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 91º ANEXO XI
Alvaro Espina Vocal Asesor 6 de Septiembre de 2010
BACKGROUND0BU PAPERS:
1. A1B Keynesian success story, Spiegel On Line…7
2. The2B Economist as policitcal philosopher, Economicprincipals.com by David Warsh…13
3. What3B Germany knows about debt, The New York Times by Tyler Cowen…15
4. Germany’s4B super competitiveness: a helping hand from eastern Europe, Vox by Dalia Marin…17
5. Krugman5B on Cowen and Germany, Marginal Revolution, by Paul Krugman…19
6. What’s6B Germany’s secret?, The Economist, by Tyler Cowen…21
7. A7B generation of overoptimistic equity analysts, McKinsey Quarterly…23
8. Equity8B analysts: Still too bullish, Mckinsey&Company by Marc Goedhart, Rishi Raj and Abhishek Saxena…24
9. Bundesbank9B says Ireland will destroy eurozone, Eurointelligence…28
10. Senate10B set to end stalemate and extend jobless aid, The New York Times by Carl Hulse…31
11. Euro1B back at $1.30, Eurointelligence…34
12. Part12B 5A. What happens if things go really badly? $15 trillion of sovereign debt in default, Calculated Risk …37
13. The13B pundit delusion, The New York Times by Paul Krugman…40
14. Why14B I worry, The Conscience of a Liberal by Goldman Sachs…41
15. Whay15B the battle is joined over tightening, Ft.com by Martin Wolf…51
16. The16B great austerity debate, Ft.com …53
17. It17B is far too soon to end expansion by Brad Delong…55
18. Today’s18B Keynesians have learnt nothing, Ft.com by Niall Ferguson…57
19. Can’t19B anybody here play this game?, Fiscal Policy Edition,
http://www.businessectator.comH H by Niall Ferguson…59
20. Critique20B of Niall Ferguson, Ft.com …60
21. 193921B and all that, Ft.com by Niall Ferguson…61
22. America’s2B sensible stance on recovery, Ft.com by Lawrence Summers…62
23. Global23B economic recovery slower than anticipated despite Asian/Latin Amerian gains, Nielsen wire …64
24. Greece24B makes ‘strong start on reforms, Ft.com by Kerin Hope…68
25. Fasten25B seatbelts for a double dip, Today by Nouriel Roubini…69
26. DeLong26B on deficits, Mises Daily by Robert P Murphy…72
27. Investors27B set record buying US Treasury securities, The Washington Post by Bloomberg News…77
28. The28B low-interest-rate trap, Vox by Francesco Giavazzi and Alberto Giovannini…78
29. Risk29B panics: when markets crash for no apparent reason, Vox by Philippe Bachetta, Cedric Tille and Eric Van Wincoop…80
30. Calling30B recessions in real time, Vox by James D Hamilton…86
1 31. Chinese31B foreign direct investment: what’s happening behing the headlines?, Vox by Lucian Cernat and Kay Parplies…92
32. Whay32B Germany should not listen to the US, Vox by Hans-Werner Sinn…97
33. Double-Dip3B days, Roubini Global Economics, by Nouriel Roubini…99
34. Cambio34B de reglas en Wall Street, El País de Sandro Pozzi…102
35. Cómo35B llenar la hucha, El País de Fiona Maharg-Bravo …107
36. Objetivo:36B las agencias de calificación, El País de Miguel A Noceda…108
37. La37B tercera España, 74 años después, El País de José Juan Toharia…110
38. Europa38B empieza a escribirse a sí misma, El País de Xavier Vidal-Folch…112
39. El39B estilo de los historiadores, El País de Carlos García Gual…116
40. Angela40B Merkel pide en Pekín más acceso para las empresas alemanas, El País …118
41. El41B CIS otorga a Zapatero la victoria frnete a Rajoy en el debate sobre el estado de la nación, El País de Agencias…120
42. La42B presión sobre la deuda española se reduce con fuerza, El País…120
43. El43B precio de la vivienda solo cae un 12% desde máximos, El País de MV Gómez…121
44. La4B caída de la prima de riesgo española se acentúa, El País …122
45. Movistar45B dará Internet de 100 megas en otoño, El País de EP…123
46. Griñan46B sobre Cajasur: No es una buena noticia, pero se ha cumplido la ley, El País de EFE…124
47. Ordóñez47B entrega Cajasur a la BBK, El País de I de barrón y L Lucio…125
48. El48B Banco de España fuerza a la dirección de CAM a aceptar la fusión, El País de R Biot y I de barrón…127
49. El49B presidente ruso y Angela Merkel intensifican las relaciones económicas, El País de Pilar Bonet…129
50. Wonkbook:assessing50B finreg; Goldman suit settled; oil gusher stopped, The Washington Post …131
51. The51B future of finance: The LSE report…134
52. La52B fuerte demanda extranjera se consolida en la subasta a 15 años, Cinco Días…135
53. Economist53B Split over financial overhaul, The Wall Street Journal…137
54. Redo54B that voodoo, The New York Times by Paul Krugman…138
55. Return5B of the bond maket vigilantes, The Wall Street Journal by MarketBeat Staff…145
56. Fed56B sees slower growth, The Wall Street Journal by Jon Hilsenrath…150
57. Boston57B fed’s rosengren: growth slowing, deflation is emergins risk, The Wall Street Journal by Jon Hilsenrath…152
58. Companies58B pile up cash but remain hesitant to add jobs, The Washington Post by Jia Lynn Yang…155
59. Financial59B overhaul signals shift on deregulation, The New York Times by Binyamin Appelbaum and David M Herszenhorn…157
60. Slovakia60B abandons resistance to EFSF, Eurointelligence…160
2 61. Fixing61B Spain’s savings banks mean paying workers to play golf, Bloomberg by Charles Panty…162
62. Sondeo62B tras el debate sobre el estado de la nación…165
63. Medvédev63B ve en Alemania el socio clave para la modernización de Rusia, El País de Pilar Bonet…166
64. Le64B déficit à 3% du PIB en 2013: ni posible, ni réalistem selon Marini, Les Echos…168
65. EU65B takes control of VAT refunds, FT.com by Nikki Tait …169
66. How6B and when to fsoc it to the hedge funds, Ft.com by Sebastian Mallbay…170
67. Bail67B in will save the taxpayer from the bail-out, Ft.com by Gillian Tett…171
68. Demand68B for financing leads flobal economic recovery toward vall of debt, The Washington Post by Howard Schneider…172
69. Allies69B may fret but Obama understands America’s role, Ft.com by Philip Stephens…175
70. The70B pain of Cameron’s 40 percent savings plan, Spiegel On Line by Marco Evers…177
71. The71B self-defeat of the Keynesian cross, Ludwig vonMises Institute by Pedrag Rajsic…181
72. Treasury72B deputi secretary neal wolin. Keynote address at the securities industry and financialmarkets association’s regulatory reform summit. Press Room…187
73. Wonkbook:finreg73B to pass; fed to sit; reid’sclimate deal;dems lose rec, The Washington Post …191
74. The74B CEA’s impossible job, Greg Mankiw’s blog…194
75. Greetings75B from RGE, Roubini Global Economics…196
76. Dodd76B implies fed must act at hearing for governor nominees, Political Economy by Neil Irwin…198
77. What7B Bernanke and the Fed won’t be doing to stimulate economic growth, Political Economy by Neil Irwin…200
78. Are78B democrats painting themselves as the leser of the evils?, The Washington Post by Dana Milbank…202
79. After79B crisis, show of power from JP Morgan, The New York Times by Eric Dash…204
80. Fed80B leaders show division over deflation, The New York Times by Sewell Chan …207
81. Economics81B behaving badly, The New York Times by George Loewentein and Peter Ubel…210
82. Reader82B question: is behavioaral economics behaving badly?, Economists do it with model…212
83. 83BZapatero warns of more budget cuts, Eurointelligence…215
84. Lex84B dis-membering the euro, Financial Times…218
85. Even85B eurozone optimists are not optimistic, Ft.com by Wolfgang Münchau…219
86. Committee86B on Europen affairs report on EMU, The Irish Economy by Karl Whelan…221
3 87. The87B China capital surge, The Wall Street Journal by Michal Pettis…224
88. The8B capital tsunami is a bigger threat than the nuclear option, China Financial Markets by Michael Pettis…224
89. What89B might history tell us about the Greek crisis? By Michale Pettis…235
90. La90B revaluación del dinero chino:un pequeño paso con un gran impacto, Finanzas e Inversión …239
91. La91B tasa bancaria y los tests de estrés: momentos de nuevos desacuerdos y de intranquilidad, Finanzas e Inversión…243
92. Ecofin92B edges towards compromise on financial regulation, Eurointelligence…248
93. Ending93B the scourge of dual labour markets in Europe, Vox by Samuel Bentolila, Tito Boeri and Pierre Cahuc…251
94. Stressing94B Spanish banks out, with fitch, Financial Times by Joseph Cotterill…253
95. Financial95B reform bill tlips toward vote, The New York Times by David Herszenhorn…255
96. Financial96B bill to close regulator of fading industry, The New York Times by Binyamin Appelbaum…257
97. Daddy97B are we rich?, and other tough questions, The New York Times by Ron Lieber…259
98. Obama98B nominates lew to head office of management and budget, The Washington Post by Anne E Kornblut and Ed O’Keefe…262
99. China9B hopes social safety net will push its citizens to consume more, save less, The Washington Post by Keith B Richburg…264
100. Government10B gest a jump on preparing for regulatory overhaul, The Washington Post by Brady Dennis…267
101. Ambassadors10B of a New Germany, Spiegel On Line…269
102. Mentirillas102B y disparates fiscales, Project Syndicate by barry Eichengreen…274
103. Topics:103B the 5 best things about the flash crash, JP Morgan …276
104. ECB’s104B bond purchase programme has effectively ended, Eurointelligence…281
105. Debt105B shuffling will be a self-defeating exercise, Ft.com by Satyajit Das…285
106. Sagging106B global growth requires us to act, Ft.com by Ian Bremmer and Nouriel Roubini…287
107. Merkel’s107B rules for bankruptcy, Spiegel On Lines by Chirstina Reiermann…289
108. Germany’s108B eurobailout template: a stealth takeover?, Naked Capitalism…294
109. Concern109B of stress test failures on the rise, Spiegel On Line…296
110. German10B car makers fear US trade sanctions, Spiegel On Line…298
111. Is1B ther global economic slowdown is the works?,
http://fistfulofeurosH .net…299H
112. Commodity12B shipping slumps for longest in almost nine years on China steel, Bloomberg by Alaric Nightingale…309
113. The13B fedkless fed, The New York Times by Paul Krugman…310
4 114. The14B revenge of Felipe II, The conscience of a Liberal…312
115. The15B rising threat of deflation, AEI Outlook series by Joh H Mafkin…314
116. The16B class war we need, The New York Times by Ross Douthat…318
117. Stark17B hits at an end to ECB’s sovereign bond purchases, Eurointelligence…320
118. Number18B of the week:euro zone debt is coming due, The Wall Street Journal …324
119. Bank19B swaps show reduced stress-test fears as bonds rally: credit markets, Bloomberg by Abigail Moses…325
120. Del120B fin de la recession al acoso de los mercados financieros, El País de Miguel Jiménez…329
121. Alemania12B juega un papel destructivo, El País de Alicia González…330
122. Europa12B muestra las tripas de su banca para calmar al mercado, El País de A Missé I de Barrón…332
123. Muchos123B inmigrantes y algunos españoles tendrán que buscar empleo en otro país El País de Miguel Angel Noceda…335
124. Latinoamérica124B sortea la crisis, El País de Alejandro Rebossio…340
125. El125B excedente de las mutuas se invertirá en deuda pública, El País…344
126. El126B Gobierno abre la puerta a la privatización total de las cajas, El País de Iñigo de Barrón…345
127. China127B no manipula su divisa, El País de Sandro Pozzi…347
128. ¿Por128B qué China no revaloriza el yuan?, El País de Sandro Pozzi…349
129. La129B hora de la política, El País de Josep Ramoneda…350
130. Días130B de fútbol, El País de Josep Ramoneda, …351
131. 3313B años después, El País de Agusti Fancelli …352
132. Un132B estatuto constitucional, El País de Josep Antonio Montilla353
133. Soberanismo13B en la calle, El País…355
134. Amenaza134B otra quiebra, El País …356
135. World135B economic recovery driven by global imbalances, The Washington Post by Neil Irwin…357
136. Brasil136B se olvida de la crisis, El País de Francho Barón…359
137. Pity137B the por CEO’s, The New York Times by Paul Krugman…361
138. The138B EU has once again lost credibility with the financial markets –this time over the stress tests, Eurointelligence…363
139. School139B is out, but does the final bell toll for London?, FT.com by Gillian Tett…366
140. Late140B OBR changes shrank job loss figure, FT.com by Chris Giles…3368
141. Trichet14B plays down eurozone gloom, Ft.com by Ralph Atkins…369
142. IMF142B warns of contagion threat to US, FT.com by Alan Beattle and James Politi…370
143. Europe’s143B 91 potentially bad banks, The Prudent Investor…372
144. Jobs14B now, deficits … soon! The Washington Post by Matt Miller…376
145. A145B little economic realism, The New York Times by David Brooks…378
5 146. Trichet146B calls for appropriate action on stress tests, The Wall Street Journal by Nina Koeppen…380
147. Federal147B reserve weighs steps to offset slowdown in economic recovery, The Washington Post by Neil Irwin…382
148. How148B much can the fed help?, (Wonkish), The Conscience of a liberal…384
149. Self-defeating149B austerity…384
150. What150B might the fed do? By Calculated Risk…386
151. A15B slightly off-center perspective on monetary problems, The Money Illusion…387
152. Jobless152B aid stalls in Senate; home buyers get more time, The Washington Post by Lori Montgomery…391
153. The153B stress test are finalized, Eurointelligence…392
154. España154B acapara un tercio de los bancos analizados por la UE, El País de Iñigo de Barrón…395
155. Europe15B presents main threat to global recovery, IMF says, The Washington Post by Howard Schneider…396
156. German156B deaf to US Nonsense as exports power Growth, Bloomberg by Alan Crawford and Tony Czuzka…397
157. Don’t157B panic, the Baltic dry is a rubbish indicator!, Financial Times by Izabelle kamisnka…400
158. EU158B parliament pick fight with Germany and th UK over EU financial supervision, Eurointelligence…402
159. Demand159B shortfall casts doubt on early austerity, Ft.com by Martin Wolf…404
160. Export160B optimism, financial fear bank balance sheets could torpedo recovery, Spiegel On Line by Bear Balzli, Markkus Dettner, Armin Mahler and Christian Reiermann…407
161. It’s16B Greek to me, Board of Governors of the Federal Reserve System…411
162. Spinoza,162B Descartes and suspension of disbelief in the ivory tower of economics, Credit Writedowns by Edward Harrison…416
163. The163B year in review at credit writedowns leptocracy, Credit Writedowns, by Edward Harrison…423
Período:164B de 28/06/2010 a 19/07/2010 en orden inverso a la fecha
6 07/19/2010 12:00 AM A Keynesian Success Story Germany's New Economic Miracle During the worst of the global financial meltdown, Berlin pumped tens of billions of euros into the economy and spent hundreds of billions propping up German banks. Now, the country is reaping the benefits as Germany is once again Europe's economic motor. By SPIEGEL Staff It was just the sort of photo-op German Chancellor Angela Merkel urgently needs. Peter Löscher, the CEO of electronics giant Siemens, was sitting on a throne-like chair in the governor's palace in the central Russian city of Yekaterinburg. Contracts were being handed to him in brown leather folders, and every time Löscher signed one of the documents with his malachite green pen, the chancellor clapped with delight. The procedure took place four times, and by the time the round of contract signing ended, Siemens had secured Russian orders worth about €4 billion ($5.2 billion).
DER SPIEGEL
7 The real purpose of Merkel's five-day visit to Russia and China last week was to hold political talks with the two countries' leaders, but the most important message of the trip was meant for the German people. Look, Merkel seemed to indicating to German citizens, German industry is in demand worldwide, even if the government at home is divided and lacking direction. The German economy has indeed come roaring back to life this summer. Two years after the outbreak of the financial crisis, the auto industry is adding extra shifts once again. The machine building, electronics and chemical industries are all reporting a rapidly growing number of orders. Total unemployment is expected to drop below the 2.8 million mark this fall, the lowest level since 1991. For the first time in decades, the former "sick man of Europe" is back to being an engine for economic growth. According to an internal government assessment, the country's gross domestic product increased by more than 1.5 percent in the second quarter of this year. In their last prognosis, completed in April, government officials had predicted only 0.9 percent GDP growth. Production in the manufacturing industry increased by 5 percent over the previous quarter. The government assessment also shows that exports grew by more than 9 percent in May. 'Number One in Europe' If the trend continues, say the experts, the German economy will grow by well over 2 percent this year, or almost twice as much as in most neighboring countries. Economists are already proclaiming a second economic miracle, while a former French foreign minister is complaining that Germany is "number one in Europe" once again. The unexpected comeback is the result of an unprecedented large-scale economic experiment. After last year's dramatic economic slump, Chancellor Merkel, after some initial hesitation, decided to support a bailout program modeled on the theories of British economist John Maynard Keynes. When the economy is in decline, the professor concluded based on the experiences of the Great Depression, the government must quickly counteract the trend with massive government spending programs. In keeping with Keynes' theory, the former grand coalition government of the center-right Christian Democrats (CDU) and the center-left Social Democrats (SPD) launched an extensive package of stimulus and bailout measures, which included €480 billion for ailing banks, €115 billion for financially weakened companies and €80 billion for two programs to stimulate the domestic economy. As then-Finance Minister Peer Steinbrück said, the goal was to "fight fire with fire." It did not proceed entirely without collateral damage. The government kept moribund banks alive and rescued companies that didn't need rescuing. It spent money to allow companies to scale back production and paid consumers premiums to destroy assets with intrinsic value. Streets were repaved only to be torn up again soon afterwards, and schools were renovated and later shut down. Although a gigantic waste of money was put into motion, it did prove to be extremely beneficial during last year's historic economic slump. Government debt skyrocketed, but in return companies received new orders, consumers had more money to spend and banks, no longer fearing that their borrowers could soon go out of business, started lending again. Kept the Economy Afloat The government bailout programs reestablished the basic confidence in economic development that had been lost in the financial crisis. "Public spending, in the form of economic stimulus programs, kept the economy afloat," says economist Peter Bofinger, a member of the German Council of Economic Experts. This is true, for example, of the scrapping premium -- a program similar to "cash for clunkers" in the US. The name alone suggests that it has little to do with conventional ideas of economic prudence. Under the program, consumers buying new cars received €2,500 for their old cars, which were then scrapped.
8 This was nothing but a government incentive to destroy billions in national wealth, and quite a few observers were surprised by the enthusiasm with which Germans took the government up on its offer. Hundreds of thousands of perfectly functional cars were taken out of circulation, while new car ownership grew by an impressive 23 percent. The incentive program cost the government €5 billion, while primarily benefiting foreign makers of small cars. The biggest beneficiaries were companies like Dacia, Fiat, Suzuki and Kia. Opel, VW and Ford also profited from the scrapping premium program, while German luxury carmakers Audi, BMW, Mercedes-Benz and Porsche got nothing. "We are the only country," Daimler CEO Dieter Zetsche scoffed, "that has created a program worth billions to subsidize foreign industry." Experts called it a "flash in the pan," while forgetting that even small sparks can be helpful in a severe crisis. The premium to encourage small car purchases did more than support the economy in the Asian and Eastern European countries where the cars were produced. It also helped Germany's substantial auto supplies industry to offset the sharp decline of the previous year with shipments to those foreign automakers benefiting directly from the scrapping premium. This helped companies survive that are now urgently needed by German automakers in the current recovery. Nevertheless, it was a success that came at the high cost of €5 billion in government bailout funds. Only a Slight Increase in Unemployment The second large-scale program that the government devised to assist companies, the so-called short-time working program, also helped bridge the economic slump. The legal framework for the program has existed in German social legislation for decades. When companies experience sharp declines in sales, they are permitted to reduce their employees' working hours, and the government offsets a portion of the costs. The goal is to avoid layoffs and retain employees until the recession is over. In the most recent crisis, Berlin repeatedly enhanced the rule, thereby triggering an economic miracle that attracted worldwide attention. While the jobless count grew by seven million in the United States, Germany experienced only a slight increase. In return, however, the number of short-time workers rose sharply, until it reached a record 1.5 million last May. Now that the economy is picking up steam once again, Germany industry already has a large reserve of well-trained employees at its disposal to handle the growth in orders, and at minimal cost. At Munich- based Siemens, for example, the number of short-time employees has declined from 19,000 last summer to 600 today. Human resources executive Walter Huber says that the situation has eased, and that the federal government deserves the credit: "The extension of short-time working benefits was the right decision at the right time." The measure is expected to cost at least €6 billion this year alone. But even the Organization for Economic Cooperation and Development (OECD) believes that it is money well invested. According to an OECD report, the labor market in Germany "has survived the global economic crisis much more effectively than in most other member nations." In addition to benefiting the labor market, the German economic stimulus program also boosted consumer spending. Short-time workers have more disposable income than the unemployed, and as a result, German consumers were hardly forced to cut back during the crisis. Throwing Cash at the Populace Foreign countries also benefited. US economists are still critical of Germany for saving money at the expense of its trading partners during the crisis. But precisely the opposite is true. Last year, Germany saw a significantly sharper decline in exports than imports. On balance, German imports boosted demand in the global economy by about €42 billion. The two economic stimulus programs launched by the cabinet were partly responsible for the boost. They were designed to stimulate domestic demand, and as part of the program, the government spent more than €20 billion in additional funds for new construction and the renovation of existing buildings. Sidewalks and streets were paved, universities were renovated and windows were sealed.
9 The package was of truly Keynesian proportions. For the British economist, whether government spending programs provided practical benefits was secondary. He argued that the most important thing was to distribute as much money to the population as quickly as possible, even if it meant that the government "were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again." Seen in this light, the most recent stimulus programs completely satisfied Keynes' requirements. Millions were spent on swimming pools that had seen declining numbers of visitors for years, or on schools that had to be closed soon afterwards, because there weren't enough children to fill the classrooms. Questionable at Best By law, recipients of public investments under the second economic stimulus program must be permanent. But according to a previously unpublished report by the German Federal Audit Office, this requirement is often not met. The auditors at the Bonn-based agency identified many measures for which long-term use is questionable at best. For instance, they wonder whether it truly makes sense to spend €222,000 on the renovation of a cultural center in a neighborhood with only 300 residents. And they question whether it is reasonable to invest in firehouses in regions that have seen population decline for years. In some cases, local governments are spending stimulus funds to fulfill costly wishes. A government- owned stud farm in the southwestern town of Marbach, which includes a breeding facility for Arabians, is being renovated to the tune of €7.5 million. Schöningen, a town in the northern state of Lower Saxony, has plans to build a €15 million interactive museum for old hunting weapons. The Hamburg zoo is using €7.5 million in government subsidies to build an Arctic Sea habitat that will initially house polar bears, common murres and other animals. According to the Federal Audit Office report, in 9 percent of projects "the subsidization criteria were not adhered to" or "it was not possible to achieve the goals associated with them." The auditors are particularly troubled by the fact that the money from Berlin is being used to fund so many small projects. They report that about a third of all projects cost less than €50,000, and that about 2 percent come in at less than €5,000. Projects like a wall-mounted diaper table for a kindergarten, historical wall charts and the construction of a sandbox are not suited "to achieving the economic goals of the Future Investments Act," the Bonn auditors conclude. In addition, they argue, such "very small projects" are "consumptive in nature." Perhaps they are right, but during the crisis, it was more important to provide companies with orders. No one is more aware of this than Jörg Meseck, who owns an engineering firm in the eastern state of Brandenburg. When the economy declined, Meseck lost about €13 million in orders. Just as he was contemplating having to let some of his employees go, he started receiving new orders funded by the government's second stimulus program. 'Pick Up the Pace' Most of the projects Meseck accepted were small, including a school renovation and replacing the windows at a high school. But without the orders, he would hardly have been able to retain all of his employees. Now the crisis is over and Meseck's business is going so well that he even plans to hire another engineer soon. He says that customers have been calling him for the last two months and saying: "Things are looking up for us, so you're going to have to pick up the pace." The same story is now unfolding across the entire German economy, even in the long-ailing construction industry. To the surprise of many experts, private demand is growing again in the wake of the artificial boom triggered by the economic stimulus program. In the fourth quarter of 2009, the number of building permits issued for new multi-family dwellings was up by 25 percent over the previous year, and since then statisticians have seen a rise of 5.5 percent. If there had been no
10 government stimulus programs, many companies would no longer be around to benefit from the current boom. Companies that still ran into difficulties despite the measures could fall back on another government assistance program. The German Economic Fund kept €115 billion available for companies that could no longer qualify for loans from their banks because of the crisis. The package designed to head off a feared credit crunch proved to be grotesquely oversized. By early July, about 15,000 applications had been approved for loans or loan guarantees, for a total value of just over €13 billion -- far less than expected. Financial Boost from Berlin Many businesses had exhausted their credit lines with banks. Often, they could only receive fresh funds by providing more collateral or by paying higher interest-rate premiums than before the crisis. Some companies were simply unable to meet these conditions, even when business was going relatively well again. A subsidiary of Düsseldorf steelmaker Schmolz + Bickenbach needed about €500 million, most of which came from the federal government and the state of North Rhine-Westphalia. The money served "as the basis for the successful completion of a new financing framework by the end of 2010," says Marcel Imhof, the company's chief executive. The company received a loan for €200 million and loan guarantees worth €300 million. If the company had not received the funds, "the rug would have been pulled out from under us," says Imhof, referring to the banks with which his company normally does business. ZF Friedrichshafen, an auto parts supplier based in southern Germany, also received €250 million from the Germany Fund. The company didn't need the money to stay afloat, but to keep its banks happy. ZF, which specializes in transmissions, set the money aside as a safety cushion, "in case the crisis had lasted longer," according to the company's official statement. ZF still hasn't actually used the financial boost from Berlin. It's a completely different story in the northeastern state of Mecklenburg-Western Pomerania. Last year, shipyards in two coastal towns, the former People's Shipyard in Stralsund and the Peene Shipyard in Wolgast, which have since merged to formed P + S Werften, were hit with nine cancellations of orders for new ships worth a total of €300 million. The group slipped into the red and layoffs began. The new shipyard was able to acquire new orders, but now it needed additional loans to pre-finance the labor. The banks hesitated, and the Germany Fund eventually approved a guarantee for a €326 million loan. "Without this assistance," says P + S Werften CEO Dieter Brammertz, the continued existence of the company "would certainly not have been possible to this extent, and presumably not at all." Not as Positive Cases like this lead many economists to conclude that the impact of the bailout programs on the real economy has generally been positive. A lot of money was wasted and many pointless projects were subsidized. Nevertheless, the government stimulus programs helped pull the economy out of the recession. The verdict on the oldest of the crisis programs, the Soffin bank bailout fund, is not as positive. Only a few weeks after the Lehman bankruptcy, the German government, in what was an historically unprecedented move at the time, made €480 billion available to rescue the country's crisis-shaken banks. Since then, the banks have received about €150 billion in guarantees and about €30 billion in capital assistance. Some banks went under and others were nationalized. Today, conditions have somewhat returned to normal in the German money and credit markets. But the financial sector, unlike industry, is still a long way from recovery. On the contrary, a large share of the country's state-owned banks still lack a sustainable business model, and it remains to be seen whether government-supported lenders like Munich-based Hypo Real Estate can survive in the long term.
