The "convoy system" in place since the end of WWI lulled banks into complacency that the Ministry of Finance would remedy any existential threats. Pro-export industrial policy created a trade surplus that added to the glut in corporate funding. The government s preference of monetary policy over fiscal policy as a tool to stimulate the economy led to a balanced budget that minimized debt repayment outflows. The 1985 Plaza Accord initiated a series of rate cuts in Japan to devalue the yen. Flush with liquidity and lower interest rates, bank credit became easy and cheap to obtain, fueling investment in real estate and stocks. Meanwhile, financial deregulation pursued in the 1980s removed limits on deposit rates and opened up the bank industry to competition from foreign banks and the postal saving system. Due to fierce competition, Japanese banks' net interest margins turned negative by 1990. Large businesses, most often exporters, switched from bank financing to market financing, leaving banks to scramble for other borrowers, most often SMEs (small- and medium-sized enterprises) in construction and real estate. Deregulation also allowed banks to own stock. This led to conflicts of interest arising from cross-shareholding between financial and nonfinancial firms within the same keiretsu, or conglomerate. Banks invested in the stock of the large, market-listed firms that sat on their boards—though stock purchases were also motivated by banks desire to raise capital to comply with recently adopted BIS capital adequacy requirements. While the markets disciplined large businesses (at least before the stock market bubble), small and medium-sized enterprises (SMEs) enjoyed lax monitoring from banks. Opacity made asset quality assessments of SMEs problematic. Banks were new to SME lending while SMEs lacked the transparency of large firms that published annual reports, had market pricing and were covered by outside analysts. Moreover, many bank investments in real estate were channeled through poorly supervised non-bank financial institutions, similar to the SIVs and consumer
546 finance lenders that expanded bank assets off-balance sheet in the U.S. credit crisis. Financial innovations did not figure prominently in the genesis of Japan s financial crisis. As banks were run as a public service rather than a for- profit business, there was no incentive to create new products or services. Regulatory institutions did not expand along with financial liberalization, leaving banks to do much of the corporate monitoring. However, no one was watching the watchmen, who were too embroiled in their borrowers' interests and off-balance sheet business to maintain a responsible allocation of financial resources. While companies, banks and individuals engaged in finance-related misconduct, the Ministry of Finance, the sole financial regulator at the time, looked the other way. Bureaucrats were courted by private sector interests and lured into high-paying jobs in private financial institutions. The Minister of Finance and the Governor of the Bank of Japan both had to resign in 1998 due their involvement in financial scandals. Pre- U.S. Credit Crisis The run-up to the U.S. credit crisis was driven by factors also seen in the Great Depression: expansionary financial innovations (particularly home equity withdrawal and mortgage securitization), a real estate boom, the allure of new consumer technologies, and the failure of regulators to keep up with a changing financial system. As in the years preceding the Great Depression, demographics also drove the buildup of debt—this time through an aging population rather than a boom in families. Behind the investment boom was a mass of baby boomers approaching retirement. Fears of an underfunded public pension system, coupled with employers' switch from defined benefit plans to defined contribution plans, spooked baby boomers into an investment spree. Furthermore, the dot-com bust sent money out of stocks into real estate after policymakers approved a raft of measures to expand homeownership— tax breaks, subsidized loans, mortgage securitization—among low-income households. Low interest rates abetted a rash of speculative property investment among empty-nesters looking to "get rich quick" through rental properties and "property flipping." Conflicts of interest and the complexity of structured financial products had a hand in pumping up the bubble. Investment banks and insurance companies grew more interested in the commissions and fee income provided by creating and insuring structured financial products rather than the ability of borrowers to repay the mortgages on which they were based. Meanwhile, rating agencies could not make objective ratings of these products because of their sheer complexity, and informational asymmetries (issuers knew more about the borrowers than rating agencies did) that left them dependent on advice from the same issuer paying for the rating (another conflict of interest). There was also a conflict of interest at the regulatory level: Fannie Mae and Freddie Mac donated to its regulator, the Office of Federal Housing Enterprise Oversight. The GSEs also made campaign contributions to several senators and congressmen and employed an army of lobbyists. Freddie Mac was among the top ten spenders on lobbying in 1998-2009. During the Crises The three crises began with monetary tightening in a latent response to asset price bubbles. Credit tightening initiated failures among non-bank financial institutions (such as housing loan companies in Japan) before spreading to banks. The Great Depression was the most severe of the three crises because the U.S. lacked important stabilizers at the time, such as a national social security system and deposit insurance, as well as prudential measures, such as the division between commercial banking and investment banking under the 1933 Glass-Steagall Act (later repealed in 1999). Like the U.S. credit crisis, the Great Depression was also global phenomenon, while Japan's Lost Decade was isolated to Japan. Japan's Lost Decade was the longest of the three crises due to delays in bad loan disposal. In this section, the impact of the crises on financial markets, the real economy, private sector finances, monetary policy and fiscal policy will be examined. Pricking the Bubbles: Stock Markets Great Depression: The Fed pricked the late 1920s stock market bubble with a series of discount rate hikes and reserve ratio hikes starting in 1928 that touched off a steep stock market plunge in October 1929. From peak to trough, the DJIA dropped 89% in 34 months. Higher interest rates induced a pullback in rate-sensitive spending and consumer financing, which in turn reduced production. Lost Decade: The Japanese stock market bubble peaked in December 1989 and burst in 1990 after a tripling of interest rates from 2.25% in May 1989 to 6% in August 1990. The Nikkei 225 index shed 81% from its 1989 peak monthly average of 38916 to its February 2009 trough of 7568. U.S. Credit Crisis: Financial turmoil surrounding the collapse of Lehman Brothers and the bailout of AIG and the GSEs (Fannie Mae, Freddie Mac) kicked the Dow Jones Industrial Average into a bear market starting October 2007, during which the monthly average peaked at 13930 and began a precipitous 49% decline to 7063 by February
547 2009. The index declined at a slightly faster rate (an average 3% per month) than during the Great Depression (2.6%).
Pricking the Bubbles: Property Markets Great Depression: Property prices during the Great Depression (as measured by the value of residential construction contracts) experienced the steepest contraction of the three crises, shedding 91% in 5 years from their peak in 1928. Like real GDP growth and unemployment, the property value index bottomed in 1933. Homeownership did not grow as fast or as long as during the 21st century housing bubble, however. Lost Decade: Japan's real estate bubble began its collapse in 1991, a year later than the stock market, and declined much more gradually, but the magnitude of decline was just as great as that of the stock market. By March 2009, urban land prices had dropped back to 1970s levels. Commercial land prices suffered the most, falling 72% between 1991 and 2008, while the average of commercial, residential and industrial land prices fell 57%. Residential prices corrected more mildly (falling 44% from peak to trough) but they nonetheless led to the collapse of jusen in real estate finance. Jusen were nonbank financial institutions (i.e., securities firms, insurance companies, consumer finance lenders) that were subsidiaries of banks. U.S. Credit Crisis: From its peak in July 2006 at 206.52, the S&P/Case-Shiller Home Prices Composite-20 index fell 33% to its trough in April 2009. U.S. home prices during the Credit Crisis declined about half as fast as during the four years after their pre-Depression peak, but 3 times faster than Japanese residential urban land prices fell in the four years after their pre-Lost Decade peak. Impact on Real Economy: GDP Great Depression: Though the stock market bubble burst in 1929, the U.S. economy did not feel the pinch until 1930. Real GDP growth bottomed at -13% y/y in 1933 and enjoyed a strong double-digit recovery before premature fiscal and monetary tightening sent the still fragile economy back into another recession with a 3.4% y/y GDP contraction in 1938. The level of real GDP didn't recover back to its 1929 peak until 1941. A total of US$262.1 billion in GDP, or 2.5 times 1929 GDP, was lost in 1930-1940. Lost Decade: Japan's real GDP growth slowed sharply in the 1990s from a brisk 8.0 % in 1990 to -2.1% in 1998 and -14.2% y/y in Q1 2009. The three recessions—1998-1999, 2001-2003, and 2008-2009—were interspersed with sluggish recoveries. Japan's GDP contraction was not as severe as the Great Depression but lasted at least twice as long. A total of US$486.4 billion in GDP, or 11% of GDP in the immediate pre-recession years (1997 and 2000), has been lost since 1990. The level of real GDP returned to its 1997 peak of 515,644 billion yen (US$5.3 trillion) in 2007, but another recession—the deepest of Japan's three recent recessions—ensued shortly afterwards due to Japan s increased dependence on exports as a driver of economic growth.
548 U.S. Credit Crisis: Annual real GDP growth in Q1 2009 slid 2.5% y/y, the worst quarterly performance so far but still the mildest of the three crises studied here. Though NBER dated the beginning of the current U.S. recession to January 2008, the level of real expenditure GDP in chained 2000 dollars did not begin contracting until Q3 2008. As of end-Q1 2009, a cumulative US$587 billion (chained 2000 dollars) in GDP, or 5% of Q2 2008 GDP, has been lost since Q2 2008.
Impact on Real Economy: Inflation Great Depression: As with GDP growth, annual headline consumer price deflation in the U.S. during the Great Depression was also the worst among the three crises. Deflation troughed at -9.9% y/y in 1932 and lasted for a total of six years between 1929 and 1940. Falling prices put many farmers and manufacturers out of business, forcing them to lay off workers. Lost Decade: Annual deflation in Japan's headline consumer prices dipped as low as -1.8% y/y in June 2009. Deflation has been experienced in nine of the years since 1990. Core CPI (excluding food and energy) fell 0.7% y/y in June 2009 after March posted the first year-over-year decline (-0.1%) in core CPI since late 2007, raising concerns of a potential deflationary spiral—especially as wages have been contracting since May 2008. U.S. Credit Crisis: U.S. headline CPI decreased 1.4% y/y in June 2009—the deepest annual plunge since 1950— and may have further to fall due to base effects from lower energy prices. Core CPI has not yet contracted, only slowed to 1.7% y/y growth in June 2009. However, the way the index is constructed may understate deflation. For example, the calculation of housing costs (63% of core CPI) via owner-equivalent rent tends to overstate housing costs because rents tend to rise as house prices fall. A deflationary spiral in the U.S. does not seem as likely as in Japan but upward wage pressures have vanished with weak demand for labor. The growth of the Employment Cost Index has slowed while personal income, wage and salary disbursements have decreased.
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Private Sector Financial Health: Household Saving Rate Great Depression: The U.S. net household saving rate (ratio of net personal saving to net disposable income) slumped to a low of -1.5% in 1932 and recovered to 6.3% in 1936 before a brief dip to 2% during the 1938 recession. It seems that Americans initially drew down their savings and took on debt in the first few years of the Depression to offset falling income. Household net worth dropped 11% between 1929 and 1934 and liabilities rose from 65% in 1929 to a peak of 81% in 1932. Lost Decade: Japan's net household saving rate steadily declined from a high of 13.3% in 1991 to just over 2% in 2007. The savings rate fell because households accumulated financial assets to substitute for the thin social safety net during a time of job insecurity and lethargic economic growth. The approaching retirement of baby boomers and worries over the underfunded public pension system provoked a rise in investment by households. At the same time, young Japanese, who comprise most of the growing army of temporary and "part-time" workers (part-time in name only), earn too little to save and must pay for their own housing and healthcare as they are ineligible for company or government benefits. U.S. Credit Crisis: Unlike the Great Depression or Japan's Lost Decade, the household saving rate rose in the U.S. during the credit crisis but starting from a very low base. Household balance sheets were much more stretched going into the crisis: Household debt exceeded personal income since 2002, reaching a peak of 133% in 2008. Americans had little cash savings to use as a cushion during the recession and market crashes wiped out the value of their financial assets—particularly stocks and real estate. As a result, Americans cut spending, deleveraged, repaid debt and avoided new debt.