11 'Quite Underdeveloped' The unsolved problems of the German financial industry show that although the economic recovery is clearly visible, it is still far from certain. Banks around the world still have large numbers of toxic securities and treasury bonds from highly-indebted countries on their balance sheets. The bankruptcy of a major bank or an EU member state would be enough to trigger the next global downturn. Besides, Germany, for better or for worse, is tied to the global economy. The fortunes of German industry are still dependent on the economic health of trading partners. If the United States were to plunge into another recession or if growth weakened significantly in China, Germany's recovery would end very quickly. As such, Germany's greatest strength is also its biggest weakness. "We have a world-class industry," says Deutsche Bank chief economist Thomas Mayer, but adds that the key sectors of the domestic economy are "quite underdeveloped." By Markus Dettmer, Dietmar Hawranek, Guido Kleinhubbert, Alexander Neubacher, Christian Reiermann, Friederike Schröter and Janko Tietz Translated from the German by Christopher Sultan
URL: http://www.spiegel.de/internatiH onal/business/0,1518,707231,00.html H RELATED SPIEGEL ONLINE LINKS:
Europe'sH Financial Health Check: Concern of Stress Test Failures on the Rise (07/12/2010) H http://www.spiegel.de/internatiH onal/business/0,1518,706076,00.html H
CrisisH 2.0?: Banks Skeptical Despite Signs of Economic Recovery (07/09/2010) H http://www.spiegel.de/internatiH onal/business/0,1518,705590,00.html H
ExportH Optimism, Financial Fear: Bank Balance Sheets Could Torpedo Recovery (07/05/2010) H http://www.spiegel.de/internatiH onal/business/0,1518,704663,00.html H
ProsperingH at the Expense of Others?: Germany's Export Boom Has Trade Partners Stewing
(06/30/2010) H http://www.spiegel.de/internatiH onal/business/0,1518,703617,00.html H
Germany'sH Economy on the Mend: Berlin Budget Deficit Much Lower than Expected (06/22/2010) H http://www.spiegel.de/internatiH onal/business/0,1518,702114,00.html
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July 19, 2010 David Warsh, Proprietor
The Economist As Political Philosopher
Few positions educate the incumbent more thoroughly to a global point of view than that of chief economist of the International Monetary Fund. The IMF was buttressed in its founding by the authority of John Maynard Keynes, even if his fellow architect Harry Dexter White, representing Franklin Roosevelt, hadH more to do H with its design. IMF economic counselors, if they are successful, are entitled to speak for Keynes, or so we hope – privately, as clinicians, while in office; publicly, once they have left.
It is not surprising, therefore, that each of the three holders of the job in the last ten years has become a household name, at least in households where economic ups and downs are analyzed as well as experienced..
Thus Kenneth Rogoff, of Harvard University, is famousH H for his collaboration with Carmen
Reinhart, of the University of Maryland, on ThisH Time Is Different: Eight Centuries of
Financial Folly.H Simon Johnson, of the Massachusetts Institute of Technology’s Sloan School of Management, and author, with James Kwak, of 13H Bankers: the Wall Street Takeover and the Next Financial Meltdown,H continues to thunder on his highly influential website, BaselineH
Scenario,H against the financial oligarchs.
And RaghuramH Rajan,H of the University of Chicago Booth School of Business, has produced
FaultH Lines: How Hidden Fractures Still Threaten the World Economy,H superior in many ways to its more flamboyant competition, CrisisH Economics: A Crash Course in the Future of
Finance,H by Nouriel Roubini. As Rogoff says, it is “the best book out there on the global imbalances that gave us the last financial crisis and that might well give us the next one.”
(What, incidentally, about the current IMF incumbent? As MIT’s leading macroeconomist for
25 years, OlivierH Blanchard H trained all three of his immediate predecessors, but only after
MIT’s StanleyH Fischer H trained him. MichaelH Mussa,H of the University of Chicago, who did very well in the job for ten years from 1991, continues to play an active role behind the scenes from Washington’s Peterson Institute for International Economics, but that’s anotherH story.H So is FischerH .)H
Of the three recent IMF economists, Rajan is in many ways the most interesting because he is, in a certain sense, the most ambitious. Rogoff HAS gone back to work with his longtime collaborator Maurice Obstfeld, of the University of California at Berkeley, to further elucidate the mechanisms that produced such turmoil. Johnson has dropped out of his previous heavy- duty collaboration with Daron Acemoglu, of MIT, and James Robinson, of Harvard, on long- term institutional change. “TheH Quiet Coup,”H the indignant article he published in The Atlantic shortly after leaving office, changed his life, evolving first into his blog and then his book.
Rajan, on the other hand, has signed on as adviser to the prime minister of India. He is a. frequent traveler to China, and, in common with Dani Rodrik, of Harvard’s Kennedy School of
13 Government, has achieved a global audience. (Rodrik’s TheH Globalization Paradox:
Democracy and the Future of the World Economy H will appear in February.)
For example, in SavingH Capitalism from the Capitalists:Unleashing ther Power of Financial
Markes to Create Wealth and Spread Opportunity,H with Luigi Zingales, also of Chicago’s Booth School, Rajan served up an ambitious history of both capitalism and communism in the twentieth century, complete with a plan for maintaining the political viability of markets. While still at the IMF, Rajan warned in 2005 at a Federal Reserve Bank conference at Jackson Hole, Wyoming, that financial innovation was making the world riskier, earning a place in the Pantheon of Prescients, along with Roubini, Rogoff, Robert Shiller, of Yale, and William White, of the Bank for International Settlements. And now he is back with Fault Lines, arguing that “the past three decades have brought immense improvements to countries around the world: even as “insecurity and despair have replaced hope” in many rich countries.
For my money, it’s too soon to sum up the forces that led to the recent crisis and the prospects that lie beyond. Rajan is after something different – a seat at the table. He writes with an authority of someone who has seen barriers fall all around the world and yet who hasn’t lost interest in the safety nets that must be repaired if markets are to continue to flourish. He is not a stylish elaborator of a point of view like John Kenneth Galbraith – he’s too engagée. But you know the world is changing when an Indian economist becomes a leading Walter Lippmann- like spokesman for the tightrope of reform between too little and too much social control.
http://www.economicprincipals.com/issuesH /2010.07.19/1163.html?utm_source=feedburner&ut m_medium=feed&utm_campaign=Feed%3A+EconomicPrincipals+%28Economic+Principals
%29 H
14 BusinessH Day H
July 16, 2010
What165B Germany Knows About Debt
By561B TYLER COWEN IN many countries, including the United States, there are calls for the government to spend more to jump-start the economy, and to avoid the temptation to cut back as debts mount. Germany, however, has decided to cast its lot with fiscal prudence. It has managed rising growth and falling unemployment, while putting together a plan for a nearly balanced budget within six years. On fiscal policy and economic recovery, Americans could learn something from the German example. Twentieth-century history may help explain German behavior today. After all, the Germans lost two World Wars, experienced the Weimar hyperinflation and saw their country divided and partly ruined by Communism. What an American considers as bad economic times, a German might see as relative prosperity. That perspective helps support a greater concern with long-run fiscal caution, because it is not assumed that a brighter future will pay all the bills. Even if this pessimism proves wrong more often than not, it is like buying earthquake or fire insurance: sometimes it comes in handy. You can’t judge the policy by asking whether your house catches on fire every single year. Keynesians have criticized fiscal caution at this point in the economic cycle, arguing that fiscal stimulus will give economies more, not less, protection against adverse events. But is that argument valid?
Certainly, in Germany, the recent history of fiscal stimulus wasn’t entirely positive. AfterH reunification in 1990, the German government H borrowed and spent huge amounts of money to finance reconstruction and to bring East German living standards up to West German levels. Millions of new consumers were added to the economy. These policies did unify the country politically but were not overwhelmingly successful economically. An initial surge was followed by years of disappointing results for output and employment. Germany’s taxes remain high, and overall West German living standards failed to rise at the same rate as those of most other wealthy countries. Persuading former East Germans to spend more as consumers turned out to be less important than making sure that they had the skills to mesh with the economic expansion of the country. It is no surprise that many Germans are now skeptical about debt-financed government spending or excessive reliance on domestic consumers. In recent times, Germany has shown signs of regaining a pre-eminent economic position. Policy makers have returned to long-run planning, and during the last decade have liberalized their labor markets, introduced greater wageH flexibility H and recently passed a constitutional amendment for a nearly balanced budget by 2016, meaning that the structural deficit should not exceed 0.35 percent of gross domestic product. Amid the sluggish economies of much of Europe, Germany has booming exports and is nearing full capacity utilization. And many of its workers are postponing vacations to produce, and
15 earn, more. The unemployment rate in Germany is 7.5 percent — below that of the United States — and falling. Far from embracing this social democratic model, American Keynesians have criticized it for relying too heavily on exports and not enough on spending and debt. Yet it is not just the decline in theH euro’sH value that supports the German resurgence. Most of the other euro-zone economies are not having comparable success because they did not make the appropriate investments and reforms. Moreover, the euro is still strongerH than its average value since 2001,H which suggests that the recent German success is not attributable only to a falling currency. In any case, the Germans are exporting much quality machinery and engineering (not just glitzy autos), which can help other nations recover. It is an odd state of affairs when the relatively productive nations are asked to change successful policies because of an economic downturn. The German government is also making credible long-term commitments to reduce its debt.
Germany’sH ratio of debt to G.D.P. H has been hovering in the unhealthy range of more than 70 percent, and the country has one of the lowest birth rates in the developed world, which raises the question of how to pay for future pensions. Yet many investors consider German bonds a haven, in part because the government has a reputation for addressing fiscal issues promptly and responsibly. It is working to cut government spending, although not in crucial long-term areas of research and education. Germany is likely to continue having a higher relative level of government spending than the United States. But the German civil service has a stronger hand in writing legislation — a role that limits the sort of waste and short-term thinking that Congress injects into American law. It is also well understood in German political discourse that tax cuts need to be paid for. THE German economy is far from perfect. In addition to high taxes and a low birth rate, there are potential solvency problems in German banks, and these institutions lack transparency.
Furthermore, poorer countries may need a looser monetary policy from the EuropeanH
Central Bank H than Germany wishes to support. Nonetheless, it’s a common German attitude that adding debt, whether private or public, will not solve those problems. In fact, debt can provide the illusion of relief and thus postpone their resolution. Increased spending is a quick fix for what are very often more fundamental difficulties. The point is not that Americans can or should copy Germany. But are German policy makers so wrong in their long-term orientation? We can lecture, or we can listen. The choice is ours.
Tyler Cowen is a professor of economics at George Mason University.
TYLER COWEN What Germany Knows About Debt July 16, 2010 July 16,
2010http://www.nytimes.com/2010/07/18/business/H 18view.html?_r=2&partner=rss&emc=rss H
16 vox16BH
Research-based policy analysis and commentary from leading economists
Germany’s167B super competitiveness: A helping hand from Eastern Europe
Dalia Marin 20 June 2010
Discussions about the current-account imbalance within the Eurozone have focused on the under-competitive periphery and super-competitive Germany. This column suggests that the argument ignores one powerful way that Germany lowered its relative unit labour costs. German firms offshored parts of their production to the new member states in Eastern Europe, Russia, and the Ukraine.
Germany’s substantial trade surplus with its southern neighbours is in the spotlight (WyploszH
2010).H Many economists argue that Germany’s trade imbalance with its southern Eurozone neighbours has contributed to their woes. German industry has boosted the competitiveness of its exports over the past decade by keeping wages flat. As a result, German wage restraint has led to a real depreciation of Germany’s fixed nominal exchange rate vis-à-vis its Eurozone members, helping Germany to win market shares at the expense of Southern Europe. The numbers give support to this argument. In fact, Germany’s real effective devaluation in terms of relative unit labour costs compared with the EU27 during 1994-2009 is about 20%. This is indeed substantial. But the argument hides another powerful way by which Germany lowered its relative unit labour costs. German firms’ offshored part of production to the new member states in Eastern Europe, Russia and Ukraine. At first, Germany was slow in exploiting the opportunities offered by the opening up of Eastern Europe after the fall of communism compared to its neighbour, Austria. In 1999 Austria’s outgoing foreign direct investment to Eastern Europe accounted for almost 90% of total investment leaving the country, Germany invested a meagre 4% in Eastern Europe. As a result, offshoring as measured by the share of trade between German parent firms and their subsidiaries in Eastern Europe – also called intra-firm trade – accounted for only about 20% of total German imports from Eastern Europe, while it reached almost 70% of total Austrian imports from the same region (Marin 2009). In the second half of the 1990s Germany shifted its strategy and started to invest heavily in Eastern Europe. Its share of outgoing foreign investment to the region increased to almost 30% in 2004-2006. This new way of organising production by slicing up the value chain has been more important for Germany’s lower unit labour costs than German workers’ wage restraint. According to estimates, German offshoring to Eastern Europe boosted not only the productivity of its subsidiaries in Eastern Europe by almost threefold compared to local firms, but it also increased the productivity of the parent companies in Germany by more than 20% (Hansen 2010 and Marin 2010). As a result, relocating production to Eastern Europe made globally competing German firms
17 leaner and more efficient helping them to win market shares in a growingly competitive world market. The efficiency gains from reorganising production were particularly pronounced after 2004 leading to a sharp fall in Germany’s relative unit labour costs from 2004 to 2008. Productivity gains from offshoring are also the main reasons why Germany and Austria experienced only minor job losses as a result of the opening up of Eastern Europe. By finding this new way of producing, German and Austrian firms were able to cut costs and to take advantage of the pool of skilled workers available there. It seems that the fall of communism and the opening up of Eastern Europe happened just at the right time. It allowed German firms to cut costs at the time when globalisation intensified competition and it allowed Germany to cope with the scarcity of human capital which became particularly pronounced in the 1990s. Due to Germany’s skill shortage, offshoring to Eastern Europe has led also to lower wages for skilled workers in Germany. German firms offshored the skill intensive part of the value chain to exploit the low cost skilled labour available in Eastern Europe. As a result, the demand for this type of labour in Germany was lower, putting downward pressure on skilled wages in Germany. Hence, offshoring improved Germany’s competitiveness by increasing German firms’ productivity and by lowering its skilled wages.
What168B follows from this for southern Europe? Germany and Austria adjusted to eastern enlargement by changing the way they do business. It is often argued that the Eurozone’s problem is that, contrary to the US, it lacks labour mobility and fiscal centralisation. But the evidence for Austria and Germany suggests that Europe has invented a new adjustment mechanism based on firms’ slicing up of the value chain. As a result, while country boundaries have become less important for the competitiveness of Europe as a whole, firm boundaries are now more important.
References169B
Thorsten Hansen (2010), “TariffH Rates, Offshoring and Productivity: Evidence from German
and Austrian Firm-Level Data”,H Munich Discussion Paper 2010-21, University of Munich.
Dalia Marin (2009), “TheH New Corporation in Europe”,H BRUEGEL Policy Brief, Brussels, September.
Dalia Marin (2010), “TheH Opening Up of Eastern Europe at 20: Jobs, Skills, and ‘Reverse
Maquiladoras’ in Austria and Germany”,H Munich Discussion Paper 2010-14, University of Munich.
Wyplosz, Charles (2010), “Germany,H current accounts and competitiveness”,H VoxEU.org, 31 March.
Dalia Marin Germany’s super competitiveness: A helping hand from Eastern Europe 20 June
2010http://www.voxeu.org/index.php?q=node/5212H H
Sinn habló de la Economía Bazar.
18
Marginal170BH Revolution
Small305B steps toward a much better world.
July306B 19, 2010 at 01:53 PM
Krugman435B on Cowen and Germany
Paul Krugman offersH some critical comments H (More Stimulus Despair July 18, 2010, 10:46 am ). But, apparently to prevent a Cyclops epidemic, it is necessary to put this discussion below the fold... Let's consider Krugman's three main points: 1. This was not an effort at fiscal stimulus; it was a supply policy, not a demand policy. The German government wasn’t trying to pump up demand — it was trying to rebuild East German infrastructure to raise the region’s productivity. 2. The West German economy was not suffering from high unemployment — on the contrary, it was running hot, and the Bundesbank feared inflation. 3. The zero lower bound was not a concern. In fact, the Bundesbank was in the process of raising rates to head off inflation risks — the discount rate went from 4 percent in early 1989 to 8.75 percent in the summer of 1992. In part, this rate rise was a deliberate effort to choke off the additional demand created by spending on East Germany, to such an extent that the German mix of deficit spending and tight money is widely blamed for the European exchange rate crises of 1992-1993. On #1, policymakers may intend all kinds of results, including a new skat table for Onkel Mathias and bananas for Brandenburg. The scenario nonetheless saw a big boost in debt, spending, and aggregate demand, and in a setting with unemployed resources. That makes it one test case, even if the primary motive was the unification of Germany and not stimulus per se.
On #2, you willl find dataH on German unemployment rates here,H for each half of the country and consolidated. In the West there is unemployment before unification, a big boost in employment during the first two years of unification, and then much higher unemployment. Let's track those rates, starting in 1989: 7.9, 7.2, 6.2, 6.4, 8.0, 9.0, 9.1 (1995), 9.9, 10.8, 10.3, etc. You can read those numbers two ways. First, stimulus worked until they lost heart, or "it boosts the economy in the short run but it postpones adjustment problems and in the medium run you end up with a poor and sluggish private sector job market." I was making the simpler historical-explanatory point that, no matter how you slice and dice the data, the poor outcome in absolute terms explains why the Germans are not so impressed by ideas of debt, spending and aggregate demand. And if stimulus proponents keep on losing heart at the critical moments, the citizenry is still right to be skeptical. The real story requires a look at the tottering East German labor market as well. At the immediate moment of unification, unemployment/underemployment for the consolidated
19 Germany are higher than the above numbers behind the link indicate; read for instance theseH comments H and also hereH .H The strongest criticism of the example is not one that Krugman considers. If you had access to a more finely calibrated employment index, reflecting the gross underemployment of DDR workers, with continually collapsing jobs, there is at least some chance the true data series might show more effectiveness for fiscal policy than the published data, or the West German mood at the time, would indicate. #3, like #1, is a distraction. The zero bound might -- in some frameworks -- make fiscal policy necessary rather than monetary policy. But the zero bound is not required to drive the main arguments that fiscal policy is effective with unemployed resources. So historical examples with a non-zero bound and ineffective fiscal policy do count against fiscal policy. As an aside, you can find some RBC and cash constraint models where fiscal policy is more effective at the zero bound, but a) I think these papers are deeply flawed, b) the liquidity constraints in those models do much of the work and those constraints held anyway for parts of East Germany, and c) Krugman and others are advocating fiscal policy for a wide variety of economies, not all of which are at the zero bound, even if they have constrained monetary policy for other reasons, such as Ireland. On #3, Krugman is correct that the Bundesbank actions hurt the German economy
(though keep in mind, at the time of tightening inH 1992 the rate of German price inflation was five percent H and it stayed at 4.4 percent the year after). This implies that tight monetary and loose fiscal policy, taken together, won't work. I endorse that conclusion. It also shows that theH monetary authority moves last,H which is exactly the point made by fiscal policy critics such as Scott Sumner. Stressing that point does no favors to the argument for fiscal expansion, quite the contrary. Krugman is eager to slap down the historical example but he is losing track of the broader principle he cites to do so. Overall the pro-ramp-up-the-spending fiscal policy advocates are keener to produce examples which don't count than examples which do count. The positive arsenal is pretty weak, consisting mainly of World War II, an experience which cannot be repeated or replicated. Krugman also directs his attention at a secondary point in the argument, taking up a single paragraph in the column. He doesn't touch the main point: Germany cut off fiscal stimulus early and focused on the real economy and they're doing fine. Even if you think this prosperity is at the expense of others (andH I don't),H the pro-ramp-up-the-spending-stimulus view suggests that Germany itself should be ailing, yet it isn't. Here are furtherH good comments on that topic.H
On the main point of the column, you can find someH good criticisms from Ryan Avent,H though I would stress it is exports not stimulus that led the German recovery and that Germany is not obviously due for a spill. Posted by Tyler Cowen on July 19, 2010 at 01:53 PM in
http://www.marginalrevolution.com/maH rginalrevolution/2010/07/germany.html H
20
What's Germany's secret? Jul 18th 2010, 16:01 by R.A. | WASHINGTON
TYLER COWEN has an interestingH piece H in the New York Times today, which recycles some arguments he's been making at his blog regarding the economic situation in Germany. In particular, he suggests that struggling countries shouldn't be giving Germany quite such a hard time, since its relative success is largely about structural things that it has done right—labour costs have been kept down, education and productivity are constant emphases, and the government has a reputation for responsibility when it comes to public debt. I think that structural strengths have been underplayed in this crisis and underappreciated through the recovery, so I have some sympathy with Mr Cowen's arguments. At the same time, I believe he is presenting the German case in an incomplete way: In many countries, including the United States, there are calls for the government to spend more to jump-start the economy, and to avoid the temptation to cut back as debts mount. Germany, however, has decided to cast its lot with fiscal prudence. It has managed rising growth and falling unemployment, while putting together a plan for a nearly balanced budget within six years. On fiscal policy and economic recovery, Americans could learn something from the German example... In recent times, Germany has shown signs of regaining a pre-eminent economic position. Policy makers have returned to long-run planning, and during the last decade have liberalized their labor markets, introduced greater wage flexibility and recently passed a constitutional amendment for a nearly balanced budget by 2016, meaning that the structural deficit should not exceed 0.35 percent of gross domestic product. Amid the sluggish economies of much of Europe, Germany has booming exports and is nearing full capacity utilization. And many of its workers are postponing vacations to produce, and earn, more. The unemployment rate in Germany is 7.5 percent — below that of the United States — and falling. This is all very nice, but it's worth pointing out that Germany's programme of fiscal stimulus was among the largest in Europe (across developed nations). Germany's unemployment rate is low, and it declined through some of the worst portions of the recession, but it's important to point out that this is due in part to an ambitious work-sharing arrangement, in which employers are encouraged to reduce individual hours worked rather than lay off employees. This policy certainly helps to mitigate job losses during a downturn (which makes for great countercyclical policy, and which reduces the fiscal cost of recession) but it's more likely to delay necessary structural reforms than accelerate them. And finally, as you can see at right, Germany is one of the few large European economies to increase its deficit from 2009 to 2010. And its planned deficit reduction in 2011 is among the smallest in the euro area. If Germany is more successful than other economies at pulling through recession, it may be because it's better at performing the ideal policy move—a move
21 the that Mr Cowen appears to criticiseH H when it's urged by members of the American left— bigger short-term deficits followed by a credible switch to fiscal tightening down the road. Mr Cowen's point still stands, to some extent; other countries shouldn't berate Germany for having the good sense to do what they ought to be doing. But I don't think it's quite accurate to sell the German experience as one of a triumph of structural savvy over countercyclical good sense.
http://www.economist.com/blogs/freH eexchange/2010/07/recovery_1/print H
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Chart Focus Newsletter July 2010 A generation of overoptimistic equity analysts McKinsey research shows that equity analysts have been overoptimistic for the past quarter century: on average, their earnings-growth estimates—ranging from 10 to 12 percent annually, compared with actual growth of 6 percent—were almost 100 percent too high. Only in years of strong growth, such as 2003 to 2006, when actual earnings caught up with earlier predictions, do these forecasts hit the mark.
The capital markets, by contrast, have been more realistic: except during the 1999–2001 market bubble, actual price-to-earnings ratios were 25 percent lower than those implied by the forecasts of analysts. To learn more about this research, read “EquityH analysts: Still too bullish”H (April 2010).
http://www.mckinseyquarterly.comH /newsletters/chartfocus/2010_07.htm
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The McKinsey Quarterly
Equity5B analysts: Still too bullish After almost a decade of stricter regulation, analysts’ earnings forecasts continue to be excessively optimistic. April 2010 • Marc Goedhart, Rishi Raj, and Abhishek Saxena
Source: CorporateH Finance Practice H
No executive would dispute that analysts’ forecasts serve as an important benchmark of the current and future health of companies. To better understand their accuracy, we undertook research nearly a decade ago that produced sobering results. Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when 1 economic growth declined.H Alas, a recently completed update of our work only reinforces this view—despite a series of rules and regulations, dating to the last decade, that were intended to improve the quality of the analysts’ long-term earnings forecasts, restore investor confidence in them, 2 and prevent conflicts of interest.H H For executives, many of whom go to great lengths to satisfy Wall Street’s expectations in their financial reporting and long-term strategic moves, this is a cautionary tale worth remembering.
24 Exceptions to the long pattern of excessively optimistic forecasts are rare, as a progression of consensus earnings estimates for the S&P 500 shows (Exhibit 1). Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught up with earlier predictions, do forecasts actually hit the mark. This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions. When economic growth accelerates, the 3 size of the forecast error declines; when economic growth slows, it increases.H H So as economic growth cycles up and down, the actual earnings S&P 500 companies report occasionally coincide with the analysts’ forecasts, as they did, for example, in 1988, from 1994 to 1997, and from 2003 to 2006.
Moreover, analysts have been persistently overoptimistic for the past 25 years, with 4 estimates ranging from 10 to 12 percent a year,H H compared with actual earnings growth of 5 6 percent.H H Over this time frame, actual earnings growth surpassed forecasts in only two instances, both during the earnings recovery following a recession (Exhibit 2). On 6 average, analysts’ forecasts have been almost 100 percent too high.H Capital markets, on the other hand, are notably less giddy in their predictions. Except during the market bubble of 1999–2001, actual price-to-earnings ratios have been 25 percent lower than implied P/E ratios based on analyst forecasts (Exhibit 3). What’s 7 more, an actual forward P/E ratioH H of the S&P 500 as of November 11, 2009—14—is 8 consistent with long-term earnings growth of 5 percent.H H This assessment is more reasonable, considering that long-term earnings growth for the market as a whole is 9 unlikely to differ significantly from growth in GDP,H H as prior McKinsey research has 10 shown.H H Executives, as the evidence indicates, ought to base their strategic decisions on what they see happening in their industries rather than respond to the pressures of forecasts, since even the market doesn’t expect them to do so.
25 About the Authors Marc Goedhart is a consultant in McKinsey’s Amsterdam office; Rishi Raj and Abhishek Saxena are consultants in the Delhi office. Notes
1 H H Marc H. Goedhart, Brendan Russell, and Zane D. Williams, “ProphetsH and profits,”H mckinseyquarterly.com, October 2001.
2 H H US Securities and Exchange Commission (SEC) Regulation Fair Disclosure (FD), passed in 2000, prohibits the selective disclosure of material information to some people but not others. The Sarbanes–Oxley Act of 2002 includes provisions specifically intended to help restore investor confidence in the reporting of securities’ analysts, including a code of conduct for them and a requirement to disclose knowable conflicts of interest. The Global Settlement of 2003 between regulators and ten of the largest US investment firms aimed to prevent conflicts of interest between their analyst and investment businesses.
3 H H The correlation between the absolute size of the error in forecast earnings growth (S&P 500) and GDP growth is –0.55.
4 H H Our analysis of the distribution of five-year earnings growth (as of March 2005) suggests that analysts forecast growth of more than 10 percent for 70 percent of S&P 500 companies.
5 H H Except 1998–2001, when the growth outlook became excessively optimistic.
26 6 H H We also analyzed trends for three-year earnings-growth estimates based on year-on-year earnings estimates provided by the analysts, where the sample size of analysts’ coverage is bigger. Our conclusions on the trend and the gap vis-à-vis actual earnings growth does not change.
7 H H Market-weighted and forward-looking earnings-per-share (EPS) estimate for 2010.
8 H H Assuming a return on equity (ROE) of 13.5 percent (the long-term historical average) and a cost of equity of 9.5 percent—the long-term real cost of equity (7 percent) and inflation (2.5 percent).
9 H H Real GDP has averaged 3 to 4 percent over past seven or eight decades, which would indeed be consistent with nominal growth of 5 to 7 percent given current inflation of 2 to 3 percent.
10 H H Timothy Koller and Zane D. Williams, “HWhat happened to the bull market?”H mckinseyquarterly.com, November 2001.
https://www.mckinseyquarterly.com/Corporate_FiH nance/Performance/Equity_analysts_Still_to o_bullish_2565 H
27
Eurointelligence17B Daily Morning Newsbriefing
Bundesbank436BH says Ireland will destroy eurozone
20.07.2010 The Bundesbank’s monthly report says that the tendency for Ireland, Spain, Portugal and Greece to run high deficit, constituted a source of danger for the eurozone; tells the Irish that they should take measures to improve the economy; the Bundesbank, however, has nothing to say about countries with current account surpluses; Hungary and the IMF break off talks, after the Hungarian government refuses further austerity measures; forint falls more than 3% on the news; Moody’s downgrades Irish debt in line with S&P’s rating; Brad DeLong says it is time for more stimulus spending, until the market tells us that it has to stop: this time won’t come for some time; Niall Ferguson says Keynesians – like the Bourbons – have learnt nothing and forgot nothing; Francesco Giavazzi and Alberto Giovannini, meanwhile, warn of a low interest trap that results from direct inflation targeting.
20.07.2010
Bundesbank307B says Ireland will destroy eurozone
TheH Irish IndependentH picked up these incredible comments from the Bundesbank in its monthly bulletin in which it criticised Ireland, Spain, Portugal and Greece for running "persistently high" current-account deficits over the past decade, which the Bundesbank says is a "source of danger" for the single-currency region. The Bundesbank blamed the current-account deficits in Ireland and elsewhere on increases internal demand, "comparatively" strong inflation and a "grave" erosion of competitiveness. The Bundesbank dismissed the claim that reducing the German surplus would help to reduce
28 the imbalances. Ireland's current account deficit would only improve by 1 percentage point if Germany increased imports by 10pc, the report says. “Ireland's economic policies pose a danger to the eurozone as a whole and we should take measures to improve the economy ourselves rather than look to others to change” (Interestingly, the Bundesbank does not think that persistent current account surpluses, which are the logical counterpart of current account deficits, constitute a “source of danger”. This suggests to us that the people who write these report are economically illiterate.) IMF breaks off talks with Hungary This is a story we used to see a lot more ten or twenty years ago. Hungary and IMF have broken off talks, as the new Hungarian government refuses to accept further austerity measures. TheH FT reports H that the message is not entirely clear, as the economy minister later accepted that Hungary would cut its budget deficit to 3% of GDP by 2011. It looks as though the government is mindful of the local elections, which could see the rise of a far-right party that opposes foreign capital. The election are held in October. The EU also criticised the Hungarian policies, as well as attempt to undermine the independence of the central bank. Hungary currently does not need to draw on the €20bn standby facility, but the article says the country’s financial position remains precarious. The forint fell by over 3% against the euro after the news of the breakdown of talks came out. Moody’s downgrades Ireland’s rating Moody’s has been the last rating agency to downgrade Irish debt citing growth prospects and a deteriorating debt position. TheH FT says H the downgrade to Aa2 puts Moody’s rating on the same level as Standard & Poor’s, and still one notch higher than Fitch. Irish 10-year yields went up 8bp to 5.51%, and CDS rose 10bp to 261. Austerity vs Stimulus: Brad de Long and Niall Ferguson
TheH FT’s debate H on austerity vs stimulus seems continued with Brad DeLong and Niail Ferguson. DeLong argues: “Greece, Ireland, Spain, Portugal and Italy need to be austere. But Germany, Britain, America and Japan do not. With their debts valued by the market at heights I had never thought to see in my lifetime, the best thing they can do to relieve the global depression is to engage in co- ordinated global expansion. Expansionary fiscal, monetary and banking policy, are all called for on a titanic scale. But, the members of the pain caucus say, how will we know when we have reached the limits of expansion? “ He says the US enjoys an exorbitant privilege, and should use. The market will tells us when to stop, but they have not done so now, and probably will for some time to come. Niall Ferguson says the Keynesians are like the old Bourbons: The have learned nothing, and they forgot nothing. He makes the argument that the US amassed similar levels of debt during the second world war, but to do so in peacetime is reckless. He cites surveys on both sides of the Atlantic showing that the public is nervous about the debt-build-up. He says the key is to enact policies that shore up the confidence of the public. Giavazzi and Giovannini on the low interest rate trap
Writing in Vox, FrancescoH Giavazzi and Alberto GiovanniniH argue that the strict application of an inflation target – with no financial stability rule – would land economies in a low
29 interest rate trap, in which they are prone to financial crises. “... the crisis has taught us that central banks, when they set interest rates, should also be concerned about the fragility of the financial system. Interest rates should reflect the value of liquidity, and this should take into account the fact that crises are spikes in the value of liquidity...Underpricing liquidity in this way makes crises more likely. In other words, since in the event of a crisis the price of liquidity goes up, central bankers should keep policy rates higher than those they would set with the sole objective of price stability. Such a deviation from simple inflation targeting would have the important effect of signalling to all financial market participants that liquidity is not as abundant as they perceive in normal times, but can dry out unexpectedly and dramatically. By charging the ‘true’ price of liquidity (i.e. its shadow price), central banks will help dampen excessive risk taking.”
Bundesbank says Ireland will destroy eurozone20.07.2010http://www.eurointelligence.com/iH ndex.php?id=581&tx_ttnews[tt_news]=28
59&tx_ttnews[backPid]=901&cHash=5113f340b9# H
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30 H PoliticsH H
July 19, 2010
Senate172B Set to End Stalemate and Extend Jobless Aid
By562B CARLH HULSE WASHINGTON — Senate Democrats are poised to break a partisan stalemate on Tuesday over extending unemployment benefits for millions of Americans who have been jobless for six months or more, but the fight seems certain to continue playing out as a defining issue in the midterm elections. One day before a crucial procedural vote to provide added unemployment assistance through
November, PresidentH Obama H appeared in the Rose Garden on Monday with three out-of-work Americans to hammer Republicans for blocking the extension until now by insisting, over Democratic objections, that the $34 billion costs of the benefits not be added to the deficit. “The same people who didn’t have any problem spending hundreds of billions of dollars on tax breaks for the wealthiest Americans are now saying we shouldn’t offer relief to middle-class Americans,” Mr. Obama said. Democrats have been one vote short of pushing the measure through the Senate. But on
Tuesday, a new Democratic senator from West Virginia will be sworn in to succeed RobertH C.
Byrd,H who died last month, putting Democrats in position to overcome the Republican blocking tactic and bring the bill to a final vote. As a political matter, the issue has appeal to both parties, especially in an election year in which each party needs first to motivate its own base. For Republicans, it provides a concrete vehicle for pushing the argument that the government’s response to the recessionH H has been wasteful and ineffective, that the growing national debt requires deep spending cuts and that Mr. Obama is guilty of ideological overreach. For Democrats, it is an opportunity to accuse Republicans of being obstructionist and out of touch with the pain caused by an economic downturn that began on the Republicans’ watch. Mr. Obama’s tough attack on Monday signaled the White House’s confidence that it has the upper hand, legislatively and politically. Recent public opinion polls show that a majority of Americans favor giving the long-term unemployed more financial help even if it adds to the deficit. “To govern is to choose, and this is a clear choice: You either support extending benefits for people who are out of work or you don’t,” said RahmH Emanuel,H the White House chief of staff. “There are obvious political ramifications to that difference.” With many voters expressing growing alarm at the mounting national debt, Republicans say that standing against an unemployment extension that would add to the deficit could energize their voters and help them regain some of the reputation for fiscal responsibility they have lost in recent years. They also accused the White House of misleading the public about the Republican position on added jobless pay.
31 “The president knows that Republicans support extending unemployment insurance, and doing it in a fiscally responsible way by cutting spending elsewhere in the $3 trillion federalH budget,”H
Representative JohnH A. Boehner H of Ohio, the House Republican leader, said in a statement Monday. “At a time of record debt and deficits made worse by Washington Democrats’ massive spending spree, that’s the right thing to do and the right way to do it.” The additional money for those who have exhausted their standard 26 weeks of jobless pay has been tied up since the beginning of June but had become a growing point of contention since
February when Senator JimH Bunning,H Republican of Kentucky, initiated a one-man filibusterH H against a temporary extension of the safety-net spending. While Republicans eventually relented and allowed an additional month of unemployment compensation, the party began to coalesce around the position that further extensions should be paid for with offsetting cuts in other spending, leading to the current stalemate. Most Democrats contend that deficit spending is acceptable — even, in economic terms, necessary — to help not only the jobless but also the economy as a whole. Their argument is that unemployed workers will spend all or nearly all of their benefits on goods and services that help support other jobs. “At what point do we pivot and start being concerned about our children and our grandchildren?” Senator MitchH McConnell H of Kentucky, the Republican leader, said Sunday on CNN. “There is no way in the world on a trillion-dollar budget this year we can’t find the money to pay for an extension of unemployment insurance, something we’re in favor of.” Besides the support of Carte Goodwin, the West Virginian to be sworn in Tuesday to succeed
Mr. Byrd, Democrats are counting on the votes of Senators SusanH Collins H and OlympiaH J.
Snowe,H the two Maine Republicans, to reach the minimum 60 votes needed to overcome the threat of a Republican filibuster. To ease objections, Democrats have scaled back the unemployment proposal, which originally was to extend through December and included billions of dollars in health insurance subsidies for the unemployed.
In a floor speech Monday, Senator HarryH Reid,H the Nevada Democrat and majority leader, chastised Republicans for blocking the added unemployment benefits, noting that Republicans had voted before to treat the assistance as emergency spending that could be added to the deficit. He also accused Republicans of being callous to the unemployed, noting that some Senate Republicans — as well as Senate candidates — have suggested that the added unemployment pay amounts to welfare and is discouraging people from taking jobs when they can rely on the government. “Many of my constituents take offense at these absurd allegations, and they’ve let me know about it,” Mr. Reid said. “They’ve written or called me or pulled me aside when I see them in Nevada.” If the Senate is successful in approving the extension, the House will have to vote on the measure before it is sent to the president, but Democrats have sufficient votes there. The potential impact on Congressional races was evident Monday. In one case, the Democratic Senatorial Campaign Committee issued a statement noting that
DanH Coats,H the Republican Senate candidate in Indiana, had backed Republican efforts to block the jobless pay unless it was offset with cuts elsewhere.
32 “Due to Republican obstructionism, over 48,000 unemployed Hoosiers have already lost their unemployment benefits,” the Democratic statement said. Republicans fired back, criticizing Representative Brad Ellsworth, the Democratic Senate candidate, for his support of deficit spending on unemployment pay. “Instead of making the tough economic decisions that every Indiana family and small business face each day, Brad Ellsworth has been sitting in Washington maxing out the government credit card and doing nothing to get more Hoosiers back to work,” said Brian Walsh, a spokesman for the National Republican Senatorial Committee. Helene Cooper contributed reporting.
http://www.nytimes.com/2010/07/20/us/politics/20jobs.html?hpH H
33
Eurointelligence173B Daily Morning Newsbriefing
Euro437BH back at $1.30
19.07.2010 The euro is appreciating as investors get nervous about US prospects; The IMF wants to boost its lending resources to $1000bn to offer assistance for countries facing liquidity crisis; Greece start of the austerity programme earns compliments from the IMF; But challenges are still ahead, with looming protests and possible spending overruns in health care and social security; Martin Wolf kicks off a debate about the crucial policy question today whether to tighten fiscal policy or not; For the worst case scenario for sovereign bond defaults read the calculated risk blog; Francois Fillon and his comments on budget cuts keeps the French press wondering about the meaning of “rigueur”; Angela Merkel gets more support from La Tribune readers than at home; James Hamilton, meanwhile, looks at the possibility of deflation in the US. 19.07.2010
Euro308B back at $1.30
There is no such thing as a trend in the forex market. The euro is back at reasonably strong
level against the dollar, as investor sentiment has turned on negative on the US. LaH
Repubblica reports H that on Friday the euro surpassed $1.30 again. The paper cites positive news from Spain and Greece but above all an increased nervousness about the US outlook as the reasons behind this shift. Against those who are still in doubt about European prospects, Dominique Strauss Kahn is citied throughout the European press with his positive expectation that the stress tests will reassure markets, showing that European banks are sufficiently solid to withstand some minor earth trembling (yet there seems to be a gap between was markets and policy makers consider a realistic scenario for such a “trembling”) .
34 Increase Safety funds for the IMF The IMF is seeking to boost its lending resources to $1,000bn from $750bn to build safety nets that could prevent financial crises, the FT reports. Instead of responding solely to crises with conditional loan packages, the IMF wants financing agreed in advance and specially tailored to individual countries, to cool market nerves over any nation facing an imminent liquidity crunch. South Korea, presiding the G20 this year, hopes to convince the other G20 countries to back the proposal at a summit in South Korea in November.
Greek fiscal programmes procedures smoothly The IMF is full of praise for a strong start if the Greek consolidation programme in its progress report, theH FT reports H Greece is “broadly on track” to achieve this year’s budget deficit target of 8.1% of GDP thanks to tight spending controls and improved revenues. But the report also warns that the challenges are still high: low credibility with the market, lacking social consensus on reform, persistent high inflation, and possible spending overruns in healthcare, social security, local government and public enterprises. The IMF says only a full implementation of the programme could help to overcome the credibility costs that Greece is actually paying. Experts from the “troika” – the IMF, the European Commission and the ECB - are due to pay another visit to Athens end of July to review progress with reforms.
An FT debate of stimulus vs tightening
MartinH Wolf H kicks off a debating series in the FT on the question of stimulus versus tightening. Wolf is laying out the arguments that policy makers use in the debate: those for tightening argue that it is inevitable to ensure long term fiscal sustainability and private sector confidence and spending. Together with loose monetary monetary policy there should be no risk for the economy. Those who are in favour of continuing to stimulate the economy argue that it was the private sector’s crisis that caused the fiscal deficits, fiscal consolidation is too early as the private sector is still too weak, and monetary policy is of no use as it operates at the zero bound. Whoever is right in this debate the problem is that “if policymakers get it wrong, the results may well be dire, so policy makers should be prepared to turn around their position. If you want to be really, really pessimistic...
...then CalculatedH Risk H is the place to this morning. A guest blogger ruminated on the absolute worst scenario that could happen, and explains in gory detail. The worst sovereign debt default a scenario that is consistent with prior experience, is one where 45% of the countries with large outstanding sovereign debts are in default within a 2-3 year period. The countries involved include Greece, Portugal, Ireland, Spain, Italy and Belgium. The total debt in default reaches $15.3 trillion, and almost half of all outstanding sovereign debt is in default. The losses are $10.5 trillion at the low end recovery rate of 31%. Next worst scenario to come up is for CDOs Fillon breaks tabou and uses the R-word The French prime minister Francois Fillon dared to use the word “rigueur” describing what the French government does not do with R&D expenditures, implying of course that other expenditures are well treated with rigour. LesH Echos H writes that he contradicts directly Nicolas Sarkozy, who prefers to use the word rigorous instead. This debate might
35 seem bizarre to the outsider, but the debate is not only about the sematic significance of the term “rigueur”, but about the symbolism as “rigueur” is remembered by the French from the 1980s as a involuntary belt-tightening exercise, which is a picture Sarkozy seeks to avoid. Fillon is framing himself now as a frank talker who has all interests to distinguish himself from an unpopular and increasingly compromised president.
Angela Merkel popular in France Angela Merkel’s popularity is at a low point at home, but she gets support, quite
unexpectedly, from HLa Tribune readers.H An internet poll finds that 58% agree with Angela Merkel and her economic policy initiatives. They appreciate the German economic performance, rigor and transparency and wish that the French could take an example. Jim Hamilton on deflation
Writing in his blog Econbrowser, JamesH Hamilton H looks at the probability of deflation. His CPI data from the BLS show that deflation could once again become a key concern. He looks through the theoretical arguments arguments and concludes that expansionary monetary policy surely can accomplish is to prevent deflation even if its interest rate is bound to zero, but the Fed needs to be clear in its commitment to do so.
6-month56B CPI inflation (quoted at an annual rate), 2000:M1-2010:M6. Data source:
FREDH H
Euro back at $1.3019.07.2010 http://www.eurointelligence.com/index.php?id=581&H tx_ttnews[tt_news]=2858&tx_ttnews[backPid]=9
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36
SUNDAY,309B JULY 18, 2010
Part438BH 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in
Default H by CalculatedRisk on 7/18/2010 03:48:00 PM
Here is the WeeklyH Summary and a look ahead H (Housing, Bernanke testimony, Euro stress tests all coming up).
CR Note: This series is from reader "some investor guy".
In order to keep the Really Bad scenario from becoming massively long, it’s in several pieces. This one is only on sovereign defaults. There will be more on swaps and banking later in the week.
How likely or unlikely is the “Really Bad” scenario? The author has built a number of risk simulation models for various purposes. Choosing scenarios or simulation outputs which show things going really badly involves some tradeoffs. There is always that small probability of Earth being hit by a huge asteroid resulting in mass extinction. I usually leave such events out of my models. Wars and disease are tough items to model, but government financial problems are often related. More on those in Part 6. There is a strong tendency among people who are not researchers or modelers to think a particular bad scenario can’t or won’t occur. If you want to get attention from management or regulators and motivate them to do something, one effective technique is to show what would happen if something very similar to prior history repeated itself. When they say “there’s no way that many sovereigns could default at once”, you pull out the numbers and show them that it’s actually occurred several times in the past.
People who don’t do statistics are usually drawn to individual stories or scenarios. I look for scenarios which are informative about risks that might be mitigated in some way. It’s frustrating for everyone involved if they believe what you are presenting, but then can’t do anything about the risks or other problems.
So, out of the multitude of potential scenarios, I have settled upon one which is really bad, but doesn’t involve asteroids, mass extinctions, or apes taking over. It is consistent with prior bad episodes of sovereign debt default.
Here is the Really Bad scenario. It’s not a worst possible scenario. It is more like the Long Depression or the Great Depression reoccurring under 2010 conditions. In the Really Bad scenario, 45% of the countries with large outstanding sovereign debts are in default within a 2-3 year period.
As we saw in PartH 2B,H levels between 40% and 50% of sovereigns in default have been reached five times in the last two centuries, (1830s, 1840s, 1880s, 1930s, 1940s, source: Eight Centuries of Financial Crises, page 4).
37 So, who defaults? A simple method is to choose the 45% of countries with large sovereign debts (over $50 billion) that currently have the highest cumulative probability of default. They are assumed to default in the same order as implied by their cumulative probability of default at 6/30/10 from CMA: Greece, Argentina (again), Portugal, Ireland, Spain, Italy, Turkey, Indonesia, Belgium, South Africa, Thailand, South Korea, Poland, Brazil, Mexico and Malaysia.
This involves about $5.6 trillion of debt in default, about 16% of all sovereign debt. If historic trends repeat themselves, it all happens within about two years of the first default (Greece), and 11 home currencies are involved. At the low end recovery rate of 31% of face value, there are about $3.8 trillion of losses. This is about 2-3 times the amount currently embodied in credit default swap pricing which we calculated in Part 4 ($1.3-1.8 trillion). But then, since this is a really bad scenario, Japan defaults too. This might occur because of a global economic slowdown, a rise in general risk premiums and interest rates raising Japan’s debt service (this could take longer, Japan’s average maturity is 5-6 years), Japan’s banking system being affected by defaults elsewhere in the world, lack of political will to make reforms, or several other mechanisms.
For those of you who say Japan’s default is an incredibly unlikely event, note the following. Many officials have a long term concern about Japan. If there are many other sovereign defaults, the time frame could speed up considerably.
1. Prime Minister Naoto Kan saidH H “We cannot sustain public finance that overly relies on issuing bonds," Kan told parliament in his first policy speech. As we can see in the euro zone confusion that started from Greece, there is a risk of default if the growing public debt is neglected and if trust is lost in the bond market." 2. In the last year, the price of Japanese CDS have tripled. CMAVision estimates a 5 year probability of default of 8.3% from their CDS prices at June 30, 2010. 3. Japan has the highest debt to GDP ratio of any developed country. It is expected to reach 225% of GDP in 2010 (Source: The Outlook for Financing Japan’s Public Debt, IMF 2010)
4. “Japan is in danger of a slow motion sovereign debt crisis 5 to 10 years from now, warnsH H Kenneth Rogoff, professor of public policy & economics at Harvard University.”
5. The IMF modeled the effect of sovereign defaults elsewhere on Japan. They found “Sovereign debt crisis and increased risk premium. Assessing the macroeconomic implications of a sharp rise in government bond yields, this scenario assumes an increase in the risk premium by 100 basis points for the U.S. and 200 basis points for the euro area without offsetting fiscal policy. If the risk premium in Japan remains unaffected, growth would slow through the export and exchange rate channel by between 0.5 to 1 percentage points in 2010. If, on the other hand, the risk premium in Japan also
38 increases (by 100 basis points), growth could fall by as much as 2 percentage points. Given depressed demand, deflation would worsen by about 0.5to 1 percentage point below the baseline in 2011.” (source: IMF, Japan Staff Report for the 2010 Article IV Consultation, June 2010).
Japan has over a quarter of all sovereign debt outstanding worldwide. It’s default would be bigger than all of the others in this scenario combined.
In our Really Bad scenario, another $9.7 trillion in sovereign debt goes into default. The total debt in default reaches $15.3 trillion, and almost half of all outstanding sovereign debt is in default. The losses are $10.5 trillion at the low end recovery rate of 31%. At the low end, losses are $7.5 trillion (50% of face value). Of course, recoveries in some countries will be higher than others, but you get the general idea. Next up: Part 5B. What Happens If Things Go Really Badly? More Things Can Go Badly: Credit Default Swaps, Interest Swaps and Options, Foreign Exchange. Disclosure on Some Investor Guy: Based in the US, I currently own no foreign sovereigns. I do own some foreign bank bonds. Unless cited to another source, all research and opinions are my own, and could differ from just about anyone, potentially including: the firm I work for, regulators, politicians, the bond market, the CDS market, academics, doomers, polyannas, and people who are trying to sell you something. Nothing in the series is legal or investment advice, nor advice to buy or sell investments, concrete, remote doomsteads, or canned goods. Renting copies of Mad Max videos may be entertaining, however science fiction movies are no indication of future real world performance.
CR Note: This is from "Some investor guy".
Part 1: HowH Large is the Outstanding Value of Sovereign Bonds? H
Part 2. HowH Often Have Sovereign Countries Defaulted in the Past? H
Part 2B: MoreH on Historic Sovereign Default Research H
Part 3. WhatH are the Market Estimates of the Probabilities of Default? H
Part 4. WhatH are Total Estimated Losses on Sovereign Bonds Due to Default?
CalculatedRisk PartH 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in
Default H 7/18/2010 03:48:00 PM http://www.calculatedriskblog.com/H 2010/07/part-5a-what-happens-if- things-go.html H
39 OpinionH H
July 18, 2010
The174B Pundit Delusion
By563B PAULH KRUGMAN The latest hot political topic is the “Obama paradox” — the supposedly mysterious disconnect between the president’s achievements and his numbers. The line goes like this: The administration has had multiple big victories in Congress, most notably on health reform, yet President Obama’s approval rating is weak. What follows is speculation about what’s holding his numbers down: He’s too liberal for a center-right nation. No, he’s too intellectual, too Mr. Spock, for voters who want more passion. And so on. But the only real puzzle here is the persistence of the pundit delusion, the belief that the stuff of daily political reporting — who won the news cycle, who had the snappiest comeback — actually matters. This delusion is, of course, most prevalent among pundits themselves, but it’s also widespread among political operatives. And I’d argue that susceptibility to the pundit delusion is part of the Obama administration’s problem. What political scientists, as opposed to pundits, tell us is that it really is the economy, stupid. Today, Ronald Reagan is often credited with godlike political skills — but in the summer of 1982, when the U.S. economy was performing badly, his approval rating was only 42 percent.