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Private Sector Financial Health: Credit Growth Great Depression: Bank credit (excluding margin lending) contracted severely in the U.S. during the Great Depression and the U.S. relied more heavily on banks back then than it does now. Double-digit rate contractions culminated in a nearly 30% annual pullback in 1933, coinciding with the bottom in GDP and unemployment. Bank credit including margin lending contracted even longer, not reaching the bottom until 1937-1938 at -29.9%. Among the various forms of bank credit, margin lending for stock investment enjoyed the greatest rise in the pre-Depression years and hence also the greatest fall.
552 Lost Decade: Bank credit in Japan contracted more moderately at single-digit rates than the Great Depression, thanks to banks' perceived social responsibility to support troubled Japanese firms regardless of profitability, let alone the efficient allocation of capital to productive uses. Banks, whether government-controlled or not, "evergreened" loans to insolvent firms. The loans were mostly used to pay the interest on pre-existing loans. Japan was and is still a largely bank-financed economy. Aside from a desire to avoid a credit crunch, banks wanted to prevent bankruptcies, which would require reporting bad loans and increasing loan loss reserves. At the same time, a complicit government provided regulatory forbearance (e.g. relaxed reporting requirements) in the interest of avoiding a costly bailout. U.S. Credit Crisis: Bank credit has yet to contract in the U.S. but the credit growth rate did slow to the low single- digits on an annual basis in 2009. However, the U.S. is a more market-financed economy nowadays, so bank credit does not capture the magnitude of the credit crunch. The spike in risk premiums for corporate credit, MBS and interbank funding beginning in mid-2007, and the shrunken market for commercial paper, are more indicative of credit tightening.
Private Sector Financial Health: Call Money Rate The cost of short-term loans declined from high single-digits to between 0.0% and 1.0% during each of the three crises. Great Depression: The call money rate bounced from 3.6% in late 1927 to a peak of 9.2% in July 1929, roughly following discount rate hikes by the Federal Reserve to choke off speculation in the stock market. The call money rate then fell along with the subsequent easing in the discount rate to ease liquidity shortages after the 1929 stock market crash. Lost Decade: Japan's call money rate peaked 1991, the same year the rise in property values turned around. The call money rate turned to zero during the Bank of Japan's Zero Interest Rate Policy (ZIRP) years. A brief respite from deflation moved the Bank of Japan to end ZIRP in 2006 but another recession starting in 2008 shifted rates down to 0.1%. The Bank of Japan is reluctant to return to ZIRP for fear of scaring Japanese funds out of the country in search of higher yields. Experience also taught the Bank of Japan that low interest rates alone do not necessarily spur lending. Bank loans dropped from over 105% of GDP in 1992 to 75% of GDP in 2005. U.S. Credit Crisis: The Federal Reserve raised its target for the Federal Funds Rate from a low 1.0% in June 2003 to a peak of 5.25% in June 2006, bursting the housing bubble. The effective federal funds rate largely tracked these
553 changes until a surge in volatility following Lehman's demise. The target was lowered to 0-0.25% in December 2008 to ease credit and the effective rate has moved within that range since then. Monetary Policy Response: Central Bank Balance Sheet Expansion Great Depression: Though not apparent from the chart, the Federal Reserve's balance sheet assets during the Great Depression expanded the most among the three crises—and also the most gradually. Assets rose from US$7 billion in November 1928 to nearly US$42 billion by December 1940. Gold and cash accounted for most of the 83% increase due to foreign exchange: Deflation attracted foreigners to American goods and, in 1933 and 1934, FDR increased the price of gold. Weak import demand could not offset the inflows of gold. FDR also banned gold exports private sector circulation of gold to halt gold hoarding (which was triggering bank runs), end deflation and weaken the U.S. dollar. Lost Decade: The Bank of Japan's balance sheet rose nearly as much as the Federal Reserve's did during the U.S. credit crisis but took 7 years to match the expansion the Federal Reserve made in just one quarter. The Bank of Japan's balance sheet assets ballooned from US$514 billion in 1998 to US$1.4 trillion in July 1998, a 64% increase. U.S. Credit Crisis: The Federal Reserve used its balance sheet to continue monetary easing without having to lower its nominal interest rate targets below zero. The balance sheet spiked 62% from a pre-crisis max of around US$900 billion to a peak of US$2.3 trillion by December 2008, as the Fed took on assets through several programs set up to provide liquidity to banks, central banks, money market funds and primary dealers. In March 2009, the Fed decided to purchase MBS, Treasuries and Agency debt, which will take the balance sheet to a new peak.
Monetary Policy Response: Outright Asset Purchases Great Depression: The Federal Reserve balance sheet also expanded due to purchases of Treasuries to dampen the cost of the government's war debt and fiscal stimulus packages. Fiscal policy was the preferred tool for resuscitating the economy at the time as many banks were not yet part of the Federal Reserve system. Moreover, a vicious cycle of bank failure and bank runs—about 9,000 banks failed in the 1930s and there was no federal deposit insurance back then—had broken monetary policy transmission. By the end of 1939, The Federal Reserve's outright holdings of securities rose to 19 times its 1929 trough for a total increase of US$2.6 billion. Lost Decade: The Bank of Japan's "quantitative easing" program officially lasted from 2001 to 2006 but it was preceded by an order of magnitude jump in the Bank of Japan's outright securities holdings in mid-1996. By its peak in 2005, securities holdings rose to 43 times their 1990 trough for a total increase of US$1.1 trillion. The Bank of Japan purchased commercial paper, ABS, equities and government bonds. U.S. Credit Crisis: The scale of outright asset purchases by the Federal Reserve during the U.S. Credit Crisis surpasses the other two crises. The Fed was also the fastest to respond with outright purchases, compared to central banks during the Great Depression and Lost Decade. The Federal Reserve held almost US$1.3 trillion of securities as of July 2009. The level of securities holdings nearly tripled between its June 2008 trough and July 2009 peak for a total increase of US$847 billion. By the time the Fed finishes its planned US$1.75 trillion purchase of MBS, Agency debt and Treasuries in 2009, securities holdings will have multiplied 5x its June 2008 trough.
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555 Monetary Policy Response: Ratio of Commercial Bank Reserves at the Central Bank to Commercial Bank Deposits Great Depression: Banks in the U.S. during the Great Depression reached the highest level of reserve coverage among the three crises despite the lack of interest paid on reserves at the time. Coverage during the Depression peaked at 26.7% in October 1939 and continued its rise to 28.6% in 1940, then descended during World War II. Lost Decade: Japan had the lowest rise in reserve coverage and reached 5.4% in February 2004. Like in the U.S. during the credit crisis, excess reserves drove the rise in total reserves. Excess reserves peaked in November 2004 at 23.6 trillion yen (US$248.1 billion). Reserves dropped sharply in 2006, then began trending upwards again in October 2008 when the Bank of Japan decided it would temporarily pay 0.1% interest on excess reserves. U.S. Credit Crisis: The crisis saw the promptest and sharpest increase in reserve coverage, jumping from 1% in January 2008 to 12% in May 2009—a period of just 16 months. Coverage tripled in October 2008, when the Fed announced it would pay interest on reserves deposited at the Fed for the first time in its history. The payment of interest removed the effective tax on depository institutions for holding reserves against liabilities. Excess reserves accounted for the jump as depository institutions fled to the safety of Federal Reserve deposits. Excess reserves peaked at US$844.1 billion in May 2009.
Fiscal Policy Response: Annual Budget Balance Great Depression: The U.S. budget deficit peaked at 6.2% of GDP in 1934. The government prematurely reduced spending in 1937 to rebalance the budget, pushing the U.S. back into recession the following year. Public spending increased again to provide a few more boosts to the still fragile economy. Then the beginning of World War I in 1939 spurred another spending spree to build up the U.S. armed forces and ramp up production, finally sealing the end of the Great Depression. The last piece of New Deal legislation, the G.I. Bill, was signed into law in 1944, preventing a much-feared relapse into the Great Depression. Lost Decade: Among the three crises, Japan had the highest budget deficit as a share of GDP, peaking at 11.2% in 1998 after the government made its second round of bank recapitalizations. The first round in 1997 was not very effective in disposing of bad assets as banks used the capital to comply with higher capital requirements under Basel II. The second and much larger round of recapitalization was more effective in encouraging write-offs of bad loans. U.S. Credit Crisis: As of 2008, the U.S. budget deficit, at 4.5% of GDP, has yet to reach the depths seen in the Great Depression and by Japan during Lost Decade. Unlike the other two crises, the U.S. entered the credit crisis
556 with a budget deficit. However, this hasn t stopped the U.S. from spending trillions of dollars on financial stabilization and fiscal stimulus packages. Fiscal Policy Response: Public Debt Outstanding (% of GDP) Great Depression: U.S. outstanding public debt started from the lowest base among the three crises: 16% of GDP in 1929 on a fiscal year basis. Debt peaked at 44% of GDP in 1939 and inched down for a couple of years before World War II propelled debt to a historic high of 121% of GDP in 1946. Public debt never recovered to its pre-crisis level. The closest the U.S. got was the post-World War II low of 31.7% in 1974. Lost Decade: Japan's outstanding public debt rose to the highest level among the three crises: 196% of GDP in 2007—the highest among all OECD nations. Public debt initially fell to a low of 57% in 1991, then began a long climb driven by public spending to finance terminally ill companies and substitute for lackluster private domestic demand. Public debt leveled off in 2006 but threatens to resume rising to 200% of GDP as Japan fights its way out of the 2008-2009 recession. Like the U.S. during the Great Depression, Japan invested prodigiously in infrastructure (42% of fiscal expenditure in 1993-2003), but many more were boondoggles (i.e., the famous bridges to nowhere) as compared with infrastructure investments during the Depression. Policymakers continue to advocate infrastructure spending today as a way out of recession, though there is not much further expansion needed at this point. Fiscal spending should move on to curing the causes of weak domestic demand, such as a thin social security system. U.S. Credit Crisis: U.S. outstanding public debt immediately before the credit crisis started from a slightly higher level than Japan's. Public debt began at 65% of GDP on a fiscal year basis then rose to 70% as of 2008. Ironically, U.S. debt is among the lowest in the G7 despite the country's reputation for profligate spending. However, the Congressional Budget Office projects federal government debt to increase to 82% of GDP by 2019. Critics predict an even higher level if the government fails to raise revenue while increasing expenditure on entitlement programs, such as healthcare and social security.
Fiscal Policy Response: Public Debt Per Capita Great Depression: Though doubling from its 1930 low of US$132, U.S. outstanding public debt per capita peaked at a mere US$325 in 1940, which would be US$5000 today (though it's not clear from the TreasuryDirect website whether the public debt is calculated in current prices or inflation-adjusted prices). Lost Decade: Japan's outstanding public debt reached $64,000 per capita in 2008, nearly twice that of the U.S. during the credit crisis. The public debt per capita may accelerate with population declines and rising public debt. As of 2008, only 6% of Japanese public debt is held by foreigners. The IMF estimates at least half of all JGBs are ultimately held by Japanese households via Japanese financial institutions, such as Japan Post Bank and other deposit-taking institutions.
557 U.S. Credit Crisis: U.S. outstanding public debt rose to $33,000 per capita as of 2008. As of July 2009, 63% of public debt is held by the public (individuals, corporations, state or local governments, foreign governments and other entities outside the U.S. government). The rest is held by U.S. federal government agencies. 58% of public debt is in the form of Treasury bills, notes, bonds and TIPS. The ratio of foreign holdings of Treasuries to domestic holdings of Treasuries rose from 33% in 2005 to 45% as of May 2009.