My Princeton colleague LarryH Bartels sums it up H as follows: “Objective economic conditions — not clever television ads, debate performances, or the other ephemera of day-to-day campaigning — are the single most important influence upon an incumbent president’s prospects for re-election.” If the economy is improving strongly in the months before an election, incumbents do well; if it’s stagnating or retrogressing, they do badly. Now, the fact that “ephemera” don’t matter seems reassuring, suggesting that voters aren’t swayed by cheap tricks. Unfortunately, however, the evidence suggests that issues don’t matter either, in part because voters are often deeply ill informed. Suppose, for example, that you believed claims that voters are more concerned about the budget deficit than they are about jobs. (That’s not actually true, but never mind.) Even so, how much credit would you expect Democrats to get for reducing the deficit? None. In 1996 voters were asked whether the deficit had gone up or down under Bill Clinton. It had, in fact, plunged — but a pluralityH of voters, and a majority of Republicans,H said that it had risen. There’s no point berating voters for their ignorance: people have bills to pay and children to raise, and most don’t spend their free time studying fact sheets. Instead, they react to what they see in their own lives and the lives of people they know. Given the realities of a bleak employment picture, Americans are unhappy — and they’re set to punish those in office. What should Mr. Obama have done? Some political analysts, like Charlie Cook, say that he made a mistake by pursuing health reform, that he should have focusedH on the economy.H As far as I can tell, however, these analysts aren’t talking about pursuing different policies — they’re saying that he should have talked more about the subject. But what matters is actual economic results.
40 The best way for Mr. Obama to have avoided an electoral setback this fall would have been enacting a stimulus that matched the scale of the economic crisis. Obviously, he didn’t do that. Maybe he couldn’t have passed an adequate-sized plan, but the fact is that he didn’t even try. True, senior economic officials reportedly downplayed the need for a really big effort, in effect overruling their staff; but it’s also clear that political advisers believed that a smaller package would get more friendly headlines, and that the administration would look better if it won its first big Congressional test. In short, it looks as if the administration itself was taken in by the pundit delusion, focusing on how its policies would play in the news rather than on their actual impact on the economy. Republicans, by the way, seem less susceptible to this delusion. Since Mr. Obama took office, they have engaged in relentless obstruction, obviously unworried about how their actions would look or be reported. And it’s working: by blocking Democratic efforts to alleviate the economy’s woes, the G.O.P. is helping its chances of a big victory in November. Can Mr. Obama do anything in the time that remains? Midterm elections, where turnout is crucial, aren’t quite like presidential elections, where the economy is all. Mr. Obama’s best hope at this point is to close the “enthusiasm gap” by taking strong stands that motivate Democrats to come out and vote. But I don’t expect to see that happen. What I expect, instead, if and when the midterms go badly, is that the usual suspects will say that it was because Mr. Obama was too liberal — when his real mistake was doing too little to create jobs.
http://www.nytimes.com/2010/07/19/opiniH on/19krugman.html?_r=1&th&emc=th H
July 19, 2010, 2:08 pm
Why310B I Worry From Goldman Sachs research (no link): By our estimates, (federal) fiscal policy has contributed +2½ percentage points (annualized) to real GDP growth from early 2009 to mid-2010. From mid-2010 to mid-2011, we estimate an impact of about -¼ percentage point—i.e. 2¾ percentage points less than before—even under our baseline assumptions of extended unemployment benefits, more aid to state governments, and at least a temporary extension of the bulk of the 2001-2003 tax cuts. We need a lot of improvement in private sector activity to offset this swing, and at the moment it unfortunately doesn’t look like we’re getting it. There’s a lot of “who could have known” going on about the weakening recovery. But everything that’s happening now was baked in by policy choices made in early 2009. It would have taken some positive X-factor to produce an ongoing, vigorous recovery; it was never explained what that X-factor was, or why we should count on it.
41 July 19, 2010, 1:45 pm
The31B Bush Deficit Bamboozle
OK, even by contemporary standards, thisH is rich:H the official Republican stance is now apparently that Bush left behind a budget that was in pretty good shape. Mitch McConnell: The last year of the Bush administration, the deficit as a percentage of gross domestic product was 3.2 percent, well within the range of what most economists think is manageable. A year and a half later, it’s almost 10 percent. They really do think that we’re idiots.
So, that 3.2 percent number comes from hereH H (pdf). Where’s the bamboozle? Let me count the ways. First, they’re hoping that you won’t know that standard budget data is presented for fiscal years, which start on October 1 of the previous calendar year. So this isn’t the “last year of the Bush administration” — they’ve conveniently lopped off everything that happened post- Lehman — TARP and all. Second, they’re hoping you won’t look at what was happening quarter by quarter. Here’s net federal borrowing as a percentage of GDP, quarter by quarter, since 2007: BEA
SourceH Can we agree that the deficit in the first quarter of 2009 — Obama didn’t even take office until Jan. 20, the ARRA wasn’t even passed until Feb. 17, and essentially no stimulus funds had been spent — had nothing to do with Obama’s polices, and was entirely a Bush legacy? Yet the deficit had already surged to almost 9 percent of GDP. Even in 2009 II, Obama’s policies had barely begun to take effect, and the deficit was already over 10 percent of GDP. What this chart really tells us is what you should have known already: the deficit is overwhelmingly the result of the economic slump, not Obama policies. But the usual suspects want to fool you. I’d like to think that the raw dishonesty of this latest Bush defense would be obvious to everyone. But after the past decade, I’ve stopped believing such things. They think we’re idiots — and they may be right. July 19, 2010, 9:32 am
Is312B There A Jobs Mystery?
BradH DeLong H wonders why JohnH Harwood H makes so much of the supposed excessive rise in unemployment, even given the slump in GDP. Brad argues that the old Okun’s Law — in which a one-point fall in GDP caused only about a half-point rise in unemployment — didn’t hold in the last two recessions, either. I agree; there’s only a big mystery here if you imagined that the Great Recession and its aftermath was going to look like a pre-1990 business cycle, rather than be another postmodernH cycle H like those of 1990 and 2001. It’s worth looking, in particular, at how productivity across the cycle has changed. I don’t have time this morning for a proper treatment, but look at this figure:
42
If you squint a bit, you can see that before 1990, recessions were generally accompanied by a fall in productivity, mainly because businesses would hang on to workers, so as to be prepared to ramp up production quickly once recovery got underway. After 1990, this “labor hoarding” effect basically vanished; if anything, productivity growth seemed to accelerate in times of weak demand. Partly this may have reflected structural changes in the economy; it might also reflect the (correct) perception that recovery from financial-crisis-induced recessions is much slower than recovery from recessions created by tight money, imposed by the Fed to control inflation. This gets at a broader point: as I see it, one of the problems with policy in the early months of the Obama administration was that top officials (to be fair, like many Wall Street economists) thought of the Great Recession as 1982 redux, rather than as a mega version of 2001. July 19, 2010, 9:12 am
And31B So It Begins
At the end of today’sH column H I predicted that the usual suspects would react to Democratic losses by ignoring the elephant in the room — unemployment — and insist, instead, that the problem was excessive liberalism.
And right on cue, CliveH Crook H tells us that Obama’s big mistake was refusing to “disown the left.” Which leftists and/or leftist policies are we talking about here? Crook never says; he doesn’t offer a single concrete example of what he’s talking about. This is no surprise. Clive has spent the past year and a half posing as the sensible centrist, standing between the extremists of left and right; but all along he’s had the problem that while right-wing extremists basically rule the GOP, left-wing extremists are nowhere near the corridors of power. So he’s spent this whole time shadow-boxing with powerful leftists who exist only in his imagination. And suppose that Obama did find someone to denounce (MoveOn? Joe Stiglitz? Me?) Are we to imagine that swing voters, who get their political news from things they see on TV while doing something else, will then say, “Oh, OK, Obama’s not a socialist after all, I’ll vote Dem this year”? Or will they say, “These politicians keep making promises, but my brother-in-law’s still out of work. Let’s throw the bums out”?
43 Decades of political science research — not to mention common sense — say that it’s the latter. But pundits will be pundits, I guess. July 18, 2010, 10:46 am
More314B Stimulus Despair I’ll be frank: the discussion of fiscal stimulus this past year and a half has filled me with despair over the state of the economics profession. If you believe stimulus is a bad idea, fine; but surely the least one could have expected is that opponents would listen, even a bit, to what proponents were saying. In particular, the case for stimulus has always been highly conditional. Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound. That doesn’t sound like a hard point to grasp. Yet again and again, critics point to examples of increased government spending under conditions nothing like that, and claim that these examples somehow prove something.
Here’s the latest, fromH Tyler Cowen:H Certainly, in Germany, the recent history of fiscal stimulus wasn’t entirely positive. After reunification in 1990, the German government borrowed and spent huge amounts of money to finance reconstruction and to bring East German living standards up to West German levels. Millions of new consumers were added to the economy. These policies did unify the country politically but were not overwhelmingly successful economically. An initial surge was followed by years of disappointing results for output and employment. This passage makes me want to stick a pencil in my eye. Let’s consider the case: 1. This was not an effort at fiscal stimulus; it was a supply policy, not a demand policy. The German government wasn’t trying to pump up demand — it was trying to rebuild East German infrastructure to raise the region’s productivity. 2. The West German economy was not suffering from high unemployment — on the contrary, it was running hot, and the Bundesbank feared inflation. 3. The zero lower bound was not a concern. In fact, the Bundesbank was in the process of raising rates to head off inflation risks — the discount rate went from 4 percent in early 1989 to 8.75 percent in the summer of 1992. In part, this rate rise was a deliberate effort to choke off the additional demand created by spending on East Germany, to such an extent that the German mix of deficit spending and tight money is widely blamed for the European exchange rate crises of 1992-1993. In short, it’s hard to think of a case less suited to tell us anything at all about fiscal stimulus under the conditions we now face. And the fact that a prominent commentator on current events apparently doesn’t know that, after a year and a half of debating this issue — well, as I said, I’m feeling fairly despairing.
http://krugman.blogs.nytimes.com/2H 010/07/18/more-stimulus-despair/ H
44 July 17, 2010, 4:37 pm
More315B On Deficit Limits
Jamie Galbraith responded to thisH post H in comments; what he said, and my counter-response, below the fold: First, Jamie: Paul’s argument is that *infinite* inflation is a theoretical possibility. Well, yes. It happened in Germany in 1923. There is no reason to cut Social Security benefits or Medicare now, with effect in the future, in order to avoid the theoretical possibility that some combination of policies might at some time in the future give us the economic conditions of post World War I Germany. Those conditions were desperately resource-constrained. In the actual world we live in, government does not have to “persuade the private sector to release real resources.” In the actual world, the private sector has already released those resources by the tens of millions of people. All the government has to do, in the actual world, is mobilize those resources, which it does by issuing checks, preferably to pay people to do useful things. There is no reason why this should be considered “costly.” Done correctly, in economic terms it amounts simply to the reduction of the waste that is associated with unemployment. Nor is it necessary, when the government issues a check, that it issue a bond to “borrow” the money behind that check. The check creates money in the first place. (Yes, it does this from thin air, by changing numbers in bank accounts.) Operationally, this is a free reserve in the banking system. The reason the government issues a bond later, is that the banks like to have a higher rate of interest than they can earn on reserves, and the government likes to oblige them. This is why Treasury auctions don’t fail: the government has already created the demand for the bonds, by issuing checks to the banking system. If the government spent but declined to “borrow,” what would happen? Nothing much. Banks would hold their reserves as cash rather than bonds, and their earnings would be a bit lower. It is *not* true, as a rule, that people (or banks) move readily to substitute lumps of coal for dollars, unless the price level is already moving up and out of control. It is very difficult to get other people to accept coal in place of dollars! Paul’s logical error here is that of assuming-the-consequent. He assumes the inflation which causes dumping of money. But if there is no dumping of money, the inflation will not generally occur. Yes, again, it’s technically possible that the banks and others would start dumping dollars and buying up oil, wheat, rubber, and so forth (and leasing storage facilities for the stuff) thereby driving up the price level. I wrote — correctly and deliberately — that bankruptcy, insolvency and high real interest rates were not risks. Inflation *is* a risk.
45 By this, to be clear, I mean an ordinary garden-variety increase in the inflation rate is a risk — not the *infinite-inflation* scenario. Inflation, though unattractive, is not remotely comparable to bankruptcy or insolvency, unless you get to Paul’s *infinite* inflation scenario. So what about that? In his model, it is driven by his monetarist (quantity-theory) simplification, that the increase in money flows directly into prices. But this is just a modeling error. In the real world, especially in broadly deflationary conditions, people — and banks — simply hang on to cash. There is a Paul Krugman who understands this, from close study over many years of the Japanese stagnation. However, and again, in the present state of the world economy, and for the foreseeable future — and except for the energy sector — surely a small rise in the inflation rate is a trivial risk. My position is that the government should focus on real problems: unemployment, care for the aging, energy, climate change, and the disaster in the Gulf of Mexico. The so-called long-term deficit is not a real problem. And the capital markets demonstrate every day that they agree with this judgment, by buying long-term Treasury bonds for historically-low interest rates. JG My response: there’s no question that right now there is no problem: if the Fed issues money, it will in fact just sit there. That’s what happens when you’re in a liquidity trap. And there’s also no question that right now, the proposition that the government can “create wealth by printing money”, which some other commenters call absurd, is the simple truth: deficit- financed government spending, paid for with either debt or newly created cash, will put resources that would otherwise be idle to work. But we won’t always be in this situation — or at least I hope not! Someday the private sector will see enough opportunities to want to invest its savings in plant and equipment, not leave them sitting idle, and the economy will return to more or less full employment without needing deficit spending to keep it there. At that point, money that the government prints won’t just sit there, it will feed inflation, and the government will indeed need to persuade the private sector to make resources available for government use. And that’s why I don’t accept the idea that deficits are never a problem. Again, as a practical matter I don’t think we have a disagreement: right now we’re in a world where deficits really, truly don’t matter. And at the rate we’re going, it seems unlikely that we’ll have to worry about policy choices near full employment until, oh, late in Sarah Palin’s second term. July 17, 2010, 12:00 pm
I316B Would Do Anything For Stimulus, But I Won’t Do That (Wonkish) It’s really not relevant to current policy debates, but there’s an issue that’s been nagging at me, so I thought I’d write it up.
46 Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I’m very much opposed — my view is that running deficits now is entirely appropriate. But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probablyH Jamie Galbraith,H but he’s not alone. Now, Jamie and I are, I think, in complete agreement about what we should be doing now. So we’re talking theory, not practice. But I can’t go along with his view that So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system. OK, I don’t think that’s right. To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money. And there are limits to all three. Even a country with its own fiat currency can go bankrupt, if it tries hard enough. How does that work? A bit of modeling under the fold. Let’s think in terms of a two-period model, although I won’t need to say much about the first period. In period 1, the government borrows, issuing indexed bonds (I could make them nominal, but then I’d need to introduce expectations about inflation, and we’ll end up in the same place.) This means that in period 2 the government owes real debt service in the amount D. The government may meet this debt service requirement, in whole or in part, by running a primary surplus, an excess of revenue over current spending. Let’s suppose, however, that there’s an upper limit S to the feasible primary surplus — a limit imposed by political constraints, administrative issues (if taxes are too high everyone will evade), or the sheer fact that tax collections can’t exceed GDP. But the government also has a printing press. The real revenue it collects by using this press is [M(t) - M(t-1)]/P(t), where M is the money supply and P the price level. What determines the price level? Let’s assume a simple quantity theory, with the price level proportional to the money supply: P(t) = V*M(t) By assuming this, I’m actually making the most favorable assumption about the power of seignorage, since in practice, running the printing presses leads to a fall in the real demand for money (people start using lumps of coal or whatever as substitutes.) OK, now let’s ask what happens if the government has run up enough debt that the upper limit on the primary surplus is a binding constraint, and it’s necessary to run the printing presses to make up the difference. In that case, [M(t) - M(t-1)]/P(t) = D – S But P is proportional to M, so this becomes [M(t) - M(t-1)]/VM(t) = D – S Rearrange a bit, and we have M(t)/M(t-1) = 1/[1 - V[D-S]]
47 And what does this imply? Since the price level is, by assumption, proportional to M, this tells us that the higher the debt burden, the higher the required rate of inflation — and, crucially, that as D-S heads toward a critical level, this implied inflation heads off to infinity. That is, it looks like this:
So there is a maximum level of debt you can handle. In practice, if it makes sense to say such a thing with regard to a stylized model, at some point lower than the critical level implied by this model the government would decide that default was a better option than hyperinflation. And going back to period 1, lenders would take this possibility into account. So there are real limits to deficits, even in countries that can print their own currency. Now, I’m sure I’m about to get comments and/or responses on other blogs along the lines of “Ha! So now Krugman admits that deficits cause hyperinflation! Peter Schiff roolz” Um, no — in extreme conditions they CAN cause hyperinflation; we’re nowhere near those conditions now. All I’m saying here is that I’m not prepared to go as far as Jamie Galbraith. Deficits can cause a crisis; but that’s no reason to skimp on spending right now.
http://krugman.blogs.nytimes.cH om/2010/07/17/i-would-do-anything-for-stimulus-but-i-wont- do-that-wonkish/ July 17, 2010, 11:14 am
Conventional317B Madness, Revisited
In late May I had a, um, negativeH reaction H to the latest OECD Economic Outlook. Not only did the report call for immediate fiscal austerity; it called for a sharp rise in US interest rates over the next year and a half, even though its own forecasts projected very high unemployment and below-target inflation at the end of 2011. The only justification given for this monetary tightening was the fact that “some long-term measures of inflation expectations have increased.” This was a reference to the TIPS spread, the difference between the interest rate on ordinary government bonds and bonds indexed to inflation. So how’s the TIPS spread doing? Treasury Department So yes, the spread widened for a while; then it plunged.
48 I eagerly await the OECD’s retraction of its previous policy advice. July 17, 2010, 11:05 am
De318B Facto Double Dips From Ed McKelvey at Goldman Sachs, which has been very good at calling recent economic trends (no link): Real GDP growth appears to have dropped below its 2½%-3% long-term potential range last quarter, judging from the latest data on retail sales and foreign trade. We have cut our estimate for second-quarter growth from 3% to 2% (annual rate). This slowdown is occurring just ahead of the loss of growth support from fiscal stimulus and the inventory cycle that we have been anticipating would occur at midyear. With the various headwinds to private-sector growth (excess vacant housing, state and local budget stresses, lack of lending, reluctance to hire) still firmly in place, we reaffirm our view that real GDP will grow at only a 1½% rate during the second half of 2010, and we worry that reacceleration in 2011 will not occur as now projected. Despite these growing downside risks, US authorities do not exhibit much urgency to apply more policy stimulus. Let’s be clear: a recovery that involves growth so slow that unemployment and excess capacity rise, not fall, isn’t really a recovery. If we have only have 1 1/2 percent growth, that will amount to a double dip in all the senses that matter. July 16, 2010, 8:48 pm
After319B The Fall
JohnH Quiggin writes:H I’ve been too absorbed by my book projects and by Australian politics (of which more soon) to pay a lot of attention to the forthcoming US elections, but it seems to be widely projected that the Republicans could regain control of the House of Representatives. What surprises me is that no-one has drawn the obvious inference as to what will follow, namely a shutdown of the US government. It seems obvious to me that a shutdown will happen – the Republicans of today are both more extreme and more disciplined than last time they were in a position to shut down the government, and they did it then. And they hate Obama at least as much now as they hated Clinton in 1995 … I’ve been thinking the same thing. Also, expect many, many fake scandals; we’ll be having hearings over accusations of corruption on the part of Michelle Obama’s hairdresser, janitors at the Treasury, and Larry Summers’s doctor’s dog. If you don’t believe me, you weren’t paying attention during the Clinton years; remember, we had months of hearings over claims that something was fishy in the White House travel office (nothing was). And if anyone remotely connected to the administration should die — oh, boy. Oh, and you can be sure that many media figures will play right along. July 16, 2010, 9:34 am
49 Frogs,320B Boiling Water, And Central Banks
Like others, I’ve been warning that policy makers in the United States are definingH normalcy down H — accepting high unemployment and below-target inflation as just the way things are. It’s not just an obsession with inflation risks; it’s an abdication of responsibility for the economy, even if prices are falling rather than rising.
The passivity of the H Bank of Japan H offers an object lesson. The BOJ is now under political pressure? Why? Because it still sees no reason to act after fifteen years of deflation. Is this a glimpse of the Fed’s future? That’s what I’m afraid of. Oh, and yes, I know that real frogs will in fact jump out of the pot.
http://krugman.blogs.nytimes.com/2010/07/16/H frogs-boiling-water-and-central-banks/ H
50 COLUMNISTS
321B Why the battle is joined over tightening By Martin Wolf Published: July 18 2010 19:13 | Last updated: July 18 2010 19:13
To tighten or not to tighten – thatH is the question.H It is one to which policymakers have started changing their answers. Are they right to do so? That is the issue addressed in the Financial Times this week, echoing the fierce debates of the 1930s. If arguments for tightening are correct, failure to do so would bring fiscal and financial shocks in some of the world’s most important countries. If arguments for tightening are false, decisions to do so threaten recovery and might trigger further financial shocks.
Where are the policymakers? TheH declaration afterH the Toronto summit of the Group of 20 leading nations, stated: “There is a risk that synchronised fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilise or reduce government debt-to-gross domestic product ratios by 2016.”
This language is notably more cautious than that of the PittsburghH summit H of September 2009. That stated boldly: “We pledge today to sustain our strong policy response until a durable recovery is secured. We will act to ensure that when growth returns, jobs do too. We will avoid any premature withdrawal of stimulus. At the same time, we will prepare our exit strategies and, when the time is right, withdraw our extraordinary policy support in a co- operative and co-ordinated way, maintaining our commitment to fiscal responsibility.” So what has changed? The first answer is that the world economy is recovering more strongly than expected. In April 2009, at the time of the London G20 summit, the consensus of forecasts for global economic growth this year was 1.9 per cent. By last September it had reached 2.6 per cent. By June 2010, it was 3.5 per cent. In the US, the consensus forecasts for 2010 were 1.8 per cent in April 2009, 2.4 per cent last September and 3.3 per cent in June 2010. Even for the eurozone, the consensus of forecasts has moved a little, from 0.3 per cent in April 2009, to 1 per cent last September and 1.1 per cent in June 2010.
The439BH great austerity debate Over this week some of the world’s leading policymakers and economists will be addressing in the FT the all-consuming contemporary economic debate: austerity versus stimulus. Will cutting now risk suffocating the fragile recovery of the global economy? Martin Wolf, Lawrence Summers, Naill Ferguson and others give their views. The second answer lies with the fiscal crises in Greece and other peripheral members of the eurozone, reinforced by the election of the coalition government in the UK. The flight from risk was dramatic: in May, the yield on Greek 10-year bonds peaked at more than 12 per cent. This led to a rescue package by the International Monetary Fund and other eurozone governments, and the creation of a new €750bnH joint IMF and eurozone stabilisation facility.H
51 The extent of the tightening must also not be exaggerated. In its MayH Economic Outlook,H the Organisation for Economic Co-operation and Development forecast a decline in cyclically adjusted fiscal deficits for the grouping as a whole from 6.4 per cent in 2010 to 5.8 per cent in 2011. Corresponding figures were 9 per cent and 7.9 per cent for the US, and 4.1 per cent and 3.6 per cent for the eurozone. But further tightening is now planned, particularly in the UK. Moreover, many think planned fiscal tightening does not go far enough. What, then, are the arguments? At the anti-deficit extreme are those who argue fiscal deficits have no impact on activity since they lead to offsetting behaviour by private people. Thus, if governments run deficits, private people save, since they understand that their taxes will ultimately rise. Another, very different, extreme position comes from those who believe a deep slump would purge past excesses, and so lead to healthier economies and societies. While people who think in these radical ways influence the broader politics, they have limited direct influence on policymakers. So what is the latter debate about? The “cutters” argue that such huge fiscal deficits – never seen in peacetime in big developed countries, notably the US – threaten long-term fiscal credibility and depress private confidence and spending. While piling fiscal stimulus on top of the built-in stabilisers made sense in the panic of 2008 and early 2009, the time has come for swift consolidation. Otherwise, a spike in borrowing costs looms, with dire results. The permanent loss of output and revenue left behind by the crisis, along with ageing populations, make action inescapable and urgent. Finally, should economies weaken after a fiscal tightening, monetary loosening would be highly effective. The latter can work by encouraging investment and weakening exchange rates, so also encouraging exports. Many cutters also argue that the best response would be to reduce spending. That is the lesson, they say, from past fiscal retrenchment. The “postponers” agree there must be decisive slowing of the growth of long-term spending. But they emphasise the fragility of recovery and, in particular, the huge private sector financial surpluses. This private frugality has caused the fiscal deficits, they insist, not the other way round. The sequence of events makes that evident. Moreover, add postponers, we have seen a strong flight to safety: for the panickers, there is no alternative to bonds of highly rated governments, particularly the US, issuer of the world’s safe-haven currency. Since the eurozoneH crisis,H that role has become more entrenched. Moreover, the long-term interest rates of leading countries are falling, not rising: in the US, 10-year Treasury bond rates are 3 per cent. Where, then, is the threat to confidence? Moreover, postponers would add, with interest rates close to zero, monetary policy is ineffective, except to the extent that it supports fiscal loosening. Fortunately, countries with their own central banks can finance fiscal deficits directly. This is untrue for members of the eurozone, which are, in effect, operating with a foreign currency. So long as excess capacity remains so large and normal bank lending so weak, such reliance on the central bank “printing press” creates no inflationary danger. On the contrary, the danger is rather that premature fiscal tightening would trigger a sharp economic slowdown, as in Japan in the 1990s, so pitching important economies into deflation. The interaction of high indebtedness with deflation could, they argue, create a downward spiral. A Japanese-style “lost decade” threatens the developed world. That is particularly likely if everybody tightens together. If anything, further loosening is needed: in the first quarter of 2010, the GDP of every member of the Group of Seven leading countries was still below its pre-crisis peak.
52 Readers must make up their own minds on the merits of the arguments this week. My own strong sympathies are with the postponers. But on one thing everybody agrees: this debate matters. We cannot be sure who is right. But we can be sure that, if policymakers get it wrong, the results may well be dire. Physicians must prepare to respond swiftly to adverse reactions to their favoured course of treatment. Martin Wolf Why the battle is joined over tightening July 18 2010 19:13
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COMMENT
32B The great austerity debate Published: July 18 2010 19:56 | Last updated: July 19 2010 18:04 Over this week some of the world’s leading policymakers and economists will be addressing in the FT the all-consuming contemporary economic debate: austerity versus stimulus. The writers, including Larry Summers, Jean-Claude Trichet and the FT’s Martin Wolf will argue whether cutting now risks suffocating the fragile recovery of the global economy. This page allows you to see the highlights from each contribution and join the discussion in the comment box at the end of this page. You can also click through to read each piece as a whole and comment on that specific contribution. Martin Wolf, FT’s chief economic commentator The interaction of high indebtedness with deflation could create a cumulative downward spiral. A Japanese-style “lost decade” threatens the developed world. That is particularly likely if everybody starts to tighten together. If anything, further loosening is needed: in the first quarter of 2010, the gross domestic product of every member of the group of seven leading high-income countries was still below its pre-crisis peak. Readers must make up their own minds on the merits of the arguments this week. My own strong sympathies are with the postponers. But of one thing everybody agrees: this debate matters. We cannot be sure who is right. But we can be sure that if policy-makers get it wrong, the results may well be dire.
>> Keep reading Martin Wolf, HWhy the battle is joined over tightening Brad DeLong, professor of economics at the University of California, Berkeley When the government relieves an excess demand for liquid money by printing up cash and swapping it out for government bonds, we call that expansionary monetary policy. When the government relieves an excess demand for bonds by printing up more Treasuries and selling them to finance its own purchases of goods and services, we call that expansionary fiscal policy. And when it prints up cash and bonds and swaps them for risky private financial assets, or when it guarantees private assets and so raises the supply of high-quality and reduces the supply of low-quality bonds, we call that banking policy.
>> Keep reading Brad DeLong, ItH is far too soon to end expansion
ReadH Brad DeLong's blog post H on why Niall Ferguson “shouldn’t do this.” Lawrence Summers, director of President Barack Obama’s National Economic Council
53 Economic commentators are mired in an unhelpful dialectic between “jobs” and “deficits” that, despite its apparent simplicity, has obscured rather than clarified the policy choices ahead in the US, Europe and elsewhere. Critics have complained that President Barack Obama’s continued commitment both to support recovery in the short term and to reduce deficits in the medium and long term constitutes a “mixed message”. In fact, it is the only sensible course in an economy facing the twin challenges of an immediate shortage of demand and a fiscal path in need of correction to become sustainable.
>> Keep reading Lawrence Summers, America’sH sensible stance on the recovery Niall Ferguson, Lawrence A Tisch professor of history at Harvard, and FT contributing editor It was said of the Bourbons that they forgot nothing and learned nothing. The same could easily be said of some of today’s latter-day Keynesians. They cannot and never will forget the policy errors made in the US in the 1930s. But they appear to have learned nothing from all that has happened in economic theory since the publication of their bible, John Maynard Keynes’s The General Theory of Employment, Interest and Money, in 1936. In its caricature form, the debate goes like this. The Keynesians, haunted by the spectre of Herbert Hoover, warn that the US in still teetering on the brink of another Depression. Nothing is more likely to bring this about, they argue, than a premature tightening of fiscal policy. This was the mistake Franklin Roosevelt made after the 1936 election. Instead, we need further fiscal stimulus.
>> Keep reading Niall Ferguson, Today’sH Keynesians have learnt nothing ... and Brad DeLong’s rebuttal of Niall Ferguson In 1942 the US ran a federal budget deficit of 14.8 per cent of GDP; in 1943 30.8 per cent; in 1944 23.3 per cent; and in 1945 22.0 per cent – a four-year average deficit of 22.7 per cent of GDP. Today, in 2010, the US is running a federal budget deficit that the CBO estimates at 10.3 per cent of GDP. Its score of Obama’s budget proposals has that deficit falling next year to 8.9 per cent of GDP, then over the next two years to 4.5 per cent of GDP, and remaining in the 4-5 per cent of GDP range for the rest of this decade – for an average CBO-scored Obama policy deficit of 5.3 per cent over the next eight years.
>> Read more of Brad DeLong’s counterblast, DeficitH data and the fog of war
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54 COMMENT
It175B is far too soon to end expansion By Brad DeLong Published: July 19 2010 22:21 | Last updated: July 19 2010 22:21 It was in 1829 that John Stuart Mill made the key intellectual leap in figuring out how to fight what he called “general gluts”: he saw that what had happened was an enormous excess demand for particular financial assets was driving an enormous excess supply of goods and services – and if you relieved the excess demand in finance you would cure the excess supply of labour. When the government relieves an excess demand for liquid money by printing up cash and swapping it out for government bonds, we call that expansionary monetary policy. When the government relieves an excess demand for bonds by printing up more Treasuries and selling them to finance its own purchases of goods and services, we call that expansionary fiscal policy. And when it prints up cash and bonds and swaps them for risky private financial assets, or when it guarantees private assets and so raises the supply of high-quality and reduces the supply of low-quality bonds, we call that banking policy. But what happens should a government print more bonds than investors think it will dare to raise future taxes to pay off? What happens when a government’s debts are no longer regarded as safe? Then policies of monetary or fiscal expansion or of banking sector asset swaps and guarantees do not boost but reduce the supply of safe assets: they move government paper into the “risky” category. We saw this in Austria in 1931 and east Asia in 1997-98 and GreeceH H right now. Then not expansion but rather austerity, to restore confidence in the safety of government liabilities, is the best a government can do – that and cry for help from outside.
Deficit40BH data and the fog of war ‘On first reading, I found myself greatly puzzled by Niall Ferguson’s claim’ Here we have the crux: Greece, Ireland, Spain, Portugal and Italy need to be austere. But Germany, Britain, America and Japan do not. With their debts valued by the market at heights I had never thought to see in my lifetime, the best thing they can do to relieve the globalH depression H is to engage in co-ordinated global expansion. Expansionary fiscal, monetary and banking policy, are all called for on a titanic scale. But, the members of the pain caucus say, how will we know when we have reached the limits of expansion? How will we know when we need to stop because the next hundred billion tranche of debt will permanently and irreversibly crack market confidence in dollar or sterling or Deutschmark or yen assets? Will this shrink rather than increase the supply of high-quality financial assets the world market today so wants, and send us spiralling down? Economists had asserted before 1829 that what we call “depressions” were impossible because excess supply of one commodity could be matched by excess demand for another: that if there were unemployed cobblers then there were desperate consumers looking for more seamstresses, and thus that the economy’s problems were never of a shortage of demand but of structural adjustment. But once Mill had pointed out that these economists had forgotten about the financial sector, the way forward was clear – if you could cure the excess demand in the financial sector. Monetarist dogma says the key excess demand in that sector is always for money – and so you can always cure depression by bringing the money supply up. The doctrine of the British economist Sir John Hicks says the key financial excess demand is for bonds, and you can cure the depression by
55 either getting the government to borrow and spend or by raising business confidence so the private sector issues more bonds. Followers of the US economist Hyman Minsky say the monetarists and the Hicksians (usually called Keynesians, much to the distress of many who actually knew Keynes) are sometimes right but definitely wrong when the chips are as down as they are now. Then the key financial excess demand is for high-quality assets: safe financial places in which you can park your wealth and still be confident it will be there when you return. After a panic, Minsky argued, boosting the money stock would fail. Cash is a high-quality asset, true, but even big proportional boosts to the economy’s cash supply are small potatoes in the total stock of assets and would not do much to satisfy the key financial excess demand. Trying to boost investment would not work either, for there was no excess demand for the risky claims to future wealth that are private bonds. The right cure, his followers argued, was the government as “lender of last resort”: increase the supply of safe assets that the private sector can hold by every means possible: printing cash, creating reserve deposits, printing up high- quality government bonds and then swapping them out into the private market in return for risky assets. We don’t need one of expansionary monetary and fiscal and banking policy, we need all of them – until further government action begins to crack the status of the US Treasury bond as a safe asset, and further government bond issues reduce the supply of safe high-quality assets in the world economy. Has that day come? No. The US dollar is the world’s reserve currency, the US Treasury bond is the world’s reserve asset. The US has exorbitant privileges that give it freedom of action that others such as Argentina and Greece do not have. Will that day come soon? Probably not. But trust me, we will know when the time comes to stop expansion. Financial markets will tell us. And not by whispering in a still, small voice. Trust me, we will know, and right now we are still very, very far from that point indeed. 940 words: July 15, 2010
The writer is professor of economics at the University of California, Berkeley
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Draft original in: http://delong.typepad.com/sdj/2010/07/H and-we-are-live-at-the-financial- times.html H
56 COMMENT176B
Today’s17B Keynesians have learnt nothing By Niall Ferguson
Published: July 19 2010 13:52 | Last updated: July 19 2010 13:52
To those of us who first encountered the dismal science of economics in the late 1970s and early 1980s, the currentH debate H on fiscal policy in the western world has been – no other word will do – depressing. It was said of the Bourbons that they forgot nothing and learned nothing. The same could easily be said of some of today’s latter-day Keynesians. They cannot and never will forget the policy errors made in the US in the 1930s. But they appear to have learned nothing from all that has happened in economic theory since the publication of their bible, John Maynard Keynes’s The General Theory of Employment, Interest and Money, in 1936. In its caricature form, the debate goes like this. The Keynesians, haunted by the spectre of Herbert Hoover, warn that the US in still teetering on the brink of another Depression. Nothing is more likely to bring this about, they argue, than a premature tightening of fiscal policy. This was the mistake Franklin Roosevelt made after the 1936 election. Instead, we need further fiscal stimulus. The anti-Keynesians retort that US fiscal policy is already on an unsustainable path. With the deficit already running at above 10 per cent of gross domestic product, the Congressional Budget Office has warned that, under its Alternative Fiscal Scenario – the more likely of the two scenarios it publishes – the federal debt in public hands is set to rise from 62 per cent of GDP this year to above 90 per cent by 2021. In an influential paper published earlier this year, Carmen Reinhart and Kenneth Rogoff warned that debt burdens of more than 90 per cent of GDP tend to result in lower growth and higher inflation. The Keynesians retort by pointing at 10-year bond yields of around 3 per cent: not much sign of inflation fears there! The anti-Keynesians point out that bond market sell-offs are seldom gradual. All it takes is one piece of bad news – a credit rating downgrade, for example – to trigger a sell-off. And it is not just inflation that bond investors fear. Foreign holders of US debt – and they account for 47 per cent of the federal debt in public hands – worry about some kind of future default. The Keynesians say the bond vigilantes are mythical creatures. The anti-Keynesians (notably Harvard economics professor Robert Barro) say the real myth is the Keynesian multiplier,
57 which is supposed to convert a fiscal stimulus into a significantly larger boost to aggregate demand. On the contrary, supersized deficits are denting business confidence, not least by implying higher future taxes. And so the argument goes around and around, to the great delight of the financial media as the dog days of summer set in. In some ways, of course, this is not an argument about economics at all. It is an argument about history. When Franklin Roosevelt became president in 1933, the deficit was already running at 4.7 per cent of GDP. It rose to a peak of 5.6 per cent in 1934. The federal debt burden rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war. It was the war that saw the US (and all the other combatants) embark on fiscal expansions of the sort we have seen since 2007. So what we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war. But the differences are immense. First, the US financed its huge wartime deficits from domestic savings, via the sale of war bonds. Second, wartime economies were essentially closed, so there was no leakage of fiscal stimulus. Third, war economies worked at maximum capacity; all kinds of controls had to be imposed on the private sector to prevent inflation. Today’s war-like deficits are being run at a time when the US is heavily reliant on foreign lenders, not least its rising strategic rival China (which holds 11 per cent of US Treasuries in public hands); at a time when economies are open, so American stimulus can end up benefiting Chinese exporters; and at a time when there is much under-utilised capacity, so that deflation is a bigger threat than inflation. Are there precedents for such a combination? Certainly. Long before Keynes was even born, weak governments in countries from Argentina to Venezuela used to experiment with large peace-time deficits to see if there were ways of avoiding hard choices. The experiments invariably ended in one of two ways. Either the foreign lenders got fleeced through default, or the domestic lenders got fleeced through inflation. When economies were growing sluggishly, that could be slow in coming. But there invariably came a point when money creation by the central bank triggered an upsurge in inflationary expectations. In 1981 the US economist Thomas Sargent wrote a seminal paper on “The Ends of Four Big Inflations”. It was in many ways the epitaph for the Keynesian era. Western governments (not least the British) had discovered the hard way that deficits could not save them. With double-digit inflation and rising unemployment, drastic remedies were called for. Looking back to central Europe in the 1920s – another era of war-induced debt explosions – Sargent demonstrated that only a quite decisive policy “regime-change” would bring stabilisation, because only that would suffice to alter inflationary expectations. Those economists, like New York Times columnist Paul Krugman, who liken confidence to an imaginary 'fairy' have failed to learn from decades of economic research on expectations. They also seem not to have noticed that the big academic winners of this crisis have been the proponents of behavioural finance, in which the ups and downs of human psychology are the key. The evidence is very clear from surveys on both sides of the Atlantic. People are nervous of world war-sized deficits when there isn’t a war to justify them. According to a recent poll
58 published in the Financial Times, 45 per cent of Americans “think it likely that their government will be unable to meet its financial commitments within 10 years”. Surveys of business and consumer confidence paint a similar picture of mounting anxiety. The remedy for such fears must be the kind of policy regime-change Sargent identified 30 years ago, and which the Thatcher and Reagan governments successfully implemented. Then, as today, the choice was not between stimulus and austerity. It was between policies that boost private-sector confidence and those that kill it. Copyright The Financial Times Limited 2010.
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Can't42B Anybody Here Play This Game? Fiscal Policy Edition
Niall Ferguson writes:
Today’sH Keynesians have learnt
nothing:H When Franklin Roosevelt became president in 1933, the deficit was already running at 4.7 per cent of GDP. It rose to a peak of 5.6 per cent in 1934. The federal debt burden [in the United States] rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war. It was the war that saw the US (and all the other combatants) embark on fiscal expansions of the sort we have seen since 2007. So what we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war... Could we please have some acknowledgement of the fact that the reason the debt-to-GDP ratio did not rise across the 1930s was because GDP rose, not because debt didn't rise? Debt more than doubled from $22.5 billion to $49.0 billion between June 30, 1933 and June 30, 1941. But nominal GDP rose from $56 billion in 1933 to $127 billion in 1941. And could we please have some acknowledgement that our 9.4% of GDP deficit in fiscal 2010 pales in comparison to the 30.8% of GDP deficit of 1943, or the 23.3% and 22.0% deficits of 1944 and 1945? Niall Ferguson should not do this. The Financial Times should not enable Niall Ferguson to do this.
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59 Critique43B of Niall Ferguson We are live at the FT:
FT.comH / Comment / Opinion - Deficit data and the fog of war:H On first reading I found myself greatly puzzled by Niall Ferguson’s claim that: It was [the second world war] that saw the US (and all the other combatants) embark on fiscal expansions of the sort we have seen since 2007. So what we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war... In 1942 the US ran a federal budget deficit of 14.8 per cent of GDP; in 1943 30.8 per cent; in 1944 23.3 per cent; and in 1945 22.0 per cent – a four-year average deficit of 22.7 per cent of GDP. Today, in 2010, the US is running a federal budget deficit that the CBO estimates at 10.3 per cent of GDP. Its score of Obama’s budget proposals has that deficit falling next year to 8.9 per cent of GDP, then over the next two years to 4.5 per cent of GDP, and remaining in the 4-5 per cent of GDP range for the rest of this decade – for an average CBO-scored Obama policy deficit of 5.3 per cent over the next eight years. Compare that to the Great Depression: in Roosevelt’s disastrous 1937-38 fiscal austerity and monetary tightness experiment, the US federal government deficit shrank to 2.8 per cent and then to 0.5 per cent of GDP; otherwise the deficit bounced around between 3.8 per cent and 5.5 per cent of GDP between Roosevelt’s inauguration and the end of the 1930s – for an average deficit in the years outside the disastrous austerity experiment of 4.6 per cent of GDP between Roosevelt’s inauguration and the second world war. So 22.7 per cent, 4.6 per cent, 5.3 per cent: the New Deal’s 4.6 per cent looks a hell of a lot more like our forecast 5.3 per cent than the second world war’s 22.7 per cent does. On first reading, I simply did not understand how Ferguson could with a straight face claim that “what we are witnessing today has less to do with the 1930s than the 1940s: it is world war finance without the war.” On looking again, I found in Ferguson’s piece the sentence: ”The federal debt burden rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war...” On June 30, 1933 the US federal debt was $22.5bn – 40 per cent of 1933 GDP. By June 30, 1941 the US federal debt had more than doubled to $49bn – 87 per cent of 1933 GDP. That’s a big increase. How can that mesh with Ferguson’s observation that “the federal debt burden rose only slightly... prior to the outbreak of the second world war”? Look at nominal GDP: it grew from $56.4bn in 1933 to $126.7bn in 1941. Even a more-than-doubling of debt will not raise the debt buden if economy-wide spending more than doubles as well. But that does not mean that deficits in the 1930s were an order of magnitude smaller than the deficits we are looking forward to today, or that today’s fiscal picture looks more like that of the second world war than like the picture of the New Deal.
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60 COMMENT ... to which Niall Ferguson responds Economists really do seem to struggle with history – and sometimes geography, too. Brad DeLong needs to remember that the Financial Times is published in London. As far as most combatants were concerned, the second world war broke out in September 1939. So when I wrote “The federal debt burden rose only slightly – from 40-45 per cent of GDP – prior to the outbreak of the second world war”, I was referring to the increase between 1933 and 1939.
>> Keep reading Niall Ferguson, 1939H and all that ...
193932B and all that ... By Niall Ferguson Published: July 20 2010 19:53 | Last updated: July 20 2010 19:53
Economists really do seem to struggle with history – and sometimes geography, too. BradH DeLong H needs to remember that the Financial Times is published in London. As far as most combatants were concerned, the second world war broke out in September 1939. So when I wrote “The federal debt burden rose only slightly – from 40-45 per cent of GDP – prior to the outbreak of the second world war”, I was referring to the increase between 1933 and 1939. According to the data in the online millennial edition of the Historical Statistics of the United States, the gross federal debt in 1939 was $40.4bn. Gross domestic product was an estimated $92bn. So 44 per cent is the correct figure. I slightly overstated, rather than understated, the impact of the New Deal on the federal debt. But Professor DeLong does a valuable service by pointing out what happened next. With the onset of war and rearmament, the federal debt did indeed explode: from $40.4bn to a peak of $269.4bn by 1946 – 121 per cent of GDP. According to the Congressional Budget Office, the federal debt in public hands was equivalent to 40.8 per cent of GDP in 2008, a little below what it was in 1939. In its more probable “alternative fiscal scenario”, the CBO projects that the federal debt will rise to 87 per cent of GDP by the end of this decade and will reach 125 per cent by 2027. Like many proponents of further stimulus, Prof DeLong confines his analysis to the next 10 years, ignoring the severe deterioration in US public finances that lies further ahead.
As I pointed out on Tuesday’s FT (“Today’sH modern Keynesians have learnt nothing since the 1930s”),H the crucial difference between now and the 1940s is that in the second world war the federal debt was entirely financed from domestic sources. The current debt explosion relies heavily on foreign capital. Note to the compulsive stimulators: according to the latest Treasury International Capital data, China – the federal government’s single biggest foreign creditor – has quietly reduced its holdings of US Treasuries by $72bn since last July, from 13 per cent of the total debt in public hands to just 10 per cent.
In common with other stimulators, ProfH De Long H is confident that the day when “government action begins to crack the status of the US Treasury bond as a safe asset” will “probably not” come soon. The gentlemen in Beijing may be less sanguine.
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61 COMMENT
324B America’s sensible stance on recovery By Lawrence Summers Published: July 18 2010 19:53 | Last updated: July 18 2010 19:53
Economic commentators are mired in an unhelpful dialectic between “jobs” and “deficits” that, despite its apparent simplicity, has obscured rather than clarified the policy choices ahead in the US, Europe and elsewhere.
Critics have complained that the continued commitment by the administrationH of President
Barack Obama H to support recovery in the short term and also to reduceH deficits in the medium and long term H constitutes a “mixed message”. In fact, it is the only sensible course in an economy facing the twin challenges of an immediate shortage of demand and a fiscal path in need of correction to become sustainable. Most economists across a broad spectrum would likely agree to three basic propositions about fiscal policy. First, in normal times, the scale of government budget deficits affects the composition but not the level of output. Increased deficits under these conditions will raise either public spending or private consumption. But because interest rates adjust upward to balance supply and demand at full employment or at the central bank’s desired level of output, any increases in these sources of demand will be offset by reduced investment and net exports. As a consequence, budget deficits will not stimulate output or employment, A range of other considerations – including the crowding out of investment; reliance on foreign creditors; misallocation of resources into inefficient public projects; and reduced confidence in long-run profitability of investments – all make a case in normal times for fiscal prudence and reduced budget deficits. And there are numerous examples, notably the US in the 1990s, where reducing budget deficits contributed to enhanced economic performance. Second, where an economy’s level of output is constrained by demand and the central bank has at best a limited ability to relax that constraint because it cannot reduce interest rates to below zero, fiscal policy can have a significant impact on output and employment. Through either direct spending or tax cuts that promote private spending, hiring or investment, governments possess a range of tools to raise demand directly. As increased demand boosts incomes, these measures raise output further. The result will be economic growth and reduced joblessness. To the extent that expansionary fiscal policies affect growth, their impact on future indebtedness is attenuated as tax collections rise, transfer payments fall, and the ability of the economy to support debt increases.
62 Third, and finally, there is a very strong presumption that there are likely to be beneficial effects from the expectation that budget deficits will be reduced after an economy has recovered and is no longer demand-constrained. Not least of these are increased confidence and reduced capital costs that encourage investment, even before the deficit is reduced. Such impacts are likely to be particularly important when prospective deficits are large and raise substantial questions about sustainability or even creditworthiness. In most of the industrialised world, given that economies are in or near liquidity trap conditions, it is the last two propositions that should control policy. Together they make a case for fiscal actions that maintain or increase demand in the short run while reassuring markets on sustainability over the medium term.
Mr Obama is building on the RecoveryH Act H – passed early last year and now in its most intense phase of public investment – by fighting to extend unemployment and health benefits to those out of work, and to help struggling state and local governments prevent cutbacks in vital services and avoid job losses for teachers, police officers and firefighters. At the same time, he is pushing for additional measures to help create and protect jobs, and strengthen businesses. He has called on Congress to expand the clean energy manufacturing tax credit, to help small businesses through tax cuts and a lending fund, and to pass his proposal to create jobs while upgrading energy efficiency in homes. While the first step in any sound fiscal strategy must be to do everything we can to promote recovery, Mr Obama has also made it a priority to take tough steps to bring down the deficit to sustainable levels as recovery is achieved. Fiscal responsibility is not only about our children and grandchildren. Excessive budget deficits, left unattended, risk weakening our markets and sapping our economic vitality. They raise the question – as when Washington put off hard choices during much of the previous decade – of how long the world’s greatest borrower can remain its greatest power. During the next five years, the US is expected to experience the fastest deficit reduction since the second world war. Much of that will stem from the return to growth and the phasing out of Recovery Act programmes. But Mr Obama has made other commitments that further reduce the deficit by more than
$1,000bn. They include a three-year freezeH on discretionary spending H outside national security and allowing the 2001-03 tax cuts to expire for the very richest. He has also put in place a framework that offers the potential to contain health costs, and convened a bipartisan commission that will make recommendations to cover the costs of all federal programmes by 2015 and improve the long-run fiscal outlook. The combination of measures that prevent sharp declines in demand in the short run, and measures that add to confidence by controlling the factors that drive deficits, offers the best prospect for moving the economy forward in the next few years. Of course, US growth can come only in a global context. That is why Mr Obama welcomed the HGroup of 20 H leading nations’ emphasis last month on the importance of global actions to ensure that sound fiscal policies are in place and also that economic recovery has sufficient momentum. We will see clearly in the years ahead that pushing growth and reducing deficits are complementary, not competing, objectives. Reducing the spectre of prospective deficits will enhance near-term growth. And ensuring adequate growth in the near term will reduce long- term deficits. The writer is President Barack Obama’s chief economic adviser and director of the White House National Economic Council
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63
Global325B Economic Recovery Slower than Anticipated Despite Asian/Latin American Gains July 19, 2010 Global consumer confidence cautiously edged up one index point to 93 in the second quarter as confidence increases in booming Asian markets were offset by European consumers’ growing concerns of an escalating debt crisis, which battered confidence levels in Spain, Italy and France, according to the latest edition of the Nielsen Global Consumer Confidence Index. Consumer confidence rose two points in the U.S. in Q2 to 87, where the world’s largest economy continued on course for a slow, but steady climb out of the recession. Consumer Confidence Index levels above and below a baseline of 100 indicate degrees of optimism and pessimism.