Fiscal Policy Response: Government Debt Costs Great Depression: The U.S. Treasury did not begin issuing 10-year notes until 1929 and high-frequency data on 10- year Treasury yields during the 1930s is not available, so a Federal Reserve composite of Treasuries callable after 12 years was used instead. Compared to the U.S. credit crisis and Japan's Lost Decade, U.S. long-term Treasury yields experienced a milder fall when risk aversion was most acute (presumably right after the stock market crash in 1929). New York Times news articles reported political leaders exuding praise for the Federal Reserve for having averted a financial crisis with its provision of liquidity for margin calls. Little did they know that the stock market crash was just the beginning. Long-term yields rose sharply in 1931 to 4.3% by January 1932, then declined to 1.9% in 1940. Apparently, the United States' ability to rebalance its budget and repay public debt was less doubtful to Treasury investors back then compared to during the credit crisis. Lost Decade: Japan's 10-year JGB (Japanese Government Bond) yields plunged the most among the three crises. Yields fell from 8.3% in 1990 to 0.5% in 2003. Since 1999, JGB yields trod in a narrow 1-2% band and exceeded it only occasionally, even as public debt climbed. Home bias, a perceived duty to support the country and a thin social safety net encouraged Japanese to save much of their income in cash or safe investments. U.S. Credit Crisis: The 10-year Treasury yield also plunged steeply from 5.1% in June 2006 to 2.4% in December 2008. Improving risk appetite since spring 2009 dried up safe haven flows into bonds while massive fiscal and monetary expansion raised fiscal and inflation risk premiums.
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Fiscal Policy Response: Average Income Tax Rates Other than debt issuance, a way to finance public debt and deficits is higher taxation. Great Depression: Of the three crises studied here, the Great Depression saw the sharpest increase in statutory income tax rates. The highest income bracket saw their rates spike from around 25% in 1932 to above 60% just a year later. Their tax rate spiked again from around 60% in 1936 to almost 80% in 1937, when the government grew
559 prematurely and overly concerned with budget balancing. The personal income tax for the highest income bracket eclipsed 90% around the end of World War II. Personal tax rates then recovered to 35% and 10% respectively for the highest and lowest income brackets in the 2000s. Lost Decade: Japan cut tax rates during the Lost Decade. Reflecting its pro-industrial, pro-export policy, the government cut statutory corporate income tax rates in 1999 to the lowest level relative to the other two crises. The highest individual income tax rate was also cut to induce consumer spending. However, an underfunded public pension system and rising public debt may force Japan to raise tax rates or impose new taxes. U.S. Credit Crisis: U.S. statutory tax rates have yet to see any change. However, tax rebates and other social transfers have lowered the effective tax burden and raised personal disposable income. Like Japan, an aging population and rising public debt may also force the U.S. to raise taxes or impose new ones. Tax shelter crackdowns in Switzerland and the Caribbean may also improve tax collection. After the Crises Japan's Lost Decade and the U.S. credit crisis have yet to end, leaving the Great Depression as the only closed case examined here. However, common to all crises was public outrage at taxpayer-funded bank recapitalizations. Great Depression: Postmortem Fiscal and monetary easing, financial stabilization, institutional reform and the ramp-up of wartime production ended the Great Depression. The Hoover Administration dragged its feet on responding to the Depression because it believed the economic downturn would be brief. FDR took office in 1933 and implemented the two New Deal programs that pulled the U.S. out of its downward spiral. The New Deal funded a few boondoggles—the famous "bridges to nowhere"—but most of the infrastructure spending added to the quality of life and clamped down on unemployment. Of course, there are people who do not believe museums and art improve the quality of life. But the U.S. did make some more practical investments, such as bringing electricity to rural areas. The budget balance eventually turned positive again after the war but outstanding public debt never returned to its pre-Depression level. Public debt began to inch down after 1939 but World War II massively increased public debt shortly thereafter. A long-lasting legacy of the Great Depression is a greatly expanded government, which privatizations and deregulations since the 1970s have sought to claw back. Some institutions may be worth preserving though, such as the FDIC (particularly as banks gamble with deposits) and the social security system (especially as widening generation gaps and career demands make it unfeasible for the elderly to live with and depend on their children for survival). The creation of a welfare state prevented the U.S. from falling back into a depression after the second World War. The G.I. Bill helped returning soldiers quickly adapt to civilian life, go to school and find jobs. Giving veterans the means to establish and support families generated the internal consumer demand needed to keep industries producing goods and services. Lost Decade: Progress Check Japan extended its "Lost Decade" into the current decade because it dragged its feet on financial reforms and other economic policies. The government allowed banks to hide their bad assets and suspend mark-to-market accounting. Banks, in turn, "evergreened" loans to insolvent firms, escalating the scale of NPLs (non-performing loans). Both banks and the government believed asset quality would improve in 1-2 years. Unfortunately, the economic revival they hoped would wean companies off life support never came. Furthermore, their attempts to avoid a credit crunch increased bad debt, setting up a harder fall in credit. Bank recapitalization helped stabilize banks in the early 2000s but cross-shareholding between banks and their corporate affiliates continues to pose conflicts of interest in assessing loan quality. Balance sheet transparency and adherence to international standards of accounting remain sorely lacking. Export demand from emerging markets (and, ultimately, the U.S. housing market) pulled Japan out of recession in the mid-2000s, but the ebbing tide of external demand since 2008 unmasked Japan's structural deficiencies: anemic domestic demand, inefficient enterprises, barriers to competition. Between 2006 and 2008, the Bank of Japan was able to shrink its stock of securities holdings from its first round of quantitative easing back to its late 2000 level. As of September 2008, the Deposit Insurance Corporation and the Bank of Japan recovered 65% of their losses from bailing out banks through purchases of shares and troubled assets, capital injections, nationalizations and insurance payouts. However, a round of "unconventional easing" caused the Bank of Japan's securities holdings to resume rising in 2009 to fight off yet another recession. Quantitative easing did not cause hyperinflation or asset bubbles in Japan. The yen carry trade transferred the Bank of Japan's liquidity boosts out of the country to inflate bubbles elsewhere. Low interest rates and dim prospects for the Japanese economy encouraged Japanese investors to chase higher yields outside the country. Low interest rates
560 also attracted foreign borrowers looking to minimize borrowing costs for leveraged investments in high-yield assets outside Japan. Japan's obsolete macroeconomic policies, financial regulations and accounting standards, forged in the 1950s, undermine foreign investor confidence and reinforce Japan's stagnation. The challenge back in the immediate postwar years was to ensure that producers could produce. The challenge now is to ensure that consumers can consume, but policymakers have failed to match the increase in job insecurity with an expansion of the social safety net. Household savings rates have fallen not because of increased spending but because of an increase in financial assets to make up for the shortcomings of the public pension system. National elections on August 30 may bring a radical political shift. The main opposition party, the DPJ, has a strong chance of snatching seats, including potentially the prime ministership, from the ruling LDP, which has led the country for more than 50 years (except for one brief break of less than a year). The LDP's popularity has plunged with its mismanagement of a pension scandal and the country's economic malaise. Japanese are looking for a change. Unlike the bureaucrat-driven LDP, the DPJ seems more determined to reverse the population decline and rebalance growth towards domestic demand. U.S. Crisis: Progress Check U.S. authorities intervened more promptly and forcefully during the credit crisis than Japanese authorities did during the Lost Decade. The Federal Reserve responded by slashing interest rates to all-time lows, creating several lending programs, purchasing assets directly and paying interest on reserves deposited at the Fed. Congress responded with more than a trillion dollars in stimulus packages and guarantees from the FDIC. However, bank recapitalization still leaves the problem of evaluating toxic assets. The U.S. financial crisis is not a simple bank crisis like Japan s but rather a very complex, system-wide one. Japan's banks kept loans on their balance sheets rather than securitizing them away. Not so in the U.S., where not only the fair value for bad loans needs to be determined, but also the value for the derivatives based on them. Moreover, though banks began to post profits again in 2009, they also reduced credit lines. Like Japan, the U.S. has yet to make the structural and prudential reforms necessary to ensure financial stability in the long-term. Monetary authorities must reconsider whether goods/services inflation targeting suffices to secure economic stability. The Federal Reserve may need to expand its toolbox to include credit default swaps or some kind of securities insurance during systemic crises. Since financial crises are invariably crises of confidence, MIT professor Ricardo Caballero prescribes "prime, government backed insurance against what investors fear" to secure financial, and ultimately economic, stability. Brian Madigan, Director of Monetary Affairs at the Federal Reserve, suggested establishing a lending facility for nonbank financial institutions at least in times of crisis. Temporary government assurances may create moral hazards but financial stabilization shortens the road to macroeconomic recovery. Regulators must adapt to a financial system that has grown far beyond the confines of traditional intermediaries (banks). Perhaps the U.S. needs a new Glass-Steagall Act to separate commercial banks from their in-house hedge funds or regulate hedge funds and other nonbank financial institutions (such as subjecting them to capital requirements like banks). The various financial regulators could also use more interagency communication and stronger enforcement tools. http://www.roubini.com/analysis/44374.php
Véanse las cronologías en: http://www.roubini.com/redir.php?sid=1&tgid=10000&cid=380075
561
15.12.2009 Bad news from Greece: It is open season for the speculators
We were never that optimistic that George Papandreou would stand up to tell the Greek people that he lied during the election, and that he would announce a programme that stands a chance to get the problem under control. Yesterday he outlined some of the details, which are in line with what we reported in yesterday’s mornings briefing. He will leave the biggest parts of the country’s structural fiscal problems untouched –public sector wages, which are still rising at levels above eurozone inflation – and pensions which are close to 100%. There will be a nominal wage freeze on higher earning civil servants. The FT correspondent in Athens writes: “To loud applause, he announced a 90 per cent tax on bonuses for senior bankers in the private sector.” His rescue plan for the Greek economy depends mostly on the fight against corruption, a reduction in bureaucracy, and lots micro measured design to improve the efficiency of the economy. Kathimerini has the full details of the speech he gave last night to a gather of the social partners, in which he called on everybody to “save the place”, and he outline a large number of micro- measures, such as electoral reform, a discussion on entrepreneurship (which are all worthwhile in their own right, but we have relatively little to do with the problem of a 12.6% deficit, and a projected debt-to-GDP of 130%. The actual deficit figure for 2009 is likely to be a lot higher, possibly 14 or 15%. Greece is not going to get on a sustainable trajectory through growth measures alone.) During the day yesterday, Greek CDS jumped by 18bps, the FT reports. The yield on Greek 10 year bonds rose from 5.31% to 5.47% yesterday. Wolfgang Reuter writes in Spiegel Online that German government officials and central bankers think that the actual Greek deficit for 2009 will be much higher than 12.6%, and that Fitch’s BBB+ rating is “almost flattering”. (They are effectively saying that Greece is headed for state insolvency). Interestingly, Le Monde thought that Papandreou’s measures amounted a “régime de rigeur”. Hmmm! The banking crisis, phase two
562 The decision by Austria to nationalise Hypo Group Alpe Adria, two thirds owned by the Bavarian Landesbank, Bayern LB, is costing the German taxpayer a cool € 3700 bn, which was forced the resignation of its chief. This is close to a complete disasters for Bavaria political elites, which are closely intertwined with BayernLB, as CSU politicians sit in the banks’ supervisory board. Frankfurter Allgemeine writes that the ECB favoured the Austrian state takeover of the bank, which is considered systemtically relevant. Euro area industrial output falls The German data last week gave an indication of what is now been confirmed for the euro area. Industrial output fell in October, for the first time in six months. The FT says in its news story that this fall raises doubt about the strength of the economic recovery. Industrial production was down 0.6% mom. The analysts quoted in the article said the European economy was recovering slower than they had hoped. Relief in Spain El Pais expresses relief over the fact the Spanish bond spreads, having jumped some 10 points after S&P’s change of outlook to AA+ negative, has now reversed to the status-quo ante. But the article notes there remains a very significant gap in the long-term outlook, with S&P forecasting that the Spanish debt-to-GDP ratio will settle at 90%, while the government says it will not exceed 65%. The minister for hardship This is an absolutely hilarious clip from an Irish TV programme from the 1970s, a spoof on the austerity policy by the Fine Gael leadership at the time. Hat tip the Irish Economy Blog. http://www.eurointelligence.com/article.581+M584780e6144.0.html#
563 564
Eurozone industrial output falls By Stanley Pignal in Brussels Published: December 14 2009 12:42 | Last updated: December 14 2009 12:42 Doubts were raised over the strength of the economic recovery in the eurozone on Monday, after figures showed industrial output fell for the first time in six months in October amid continued weakness in household spending. Industrial production dropped 0.6 per cent from September and is now down more than 11 per cent year-on-year, according to the European Union’s statistical arm. Van Rompuy urges Europe to double growth - Dec-10 Robust German exports calm recovery fears - Dec-09 The drop is mostly down to flagging demand for consumer goods across the 16-member currency bloc, with significant variations once again appearing between member states. The bulk of the fall was borne by Germany, where production eased 1.8 per cent, although production in France, Ireland and Portugal also fell. The Netherlands and Italy bucked the trend with modest improvements. Economists blamed weak household demand for consumer goods for the lacklustre figures, pointing to a 0.5 per cent drop in eurozone employment during the third quarter, according to EU figures also released on Monday. The number of people employed across the wider EU fell by more than 1m compared with the previous quarter, marking 15 months of contracting employment. All segments of the economy, bar those related to the public sector, shed jobs, led by continued falls in construction, manufacturing and financial services. “Overall, today’s figures confirm the previous picture of an economy that is staggering, rather than bounding, back towards health,” said Colin Ellis, economist at Daiwa Securities. Martin van Vliet at ING called the relapse in industrial production “sobering”, but stressed that the data were volatile and advised “it is premature to conclude that the industrial recovery is seriously losing momentum, let alone that it has run its course”. http://www.ft.com/cms/s/0/1dcec9be-e8a4-11de-9c1f-00144feab49a.html
565 Dubai's Debts Abu Dhabi Comes through with Funds to Avoid Dubai Inc.'s Default Dubai World's request for a standstill on its debts contributed to uncertainty in local and global markets as the state-owned holding company launched a planned restructuring of US$26 billion of its debt. Investors had mistakenly assumed that the government would support much of this debt, including that related to several property development subsidiaries. Just as the first of the related debts (that of property developer Nakheel) came due on December 14, the government of Abu Dhabi agreed to provide Dubai with US$10 billion in funds to pay off the immediate debts and to negotiate with suppliers. The Abu Dhabi government agreed to provide the Dubai support fund (which was charged with restructuring Dubai's debts) with US$10 billion to meet some of Dubai World's obligations, including the US$4.1 billion in funds needed to settle Nakheel's debt on December 14, meet upcoming interest payments, provide working capital and settle debts with suppliers. The government of Dubai will also release a new reorganization law that would come into effect should other obligations not be restructured, according to a statement from the Dubai government. The goal of the moves, the statement says, is to "demonstrate [Dubai's] strong commitment as a global financial leader to transparency, good governance and market principles." (12/13/09) News Government of Dubai Dubai govt statement on restructuring, aid FT: The move by Abu Dhabi will have the effect of easing "global concerns about Dubai’s solvency." It is also a reflection of how highly dependent Dubai is on Abu Dhabi. The US$10 billion, which brings the total support from Abu Dhabi to a figure close to US$25 billion in 2009, came without conditions "such as equity transfers or securitization of the debt." (12/14/09) Analysis Financial Times Simeon Kerr Abu Dhabi steps in to bail out Dubai RGE's Rachel Ziemba: "Now that Nakheel's bond seems set to be paid off in full, with Abu Dhabi's support, it may be even more difficult to convince Dubai World's other creditors to take a haircut on the rest of the debt coming due and/or scheduled for restructuring. The US$10 billion from Abu Dhabi comes with the caveat that the funds can be used for operating expenses only if creditors agree to a standstill. Similarly, suppliers' willingness to negotiate on payment terms may be diminished. However, this deal likely bought Dubai time, even if it comes with conditions. And the new corporate restructuring law to be introduced by the government could be a net benefit for the country if it clarifies the existing insolvency law." Bloomberg: On December 14, Dubai set up a special court to supervise the financial reorganization of Dubai World as it aims to restructure US$26 billion of debt. "The special court, or tribunal, will use insolvency laws of the Dubai International Financial Centre, a tax-free business park for financial service firms, to enable the restructuring" and should be “based on internationally accepted standards for transparency and creditor protection.” The special court will be in use “should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.” (12/14/09) News Bloomberg Arif SharifDubai Sets Up Special Court for Dubai World Debt Restructuring The National: "The tribunal will initially be composed of three senior international judges from the Dubai International Finance Centre Courts chaired by Sir Anthony Evans, the chief justice of the DIFC Courts, and a former High Court judge of England and Wales." (12/14/09)
566 News The National New panel for Dubai World disputes On November 30, Dubai World began negotiating the restucturing of US$26 billion in debt, about one-third of its total liabilities. Debt scheduled for restructuring includes that of Nakheel, a Dubai World-owned property developer, and Limitless, while that of Istithmar, Dubai Ports and Free Zone has been excluded. The Dubai support fund is heading up the restructuring effort of the companies and debt, supported by Deloitte and Touche. However, restructuring is expected to be difficult given the different creditors involved. Nakheel reported losses of 13.4 billion dirhams (AED) (US$3.65 billion) for H1 2009 as revenues plunged and land and property values were written down. In addition to the US$3.5 billion sukuk which accounts for about US$4.1 billion including a final coupon payment, Nakheel has two other notes coming due in the next year, including a US$980 billion floating rate note due in May and US$750 million due in January 2011. News Bloomberg Ayesha Daya, Tal Barak Harif and Zahraa Alkhalisi Dubai World to Restructure $26 Billion of Debt Although the debt was not sovereign or sovereign guaranteed, it was issued by a government- owned company. Dubai, mostly through its government-owned companies, has an estimated US$90 billion in debt. Including off-balance sheet exposures and others, Dubai's debts could be even greater. Investors have been expecting support from Abu Dhabi for some time. The central bank of the UAE channeled US$10 billion in funds to Dubai in February and another US$5 billion was purchased by Abu Dhabi banks in November. However, it seemed that Abu Dhabi was reluctant to support Dubai's troubled property developers. The situation was exacerbated by uncertainty about which debts Dubai World would support as the emirate's state holding companies struggle to refinance some of the US$85-90 billion of debt. On average, Dubai, especially its government- owned companies, have US$12 billion in debt to refinance each of the next five years. It is still uncertain how Dubai Holding, which is owned by the sovereign, will be treated, though so far this year, it has paid off the accruing debts of subsidiaries and has been restructuring. On November 29, the central bank of the UAE pledged a new liquidity facility for local banks to ease concerns that the banks might face liquidity issues. Banks will be able to borrow at a rate 0.5% over the emirates' interbank offered rate. The central bank guaranteed bank deposits and set up a special liquidity facility in the fall of 2008. (NYT, 11/29/09) News New York Times Graham Bowley and Vikas BajajUAE Will Support Banks in Dubai Credit Crisis RGE's Arnab Das and Ziemba: "Abu Dhabi will want to discourage creditor and debtor moral hazard to avoid a return to past excesses and to ensure it's at the front of the repayment queue. Any support package will, in the words of officials, 'pick-and-choose' among targets on the basis of economic viability" and require foreign creditors to also take a hit. "Clarity about the restructuring process, government finances and debt servicing will be needed to avoid domestic capital flight and regional market corrections." (11/29/09) In 2009, all the maturing government-linked debt was paid off in full or rolled over with government funds, making up any shortfall in private funds. Yet given the vulnerabilities of the property sector and the government's desire to support only viable companies, Nakheel seemed vulnerable. The lack of transparency about corporate and national finances and which debt might be honored added to uncertainty and credit risk. However, an outright default would increase credit costs markedly, a fact that may have contributed to Abu Dhabi's decision to support Dubai.