“While the global economy is in better shape than it was nine months ago, (+7 index points compared to Q3 2009), the ongoing European debt crisis is a major setback to the global economic recovery anticipated this year,” said Dr. Venkatesh Bala, Chief Economist at The Cambridge Group, a part of The Nielsen Company. “U.S. consumers closely watched unemployment numbers, while Europeans witnessed the government implement new and in some cases, severe fiscal austerity measures amid stagnant job markets and a weakening Euro. Consumers in Western developed economies realized that the road to full economic recovery is going to take a bit longer than expected. In the ongoing weak-to-moderate growth environment, there is some risk for businesses of deflationary pressure, requiring close attention to improving pricing power through more effective deployment of media, innovation and channel marketing efforts.” “In the U.S., consumers are still focused on repairing their household balance sheets with 45 percent allotting any remaining income (once they have covered their essential living expenses) to savings and paying off debt (37 percent),” said James Russo, Vice President,
64 Global Consumer Insights at The Nielsen Company. “Until the labor market shows continuous improvement, consumer spending will not be sustainable.” Nielsen’s Global Consumer Confidence Index tracks consumer confidence, major concerns and spending intentions among approximately 27,000 Internet users in 48 countries. In the latest round of the survey conducted between May 10 and May 26, 2010, consumer confidence fell in nine out of 24 European markets. The only non-European markets to post quarter-on- quarter declines were Australia, Thailand, United Arab Emirates, Taiwan, Brazil and Egypt. Disparity Widens Between Developing and Emerging Markets India (129 index points), Indonesia and Vietnam (both 119 index points) were the most optimistic nations in Q2, while consumer confidence in Spain plummeted by 10 index points to its lowest level on record at 69 index points from 79 in Q1 of this year. “In Asia, major economies are experiencing growth headwinds in the form of higher inflation and asset price declines. While overall growth in China, India and elsewhere in Asia will still be strong, some slowdown can be expected as governments and central banks tighten monetary and fiscal policy. Businesses therefore need to exercise more prudence in their resource allocation within Asia,” said Dr. Bala. Globally, 58 percent of people—the same number as in the previous quarter—said they are still in recession with a disparity in recovery sentiment widening between developed and emerging markets. Thirty-nine percent of Asia Pacific consumers and 51 percent of Latin Americans said they are still in recession compared to 84 percent of North Americans and 76 percent of Europeans. Among those in recession, one in five (21 percent) global consumers thinks the recession will last another year. However, this number increases among North Americans where nearly one in four (24 percent) believes the recession will linger for more than 12 months. “For most of 2010, the U.S. has seen improvement in the job and housing markets supporting the increases in U.S. consumer confidence, but consumers are still very much focused on value and they continue to reduce their overall shopping trips,” said Todd Hale, Senior Vice President, Consumer & Shopper Insights, The Nielsen Company. “Retailers and manufacturers have responded with heightened promotional support and lower prices providing consumers with great deals. However, even with enhanced prices, consumer-packaged goods dollar and unit sales have declined in the latest three consecutive 4-week periods versus year ago.” Regionally, consumer confidence steadily climbed three index points in Latin America, two index points in Asia Pacific and North America and one index point in Europe. Latin America topped regional consumer confidence levels at 102 index points, followed by Asia Pacific (101 index points), and Middle East, Africa, Pakistan (MEAP) with 89 index points. In North America, consumer confidence reached 88 index points, while Europe lagged behind as the least confident region at 79 index points. European Debt Crisis Renews Uncertainty While the pace of economic recovery accelerated in most Asian and Latin American markets, the spreading debt crisis in Europe resulted in consumer confidence reversing in most European markets. Consumer confidence fell in three out of the five biggest economies as European consumers came to grips with the extent of the debt crisis. In Italy, consumer confidence retreated to its lowest level (71 index points) since Q1 2009 when it hit an all time low of 70 index points at the height of the global recession. “There is strong evidence of a W-shaped recovery for Italy as consumer confidence in Q2 reversed back into recessionary sentiment,” said Stefano Galli, Managing Director, Nielsen Italy. “High
65 unemployment, economic stagnation and massive public spending cuts have caused consumers to further cut back on their discretionary spending and lifestyles. Budget-conscious Italians are continuing to turn to discounter shopping channels and private labels despite fast-moving consumer goods retailers and manufacturers intensifying promotions. We expect to see some signs of recovery starting from the second half of 2010.” The economic situation in Spain is especially restrained, which is indicative of the 10 point index drop. With the highest unemployment in Europe (20 percent) and a reduction of government employees, Nielsen experts estimate the possibility of economic growth will move further out to 2012. However, Germany—the region’s largest economy—posted a welcomed rebound with an increase of seven index points up to 81 from 74 index points in Q1, the highest increase in the region. In the second quarter, newly confident Germans began to open their wallets again and were among the world’s top 10 discretionary spenders on clothes and out-of-home entertainment. In fact, the German job market showed a rather robust upward trend and possible sign that consumers now believe that the worst has passed. Struggling Baltic nations of Lithuania and Latvia both posted consumer confidence increases of six points each in Q2, although both remain among the most pessimistic nations in the world with low consumer confidence index scores of 52 and 56 respectively. “After two years of a deep economic recession in the Baltic countries, local financial institutions are forecasting a slow recovery at the end of 2010,” said Arturas Urbonavicius, Managing Director, Nielsen Baltics. Brighter Asian and Latin American Prospects Six out of the top 10 most optimistic nations in the second quarter came from Asia and all these markets posted consumer confidence increases quarter-on-quarter. Vietnam recorded the highest consumer confidence increase in Q2 soaring 18 index points to 119, while Singapore (which recorded the highest consumer confidence increase in Q1), posted another solid five index point gain from 107 in Q1 to 112 points in Q2. “The enormous rise in optimism seen in the latest survey has taken ‘cautious’ out of Vietnam’s previous footing of ‘cautious optimism’,” said Darin Williams, Managing Director, Nielsen Vietnam “Vietnamese consumers are ready to spend, with new technology being the focus for many after they have paid for essential living expenses.” Forty-seven percent of respondents in Vietnam stated they would spend excess cash on new technology—the highest percentage in Asia; 39 percent stated they would spend spare cash on new clothes—a huge jump from 23 percent in the last survey. In Q1, only 16 percent of Vietnamese stated they would invest their excess cash, this has increased to 31 percent in Q2. “Financial product awareness and intent to use is also rising dramatically as banks and insurance companies have increased their advertising and Vietnamese have more spare cash on their hands,” Williams added. “In Singapore, there is a significant drop in the percentage of people who think they are in a recession—just 17 percent in Q2 versus 28 percent in Q1,” said Joan Koh, Managing Director, Nielsen Singapore. “Almost one in two feels that now is a good time to buy things. After putting spare cash into savings, Singaporeans will spend on holidays, invest in shares of stocks/mutual funds, new clothes and pay off debts.” Prospects also look brighter in the Philippines (113 index points), China (109 index points), and Columbia (105 index points), which all recorded consumer confidence highs in their respective markets. “After five quarters of continuous consumer confidence increases in
66 China, the one point increase in Q2 represents steady growth coming from consumers in rural villages,” said Chris Morley, Managing Director, The Nielsen Company China. Economic recovery and consumer confidence also accelerated in Mexico, which posted a consumer confidence increase of five index points compared to the first quarter of the year. “While positive shopping basket trends in Mexico and Colombia show a slow reactivation in consumption, the population is still concerned about economic and job prospects,” said Felipe Urdaneta, Managing Director, Nielsen Colombia. Denmark (+5), Switzerland (+5), South Africa (+4) and the Netherlands (+3) also posted consumer confidence increases. For Denmark, the rise is a welcomed change for a country that has shown a steady decline, although the Danish market continues to be volatile and vulnerable. Switzerland’s own currency removes them from the Euro crisis and the Swiss are now ready to spend on postponed investments, apparel, travel and electronics.
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Greece178B makes 'strong start' on reforms By Kerin Hope in Athens Published: July 18 2010 17:28 | Last updated: July 18 2010 17:28 Greece has won praise from the International Monetary Fund for making a “strong start” to implementing a three-year programme of fiscal and structural reforms aimed at overcoming its debt crisis. But experts from the fund warned that analysts are still sceptical about whether the country can avoid a sovereign debt restructuring during this period – an event that could threaten the stability of the eurozone. The report, released at the weekend, said,“Greece’s weak reputation is presenting credibility costs that can only be overcome by strong and full implementation (of the programme).” The socialist government agreed to deep cuts in public spending and sweeping reforms of pensions, labour markets and the tax system in return for a €10bn bail-out by the European Union and the fund. But it has been unable to build a social consensus on reform, with trade unions and leftwing political parties threatening to resume strikes and street protests after the summer. The fund’s experts said they were “impressed by the determination of authorities to make the programme a success” during a visit to Athens on June 14-17. But challenges were evident in several areas, they said. The annual inflation rate reached a 13-year high of 5.3 per cent in May following several increases in value-added and excise taxes, and declined only marginally to 5.2 per cent in June Greece’s high inflation rate reflected “serious rigidities” in markets as the impact of tax increases did not appear to be offset by narrower profit margins, the experts said. They urged the finance ministry to accelerate liberalisation of product and service markets to help improve price competitiveness, saying planned reforms were “too timid.”
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Fasten seatbelts for a double dip The global slowdown will accelerate in the second half - and policymakers are running out of tools by NOURIEL ROUBINI 05:55 AM Jul 19, 2010 The global economy, artificially boosted since the recession of 2008-2009 by massive monetary and fiscal stimulus and financial bailouts, is headed towards a sharp slowdown this year as the effect of these measures wanes. Worse yet, the fundamental excesses that fuelled the crisis - too much debt and leverage in the private sector (households, banks and other financial institutions, and even much of the corporate sector) - have not been addressed. Private-sector deleveraging has barely begun. Moreover, there is now massive re-leveraging of the public sector in advanced economies, with huge Budget deficits and public-debt accumulation driven by automatic stabilisers, counter- cyclical Keynesian fiscal stimulus, and the immense costs of socialising the financial system's losses. At best, we face a protracted period of anaemic, below-trend growth in advanced economies as deleveraging by households, financial institutions and governments starts to feed through to consumption and investment. At the global level, the countries that spent too much - the United States, the United Kingdom, Spain, Greece and elsewhere - now need to deleverage and are spending, consuming and importing less. But countries that saved too much - China, emerging Asia, Germany and Japan - are not spending more to compensate for the fall in spending by deleveraging countries. Thus, the recovery of global aggregate demand will be weak, pushing global growth much lower. The global slowdown - already evident in second-quarter data for this year - will accelerate in the second half of the year. Fiscal stimulus will disappear as austerity programmes take hold in most countries. Inventory adjustments, which boosted growth for a few quarters, will run their course. The effects of tax policies that stole demand from the future - such as incentives for buyers of cars and homes - will diminish as programmes expire. Labour- market conditions remain weak, with little job creation and a spreading sense of malaise among consumers.
69 Outlook: US mediocre,euro zone worse The likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip. In the US, annual growth was already below trend in the first half of this year (2.7 per cent in the first quarter and estimated at a mediocre 2.2 per cent in April- June). Growth is set to slow further, to 1.5 per cent in the second half of this year and into next year. Whatever letter of the alphabet US economic performance ultimately resembles, what is coming will feel like a recession. Mediocre job creation and a further rise in unemployment, larger cyclical Budget deficits, a fresh fall in home prices, larger losses by banks on mortgages, consumer credit, and other loans, and the risk that Congress will adopt protectionist measures against China will see to that. In the euro zone, the outlook is worse. Growth may be close to zero by the end of this year, as fiscal austerity kicks in and stock markets fall. Sharp rises in sovereign, corporate and interbank liquidity spreads will increase the cost of capital and increases in risk aversion, volatility and sovereign risk will undermine business, investor and consumer confidence further. The weakening of the euro will help Europe's external balance but the benefits will be more than offset by the damage to export and growth prospects in the US, China and emerging Asia. Even China is showing signs of a slowdown, owing to the government's attempts to control economic overheating. The slowdown in advanced economies, together with a weaker euro, will further dent Chinese growth, bringing its 11- per-cent-plus growth rate towards 7 per cent by the end of this year. This is bad news for export growth in the rest of Asia and among commodity- rich countries, which increasingly rely on Chinese imports. An important victim will be Japan, where anaemic real income growth is depressing domestic demand and exports to China sustain what little growth there is. Japan also suffers from low potential growth, owing to a lack of structural reforms and weak and ineffective governments (four prime ministers in four years), a large stock of public debt, unfavourable demographic trends and a strong yen that gets stronger during bouts of global risk aversion. Any number of shocks A scenario in which US growth slumps to 1.5 per cent, the euro zone and Japan stagnate and China's growth slows below 8 per cent may not imply a global contraction but, as in the US, it will feel like one. And any additional shock could tip this unstable global economy back into full-fledged recession.
70 The potential sources of such a shock are legion. The euro zone's sovereign-risk problems could worsen, leading to another round of asset-price corrections, global risk aversion, volatility and financial contagion. A vicious cycle of asset-price correction and weaker growth, together with downside surprises that are not currently priced by markets, could lead to further asset-price declines and even weaker growth - a dynamic that drove the global economy into recession in the first place. And one cannot exclude the possibility of an Israeli military strike on Iran in the next 12 months. If that happens, oil prices could rapidly spike and, as in the summer of 2008, trigger a global recession. Finally, policymakers are running out of tools. Additional monetary quantitative easing will make little difference, there is little room for further fiscal stimulus in most advanced economies and the ability to bail out financial institutions that are too big to fail - but also too big to be saved - will be sharply constrained. So, as the optimists' delusional hopes for a rapid V-shaped recovery evaporate, the advanced world will be at best in a long U-shaped recovery, which in some cases - the euro zone and Japan - may be long enough to stretch into an L-shaped near-depression. Avoiding double-dip recession will be difficult. In such a world, recovery in the stronger emerging markets - the great hope for the global economy - will suffer, because no country is an island economically. Indeed, growth in many emerging-market economies - starting with China - is highly dependent on retrenching advanced economies. Fasten your seat belts for a very bumpy ride. Project Syndicate Nouriel Roubini is Chairman of Roubini Global Economics (www.roubini.com), Professor at the Stern School of Business, New York University, and co-author of the book Crisis Economics. This commentary is exclusive to Today in Singapore. NOURIEL ROUBINI Fasten seatbelts for a double dip” Today in Singapore Jul 19, 2010,
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DeLong179B on Deficits
Mises Daily: Monday, July 19, 2010 by RobertH P. Murphy H
In a recentH blog post,H UC Berkeley economist Brad DeLong made an arithmetic case that, "We need bigger deficits now!" As an Austrian economist I naturally find his conclusion horribly mistaken, but it will still be useful to go through DeLong's argument and identify exactly where he goes astray.
"Normal"326B Economic Arithmetic To his credit, DeLong has always been careful to restrict the case for deficit "stimulus" to cases of economic depression. In other words, DeLong agrees with non-Keynesians that under normal circumstances, government budget deficits per se do not boost economic growth and in fact are generally counterproductive unless the specific items being purchased are socially valuable. DeLong writes, In normal times, a boost to government purchases or a cut in taxes produces a limited increase in production and employment while adding a substantial increase to the national debt. The increase in debt raises interest rates, which crowds out productivity-increasing private investment spending and, dollar for dollar, leaves us poorer after the effect of the stimulus ebbs. The borrowing must then be financed at a significant interest rate, and thus paid for with higher taxes, which reduce incomes by increasing the wedge between the private rewards and the social benefits of expanded production. It's nasty business. If nothing else, then, it's good that opponents of government deficits now have the above quotation in their back pocket. Once the economy gets out of the so-called "liquidity trap" (as the Keynesians define it) at least we will have the authority of Brad DeLong to back up our calls for immediate cuts in government spending. Unfortunately, even DeLong's explanation for why deficits are bad rests on dubious economics, at least from an Austrian viewpoint. Let's walk through his arithmetical example: Consider a $100 billion boost to government purchases or cut in taxes financed by borrowing from abroad. In a normal year, the Federal Reserve will worry
72 about inflation, and raise interest rates somewhat to offset the inflationary impact of the fiscal boost. The multiplier will thus be something like 0.4 — we will spend $100 billion on government purchases or tax cuts and gain perhaps $40 billion in extra production and associated employment out of it. Already DeLong's on shaky ground. Here and in the remainder of his treatment of this example, DeLong doesn't distinguish between a spending increase and a tax cut. In other words, DeLong thinks that in normal economic times, the nation gains "$40 billion in extra production and associated employment" out of an extra $100 billion in government spending or a $100-billion tax cut. Yet surely from the standpoint of the actual welfare of the people, it makes a huge difference whether taxpayers get to retain $100 billion more of their money, as opposed to the government spending an additional $100 billion. Regardless of how the government's expenditures are financed, they necessarily divert real resources (labor, steel, gasoline, etc.) away from private-sector uses and into politically chosen projects. Although we can't add up the amount of subjective happiness among different people, there is a definite sense in which 50,000,000 households each spending $2,000 more on projects they themselves choose represents more valuable economic output than if that same $100 billion is spent by bureaucrats. And notice the difference isn't that government bureaucrats are a lower form of life than private-sector individuals. From a neutral economic analysis, handing the $100 billion to the bureaucrats as their salaries would allow them to buy "$100 billion worth" of goods and services. But in their capacity as bureaucrats, purchasing items on behalf of the US government, the incentives are different. There is no longer a presumption that money is only spent on things that (to the purchaser) are worth more than the money being spent. "If people decide to save less, and the interest rate rises, that isn't "bad" but simply announces the new situation. In the same way, if people decide to buy fewer potato chips and more tofu, then market prices need to adjust to communicate this fact to the relevant people." Let us return to DeLong. After explaining the benefits of a $100-billion increase in the federal government's budget deficit, he begins listing the costs of the action. The first two are straightforward enough (the increase in the national debt and the supply-side disincentives of raising tax rates to pay for the higher interest payments). But I am troubled by DeLong's treatment of the third problem with higher deficits: Third, there is another effect. The Federal Reserve's fight against inflation, which demands an increase in interest rates, will have reduced investment. Due to the $100 billion in government purchases, perhaps $40 billion of private investment that would have been made won't be made — it will be crowded out. As a result of the lower capital stock, some $4 billion a year of income that would have been earned won't be. Thus the net cost of the $100 billion in government spending will be a reduction in Americans' disposable incomes of $7.4 billion per year. In the first place, notice how DeLong gets the (standard) result that a bigger government deficit leads to higher interest rates. He doesn't simply say that there is a market for loanable funds, and if the government enters that market trying to borrow more money, then the price of borrowing (i.e. the interest rate) will go up. No, DeLong goes through a black box mechanism by which the government's extra borrowing will (a) start to push up price inflation, which will then (b) cause the Fed to raise interest rates.
73 This is part of the problem with Keynesian economics. It's true, in certain circumstances it can spit out an answer that is reasonable — such as this case, where DeLong agrees that a government deficit would not be justified. But if the analysis itself is crude, then we shouldn't be surprised that often the Keynesian framework spits out the wrong answer — which we'll see in the next section. Specifically, the problem with DeLong's framework is that he treats interest rates as something that the Fed can control at will, and which function mainly as a governor on price inflation. This is so standard now in economics that it sounds uncontroversial. To see why this is a strange way to proceed, let's tweak the example. Suppose the government spends the $100 billion specifically on oil to add to the Strategic Petroleum Reserve. Then DeLong might say, "Because of the government's massive new purchases, production and employment in the oil industry will expand, which adds to economic growth. However, to counteract the rising price of gasoline for motorists, the Fed would begin a massive purchase of wheat futures in order to drive up the price of bread. The higher price of food would force consumers to scale back their purchases of gasoline, thus lowering the price spike in that sector and partially offsetting the government's stimulus." Incidentally, don't spend too much time trying to make sense of the above "logic." There isn't any, and that's my point — this is how it should sound to us when someone says, "By having the government borrow more money, this increases total spending but starts to push up prices, so we need the Fed to raise interest rates to reduce total spending and take the pressure off prices." One final observation on this issue: In and of itself, a government deficit is not (price) inflationary. When the Treasury sells $100 billion in new bonds and spends the money, that means there are $100 billion less in the pockets of the private sector. In the same way, if I borrow $100 from my friend to go buy some groceries, this action doesn't push up "the price level." I have $100 more to spend, but my friend has $100 less. Now it's true, there is a grain of truth in DeLong's analysis. An Austrian might say something like this: When the Treasury runs a higher deficit, this increases the demand for loanable funds and would tend to increase the interest rate. If the Fed doesn't want interest rates to rise, it can
"monetize" the new debt by creatingH money out of thin air H and purchasing outstanding Treasury bonds, thus increasing the supply of "savings" to perfectly offset the government's increased demand for savings. The new money of course will tend to cause price inflation. So in this (Austrian) framework, it's true that if the Treasury increases its borrowing, and the Fed doesn't want price inflation to result, then it will allow interest rates to rise, by refraining from creating new money. At a certain level, this explanation is similar to DeLong's, in which the government's borrowing will push up price inflation unless the Fed steps in to raise interest rates. Even so, the actual mechanics are different in the two stories, and it's important to understand what's really going on. In the next section we'll see what can go wrong when using the Keynesian framework.
"Depression"327B Economic Arithmetic After conceding that deficits are no panacea under normal circumstances, DeLong claims, But right now that arithmetic doesn't apply. We have instead depression economic arithmetic. And in depression economic arithmetic things are very different.
74 First, more government spending does not lead the Federal Reserve to raise interest rates to fight inflation. The Federal Reserve has pushed interest rates to the floor and wishes it could drive them into the basement — to −5 percent per year or so. Thus the multiplier on the government's spending is not 0.4 but more like 1.5. We do not get $40 billion of additional production and employment for $100 billion; we get something closer to $150 billion. And there is no crowding out of private investment; on the contrary, there is likely to be crowding in. If one-third of the extra production flows through to corporate profits, and if one- quarter of those extra corporate profits are then invested in projects paying a pretax net real rate of return of 8 percent per year, then future productivity is boosted to the tune of $1 billion a year. Here now we see the huge problem in treating interest rates not as a price helping to coordinate consumer preferences and producer decisions in an intertemporal framework, but rather as a lever with which to accelerate or brake "the economy." Again, to see just how weird this is, suppose instead of using interest rates we used fuel prices. After all, wouldn't it make most people feel richer, and wouldn't it stimulate most businesses, if the Fed could push oil down to $1 a barrel right now? (It's true, this might devastate some people associated with the oil industry, but 0 percent interest rates devastate people with savings right now.) "It's pointless to try to wade hip-deep into DeLong's calculations, because they are meaningless." Yet most economists would (I hope!) realize that it would massively distort the economy if the Fed were to somehow push down oil prices. (The Fed could do this, at least for a while, by buying oil at the spot price and then selling it to American distributors at $1 per barrel. The loss would be no problem, because the Fed can create dollars out of thin air. It's true, this might seem like a reckless policy to "stimulate" the economy, but then again so is thisH .)H It's pointless to try to wade hip-deep into DeLong's calculations, because they are meaningless. He is talking about dollars and cents without any reference to the actual production of real goods and services. This emphasis isn't due to sloppiness on DeLong's part; it merely flows from his reliance on a Keynesian model.
In an earlierH article H (http://mises.org/daily/3290H )H I did point out specific problems with (a different example of) DeLong's stimulus accounting. Yet in this case, it seems to me such an effort is wasted. Even if DeLong's argument is internally consistent, it still rests on quicksand from an Austrian point of view. Although he juggles several different factors, the crux of DeLong's argument seems to be this: during normal times, government deficit spending pushes up the interest rate (unless the Fed monetizes it, which would cause price inflation). So any government attempt to stimulate aggregate demand leads to higher interest rates, which reduce aggregate demand and thus mostly offset the benefits of the stimulus. In contrast, during a depression, government deficit spending does not push up interest rates, because they are going to be close to zero in any event. Thus the current stimulus to aggregate demand is not counterbalanced by rising interest rates, and the extra output today is obtained on the cheap. To repeat, the problem here is the Keynesian focus on macro aggregates such as "total spending" as opposed to the microeconomics of relative prices — and the deployment of scarce resources toward the production of those goods and services that satisfy consumer preferences.
75 The interest rate is a price; it really means something. If people decide to save less, and the interest rate rises, that isn't "bad" but simply announces the new situation. In the same way, if people decide to buy fewer potato chips and more tofu, then market prices need to adjust to communicate this fact to the relevant people. DeLong takes it for granted that right now the interest rate "ought" to be in the neighborhood of −5 percent, but that is a result of his Keynesian model. Indeed, we really don't know what the term structure of interest rates would have been, had Bernanke stood back and let AIG and some major banks collapse in September 2008. In other words, we don't know for sure that Treasuries without massive Fed intervention would currently have such low yields, which is the entire basis for DeLong's argument. Indeed, the ostensible purpose of last year's "quantitative easing" by the Fed was to lower long-term Treasury yields. So it is a bit odd to point to low long-term yields as proof that trillion-dollar deficits today aren't distorting the free market.
Conclusion328B
At times the Keynesians do offer a hint of how it is physically possible that government budget deficits can boost the real standard of living of the community: by putting idle resources back to work, more total "stuff" gets produced. In an earlierH article H I specifically tackled this Keynesian argument. Brad DeLong's recent arithmetical argument for bigger government deficits is flawed on several counts. He treats government spending as equivalent to household spending, and his focus on aggregates overlooks the coordinating function of interest rates. In the end, he offers little explanation of how letting politicians borrow an extra $100 billion to spend on anything at all could possibly make the whole country richer. Robert Murphy is an adjunct scholar of the Mises Institute, where he will be teaching
"Principles of Economics" at the MisesH Academy H this fall. He runs the blog FreeH Advice H and is the author of TheH Politically Incorrect Guide to Capitalism,H the StudyH Guide to Man,
Economy, and State with Power and Market,H the HumanH Action Study Guide,H and TheH
Politically Incorrect Guide to the Great Depression and the New Deal.H Send him mailH .H See
Robert P. Murphy's articleH archives.H
http://mises.org/daily/4539H H
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Investors set record buying U.S. Treasury securities By Bloomberg News Monday, July 19, 2010; A12 For the first time since the government started collecting the data, central banks, mutual funds and U.S. banks are buying more government securities at Treasury auctions than Wall Street's bond dealers. Foreign and domestic investors bidding directly at note and bond auctions bought 57 percent of the $1.26 trillion in Treasurys sold by the government this year, up from 45 percent in 2009 and as little as 32 percent for all of 2008, according to government data. Bids compared with the amount of debt sold, the bid-to-cover ratio, rose 18 percent from a 14-year high in 2009, according to Treasury data. The combination of the lowest U.S. inflation rate in four decades and continuing concerns that the global recovery will falter is boosting bonds even as yields on 10-year notes fall below 3 percent, the lowest since April 2009. The surge in demand through direct and indirect bids is helping drive down rates as PresidentH Obama H grapples with a budget deficit that's forecast to swell 14 percent, to a record $1.6 trillion. "The economic backdrop is favorable for Treasurys," said Thomas Girard, who helps manage $115 billion at New York Life Investment Management. "There's no fear of inflation. The bigger fear is deflation." Yields on 10-year notes fell 13 basis points last week, to 2.92 percent, according to BGCantor Market Data. That's 88 basis points above the record low of 2.04 percent reached on Dec. 18, 2008, after the collapse of New York-based Lehman Brothers spurred investors to seek only the safest government securities. The two-year yield dropped to an all-time low of 0.577 percent on a weak report on U.S. consumer confidence from July 16.
Bloomberg180B News Investors set record buying U.S. Treasury securities July 19, 2010; A12
http://www.washingtonpost.com/wp-H
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77 voxH
Research-based policy analysis and commentary from leading economists
The18B low-interest-rate trap
FrancescoH Giavazzi H AlbertoH Giovannini H 19 July 2010
Should the crisis spur central banks to change how they conduct monetary policy? This column argues that strict inflation targeting, which ignores financial fragility, can produce interest rates that push the economy into a “low-interest-rate trap” and increase the likelihood of a financial crisis. There is a fundamental flaw in the way central banks set official interest rates. This flaw has created what might be called the “low-interest-rate trap”. Low rates induce excessive risk taking, which increases the probability of crises, which in turn, requires low interest rates to keep the financial system alive. The flaw behind all this is the failure of central banks to take account of the probability of financial crises when setting interest rates.