567 Rating agencies have been sharply downgrading Dubai government-owned corporations in the last year. In November 2009, Moody’s cut the ratings on Dubai Ports World and Dubai Electricity and Water Authority (Dewa) to Baa2 (junk status) from A3 and downgraded four other government-linked companies, assuming they could count on less government support. The current ratings are, in Moody's opinion, closer to the fundamental credit position. The agency noted that the restructuring plan "highlights the government's intention to strictly adhere to its stated policy of supporting only those companies with viable long-term business prospects, which implies that support for distressed or weaker companies may be less forthcoming." News Moody's Via Financial TimesMoody’s statement on Dubai downgrades Willem Buiter, a professor of economics at the London School of Economics, wrote on his FT blog that as Nakheel's and Dubai World's debt was not sovereign or sovereign- guaranteed, the Dubai government should not bail out the company as "property companies don’t fall into the systemically important category." However, Dubai must avoid "unequal treatment between domestic (or UAE, GCC, Middle-Eastern or Islamic) creditors and other creditors from the West or from the non-Islamic East. If Islamic debt were to be interpreted by the Dubai authorities as debt instruments that give preferential treatment—non-contractual seniority—to Islamic creditors, Dubai’s reputation would be damaged severely." Based on the prospectus, "Nakheel would be in default if it does not pay the amount due on December 14. Nakheel would then have a two-week window to make a payment, before the transaction administrator—Deutsche Bank AG in London—would be obligated to notify all bondholders by first-class mail that Nakheel had failed to meet its obligations. Nakheel could also try and convince certificate holders to change the terms of the bond before then, which would prevent it from technically defaulting on its obligations." (Bradley Hope, 11/26/09) Blogs The National Hope on Nakheel's sukuk Although the US$4 billion Nakheel sukuk is backed by collateral, the value of the underlying assets has been eroded. Moreover, the UAE bankruptcy and default regulations are still relatively untested. The UAE's total external borrowing from global banks is much lower than the Abu Dhabi government's assets (estimated at around US$500 billion by RGE) but there is only limited liquidity now that they are involved in supporting banks and the property sector. Based on its own data, the UAE central bank had US$25 billion in foreign reserves in June, which may include some of the foreign currency bonds. Abu Dhabi has the ability to channel funds into federal government institutions. When Dubai floated a (sub)sovereign sukuk in October 2009, the prospectus argued that the emirate had no legal obligation to settle state company debt, adding to creditor concerns that there would be different classes of Dubai government-linked debt. Dubai World Restructuring The restructuring of Dubai World has been underway for some time. In mid-November, the leaders of Dubai World and several other state holding companies were replaced. Analysis Financial Times Simeon Kerr Dubai shock after debt standstill call Una Galani of BreakingViews argues that Dubai "is biting the bullet...finally realizing that it can't pay off all its debts without a serious financial restructuring." Although creditors will resent making concessions, it's necessary for the long term. (11/25/09) News Breaking Views Una Galani Dubai: Better late than never
568 On October 15, Dubai World announced a restructuring, including job cuts of 12,000 workers and consolidation of several of its operations, especially its overleveraged property vehicles. It tried to avoid distressed sales of its assets to raise capital but may offer equity in several subsidiaries to some of its creditors. It previously suggested offering equity stakes to some creditors. The cuts may be a precondition from creditors, both private and public (e.g. Abu Dhabi). RGE Writings RGE Monitor Rachel Ziemba What do Istithmar’s Troubles Signal for other Sovereign Investors? News Bloomberg Serena Saitto and Jonathan KeehnerDubai World Said to Weigh Offering Equity to Reduce Debt Load Dubai's Debt Timeline Including the Nakheel debt, Dubai has as much as US$9 billion in payments due from November 2009 to March 2010 and an estimated US$50 billion in 2010-12. Based on EFG- Hermes research, about US$16.4 billion of debt came due in 2009, US$9.8 billion in 2010 and US$19.0 billion in 2011. More transparency regarding the economy, the government and its finances and the UAE could ease concern. Analysis EFG HermesDubai Debt: A More Optimistic Scenario Fitch: Majority state-owned enterprises account for three-fourths of debt, and Dubai holds another 9%. Dubai corporates—public and private—had about US$11 billion of loans maturing in Q4 2008. Dubai’s debts step up significantly in 2011. To ease its cash flow, Nakheel arranged to pay half the interest on the debt, 3.1725% during the life of the bond, and the rest at maturity. It backed the sukuk with significant collateral: land and other assets worth more than twice the value of the sukuk bonds, which are now devalued. (National) Analysis The National Asa Fitch and Bradley HopeNakheel likely to resolve issues with $3.5bn bond April: Dewa, the Dubai utility that is a majority stakeholder in TAQA, and Dubai Civil Aviation raised funds to refinance debt. Dubai Civil Aviation's loan included a tranche of AED1.7 billion, US$100 million and 52 million euros. The facility will pay 300 basis points above benchmark interest rates. The Dubai government contributed US$365 million to bridge the shortfall. Dewa got a US$2.2 billion loan at an interest rate of 300 basis points above the interbank offered rates and may also scale back capex plans. February: Of the US$2.5 billion loan for Borse Dubai, US$1.2 billion came from international banks with another US$1.3 billion from state-owned Dubai banks after ICD, a state-owned investor deposited cash with them. Borse Dubai also received a US$1 billion equity injection from shareholders including the government. http://www.roubini.com/briefings/47351.php#44710
569
Environment
December 15, 2009 China and U.S. Hit Strident Impasse at Climate Talks By JOHN M. BRODER and JAMES KANTER COPENHAGEN — China and the United States were at an impasse on Monday at the United Nations climate change conference here over how compliance with any treaty could be monitored and verified. China, which last month for the first time publicly announced a target for reducing the rate of growth of its greenhouse gas emissions, is refusing to accept any kind of international monitoring of its emissions levels, according to negotiators and observers here. The United States is insisting that without stringent verification of China’s actions, it cannot support any deal. The stalemate came on a day of public and private brinkmanship as the talks moved into their second and final week. Earlier Monday, a group of poor nations staged a brief walkout from the bargaining table, and a chaotic registration system left thousands of attendees freezing outside the conference hall and forced the temporary closing of the subway stop near the Bella Center, where the meetings are being held. The slow progress of the climate negotiations could pose problems later in the week, when the heads of government begin arriving. It is not customary for so many technical, financial and emotional issues to be unsettled when national leaders sit down to negotiate an agreement. President Obama and other world leaders have said that they hope to reach some interim agreement at the Copenhagen talks, but that a binding global accord is not likely to be completed until next year. Negotiators for the United States and China have been trading public accusations in recent days and making little progress in negotiations on the critical issue of treaty compliance. Chinese negotiators have said little during formal negotiation sessions here, where they have been working in partnership with the developing countries. They have made clear that they do not expect money from the industrial powers to help make the shift to a more energy-efficient economy. But they will not accept any outside monitors to ensure that they are indeed making the changes that they have promised to reduce the amount of carbon dioxide and other pollutants emitted per unit of economic output. “I think there’s no doubt that China, when it says 40 to 45 percent reduction in energy intensity, is serious about that,” said Ed Miliband, the British secretary of state for energy and climate change. “The more challenging hurdle is finding a formula for ensuring the outside world that an avoided ton of gas is in fact a ton.” He Yafei, the Chinese vice foreign minister, said China’s laws would guarantee compliance. “This is a matter of principle,” even if it scuttles the talks, he said in an interview with The Financial Times.
570 American officials said that despite nearly a year of negotiations with the Chinese, there were still fundamental problems that may not be fixed here before the meetings end. The United States says it believes that the Chinese emissions target is too low — a top American official called it “disappointing” the day it was announced. Without a stronger emissions commitment and an agreement to international monitoring by China, Congress is unlikely to approve a tough new domestic climate regime for the United States. “If China or any other country wants to be a full partner in global climate efforts, that country must commit to transparency and review of their emissions-cutting regime,” said Representative Edward J. Markey, Democrat of Massachusetts and a co-sponsor of the climate and energy bill that passed the House in June. “Without that commitment, other governments and industries, including those in America, will be hesitant to engage with those countries when they try to partner on global warming.” And the Chinese refusal to accept verification measures could also lead to calls for punitive tariffs on Chinese goods coming into the United States. The House bill allows for the imposition of tariffs on goods from countries that do not constrain their carbon output. A group of 10 Democratic senators wrote to Mr. Obama two weeks ago warning that the Senate would not ratify any treaty that did not protect American industry from foreign competitors who do not have to meet global warming emissions limits. That threat could, paradoxically, help drive the Chinese to cement a deal here, an American official said. “Their No. 1 motivation is to avoid border tariffs,” the official said. Barbara Finamore director of the China program for the Natural Resources Defense Council, said the top Chinese leadership was pursuing a cautious and calculated strategy as the talks near a decisive phase this week. “They’re going to wait until the last hour of the last day and just as the other side is walking out they’ll say, ‘Hey, come back.’ Just as they do every day in every market in China,” Ms. Finamore said. “That’s why they’re the best negotiators in the world.” As the dispute between China and the United States was playing out in private, a group of poor nations threw the talks off track for a time with a public protest. They complained that the industrial countries were doing too little to curb their own climate-altering emissions and consigning them to perpetual poverty. Representatives of several African officials demanded that the rich countries sign a binding treaty that included a large transfer of wealth to the developing world. They brought the public sessions of the meeting to a halt at midday, but delegates began returning to the large conference hall as evening fell, and the talks resumed in desultory fashion. John Hay, a spokesman for the United Nations body sponsoring the conference, said: “The plenary was suspended. A slew of technical meetings have not taken place. It’s an indication of how adamant the G-77 are about these issues,” he said, referring to the group of less-developed nations. In New York on Monday, Ban Ki-moon, the United Nations secretary general, warned the negotiators in Copenhagen that leaving too much for the heads of state and government to hammer out at the end of the week risked enfeebling any final deal. “There is no time left for posturing or blaming,” he said at a news conference, before leaving for the Danish capital. “If everything is left to leaders to resolve at the last minute, we risk having a weak deal or no deal at all, and this will be a failure of potentially catastrophic consequences.”
571 Todd Stern, the chief American negotiator, acknowledged that Monday had been a difficult day but said that progress continued to be made. “In any big and complicated negotiation, and this may be the biggest and most complicated ever, it never goes smoothly,” he said. “It never goes as planned. There’s always bumps. There’s always zigs and zags, people getting up and down, and that’s to be expected.” Andrew C. Revkin and Elisabeth Rosenthal contributed reporting from Copenhagen, and Neil MacFarquhar from the United Nations. http://www.nytimes.com/2009/12/15/science/earth/15climate.html?th&emc=th
572 U.S.
December 15, 2009 Poll Reveals Depth and Trauma of Joblessness in U.S. By MICHAEL LUO and MEGAN THEE-BRENAN More than half of the nation’s unemployed workers have borrowed money from friends or relatives since losing their jobs. An equal number have cut back on doctor visits or medical treatments because they are out of work. Almost half have suffered from depression or anxiety. About 4 in 10 parents have noticed behavioral changes in their children that they attribute to their difficulties in finding work. Joblessness has wreaked financial and emotional havoc on the lives of many of those out of work, according to a New York Times/CBS News poll of unemployed adults, causing major life changes, mental health issues and trouble maintaining even basic necessities. The results of the poll, which surveyed 708 unemployed adults from Dec. 5 to Dec. 10 and has a margin of sampling error of plus or minus four percentage points, help to lay bare the depth of the trauma experienced by millions across the country who are out of work as the jobless rate hovers at 10 percent and, in particular, as the ranks of the long-term unemployed soar. Roughly half of the respondents described the recession as a hardship that had caused fundamental changes in their lives. Generally, those who have been out of work longer reported experiencing more acute financial and emotional effects. “I lost my job in March, and from there on, everything went downhill,” said Vicky Newton, 38, of Mount Pleasant, Mich., a single mother who had been a customer-service representative in an insurance agency. “After struggling and struggling and not being able to pay my house payments or my other bills, I finally sucked up my pride,” she said in an interview after the poll was conducted. “I got food stamps just to help feed my daughter.” Over the summer, she abandoned her home in Flint, Mich., after she started receiving foreclosure notices. She now lives 90 minutes away, in a rental house owned by her father. With unemployment driving foreclosures nationwide, a quarter of those polled said they had either lost their home or been threatened with foreclosure or eviction for not paying their mortgage or rent. About a quarter, like Ms. Newton, have received food stamps. More than half said they had cut back on both luxuries and necessities in their spending. Seven in 10 rated their family’s financial situation as fairly bad or very bad. But the impact on their lives was not limited to the difficulty in paying bills. Almost half said unemployment had led to more conflicts or arguments with family members and friends; 55 percent have suffered from insomnia. “Everything gets touched,” said Colleen Klemm, 51, of North Lake, Wis., who lost her job as a manager at a landscaping company last November. “All your relationships are touched by it. You’re never your normal happy-go-lucky person. Your countenance, your self-esteem goes. You think, ‘I’m not employable.’ ”
573 A quarter of those who experienced anxiety or depression said they had gone to see a mental health professional. Women were significantly more likely than men to acknowledge emotional issues. Tammy Linville, 29, of Louisville, Ky., said she lost her job as a clerical worker for the Census Bureau a year and a half ago. She began seeing a therapist for depression every week through Medicaid but recently has not been able to go because her car broke down and she cannot afford to fix it. Her partner works at the Ford plant in the area, but his schedule has been sporadic. They have two small children and at this point, she said, they are “saving quarters for diapers.” “Every time I think about money, I shut down because there is none,” Ms. Linville said. “I get major panic attacks. I just don’t know what we’re going to do.” Nearly half of the adults surveyed admitted to feeling embarrassed or ashamed most of the time or sometimes as a result of being out of work. Perhaps unsurprisingly, given the traditional image of men as breadwinners, men were significantly more likely than women to report feeling ashamed most of the time. There was a pervasive sense from the poll that the American dream had been upended for many. Nearly half of those polled said they felt in danger of falling out of their social class, with those out of work six months or more feeling especially vulnerable. Working-class respondents felt at risk in the greatest numbers. Nearly half of respondents said they did not have health insurance, with the vast majority citing job loss as a reason, a notable finding given the tug of war in Congress over a health care overhaul. The poll offered a glimpse of the potential ripple effect of having no coverage. More than half characterized the cost of basic medical care as a hardship. Many in the ranks of the unemployed appear to be rethinking their career and life choices. Just over 40 percent said they had moved or considered moving to another part of the state or country where there were more jobs. More than two-thirds of respondents had considered changing their career or field, and 44 percent of those surveyed had pursued job retraining or other educational opportunities. Joe Whitlow, 31, of Nashville, worked as a mechanic until a repair shop he was running with a friend finally petered out in August. He had contemplated going back to school before, but the potential loss in income always deterred him. Now he is enrolled at a local community college, planning to study accounting. “When everything went bad, not that I didn’t have a choice, but it made the choice easier,” Mr. Whitlow said. The poll also shed light on the formal and informal safety nets that the jobless have relied upon. More than half said they were receiving or had received unemployment benefits. But 61 percent of those receiving benefits said the amount was not enough to cover basic necessities. Meanwhile, a fifth said they had received food from a nonprofit organization or religious institution. Among those with a working spouse, half said their spouse had taken on additional hours or another job to help make ends meet. Even those who have stayed employed have not escaped the recession’s bite. According to a New York Times/CBS News nationwide poll conducted at the same time as the poll of unemployed adults, about 3 in 10 people said that in the past year, as a result of bad economic conditions, their pay had been cut.
574 In terms of casting blame for the high unemployment rate, 26 percent of unemployed adults cited former President George W. Bush; 12 percent pointed the finger at banks; 8 percent highlighted jobs going overseas and the same number blamed politicians. Only 3 percent blamed President Obama. Those out of work were split, however, on the president’s handling of job creation, with 47 percent expressing approval and 44 percent disapproval. Unemployed Americans are divided over what the future holds for the job market: 39 percent anticipate improvement, 36 percent expect it will stay the same, and 22 percent say it will get worse. Marina Stefan and Dalia Sussman contributed reporting. http://www.nytimes.com/2009/12/15/us/15poll.html?th&emc=th
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bepress Journals December 14, 2009
Special Issue The Economists' Voice Vol. 6 : Iss. 11
http://www.bepress.com/ev
Further articles on Financial Market Regulatory Reform Continuing the discussion on whether or not financial reform is possible and how it can be effective, several more experts weigh in as part of Financial Market Regulatory Reform, a special issue of The Economists' Voice. Special Issue Editor: Jonathan Carmel, University of Michigan Columns Financial Regulatory Reform: The Politics of Denial Richard A. Posner(2009), The Economists' Voice: Vol. 6 : Iss. 11, Article 1. Summary:Richard Posner argues that Bernanke, Geithner, and other top economic officials, being implicated in the causes of the crisis, should not have the last word on reforms necessary to prevent a recurrence. DOI: 10.2202/1553-3832.1664 Available at: http://www.bepress.com/ev/vol6/iss11/art1
Government Guarantees: Why the Genie Needs to Be Put Back in the Bottle Matthew Richardson and Viral V. Acharya (2009) The Economists' Voice: Vol. 6 : Iss. 11, Article 2. Summary:Viral Acharya and Matthew Richardson point out that bank capital requirements and deposit insurance premia need to be based on the bank's systemic risk rather than its individual risk. DOI: 10.2202/1553-3832.1668 Available at: http://www.bepress.com/ev/vol6/iss11/art2
How Little We Know Russell Roberts (2009) "How Little We Know," The Economists' Voice: Vol. 6 : Iss. 11, Article 3. Summary: If only preventing financial crashes were as straightforward as preventing airline crashes. Russell Roberts explains the implications for future financial reform. DOI: 10.2202/1553-3832.1676 Available at: http://www.bepress.com/ev/vol6/iss11/art3
Finding the Sweet Spot for Effective Regulation Hubbard, R. Glenn (2009) The Economists' Voice: Vol. 6 : Iss. 11, Article 4. Summary: Glenn Hubbard of Columbia University calls for better regulation, not more
576 regulation, to avoid future financial crises. DOI: 10.2202/1553-3832.1661 Available at: http://www.bepress.com/ev/vol6/iss11/art4
A Recipe for Ratings Reform Charles W. Calomiris Summary Contrary to conventional wisdom, incentives to inflate credit ratings reflect pressures from buy-side investors who use inflated ratings to reduce the impact of regulation and ratings-based restrictions on their portfolio holdings. Charles Calomiris suggests ways to get effective reform. Calomiris, Charles W. (2009) "A Recipe for Ratings Reform," The Economists' Voice: Vol. 6 : Iss. 11, Article 5. DOI: 10.2202/1553-3832.1678 Available at: http://www.bepress.com/ev/vol6/iss11/art5 Should Banker Pay Be Regulated? Steven N. Kaplan Pay structures weren't the problem, argues Steven Kaplan, who suggests that contingent equity is a better way to avoid bailouts. Kaplan, Steven N. (2009) "Should Banker Pay Be Regulated?," The Economists' Voice: Vol. 6 : Iss. 11, Art. 6. DOI: 10.2202/1553-3832.1706 Available at: http://www.bepress.com/ev/vol6/iss11/art6 Fixing Bankers' Pay Lucian Bebchuk Pay structures are the problem as articulated by Lucian Bebchuk. Bebchuk, Lucian (2009) "Fixing Bankers' Pay," The Economists' Voice: Vol. 6 : Iss. 11, Article 7. DOI: 10.2202/1553-3832.1694 Available at: http://www.bepress.com/ev/vol6/iss11/art7 Whither Financial Reform? Robert E. Litan Robert Litan points out that much has been done already to prevent future financial crises, and tells us what remains. Litan, Robert E. (2009) "Whither Financial Reform?," The Economists' Voice: Vol. 6 : Iss. 11, Article 8. DOI: 10.2202/1553-3832.1654 Available at: http://www.bepress.com/ev/vol6/iss11/art8
Liebowitz, Stan J. (2009) "ARMs, Not Subprimes, Caused the Mortgage Crisis," The Economists' Voice: Vol. 6 : Iss. 12, Article 4. DOI: 10.2202/1553-3832.1655 Available at: http://www.bepress.com/ev/vol6/iss12/art4
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Spending measure clears Senate PARTIES DEBATE FISCAL POLICY Democrats say priority is jobs, not deficit By Ben Pershing Monday, December 14, 2009 The Senate cleared for President Obama's signature on Sunday a $447 billion omnibus spending bill that contains thousands of earmarks and double-digit increases for several Cabinet agencies, the latest target for Republicans seeking to make growing federal deficits a focal point of the 2010 elections. The House may vote this week to raise the federal debt ceiling by at least $1.8 trillion, as the current limit is set to be breached by New Year's Eve. Republicans and Democrats are also engaged in a rhetorical war over how to use unspent funds from the financial bailout program, with the GOP clamoring that the money be devoted to deficit reduction. Those debates, combined with the $787 billion stimulus package passed earlier this year and the slow march toward a roughly $1 trillion health-care reform bill, have focused Republican attacks on Democrats' spending habits -- a preview of the GOP's probable strategy in November. "It is business as usual, spending money like a drunken sailor, and the bar is still open," Sen. John McCain (R-Ariz.) said during the weekend's omnibus debate. Democrats say they do not deserve most of the blame for the red ink. They say that President George W. Bush inherited a budget surplus in 2001 and turned it into a large deficit by the time he left office, and that earmarks and spending grew robustly in the 12 years Republicans controlled Congress. Still, Democrats are planning a two-pronged response: Put procedural controls in place to stem future deficits and, more important, boost federal tax revenue by growing the economy and reducing unemployment. Christina Romer, chairman of the White House Council of Economic Advisers, said Sunday on NBC's "Meet the Press" that it would be "suicide" for the government to focus too extensively on the deficit when job creation is a more pressing priority. Obama made a similar point in his economic address at the Brookings Institution last week. Many congressional Democrats, who are up for reelection two years sooner than Obama, feel the same way. "The number one thing you need to do to improve the economy and improve the deficit is put people back to work," said Rep. Chris Van Hollen (Md.), chairman of the Democratic Congressional Campaign Committee. House Democrats will probably move a sizable jobs bill this week. The $70 billion-plus package will include funding for unemployment benefits, food stamps, Medicare and COBRA health insurance, along with separate money for infrastructure and aid to state and local governments. The Senate's ability to clear a jobs bill this month remains unclear, as the chamber is preoccupied by the health-care reform debate. But whether it passes in December or January, this will not be the last such package Democrats put forward.
578 "We are in a very special kind of economic situation and, frankly, jobs have to be the top priority, and every bill is going to be a jobs bill going forward," Lawrence H. Summers, director of the National Economic Council, said on ABC's "This Week." The House jobs bill will be added to the defense spending measure, which will also probably carry an increase in the current debt ceiling of $12.1 trillion. The House has already cleared an increase of about $900 billion, and the Senate could pass the same increase before it adjourns. But that would require Congress to vote on another increase during the 2010 election season, so Democrats would rather take a vote now on a larger increase rather than on two smaller ones. Republicans are already trying to make them pay for it. The National Republican Congressional Committee e-mailed supporters Thursday, highlighting the $1.8 trillion number and asking for contributions to "join the fight to rein in uncontrolled spending." Unhappy that they have to vote on the debt-limit issue, conservative Democrats in both chambers want any increase to be coupled with cost-cutting initiatives. Conservative "Blue Dog" Democrats in the House want rules put into law requiring new spending increases or tax cuts be offset by spending cuts or tax increases, and several Senate Democrats are demanding the creation of a commission with authority to force Congress to cut the deficit. Van Hollen said there are more such proposals to come. "Next year, you will see a number of initiatives to put us on a sustainable path," he said. Including spending on such mandatory programs as Medicare and Social Security, the omnibus measure the Senate passed on Sunday totals $1.1 trillion, including average spending increases of 10 percent for dozens of federal agencies. It also contains more than 5,200 disclosed lawmaker earmarks worth $3.9 billion, according to the spending watchdog group Taxpayers for Common Sense. Those numbers are down from the same bills the previous year, but that hasn't stopped Republicans from turning the projects into political weapons. Last week, House Minority Whip Eric Cantor (R-Va.) wrote a letter to Obama, noting that during his 2008 presidential campaign, he said he was "committed to returning earmarks to . . . the level they were at before 1994," the year Republicans took over the House and Senate. But with the president set to sign the omnibus measure and the expected passage of a defense spending bill laden with pet projects, he will not meet that pledge this year. Republicans are also zeroing in on the unspent funds in the government's Troubled Assets Relief Program, triggering a vote in the House last week on their proposal to steer leftover money into deficit reduction. Nineteen Democrats, nearly all from moderate or GOP-leaning districts, voted with the Republicans on that measure, which failed by a 232 to 190 vote. Many of the same vulnerable lawmakers were among the 28 House Democrats who voted against the omnibus spending bill. The White House and Hill Democrats want to spend the leftover TARP money to fund their job- creation efforts. http://www.washingtonpost.com/wp- dyn/content/article/2009/12/13/AR2009121302865.html?wpisrc=newsletter
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16.09.2009 The banking crisis - a rational interpretation By: Patrick Minford
In a recent lecture in Cardiff Dale Henderson, who worked at the Fed until the end of 2008, called the crisis ‘a financial perfect storm’ in which ‘all the wrong incentives’ for a variety of agents coincided disastrously. This seems to be exactly right. He documents the incentives for executives of banks to take bonuses on short term gains, for rating agencies to rate well products for which they were paid by the issuers, and for the originators of primary lending to create products that they could easily pass on to bundlers. He could have added that politicians too had incentives, in the form of happy voters and bulging revenue streams, to encourage lending to ‘sub-prime’ borrowers and to go easy on regulatory barriers to these activities (see Schwartz, 2009). All these aspects of the crisis have been well documented — Adrian and Shin (2008), Foster and Young (2008) and Beenstock (2009) all consider the causes. Undoubtedly all played a role. However, human affairs are full of poor incentives; yet somehow we assume that market disciplines will price their effects fairly. It remains a puzzle that the main villains of the piece, sub-prime mortgage packages (the famed ‘Collateralised Debt Obligations’), seem to have been so badly mispriced. This apparent mispricing lay not so much in the slicing of the mortgages but in the failure to price into the packages as a whole the apparent systematic risk due to the general response of house prices to the business cycle. The question is whether someone could rationally have been expected to win a bet against these products, given the information available before 2007. We know with hindsight of course that they would have won this bet. But could that have been expected statistically? Or to put the question another way: was the behaviour of the US housing market a ‘bubble’? The prosecution case saying ‘yes, it was’ might seem well founded, since plainly house prices have collapsed and ‘fundamentals’ have turned out to be much worse than the market price seemed to be discounting. A defence case however would have to point out that the fundamental in the housing market is ultimately productivity, since this drives incomes and demand against a scarce supply of land. Productivity in turn most likely follows a random walk, since the innovation causing productivity growth is largely unpredictable. In the run-up to the crisis US real house prices appeared to become a non-stationary process — taking off from the late 1990s, having previously been stationary and cyclical. If real house prices were non-stationary then their conditional forecast is close to the current value and their conditional variance say ten quarters ahead equals ten times the one-period variance, which was not very great. This calculation of systematic risk could be quite modest, as
580 compared with one based on the possible fall in a cyclical house price close to a cyclical peak, when a recession has a large probability. Figure 1: Real US House Prices, 1980Q1 = 100 All-Transactions Indexes (Estimated using Sales Prices and Appraisal Data)