Liquidity182B crises By its very nature, every modern financial system is continually stalked by financial crises. The essence of a financial crisis is the breakdown of the process of “liquidity transformation”. Such breakdowns occur whenever providers of the short-term funds fear that their ability to access their money at short notice may be impaired by the behaviour of other market participants trying to do the same. This makes liquidity needs correlated, even in the absence of significant outside disturbances. This source of fragility has long been recognised. Indeed, the Federal Reserve System was conceived precisely as an institution capable to dealing with liquidity crises more effectively. Liquidity crises are a disruptive and self-magnifying phenomenon especially in the present-day financial system characterised by: • Multiple layers of markets and intermediaries (which magnify information asymmetries); • Capital-saving trading techniques like dynamic hedging, and; • Gigantic development in the use of securities and derivatives, which have multiplied counterparty risk and the risk of contagion.
Central183B banks have fallen behind market developments Central banks have not kept sufficiently in touch with many of these developments. The liquidity crises of yesteryear hit banks – institutions that central banks knew well. But developments in securities markets mean that central banks have lost the ability to obtain the information they need to map out systemic risks among regulated banks and also beyond them. This is a problem because liquidity breakdowns produce spikes in the demand for means of payments and riskless stores of value – assets that only central banks can provide.
The184B need for a monetary policy “re-think” Has the crisis taught us anything about how central banks should set monetary policy? There was not much that we did not know about how central bankers should behave once a crisis has
78 developed; central bankers should be flexible in a financial crisis. And indeed in this crisis flexibility has been critical at avoiding a financial meltdown and an even deeper recession. But what about monetary policy in “normal times”? Has the crisis dented central banks’ recent faith in inflation targeting’? Apparently not, according to a number of recent speeches given by Fed Chairman Ben Bernanke. While acknowledging the importance of monetary-policy transmission channels that work through financial markets, Bernanke has argued that central banks continue to pursue price stabilising policies (without prejudice to economic activity). The mainstream view in the central banking community is that the pursuit of price stability remains their main task, and that financial stability is something for regulators – not central banks – to deal with. Regulators, after all, have more appropriate tools, such as policies aimed at discouraging leverage (through high capital requirements) and decreasing aggregate risks, for example with rules on derivatives trading. We understand this view. It is the product of an important intellectual and institutional evolution that has brought about the independence of central banks, as well as the technique of inflation targeting. A narrow mandate, coupled with independence, safeguards central bankers from undue influences from special interests, making them more effective. These developments deserve credit for the long period of low inflation and high growth experienced in the advanced economies before the crisis. But the crisis has taught us that central banks, when they set interest rates, should also be concerned about the fragility of the financial system. Interest rates should reflect the value of liquidity, and this should take into account the fact that crises are spikes in the value of liquidity. If they fail to do so, central bankers run the risk keeping interest rates too low – specifically, keeping them below the shadow price of liquidity – which is the value of liquidity when you take into account the probability of spikes that come with crisis-linked liquidity shortfalls. Underpricing liquidity in this way makes crises more likely. In other words, since in the event of a crisis the price of liquidity goes up, central bankers should keep policy rates higher than those they would set with the sole objective of price stability. Such a deviation from simple inflation targeting would have the important effect of signalling to all financial market participants that liquidity is not as abundant as they perceive in normal times, but can dry out unexpectedly and dramatically. By charging the “true” price of liquidity (i.e. its shadow price), central banks will help dampen excessive risk taking.
The185B low-interest-rate trap Strict adherence to inflation targeting can produce interest rates that are too low, pushing the economy into a “low-interest-rate trap.” Low interest rates induce too much risk taking and thus increase the probability of crises. Crises, in turn, require low interest rates to prop up the financial system. In a weakened financial system raising rates becomes extremely difficult, so central banks remain stuck in a low-interest-rate equilibrium, which in turn induces excessive risk taking. What we have experienced in the past few years closely resemble this paradigm. A more resilient financial system requires better regulation, but it also requires some fresh thinking on the way central banks set interest rates.
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Research-based policy analysis and commentary from leading economists
Risk18B panics: When markets crash for no apparent reason
PhilippeH Bacchetta H CédricH Tille H EricH van Wincoop H 19 July 2010
Why did the world economy plunge into the worst recession since the Great Depression? This column argues that economic fundamentals do not explain the global crisis. But they did play a role. Events such as the fall of Lehman Brothers can become focal points for investors’ risk perceptions, changing the way the fundamentals are interpreted. This can lead to “risk panics” – self-fulfilling spikes in risk and a collapse in asset prices. The economy’s performance in recent years raises questions. • Why did the world economy plunge into the worst recession since the Great Depression in the wake of the Lehman Brothers failure? • Why did fiscal problems in a small open economy such as Greece trigger a sharp drop in global stock markets? Changes in economic fundamentals do not offer a satisfactory explanation. This is not to say that the crises entailed no fundamental elements. For instance, the fall of Lehman Brothers revealed the true depth of the subprime problems – even though a full year had then elapsed since the beginning of the crisis. Yet it is hard to attribute the massive reaction in global markets to fundamentals, even if we allow for the types of feedback loops stressed by Brunnermeier and Pedersen (2009). In addition, the international transmission of the crisis does not square well with countries’ exposure to losses on US mortgage securities (Kamin and Pounder 2010). In recent research, we offer an explanation for such movements that focuses on shifts in risk perceptions (Bacchetta et al. 2010). Risk clearly plays a central role, as illustrated in Figure 1 which shows US stock prices and the VIX index measuring risk. We clearly see that large declines in asset prices are associated with surges in risk. In addition, the risk measure itself becomes more volatile at times of crisis. Time-varying risk is clearly a major feature of the crisis.
Self-fulfilling189B shifts in risk Our theory focuses on time-varying risk where large swings occur when the economy shifts between equilibria. The basic ingredient of this framework is the assertion that the current price of risky assets depends on risk associated with the future asset price. Since the future asset price then in turn depends on future risk perceptions, this means that risk today depends on uncertainty associated with risk tomorrow. Therefore asset price risk does not just depend on uncertainty associated with future dividends but also on uncertainty associated with future risk itself. This dependence of risk on uncertainty about future risk creates the possibility of self-fulfilling shifts in risk.
80 Figure 1. Asset prices and risk a) Stock prices
b) Risk
We show that such self-fulfilling shifts in risk are coordinated around a variable, which can
81 either be a pure sunspot variable or a macro fundamental. In the latter case the macro variable takes on a role that is entirely separate from its fundamental role. It becomes a focal point for self-fulfilling shifts in risk. As a result the asset price becomes much more sensitive to fluctuations in that variable than based on its fundamental role alone. Following the language adopted by Manuelli and Peck (1992), we refer to this as a “sunspot-like” equilibrium as the self-fulfilling risk shifts are unrelated to the fundamental role of the macro variable. In addition to fundamental and sunspot-like equilibria, there are also “switching equilibria” where the economy switches between a high- and low-risk state. The low risk state is like the fundamental equilibrium and the high-risk state is like the sunspot-like equilibrium, except that agents now take into account the possibility of switching to the other state. A switch from the low- to the high-risk state is a “risk panic”. When this occurs a macro variable suddenly becomes the focal point for a self-fulfilling shift in risk. This sets off a spike in risk and a drop in equity prices. While the panic is not caused by a change in the fundamental, its magnitude is larger when the macro fundamental around which the shift in risk perceptions is coordinated is weak. Subsequent to the panic the stock price becomes much more sensitive to any news about the macro fundamental, as it remains a focal point for shifts in risk perceptions in the high risk state.
Reading190B the 2007-2008 financial crisis as a shift between equilibria Based on the above logic, we develop a simple general portfolio choice model with features related to the recent crisis. We consider a mean-variance framework where the share that investors put in risky assets is proportional to their excess return over risk free assets and inversely proportional to the variance in the return, including the future asset price. Our framework is able to replicate the pattern of the current crisis with limited movements in risk and asset prices in an initial stage followed by an asset price collapse and a surge in risk. We consider an environment where only some agents (investors) purchase the risky asset. The state variable is the wealth of investors. The level and risk of asset prices then reflects the interaction between the wealth of investors and the risk state of the economy. This interaction is illustrated by a stylised experiment where we alternatively shift the wealth of investors and the risk state. The paths of the equity price and its standard deviation (risk) are presented in Figure 2. The economy is initially in the low risk state. In period 2 (dotted line) the wealth of investors exogenously falls. This shift is intended to capture the losses suffered by leveraged institutions. The economy remains in the low risk state. In period 8 (beginning of the grey area) the economy shifts to the high risk state, without any change in the wealth of investors. The wealth of investors is restored to its initial value in period 11 (dotted line) for instance through a recapitalisation of leveraged institutions. The economy remains in the high risk state until period 14, where it shifts back to the low risk state. Our scenario therefore covers all combinations of wealth and risk states. We clearly see that low wealth or high risk are not sufficient by themselves to push the economy into a major crisis situation. While they lower asset prices and make them riskier, the magnitude of the effects is small. The combination of low wealth and high risk (periods 8-11) is however a potent one, leading to a collapse in asset prices and a surge in risk. Our stylised approach generates a pattern consistent with the crisis. From the summer of 2007 to the fall of Lehman Brothers, the weakened fundamental only had a moderate impact on prices and risk. That impact was massively magnified when the wealth of investors, i.e. net worth of leveraged institutions, suddenly took on the additional role as coordination device for a self-fulfilling increase in risk.
82 Figure 2. Paths of the equity price a) Equity Price
b) Risk Equity Price
In addition to asset prices and volatility, the model has implications for other important variables, such as leverage and liquidity. Investors finance their holdings of risky assets with their own wealth and borrowing through bonds. Leverage is the ratio between investors’ holdings of risky assets and their own wealth. Liquidity reflects the impact of wealth shifts on the expected excess payoff of the risky asset (with a high value denoting an illiquid market). Figure 3 shows that investors’ leverage actually increases in the initial phase of the crisis to collapse in the risk panic. This is consistent with the data. Illiquidity slightly increases in the initial stage and surges in the panic.
83
Figure 3. Leverage and illiquidity paths a) Leverage
b) Illiquidity
It is important to realise that a risk panic is not accompanied by any change in the fundamental in our experiment. What changes is the way the fundamental is read, as investors primarily use it as a focal point for risk perceptions in the high risk state. For example, Greek debt suddenly takes an important role by becoming the focal point for a self-fulfilling increase in investors’ risk perceptions.
References19B
Bacchetta, Philippe, Cédric Tille, and Eric van Wincoop (2010), “Self-FullfillingH Risk Panics”,H CEPR Discussion Paper 7920
84 Brunnermeier, Markus and Lasse Heje Pedersen (2009), “MarketH Liquidity and Funding
Liquidity”,H Review of Financial Studies 22:2201-2238.
Kamin, Steven and Laurie Pounder (2010), “HowH Did a Domestic Housing Slump Turn into a
Global Financial Crisis?”,H International Finance Discussion Paper 994, Board of Governors of the Federal Reserve.
Manuelli, Rodolfo and James Peck (1992), “Sunspot-likeH Effects of Random Endowments,”H Journal of Economic Dynamics and Control, 16:193-206.
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Research-based policy analysis and commentary from leading economists
Calling194B recessions in real time
James D. Hamilton 18 July 2010
Is the world economy about to experience a "double-dip" recession? This column argues that, while there may be a recession on the way, the current recession ended in the summer of 2009. Any subsequent downturn should thus be labelled a new recession.
Is the world economy about to experience a "double-dip" recession, going back into a new downturn before the recovery from the previous recession is even complete? Or, if there is a subsequent downturn, should it be described as a new, separate recession? The answer requires an objective characterisation of what we mean when we say the economy is in a recession.
What’s195B in a word? In the US, the commonly used dates for economic recessions come from the judgemental conclusions of the Business Cycle Dating Committee of the National Bureau of Economic Research. This may be the best approach available, but it would be nice to be able to supplement it with purely objective statistical inference. In addition to clarifying what exactly one means by the statement that the economy is in recession, such an approach might be able to provide more timely economic assessments that one can be sure are immune from any political influence. Harvard Professor James Stock and Princeton Professor Mark Watson proposed one algorithm for identifying business cycle turning points in 1988 (Stock and Watson 1989), and provided widely publicised predictions from the model up until 2003. Their press releases highlighted the more ambitious component of their approach, which offered the promise of being able to predict turning points in advance of their occurrence. This particular goal proved to be elusive for both the 1990 and the 2001 economic downturns. But their lead in suggesting that researchers should establish a real-time, out-of-sample track record is one well worth following, and the immediate publication possibilities of the internet allow many researchers today to do just that. In a new research paper (Hamilton 2010), I survey the methods and conclusions of a number of these real-time dating methods currently in use by various researchers. For the last five years, I have been using EconbrowserH H as a forum for publicly reporting the real-time output of a mechanical GDP-based algorithm for dating US business cycle turning points. Figure 1 below plots those inferences in the form of a GDP-based recession indicator index. Values to the left of the vertical line are what I would describe as "simulated real time" – each observation plotted was constructed solely from a vintage data set as it would have been reported at the indicated date. To the right of the vertical line are "actual real time" numbers – each observation plotted was publicly announced at the indicated date.
Figure 1. GDP-based recession indicator index
86
Graph plots for each quarter t the value for Prob(St|Yt+1) where Yt+1 is the history of observed GDP growth rates as reported as of date t+1. Based on the procedure detailed in my earlier paper with Marcelle Chauvet (Chauvet and Hamilton 2006), the algorithm determined that the most recent recession began in the fourth quarter of 2007 and ended in the second quarter of 2009. A subsequent economic downturn would be viewed by this procedure as the beginning of a new recession rather than a continuation of the previous one. Figure 2 shows the simulated real time and actual real time record of the algorithm. Figure 2. Start and end dates of recessions
Start578B of recessions
Recession Peak as Date start Date Algorithm NBER algorithm announcement determined made as determined made lead (-) or lag (+) in by NBER declaration by algorithm declaration months 1969:Q4 N.A. 1969:Q2 May 1970* N.A. 1973:Q4 N.A. 1973:Q4 May 1974* N.A. 1980:Q1 Jun 1980 1979:Q2 Nov 1979* -7 1981:Q3 Jan 1982 1981:Q2 Feb 1982* +1 1990:Q3 Apr 1991 1989:Q4 Feb 1991* -2 2001:Q1 Nov 2001 2001:Q1 Feb 2002* +3 2007:Q4 Dec 2008 2007:Q4 Jan 2009 +1
87
Start579B of expansions Trough as Date Recession end Date Algorithm NBER algorithm announcement determined made as determined made lead (-) or lag (+) in by NBER declaration by algorithm declaration months 1970:Q4 N.A. 1970:Q4 Aug 1971* N.A. 1975:Q1 N.A. 1975:Q1 Feb 1976* N.A. 1980:Q3 Jul 1981 1980:Q2 May 1981* -2 1982:Q4 Jul 1983 1982:Q4 Aug 1983* +1 1991:Q1 Dec 1992 1991:Q4 Feb 1993* +2 2001:Q4 Jul 2003 2001:Q3 Aug 2002* -12 N.A. N.A. 2009:Q2 Apr 2010 N.A. Business cycle turning points and dates at which announcements were issued by NBER and the GDP-based algorithm. Starred entries denote simulated real-time declarations, unstarred are actual real-time declarations. N.A. indicates information is not available. Marcelle Chauvet and Jeremy Piger (2008) have suggested an approach that uses growth rates of industrial production, personal income, sales, and employment. Professor Piger has been regularly updating these inferences on his webH page H since August 2006. There is a trade-off in these methods between trying to make an inference using the most recent available data about where the economy is at the moment (called the "filter probabilities"), or waiting for data to be revised and the trend to become clearer before trying to form an inference about where the economy was n months previously (called the "n-month smoothed probabilities"). Piger's actual real-time filter probabilities for each month are plotted in the top panel of Figure 3. This series first moved above 50% in Piger's November 1, 2008 report which was based on data describing August. The probability moved to 99.2% when the September data became available but fell back to 16.1% with the next month's data which showed industrial production and real personal income less transfers to be growing again in October. Chauvet and Piger (2008) had recommended an inference rule of declaring a recession as soon as three consecutive values of recent smoothed probabilities were all above 80%. This threshold was passed with the release of the October data, for although the current month filter inference was only 16.1% based on t= October 2008 data, the 1-, 2-, and 3-month smoothed probabilities at that time were still all above 80% (see the bottom panel of Figure 3). Chauvet and Piger's (2008) announced rule would then date the start of the recession as the earliest n for which the smoothed probability was above 50%, which turned out to be February 2008. Thus their approach would have announced on 1 January 2009 that a recession had started in February 2008, although the filter probabilities available in January 2009 raised the possibility that the recession could already have been over by October. Subsequent data confirmed the downturn was ongoing (panels 2 and 3). The Chauvet-Piger rule of waiting for a reading of 3 consecutive months below 20% would have resulted in a declaration in January 2010 that a recovery likely began in July of 2009.
88 Figure 3.
Source: reproduced from HamiltonH (2010);H constructed from data supplied by Jeremy Piger. My 2006 paper with Chauvet proposed a similar 4-indicator inference. One important difference from the specification of Chauvet and Piger is the reliance on the Bureau of Labor Statistics household survey for the measure of employment rather than the establishment payroll data. Figure 4 shows the sequence of smoothed probabilities associated with different vintages of data. This model would have sent a signal in August 2008 that a recession had begun in December 2007. Like Piger's calculations, it showed a temporary hope of an end when only data through October 2008 were available. Chauvet used this model to announce on her website in October of 2009 that the recession ended in June or July of 2009. One of the most promising approaches in this area may be that developed by Camacho et al. (2010). They show how one can use an unbalanced panel of mixed-frequency indicators to update an inference daily as each new datum gets released. Figure 5 reports the probabilities of a Eurozone recession that would have been calculated by their approach based on the actual data available as of each day during 2008 and 2009. The model yields a remarkably sharp and stable inference over this period, with the probability jumping from 3.8% on 24 June 2008 to 98.1% one month later. The probability remained above 69% until 23 April 2009, at which point it fell to 6%. Although using different data sets and different methods, all of these algorithms agree on one point. The most recent recession ended in the summer of 2009. If we do see a subsequent downturn, it should be classified as a separate economic downturn.
89 Figure 4. Recession probabilities
Source: MarcelleH Chauvet.H
Figure 5. Recessions probabilities in the Eurozone
Source: Camacho,H Perez-Quiros, and Poncela (2010).H
References196B
Camacho, Maximo, Gabriel Perez-Quiros, and Pilar Poncela (2010), “GreenH shoots in the Euro area: a real time measure”,H working paper, Bank of Spain.
Chauvet, Marcelle and James D Hamilton (2006), “DatingH business cycle turning points”,H in Costas Milas, Philip Rothman, and Dick van Dijk (eds.), Nonlinear Time Series Analysis of Business Cycles, Elsevier.
90 Chauvet, Marcelle, and Jeremy Piger (2008), “AH comparison of the real-time performance of business cycle dating methods”,H Journal of Business Economics and Statistics, 26:42-49.
Hamilton, James D (2010), “CallingH recessions in real time”,H working paper, University of California, San Diego.
Stock, James H, and Mark W. Watson (1989), “NewH indexes of coincident and leading economic indicators”,H in Olivier Jean Blanchard and Stanley Fischer (eds.), NBER Macroeconomics Annual 1989, MIT Press. Stock, James H and Mark W Watson (1991), “A probability model of the coincident economic indicators”, in Kajal Lahiri and Geoffrey H Moore (eds.), Leading Economic Indicators: New Approaches and Forecasting Records, Cambridge University Press. Stock, James H and Mark W Watson (1993), “A procedure for predicting recessions with leading indicators: econometric issues and recent experience”, in James H Stock and Mark W Watson (eds.), Business Cycles, Indicators, and Forecasting, University of Chicago Press.
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Research-based198B policy analysis and commentary from leading economists
Chinese19B foreign direct investment: What's happening behind the headlines? Lucian Cernat Kay Parplies 16 July 2010 While China is recognised as one of the world's leading destinations for inward foreign direct investment, outward investment by Chinese companies has also taken off in recent years. This column presents survey data suggesting that, similar to western firms, Chinese companies tend to invest in well-developed countries with a large market size and a favourable institutional environment. At one point, most economists were interested in Chinese foreign direct investment (FDI) patterns as a route to understanding how western firms could operate in the Chinese market more effectively. Times have changed. When a line-up of top European economists meet at an EU-sponsored event at the Shanghai Expo next week they will be equally interested in understanding the motivations of Chinese firms that have been investing in Europe over the last decade, and their impact on the EU economy. The prospect of Chinese FDI in a range of infrastructure projects playing a major role in Greece's fiscal recovery efforts highlights the relevance of this research.
China20B as an FDI generator While China is now firmly established as one of the world's most important destinations for inward FDI, outward FDI by Chinese companies has also taken off spectacularly. Outflows doubled from 2007 to 2008 and expanded fourteen-fold between 2003 and 2008 (see Figure 1). Figure 1. Chinese outward FDI (€ billion)
Source: DG TRADE/ Eurostat Despite the challenging economic environment, Chinese overseas investment continued to
92 grow in 2009. According to data published by the Ministry of Commerce, outbound FDI by Chinese enterprises amounted to $43.3 billion in 2009, a year-on-year increase of 6.5%. This growth occurred against the backdrop of a decline in global FDI by up to 40% compared to 2008. Chinese overseas investment has thus proven remarkably resilient in the challenging conditions created by the financial crisis. Much of the attention has been captured by large transactions, such as the take-over of Volvo by the Chinese carmaker Geely or Chinalco's bid for Anglo-Australian mining giant Rio Tinto. Yet a lot of activity takes place below the scale of these mega deals. A new study by the China Council for the Promotion of International Trade (2010), in co-operation with the European 1 Commission's DG TRADE and CEPII research instituteH H provides a broad overview of Chinese outward FDI activity based on a detailed survey of 3,000 Chinese firms. This is the first time that firm-level information about Chinese FDI in Europe has been available at this level of detail. Thanks to the involvement of the China Council for the Promotion of International Trade, nearly half (46%) of the contacted firms replied to the extensive questionnaire. The results indicate that Chinese firms' overseas activities are still at an early stage of development. • Chinese firms are motivated mainly by access to improved distribution networks and advanced technology. Accordingly, most projects involve setting up distribution centres and sales offices. Meanwhile, access to natural resources is an important objective of investments in developing economies. • One quarter of the Chinese companies covered by the survey have made some type of overseas investment, although most of them are relatively small scale investments. • 61% of responding firms indicated that their overseas investments remained below $1 million, while more than 80% of investments are below $5 million. • Only a few companies have been capable of making large scale overseas investments in excess of $100 million. • In terms of investment projects, overseas representative offices and sales offices are the most frequent types of overseas expansion routes adopted by Chinese enterprises. • Some large companies, especially state-owned enterprises, have made cross-border mergers & acquisitions (M&A). In firms' future investment plans, M&A figure more prominently than in the past and activity can therefore be expected to pick up. What this evidence suggests is that the sunk costs of engaging in FDI activities in Europe for small- and medium-sized Chinese companies are relatively low. Unlike the argument put forward by the "new-new trade theory", inward Chinese FDI in Europe does not seem to be confined to the "happy few" multinational or large companies with strong expansion potential (see Mayer and Ottaviano 2008 and Melitz and Ottaviano 2008).
Where201B and in what? The sectoral and geographical breakdown of Chinese FDI in Europe offers additional insights. • Most Chinese outbound investors are active in manufacturing sectors, although the industry profile is becoming increasingly diversified. • Within the manufacturing industry, the textile and machinery and equipment sectors figure most prominently, reflecting China's strong export performance in these industries.
93 • Whereas most outbound investment in Europe has been aimed at enhancing market access through distribution and sales offices, manufacturing investment has been more significant for investment in developing economies. • Apart from the manufacturing industries, companies active in construction and wholesales and retail operations are among the most active foreign investors. Overall, the investment profile of the companies covered by the survey reflects China's presence in its export markets. The selection of the Chinese FDI destinations is mainly driven by their market potential, in addition to their proximity to the Chinese market. Perceived strengths of the EU include the integrated market, the single currency and the good regulatory environment. Meanwhile, China's "Going Global" policy seems to be an important push factor in firms' outbound FDI activity. The study indicates that investment barriers do not play a major role among the factors influencing Chinese investment in the EU. The main destinations for the overseas investments of Chinese enterprises are Asia, followed by Europe and North America, while only a few respondents have overseas investments in other regions. Asia, especially the Southeast Asian region which has a similar economic structure and cultural tradition, as well as long-standing commercial relations with China, has become the preferred destination for Chinese enterprises. We believe this situation will not change significantly for some time. It is noteworthy that Vietnam, following its economic reforms, is becoming an important destination for Chinese investment. In terms of future investment plans, African destinations are becoming more important. They are seen as nearly equally important as a future investment location as the EU and North America. When Chinese companies invest in the EU, the size of the local market seems to matter greatly. • They mainly locate in Germany, France, Italy and the UK. Respondents' future investment plans show the same geographic profile. • Smaller EU member states continue to be perceived as less attractive destinations, although Chinese enterprises consider the fact that the EU is an integrated market, has a single currency and a good regulatory environment as the main advantages of investing in the region. • The most promising sectors for investing in the EU are considered to be manufacturing and wholesale and retail trade. • The US remains a very important destination for Chinese FDI. Chinese enterprises view overseas investments as a long term development strategy and respondent firms indicate a strong resolve to view overseas investments in a medium and long term perspective. While the scale of the respondents’ investments is generally small, over half of the respondent enterprises expressed an intention to increase overseas investments in the coming two to five years.
Impact20B of the crisis As expected, the survey indicates that the overseas investments of most enterprises have been affected by the financial crisis. The financial crisis has caused economic recessions in many countries as well as a reduction in China’s domestic demand growth, which has made overseas investments more difficult for many Chinese enterprises. Moreover, access to financing for overseas investment has become difficult due to the crisis, and trade protectionism is perceived to be on the rise in some destination markets (see EvenettH 2010).H By contrast, some respondents
94 identified positive effects associated with the crisis, such as weakened overseas competitors and the availability of acquisition targets at more attractive prices.