The policy conclusion from our analysis is a gloomy one: ‘capitalism’, in which large bets are taken on available information, will generate ‘crises’ periodically for particular sectors where the bets go wrong after the event. Occasionally the sector in question will be or will include the banking sector and we will have a banking crisis. Since it is generally agreed that we cannot let a banking system, or nowadays more broadly a financial system, fail, then because the required bail-out is costly to the taxpayer the taxpayer will insist on regulation to control the cost when the inevitable happens. This leads us directly into a discussion of ‘cures’. What can be meant by ‘cure’ when the crisis is inevitable (even though unpredictable)? We mean measures that can either reduce the chances of a banking crisis or reduce the fall-out from it. The main cure suggested is, following the logic above, regulation of bank risk; we had Basel I and then Basel II (which was not fully operative at the time of the crisis) and some have suggested modifications to Basel II such as pro-cyclical risk capital provision. Taxpayers clearly have the right to demand such safeguards to limit the potential calls on their resources. However, the problem does not stop there. We had regulations before this crisis but in many countries the politicians saw that they were disregarded; thus in the UK the new tripartite system of regulation from 1997 gave the Financial Services Authority power to control the banks, and the FSA has reported in its own defence that it was instructed by the government to do ‘light-touch regulation’— i.e. effectively it let the UK banks load up risk off-balance sheet with impunity. Thus we note that the reappearance in this context of the well-known problem of time-inconsistency, whereby politicians can be persuaded for short-term reasons to override sound previous instructions. Thus ‘quis custodiet ipsos custodes?’ — which translated asks: ‘how will we keep control of the regulating government itself?’ In the area of other policies where this time-inconsistency crops up the remedy has been that public opinion should discourage politicians from such interfering overrides. For example we frown on politicians interfering with sentencing in law courts, or nowadays with the setting of interest rates. For public opinion to impose this discipline on politicians it needs to be both well educated in the issues at stake and well informed about the facts. In the case of the banking and financial system neither is the case. The system is poorly understood (even upmarket newspapers can describe financial market participants as ‘greedy’ and short-selling as ‘evil’) and as for information it is by law restricted to the regulators themselves. As Michael Beenstock (ibid) has argued, it is important that regulators release this information to the public so that
581 restraint on participants from public opinion can be operative. This restraint will work directly on the share prices of those taking excessive risks and indirectly through the political process. So while there can be no ‘cure’ in the sense of preventing bank crises, there can be some reduction of the taxpayer cost when crises occur through regulation of risk-taking and through the release of information about the risk-takers.
How good are our macro models? The crisis has been an occasion for a number of economists to rail against the ‘modern generation’ of macro models. By this is meant models that assume rational expectations and efficient markets, in which people and firms respond to the cost of capital, and in which the monetary system is modelled in terms of an interest rate-setting rule, whereby the central bank sets the short-term cost of capital in response to inflation and an output measure of the business cycle. A main protagonist has been Charles Goodhart who would like models to embody realistic assumptions about behaviour, much as in the ‘behavioural finance’ literature, and fully specified models of banking and financial balance sheets, which then impinge on people’s behaviour. Recently he has been joined by Willem Buiter who has apologized pro vita sua as a supporter of modern macro (most of which is ‘useless’ he now avers). There has been much in the same vein from Keynesians such as Lord Skidelsky, Professor Vicky Chick and the ubiquitous Paul Krugman,. This headlong desire to scrap modern models must be resisted. Of course research improving them must continue and it may well that these improvements include a better modelling of the channels of monetary policy. But it is unlikely, in my view, that they will be improved by jettisoning their current properties; rather the extra channels may help by being added to this structure. Let us start by repeating the point above that our crises reflect efficient markets and the underlying nature of capitalism in which we expect and encourage firms and people to take big bets in a decentralized way — the reason being that this way we get social gains from the good innovations which last for ever and so more than compensate for the bets that fail. Thus our models are capturing an important fact about capitalism. Furthermore, it is theoretically absurd in my view to assume agents are irrational when we make conditional forecasts of the effects of events and policies: they will either catch on sooner or later or we should ensure that they do. ‘Learning’ can also be modelled; but the policy implication of learning models is that the authorities should communicate well what they are doing. This is not to say that ‘behavioural’ models are always wrong, just that to rely on them systematically would be unwise since people have strong incentives to be rational. Macro- modellers gave up on ‘ad hoc’ behavioural assumptions precisely because they realized they would shift as policies developed and were well understood. So theoretically there are strong reasons to maintain the basic assumptions of modern models. But the empirical case turns out to be strong too. These models, when suitably set up, have a fairly impressive ability to mimic the behaviour of the economy. They are still under development and there are things that still need fixing for them to do a fully comprehensive job. But this needs to be put into the context of their youth in scientific terms. Serious efforts to use these models to match the data have only been going on for a decade or so. But what about the detailed attack on their representation of monetary policy? Surely it cannot be right to look merely at interest rates when this crisis has shown that great gaps have opened up between the official interest rates central banks set and the rates prevailing in the market-
582 place? Do we not need a model of ‘monetary transmission’ which can predict what will occur in the market from given monetary actions? It would certainly be nice to have such a model. However, we should note that it has only been for the period of this crisis that such ‘great gaps’ (risk-premia) have appeared. For most of the post-war period these gaps between market and official rates have been fairly constant, or more precisely have fluctuated within a pretty narrow range of little importance for the economy. What our current modellers have done pragmatically is to add these risk premia directly into their equations for consumer and investor spending where they have their impacts. Thus these premia act like other sources of ‘error’ or ‘shock’ in the model. One can then ask what will happen to the economy as a result of these shocks, including the reaction of the central bank to developments via its base rate. The critics go on: what about the effects of ‘quantitative easing’? How can these be assessed in a model without monetary quantities? However this misses the point of the difficulty of assessing QE: that it is occurring at a time when official interest rates, the normal channel for money supply changes, are at their lower bound of zero. This difficulty is shared with models where money supply and demand are explicitly modelled. In effect QE is attempting to flood the banking and intermediary markets with cash in order to bring down the (risk premia) gaps between market rates for credit and base rates- either by stimulating normal bank credit and so bank money creation or by directly providing credit bypassing the banks and so stimulating activity in retail and other markets normally served by the banks. Both these aims share the objective of bringing down the risk premia in the market. Now we notice how QE is helping the government’s other policy instruments, fiscal support to banks, fiscal action via the automatic stabilisers to support firms and households (effectively with credit, since in due course the budget deficit will need to be paid back with tax rises of spending cuts), and finally ‘discretionary’ fiscal packages with essentially the same purpose. All these actions are supplementing the normal role of monetary policy in reducing interest rates, with the aim of extending credit to the private sector in a credit crisis. We notice that in this credit crisis the role of government is to provide credit where the banks are failing to provide it. Fiscal policy in this crisis should therefore not be analysed in the usual way, for its ‘multiplier effect’. The whole point of this crisis is that there is a serious shortage of liquidity. Hence fiscal actions are remedying that shortage directly. Hence because the credit crisis is sui generis a model built to analyse normal credit and intermediary operations would be little use. As it happens a standard macro model is able to examine what is going on by examining the errors in its equations related to the risk premia. We can ‘inject’ into the model ‘improving risk premia’ by altering the errors affecting the model. These improvements will be due to the joint efforts of the fiscal and QE actions; their effects on risk premia are easily monitored even if we cannot analyse just how and why they are working. So I would argue that in practical terms our macro models have served us well, if we treat the crisis and monetary/fiscal responses to it as a series of shocks, provided we are willing to accept that we cannot use them to understand and analyse these very shocks. I would not dispute that it would be good to have a model of the crisis itself; but that is a different thing from a macro model.
The prospects: examining the model simulations of crisis and response To examine the prospects we divide our analysis into policy (monetary policy predominantly) for the period before the Lehman bankruptcy in mid-September 2008 (Before Lehman); and
583 policy After Lehman when the crisis deepened dramatically into a full-scale collapse of the world economy. We begin with an account of the model we are using; then consider the two periods in turn.
Research and a well-performing model of the EU In our research under our ESRC grant within the WEF programme, Mike Wickens and I have been examining, together with David Meenagh (Meenagh et al., 2008), whether one can find a modern theoretically well-founded model that can match the data over the past few decades. The model is for the EU as a whole (including the UK) so we can use it to understand average EU behaviour — our work on the UK on its own is not yet complete. A great deal of work across the world has gone into finding a theoretical basis that is able to fit the facts. Our work builds on this effort. We have taken a model of a type used widely by central banks around the world and made some adjustments to it in the light of a very thorough testing procedure we have developed, based on the model’s behaviour in response to shocks. The model we used is by Frank Smets at the European Central Bank (ECB) and Rafael Wouters at the Belgian National Bank; it is a ‘New Keynesian’ (NK) model, that is it embodies a high degree of price and wage stickiness. Its other features are habit persistence in consumption, variable capacity utilisation, and investment adjustment costs, all of which have been found to be helpful in matching the data. In our tests we found that in some respects superior performance could be obtained without significant price/wage stickiness — a ‘New Classical’ (NC), flexible price, version of the same model. However, neither version was able to match the data — in brief this was because the NK model generated too much output (real) variability and not enough inflation and interest rate (nominal) variability, while the NC model did the opposite, producing too little real and too much nominal variability. So it turned out that a ‘mixed’ version worked best, in which firms sold their output in both a sticky price sector and a flexible price sector, and similarly workers their labour to both a sticky wage sector and a flexible wage sector. The mixture that fitted best was one with most (around 95%) of the economy flexible price/wage, and only a small part with price/wage rigidity; the latter part is sufficient to get the NC model’s nominal variability down and real variability up to match the data. So in what follows we use this mixed or ‘weighted’ model, to assess the shocks and policy responses.
Before Lehman What are the shocks? Our estimates of the shocks are intended to be illustrative of the order of magnitude rather than in any way precise. We assume that commodity price inflation would have added about 3% to headline inflation after a year — we model this as an equivalent shock to productivity since commodity prices do not enter the model as such. For the credit crunch shock we assume 20% of borrowers were marginal and unable to obtain normal credit facilities after the crisis hit; we assume they could obtain credit on credit card terms (say around 30% p.a.) only. Other borrowers faced a rise in interest rates due to the inter- bank risk premium which has varied between 50 and 200 basis points during this crisis so far, as compared with a negligible value beforehand; there was also some switching of borrowers away from fixed-rate mortgages to higher variable rate ones. Overall, we assume these other borrowers faced a rise of 2% in rate costs. Averaging across the two categories, we get an estimated 6% per annum rise in average credit costs. We assume it carries on at this level for six quarters before gradually dying out.
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What are the possible monetary policy responses? To estimate the effects on the economy we have to make an assumption about how monetary policy reacts (i.e. the response of interest rates). We compare two alternative approaches. Under the main one, that is currently followed by central banks committed to inflation targets, they react according to a ‘Taylor Rule’ in which interest rates respond mainly to inflation though also somewhat to output. Under another one, which occasionally the ECB suggests it has in mind, the central bank moves interest rates to meet a fixed money supply growth target. When we run the model for these two shocks under these two policy assumptions we get the results shown in the six charts that follow: the last chart in each part show the sum total of effects when the two shocks are combined. In all our charts we show effects quarter by quarter (the horizontal axis measures time in quarters). On the vertical axis the left hand scale applies to output and shows the percent effect on output, the right hand scale applies to interest rates and inflation and shows the effect in percent per annum. Interest rates shown are those that consumers pay (i.e. under the credit crunch they include the estimated direct effect of the credit crunch).
Taylor Rule results: Under the main Taylor Rule policy we find that interest rates rise substantially in response to the commodity price shock; this is because although there is a recessionary effect it is weak compared with the short-run effect on inflation. However, in response to the credit crunch shock interest rates inclusive of the credit crunch effect fall markedly; this is in reaction to the deflationary effect of the shock, creating both a sharp recession and a sharp fall in inflation. Since the direct effect of the credit crunch is initially 6 % on interest rates, to get market rates to fall would require an even bigger fall in base rates — in effect to below zero. While that is technically possible, it is in practice unlikely. Nevertheless it is interesting to see how sharply monetary policy would need to move under the Taylor Rule; and then of course we did not see the credit crunch shock in isolation. When one adds the two shocks together, the interest rate inclusive of the credit effect (the market rate, shown in the charts below) remains about constant — which means that official rates are cut to match the credit crunch effect while it is occurring; plainly this means large cuts in official rates (effectively to around zero) in the attempt to offset the rise in interest rates charged for risk reasons. If we look at the interest rates actually set by the ECB and the Bank of England, it is clear that they have deviated substantially from this Taylor Rule prescription. They have barely cut base rates since August 2007. This is to be compared with the US Fed which has tried roughly to offset the tightening credit conditions with repeated cuts in its Fed Funds target (now set at 1%); it looks as if the Fed has roughly followed a Taylor Rule.
Money Supply Rule results: When we apply the alternative policy of money supply targeting, we find rather different results. First of all, interest rates do not react to the commodity price shock because the demand for money is largely unaffected — the inflation rise more or less offset the drop in output. But secondly, interest rates inclusive of the credit crunch rise in response to the credit crunch; official interest rates only partially offset the tightening from the rising risk premium. This is because demand for money growth falls but to increase it back up to the money supply growth
585 target only a small cut in interest rates is required — reflecting quite a substantial interest rate demand response in line with the sort of interest elasticity usually found (we assume here 0.075). Adding the two together we find that interest rates do rise over the whole episode but by quite a lot less than they have done in actual fact in the EU, and rather more than they have in the US.
Conclusions about monetary policy before Lehman What we can say from these estimates is that on two rules that have been widely suggested for monetary policy, the verdict on US policy is that it has been about right on one approach (Taylor Rule) and a bit too loose on the other (Money Supply target). Whereas in the EU policy has been too tight on both: very much too tight on the Taylor Rule, rather too tight on the Money Supply target. The Taylor Rule is what most central banks say they are following and is also widely thought to be a good policy for containing inflation without unduly harsh effects on output. If we take this as our main guide it suggests that the US Fed got its approach to the Before Lehman episode about right while the ECB and the Bank of England, together with most other European central banks, has set policy quite a lot too tight. The ECB could reply that it pays more attention to money supply. Even if that is the case, on this measure here it was still rather too tight. The same applied to the Bank of England and most other European central banks. Where might this excessive tightness come from? It appears from statements by board members of these bodies that on the European side of the Atlantic there was concern about losing credibility in the face of rising ‘headline’ inflation whereas on the US side of the Atlantic credibility was felt to be safe because ‘core inflation’ was not affected by the commodity price shock. Clearly assessing credibility requires another sort of model entirely — one that allows for political backlash against the regime of inflation targeting among other elements. But certainly in the context of such a severe credit shock, the US judgement seems to have been valid judging by events. Credibility has not been threatened because credit conditions have in effect been greatly tightened by the credit shock just as the commodity shock was hitting. In the US even the efforts of the Fed to offset the rise in credit costs failed to do so completely.
586 Our assessment here has assumed that these two monetary rules represent the best practices available, based on the views of central bankers and their advisers. It would be interesting to experiment with other monetary policy rules, both evaluating their properties in general and in the context of these shocks. That is something for further work.
After Lehman What distinguishes the aftermath of the Lehman bankruptcy from this earlier drawn-out and ambiguous episode that went before is that the shock and the response were both huge and nearly simultaneous. So it seems as if the economy was beset by an irresistible force and an immovable object at more or less the same time. However, it is plain on brief reflection that the two shocks are not on a par in terms of force. The Lehman bankruptcy was itself a decision of government (arguably a bad mistake but that does not concern us here), designed ironically to save the US taxpayer money from bailouts. Of course the crisis it caused led to far bigger bailout demands on that taxpayer. What government caused it was doomed to remedy. What Lehman did was suck all taxpayers everywhere into that remedying process, as I have argued above providing credit in supplementation of the normal credit channels. Just as government had the power to cause the crisis, so it had the power to more than offset it. Analysing the shock and counter-shock is therefore in my view to be seen as one negative shock followed by a larger positive shock with a short lag, say of about a quarter. The easiest way to understand the effects are to look at the effect of one such shock and examine the speed and shape of its effect. Before we do so we should consider the main alternative canvassed to the model we are using here. In our model there are no balance sheet effects; everything turns on incentives at the margin to take additional actions on consumption, investment, production and labour supply. These incentives come from prices and asset yields. Balance sheets only enter implicitly in the sense that there is a physical capital stock and it has a value which in turn affects investment; but its valuation is entirely forward-looking, based on prospects of future returns from future consumption, investment etc. and hence on incentives. In the alternative model we have heard much about everything hangs on the state of balance sheets. It is said that with net assets of consumers and firms having been savaged by low asset prices, consumers and investors must necessarily retrench to ‘rebuild’ their net assets. This is said to be likely to take a long time, some people say decades. According to this model the world after Lehman could be headed for a long depression as balance sheets are rebuilt. Yet in our model this is not the case at all; bygones are bygones. What determines spending is the prospect of return. To put it crudely if I was a billionaire, now down to my last few millions, I do not react by doing nothing and hoarding what I have got, in the hope of things getting better without my active intervention. Rather I look at new opportunities to restore my fortunes. As we have seen earlier the model we are using is also one with a high degree of wage and price flexibility — recent wage figures have illustrated that idea, with private sector wages in the UK falling recently, as have recent price figures everywhere. So what with firms and households being forward-looking, responding to incentives, and operating in a marketplace with largely flexible wages and prices, it should not surprise us that it shows quite short lags in response to shocks. Below, in Figure 3, we show the effect of a worldwide banking crisis shock in a model that links the EU model above and a similar US model in a ‘world economy’ model (Le et al,
587 2009). It is calibrated to produce a fall in official interest rates similar to what we saw. What we see is that the peak effect comes quickly, by the second quarter. Also the monetary response comes rapidly, reinforcing the upswing. Figure 3:Deterministic Credit Crunch Shock to Both EU and US
Now in this particular crisis we can think of the full response as being more delayed that assumed here- if one includes all the fiscal support and the QE measures. This delay will have worsened the output effect shown here for illustration. However, it is hard to disentangle such details; it must be freely admitted that in such a crisis macro models can only grope for orders of magnitude, shapes of movement and possible speeds of convergence. The basic point, which may be all we can make here, is that the crisis according to this model would be likely to be over fairly quickly, as it induces offsetting action on a large scale, all in the context of rather short lags.
Making some sense of the whole episode — an attempt at an overall conclusion I have argued that this crisis, for all the failures of regulation and incentives, has to be seen as one of a line of capitalist crises (that look like ‘bubbles’), in which bad news comes hard on the heels of a long period of good news. The resulting crash is worse when it involves the banking and financial system — as often is the case since these are sucked by long periods of expansion into large credit and asset positions. I have also argued that as crisis it is likely soon to be over, because due to government action worsening it, governments everywhere were forced into a massive response. However, this still leaves unclear what bad news it was that precipitated the end of the world expansion fed by the good news since 1992. As I argued above the main factor significant for the economy is productivity; this drives production, consumption and housing demand in particular, all symptoms of the underlying productivity success. It is not hard to see the huge
588 exploitation of the computer as the engine of this long productivity miracle. What brought this process to a shuddering halt during 2008? We saw during 2007 and 2008 a dramatic upsurge in commodity prices, especially oil. It began to become clear that with emerging market economies like China growing at up to 10 percent a year the demands for commodities would quickly outrun supplies. A similar thing had happened in the 1970s; but this triggered large-scale substitution away from the use of oil and other scarce raw materials so that by the 1990s commodity prices languished at nugatory levels and substitution slowed with them. But by the late 2000s this slowing substitution had been overtaken again by the massive growth in the decade and half from 1992. Productivity growth fuelled by the computer hit a wall of raw material shortage again. For it to restart will require productivity growth in raw material technology — i.e. more substitution. So in final conclusion it is not possible to see a return to the rapid growth rate of the world in the mid 2000s until productivity growth has spread to eliminate the new scarcity of raw materials. While the crisis should be over soon, and indeed is probably already over, the immediate macro prospect is for a return to moderate growth in line with the restraint placed on productivity growth by current raw material shortage. Patrick Minford is professor at Cardiff University and member of the CEPR. References Adrian, Tobias and Hyun Song Shin (2008), ‘Liquidity and Financial Cycles’, BIS Working Paper No. 256. www.bis.org/publ/work256.pdf Beenstock, Michael (2009), ‘Market foundations for the new architecture’, in Verdict on the crash — causes and policy implications, ed Philip Booth, IEA. Foster, Dean P. & H. Peyton Young (2008), “The Hedge Fund Game: Incentives, Excess Returns, and Piggy-Backing”, Oxford working paper 378. www.economics.ox.ac.uk/Research/wp/pdf/paper378.pdf Henderson, Dale (2009), “All the Wrong Incentives — A Perfect Financial Storm”, Julian Hodge Annual lecture, presented in Cardiff on May 21st. More information forthcoming at http://www.cf.ac.uk/carbs/research/groups/jhiam/events.html Le,Vo Phuong Mai, David Meenagh, Patrick Minford and Michael Wickens (2009) ’Two Orthogonal Continents: Testing a Two-country DSGE Model of the US and EU Using Indirect Inference’ Cardiff Economics Working paper E2009/3, www.cardiff.ac.uk/carbs/econ/workingpapers/papers/E2009_3.pdf Meenagh, David, Patrick Minford and David Peel (2007), “Simulating Stock Returns under switching regimes — a new test of market efficiency”, Economics Letters (94), pp. 235–239. Working Paper version at www.cardiff.ac.uk/carbs/econ/workingpapers/papers/E2006_13.pdf Meenagh, David, Patrick Minford and Michael Wickens (2008), ‘Testing a DSGE model of the EU’, Cardiff Economics Working Paper E2008/11. www.cardiff.ac.uk/carbs/econ/workingpapers/papers/E2008_11.pdf Schwartz, Anna (2009), “The origins of the financial market crisis of 2008” in Verdict on the crash — causes and policy implications, ed Philip Booth, IEA. http://www.eurointelligence.com/article.581+M5b1e52a25ad.0.html
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