Results203B from statistical analysis of the data An augmented gravity analysis (see appendix) including a number of structural parameters describing the institutional environment prevailing in different markets (such as the World Bank Doing Business indicators and OECD employment protection indicators) confirms the pattern emerging from the descriptive survey data. The regressions confirm the more anecdotal finding that Chinese companies tend to invest in countries with a large market size, a high level of economic development, and a favourable institutional environment. Hence, the pattern emerging from the survey is that the behaviour of Chinese firms can be explained by much the same parameters as western firms' international activities. Perhaps the biggest surprise is that there are so few surprises in the data. Yes, Chinese investors do mainly seek to build distribution channels for their exports and access to advanced technology. When they set up manufacturing activities they do so mainly in developing countries. African destinations are becoming increasingly important as a market for exports and for access to raw materials. The data thus reflect the overall level of development of the Chinese economy and its manufacturing enterprises. From an EU perspective, encouraging findings include the fact that investment barriers are not perceived as a significant impediment to setting up operations in Europe. It is also heartening that Chinese investors seem to value a well-functioning institutional environment, including the integrated market. What the survey of Chinese companies suggests is that Europe does have some strong selling points to promote in Shanghai. As Lao Tzu's famous saying goes, "a journey of a thousand miles begins with a single step". For those Chinese companies that have invested in Europe that journey has begun quite promisingly, despite the more subdued economic climate. And despite complaints from some European businesses in China that the operating environment has become more difficult for them recently, the benefits of FDI are clearly recognized. Enhanced cooperation between China and the EU should thus aim at ensuring a level playing field for both Chinese and European companies. Disclaimer: The views expressed in this article are those of the authors and are not necessarily those of the European Commission.
References204B
China Council for the Promotion of International Trade (2010), “SurveyH on Current Conditions and Intention of Outbound Investment by Chinese Enterprises”,H April.
Evenett, Simon (2010), “UnevenH compliance: The sixth report of the Global Trade Alert”,H VoxEU.org, 23 June.
Mayer, Thierry and Gianmarco Ottaviano (2008), "TheH Happy Few: The Internationalisation of
European Firms",H CEPR Policy Insight 15
Melitz, Marc and Gianmarco Ottaviano (2008), "MarketH Size, Trade, and Productivity",H Review of Economic Studies, (75):295-316
95 Appendix. Determinants of Chinese overseas investments
Dependant Variable: Number of Investments in Destination Country j
(1) (2) (3) (4) (5) Ln Market Potential 0.357*** 0.110*** 0.229** 0.454*** -0.288 (0.0177) (0.0304) (0.112) (0.134) (0.331) ln Distance -0.0310 -0.304*** -0.506** -1.540*** -7.281*** (0.0609) (0.0670) (0.244) (0.362) (1.797) Ln GDP per capita 0.415*** 0.263** 0.558*** -1.209** (0.0397) (0.108) (0.173) (0.513) Ln (Ease of Doing Business) 0.131 (0.105) Ln (Starting A Business) -0.0997 -2.214*** (0.111) (0.408) Ln (Protection of investors) -0.333** 1.757*** (0.148) (0.472) Ln (Paying Taxes) 1.027*** -5.389*** (0.226) (1.499) Ln (Trading Across Borders) 0.375** 0.741* (0.147) (0.402) Ln (Employment Protection) 3.025* (1.670) Pseudo R2 0.279 0.359 0.433 0.547 0.676
All results are from ordinary poison regressions. Standard errors are in parenthesis. *,**,*** ndicate respectively that coefficients are significant at 10%, 5% and 1%. Source: CCPIT/ DG TRADE/ CEPII
1 Centre d'études prospectives et d'information internationale, Paris
Lucian Cernat Kay Parplies Chinese foreign direct investment: What's happening behind the headlines?
16 July 2010 http://www.voxeu.org/index.php?q=node/5301H H
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Research-based206B policy analysis and commentary from leading economists
Why207B Germany should not listen to the US
Hans-Werner Sinn 15 July 2010
Some Americans are calling on Germany to pursue expansionary fiscal policy. This column says that the German government should ignore US criticism of its savings measures. Once again US economists and politicians, above all Nobel laureate Paul Krugman, are pressuring Germany to spend more money to support the international economy (KrugmanH
2010).H They gave the same advice at the peak of the crisis in autumn 2008 (KrugmanH
2008).H Back then, they were right that Keynesian deficit spending was called for to prevent a collapse of the world economy. The worst post-war recession required energetic measures to support demand – and in actual fact the worldwide economic stimulus packages totalling some €1 trillion brought the recession to an end as quickly as it had begun. The criticism aimed at Germany was not justified even then. Not only did Germany, with its two discretionary economic stimulus programmes amounting to €84 billion, live up to its responsibilities, it surpassed them. Germany added an extensive social safety net, subsidised short-time working schemes, and also dismissal protection laws. As problematic as these may be in other regards, Germany exerted an immense, automatic stabilising force on the world economy. The German labour market has proved to be extremely robust, and transfer recipients were left largely untouched by the crisis. Whereas US imports fell much faster than US exports, which plunged the world economy into crisis, the reverse was the case in Germany. The German balance of trade surplus fell from 2008 to 2009 by $74 billion. This is the net extent of the demand boost that Germany exerted on the world. Only China, with its net demand support of $102 billion, gave a stronger stimulus to the world economy.
Odd208B advice Today the world economy is in the midst of a strong economic upswing, touched off by the newly industrialised countries, and which has fully impacted Germany. The Ifo Business Cycle Clock has now moved into the “boom” quadrant for the first time in more than two years. The majority of the surveyed companies have now finally reported that their current business situation is good. The IMF has estimated that the world economy will grow by 4.2% this year and by 4.3% in 2011 – a pace that is stronger than the average of the past four decades. This is why the recent advice from the US that Germany should stop saving sounds so odd. Now is certainly not the time for new stimulus programmes – now budget consolidation is called for. When, if not now, should the state begin to save? America also knows, of course, that the world economy is booming, but it is seeking allies for its own debt policies, which have surpassed any justifiable level. President Obama, at the G20 Summit in Toronto, reluctantly subscribed to a savings policy but has no idea of how he will implement it. Today the US economy is on government life-support. The budget deficit this year will amount to 12.5% of GDP; 40% of the federal budget is credit financed. In 2011 the debt to GDP ratio will exceed 100% and move closer to the Greek’s level as of today. Now that the private securitisation of mortgages is virtually non-existent, 95% of all real-
97 estate credit passes through three government institutions: Fannie Mae, Freddie Mac and Ginnie Mae. The Federal Reserve buys the securities of these institutions with freshly printed money since customers abroad have become scarce. The capital imports of the US have shrunk by half in comparison to recent years. Where all this will lead to, heaven only knows.
Responsibility209B for future generations Unfortunately German banks were also strongly affected by the US crisis. Germany, along with China, was one of the major financers of the American capital market in recent years. The flow of credit flagged, however, as the shady nature of some US securities became clear. State banks and private banks will need years to absorb the write-off losses from US securities in their balance sheets. Now America wants the German state itself to call up and spend the funds that no longer want to flow to America. This has its own logic. It is similar to the rescue programme for the crisis-stricken southern European states. But this is not the proper course. Beyond the overcoming of the crisis there is a responsibility towards future generations, and the present world economic boom has negated all arguments for neglecting this responsibility. Instead it is mandatory that debtor countries such as Greece and the US restore the stability and credibility of their private and public financial systems so that lenders’ confidence can be restored and so they can grant new loans. The US must reduce government borrowing by improving the creditworthiness of private debtors. To do this they need to develop more reliable securitisation structures, using covered bonds, and require that their banks hold considerably higher amounts of capital. The most difficult adjustment will be giving up the standard of living financed by foreign capital. This also applies to the southern European countries. There is no way around painful structural reforms for the debtor countries.
References210B
Krugman, Paul (2008), “TheH economic consequences of Herr Steinbrueck”,H The New York Times, 11 December.
Krugman, Paul (2010), “DealingH with ChermanyH”, The New York Times, 11 June.
http://www.voxeu.org/index.php?q=node/5298H H
98
Double-Dip21B Days
NourielH Roubini H Jul 18, 2010 8:22PM The global economy, artificially boosted since the recession of 2008-2009 by massive monetary and fiscal stimulus and financial bailouts, is headed towards a sharp slowdown this year as the effect of these measures wanes. Worse yet, the fundamental excesses that fueled the crisis – too much debt and leverage in the private sector (households, banks and other financial institutions, and even much of the corporate sector) – have not been addressed.Private-sector deleveraging has barely begun. Moreover, there is now massive re-leveraging of the public sector in advanced economies, with huge budget deficits and public-debt accumulation driven by automatic stabilizers, counter-cyclical Keynesian fiscal stimulus, and the immense costs of socializing the financial system’s losses.
Nouriel329BH Roubini H Double-Dip Days Jul 18, 2010 8:22PM
http://www.roubini.com/roubini30BH -monitor/259259/double-dip_days H
Una21B época de dobles caídas
Nouriel31BH Roubini
2010-07-16
NUEVA YORK – La economía mundial, artificialmente impulsada desde la recesión de 2008- 2009 por un estímulo fiscal y monetario en gran escala y rescates financieros, va camino de una profunda recesión este año, al ir desapareciendo los efectos de esas medidas. Peor aún, no se han abordado los tremendos excesos que alimentaron la crisis: demasiada deuda y demasiado apalancamiento en el sector privado (familias, bancos y otras entidades financieras e incluso en gran parte del sector empresarial). El desapalancamiento del sector privado apenas ha comenzado. Además, ahora hay un enorme reapalancamiento del sector público en las economías avanzadas, con enormes déficits presupuestarios y una acumulación de deuda pública impulsada por los estabilizadores automáticos, los estímulos fiscales anticíclicos keynesianos y los inmensos costos de la socialización de las pérdidas del sistema financiero. En el mejor de los casos, afrontamos un período prolongado de crecimiento anémico y por debajo de la tendencia general en las economías avanzadas, al empezar el desapalancamiento por parte de las familias, las entidades financieras y los gobiernos a repercutir en el consumo y la inversión. En el nivel mundial, los países que gastaron demasiado –los Estados Unidos, el
99 Reino Unido, España, Grecia y otros– deben ahora desapalancarse y están gastando, consumiendo e importando menos. Pero los países que ahorraron demasiado –China, el Asia en ascenso, Alemania y el Japón– no están gastando más para compensar la reducción del gasto en los países que se están desapalancando. Así, pues, la recuperación de la demanda agregada mundial será débil, con lo que impulsará mucho menos el crecimiento mundial. La desaceleración mundial, ya evidente en los datos correspondientes al segundo trimestre de 2010, se acelerará en la segunda mitad del año. El estímulo fiscal desaparecerá, cuando empiecen a entrar en vigor los programas de austeridad en la mayoría de los países. Los ajustes de inventario, que impulsaron el crecimiento durante algunos trimestres, se acabarán. Los efectos de las políticas tributarias que robaron la demanda al futuro –como, por ejemplo, los incentivos a compradores de coches y viviendas– disminuirán, al expirar esos programas. Las condiciones del mercado laboral siguen siendo débiles, con poca creación de empleo y una sensación de malestar que va extendiéndose entre los consumidores. La situación previsible en las economías avanzadas es una mediocre recuperación en forma de U, aun cuando evitemos la doble caída en forma de W. En los Estados Unidos, el crecimiento anual ya estaba por debajo de la tendencia general en la primera mitad de 2010 (2,7 por ciento en el primer trimestre y se calcula que en el período abril-junio será un mediocre 2,2 por ciento). El crecimiento va a aminorarse aún más: hasta el 1,5 por ciento en la segunda mitad de este año y avanzado 2011. Sea cual fuere la letra del alfabeto que los resultados económicos de los EE.UU. representen en última instancia, lo que viene será como una recesión. Una mediocre creación de empleo y un mayor aumento del desempleo, mayores déficits presupuestarios cíclicos, una nueva bajada de los precios de las viviendas, mayores pérdidas de los bancos con las hipotecas, el crédito al consumo y otros préstamos y el riesgo de que el Congreso apruebe medidas proteccionistas contra China contribuirán a ello. En la zona del euro, las perspectivas son peores. El crecimiento puede estar próximo a cero al final de este año, cuando la austeridad fiscal haga efecto y los mercados de valores bajen. Unos marcados aumentos en los márgenes soberanos, empresariales y de la liquidez interbancaria aumentarán los costos de capital y los aumentos de aversión al riesgo, volatilidad y riesgo soberano socavarán aún más la confianza de las empresas, los inversores y los consumidores. El debilitamiento del euro será positivo para la balanza exterior de Europa, pero los beneficios resultarán más que contrarrestados por el daño a las exportaciones y las perspectivas de crecimiento en los EE.UU., China y el Asia en ascenso. Incluso China está dando muestras de desaceleración, debidas a los intentos de su Gobierno de controlar el recalentamiento económico. La desaceleración en las economías avanzadas, junto con un euro más débil, minarán aún más el crecimiento chino, con lo que su tasa de crecimiento pasara de más del 11 por ciento al 7 por ciento al final de este año. Se trata de una mala noticia para el aumento de las exportaciones en el resto de Asia y entre los países ricos en materias primas, que cada vez dependen más de las importaciones chinas. Una importante víctima será el Japón, donde el anémico crecimiento de la renta real está deprimiendo la demanda interna y las exportaciones a China mantienen el poco crecimiento que hay. El Japón padece también un bajo crecimiento potencial, debido a la falta de reformas estructurales y a unos gobiernos débiles e ineficaces (cuatro primeros ministros en cuatro años), un gran volumen de deuda pública, tendencias demográficas desfavorables y un yen fuerte que se aprecia durante los períodos de aversión al riesgo.
100 Una previsible situación en la que el crecimiento de los EE.UU. se desplome hasta el 1,5 por ciento, la zona del euro y el Japón estén estancados y el crecimiento de China se reduzca hasta por debajo del 8 por ciento puede no entrañar una contracción mundial, pero, como en los EE.UU., lo parecerá, y cualquier sacudida posterior podría inclinar de nuevo esa inestable economía mundial hacia una recesión propiamente dicha. Las posibles causas de semejante sacudida son legión. Los problemas de la zona del euro con los riesgos de la deuda soberana podrían empeorar, con lo que propiciarían otra ronda de correcciones de los precios de los activos, aversión mundial al riesgo, volatilidad y contagio financiero. Un circulo vicioso de corrección de los precios de los activos y un crecimiento más débil, junto con contratiempos inesperados que actualmente no están reflejados en los precios, podría propiciar nuevas bajadas de los precios de los activos y un crecimiento aún menor, dinámica que condujo a la economía mundial a la recesión en primer lugar. Y no podemos excluir la posibilidad de un ataque militar israelí al Irán en los doce próximos meses. Si sucediera eso, los precios del petróleo podrían aumentar rápidamente y, como en el verano de 2008, desencadenar una recesión mundial. Por último, los encargados de la adopción de decisiones se están quedando sin instrumentos. Otra relajación monetaria cuantitativa no cambiará gran cosa, porque hay poco margen para un estimulo fiscal suplementario en la mayoría de las economías avanzadas y la capacidad para rescatar a las entidades financieras que son demasiado grandes para quebrar –pero también para ser salvadas– quedará profundamente limitada. De modo que, a medida que se evaporen las ilusorias esperanzas optimistas de una rápida recuperación en forma de V, el mundo avanzado se encontrará en el mejor de los casos en una larga recuperación en forma de U, que en algunos casos –la zona del euro y el Japón– puede ser lo suficientemente larga para extenderse en una casi depresión en forma de L. Será difícil evitar la recesión con caída doble. En un mundo así, la recuperación en los más fuertes mercados en ascenso –la gran esperanza de la economía mundial– también se verá afectada, porque ningún país es una isla económicamente. De hecho, el crecimiento de muchas economías con mercados en ascenso – empezando por la de China– depende en gran medida de unas economías avanzadas entregadas a la reducción de gastos. Abróchense los cinturones para un viaje muy accidentado. Traducido del inglés por Carlos Manzano.
http://www.project-syndicate.or32BH g/commentary/roubini27/Spanish H
Sagging213B Global Growth Requires Us to Act
NourielH Roubini H Jul 12, 2010 9:20PM
From the FinancialH Times:H Sagging Global Growth Requires Us to Act By Nouriel Roubini and Ian Bremmer It looks as if the global economy is heading for a serious slowdown this year. Emergency austerity programmes in some countries will put a drag on growth. Inventory adjustments will run their course. The effects of tax policies that steal demand from the future – such as the US “cash for clunkers” scheme, tax credits for home buyers or cash for green appliances – will fizzle out. Labour market conditions will remain weak. The slow and painful deleveraging of balance sheets and income-challenged households, financial institutions and governments will continue.
101 3B REPORTAJE: Primer plano
Cambio214B de reglas en Wall Street
La4B reforma de "lo posible" deja muchos insatisfechos y problemas sin resolver SANDRO POZZI 18/07/2010 "No más Lehman Brothers , no más AIG", cantaba a los cuatro vientos Timothy Geithner en un intento por dar con los votos que necesitaba para sacar adelante en el Senado las nuevas reglas que gobernarán Wall Street. Pero era, sobre todo, un golpe de mesa del responsable del Tesoro de Estados Unidos ante las críticas por cómo quedó la versión final de la reforma financiera. Unos, los conservadores, porque va demasiado lejos. Otros, a la izquierda, por las omisiones. ¿Pero servirá para acabar con los excesos que llevaron a la crisis? El presidente Barack Obama no quería que llegara el segundo aniversario del terremoto financiero sin reglas que eviten una quiebra caótica como la de Lehman, que forzó a las autoridades públicas -Tesoro, Reserva Federal (Fed) y Fondo de Garantía de Depósitos (FDIC)- a inyectar 11,5 billones de dólares en el sistema para evitar que cayera por el precipicio, saliendo al rescate de colosos como la aseguradora AIG, los conglomerados Bank of America y Citigroup o las hipotecarias Fannie Mae y Freddie Mac. Tras un año de negociación, la reforma salió adelante el jueves. Se vende como el mayor cambio en la estructura de supervisión desde la Gran Depresión. Geithner la resume en una frase, en la que afirma que la nueva legislación "restringirá la asunción de riesgos, limitará el nivel de apalancamiento de las entidades y forzará requerimientos de capital y de liquidez mucho más conservadores, para que las entidades sean mucho menos vulnerables frente a los errores, muchos más capaces de soportar los choques". Es decir, en sus palabras, se atacará al "imprudente". La firma Deloitte lo condensa en la información remitida a sus clientes en dos objetivos relativamente simples. El primero, rebajar el riesgo en el sistema financiero, limitando las actividades de riesgo en las que se embarcan las firmas individuales y ampliando el abanico de organizaciones que estarán bajo el control de la red de supervisión. Segundo, reforzar la protección del consumidor. En la práctica, esto se traduce en que los reguladores tendrán más margen de maniobra para poner fin a comisiones abusivas en las tarjetas de crédito hasta desmantelar un banco cuya situación financiera ponga en riesgo al conjunto de la economía. Y al arrojar luz en las esquinas más oscuras de mercados como los derivados, en última instancia afectará al precio de la gasolina o la leche. Estos son, en síntesis, los puntos principales de una reforma en la que la Casa Blanca promete que "remodelará" la manera en la que se hace negocio en Wall Street y "redefinirá" el papel de los reguladores, para que el público confíe en el sistema y se sienten las bases "para el crecimiento económico y la creación de empleo". Eso sí, una reforma de 2.323 páginas con las debidas concesiones para que la gran banca se adapte sin sobresaltos: - Protección del consumidor: se crea en el seno de la Reserva Federal una agencia con la autoridad y la independencia necesarias para asegurar que el consumidor reciba una información clara y veraz sobre los términos asociados a productos financieros como hipotecas, tarjetas de crédito o préstamos a estudiantes. Se trata de evitar abusos y costes ocultos. Excluye los relacionados con la automoción. - Alerta temprana: el Tesoro de Estados Unidos formará un consejo que identificará los riesgos potenciales al sistema que pueden amenazar la economía. Con el secretario del Tesoro
102 presidiendo, estará integrado por los 10 reguladores del sistema financiero (entre ellos la Fed, la FDIC y la SEC), un experto independiente en seguros y cinco representantes de la industria financiera. - El gran vigilante: la Fed conservará la autoridad de supervisión sobre la gran banca y tendrá voz ante las miles de pequeñas firmas financieras locales (community banks). El Congreso de Estados Unidos realizará una única auditoría relativa a los programas de emergencia activados durante la crisis. El sector financiero ya no podrá elegir a los presidentes de los bancos regionales que integran la Fed. - Liquidación ordenada: se establece un mecanismo que permitirá a la FDIC desmantelar entidades problemáticas. Es el fin del principio "demasiado grande para quebrar", para evitar que el contribuyente pague rescates como el de AIG. Para no llegar a ese extremo, y limitar el tamaño de las entidades, se imponen requisitos más estrictos de capital y un mayor colchón de liquidez. Las grandes firmas someterán un "plan de su funeral" que marque una hoja de ruta para el caso en que deba ser intervenida. - Productos exóticos: los bancos deberán escindir en filiales algunos de sus negocios más rentables y de más riesgo en el mercado de los derivados, como los que tumbaron a AIG. Para dar transparencia, la mayoría de estos productos -incluidos los seguros de impago de deuda (CDS)- se negociarán en cámaras de compensación centralizadas o en mercados organizados bajo la supervisión de la CFTC (regulador de futuros). - La Regla Volcker: la legislación restringe que los bancos inviertan sus recursos propios en operaciones especulativas a través de fondos de alto riesgo (hedge funds) y firmas de capital riesgo (private equity). Esas inversiones estarán limitadas al 3% de sus fondos propios (Tier 1). No podrán negociar por cuenta propia con los depósitos, salvo que lo hagan en nombre de sus clientes. - Agencias de calificación: los árbitros del riesgo se someterán a un mayor control del regulador del mercado de acciones (SEC), que a su vez ve ampliado su papel con autoridad sobre los hedge funds y los private equity. Se les da mandato para elaborar un estudio sobre posibles conflictos de interés, lo que podría llevar en el futuro a reforzar la supervisión. - Accionistas: la legislación da más voz entre bastidores a los inversores, al facilitar al pequeño accionista la nominación de representantes en los consejos de administración de las entidades. También podrán pronunciarse sobre las remuneraciones a ejecutivos y empleados de las firmas financieras, aunque, en este caso, el voto del accionista no será vinculante. El presidente Barack Obama ya dijo antes de que se produjera el voto final en el Senado que estas medidas "pondrán fin a la era de irresponsabilidad que llevó a perder ocho millones de empleos y billones de dólares en riqueza". La reforma, uno de los pilares de su primer mandato, "es buena para las familias, es buena para los negocios, es buena para el conjunto la economía". Básicamente, la mayor transformación tendrá lugar entre los supervisores. La estructura reguladora creada en la legislación ayudará a las agencias a detectar y esquivar potenciales crisis, como la que se le escapó a la Reserva Federal con el colapso del mercado hipotecario. Y en el caso de que fracasaran, contarán con los instrumentos legales para responder cuando comience. Harry Reid, líder de los demócratas en la Cámara, explica que el objetivo último es "asegurarnos de que los grandes bancos no juegan con nuestro futuro". O dicho con palabras que llegan mejor al electorado de Nevada (que debe decidir en noviembre si Reid les seguirá
103 representando en Washington), la reforma "va a limpiar Wall Street" y "arreglar el sistema que causó la recesión". "Se acabó este casino que les enriqueció", afirma. ¿Compra el público el mensaje? Una reciente encuesta de Bloomberg reveló que cuatro de cada cinco estadounidenses mostró poca o nada de confianza en la reforma. Es más, opinan que está diseñada más para ayudar a la industria financiera que a la gente de la calle, la denominada Main Street. Es lo que piensa también el senador Tom Coburn. Y para ello se remite a una afirmación del consejero delegado de Goldman Sachs, Lloyd Blankfein, en la que dijo que "el gran beneficiario de la reforma es el propio Wall Street". En este sentido, el líder de la minoría republicana en el Senado, Mitch McConnell, cree sospechoso "que los grandes bancos apoyen la legislación y que no guste a los pequeños ni al público". Es más, considera que la Casa Blanca y sus aliados demócratas en el Capitolio están fracasando con esta legislación a la hora de atajar las causas reales de la crisis financiera, y lo que consiguen en su lugar es "crear más burocracia". Más allá de la retórica política, Brian Bethune, economista de IHS Global Insight, cree que la reforma "afronta importantes puntos de vulnerabilidad" en la estructura financiera actual que actuaron como detonante de la crisis. El más destacado, opina, son las medidas para limitar la especulación en los derivados y que se someta a las agencias de calificación a un mayor control. Pero sobre todo, valora el mecanismo para liquidar entidades sistémicas. Simon Johnson, antiguo economista jefe del Fondo Monetario Internacional (FMI), cree que el paquete legislativo diseñado por Barney Frank y Christopher Dodd va a conseguir un cambio fundamental en la forma de operar de la banca, equiparable al que hace 120 años se logró con la Ley Sherman de Antimonopolios, por la que se constriñó por primera vez el poder que debían tener las grandes corporaciones en el mundo de los negocios. Sin embargo, lo bueno y lo malo de la reforma dependen de la perspectiva desde la que se examinen los detalles de la legislación. Hasta el propio Paul Volcker, ex presidente de la Fed y asesor de Barack Obama, le pone un "suficiente raspado". El enfado de Volcker tiene lógica, porque se diluye la iniciativa que lleva su nombre para evitar que los bancos especulen con el dinero de sus clientes. Están también los que la califican de inadecuada e irrelevante por las omisiones. En la recta final de la negociación cayó el impuesto a la banca y los grandes hedge funds, con el que la Casa Blanca esperaba recaudar 19.000 millones de dólares en 10 años para financiar la liquidación ordenada de las entidades en apuros. Fue el peaje que pagaron los demócratas para conseguir el voto de tres republicanos. A cambio, la FDIC elevará la prima de seguro a la banca y se liquidará el fondo de rescate bancario (TARP). Russ Feingold fue el demócrata que más se opuso a la reforma, porque dice que no es lo suficientemente progresista. Las nuevas reglas son tan tímidas, añade, que teme que haga más daño que beneficio. Su argumento es que no habrá un cambio mayor en la estructura de Wall Street, salvo por las exigencias de la Regla Volcker, y eso podría permitir a los más grandes hacerse con más poder, a pesar de los límites que se imponen. Se mire como se mire, lo cierto es que la legislación no es tan dura como la vendió hace un año la Administración de Obama a la hora de levantar ese muro que proteja a Main Street de los excesos en Wall Street. Los bancos contarán con un amplio margen de tiempo para adaptar sus modelos y podrán mantener buena parte de las operaciones con derivados, como seguir contratando coberturas de divisas y permutas de tipos de cambio. Y está por ver, además, cómo reaccionarán Goldman Sachs y Morgan Stanley, a los que se animó a que se transformaran en holdings para acercarlos más a la banca comercial y darles
104 acceso a los fondos de rescate. Ahora podrían plantearse volver al estatus de banca de inversión para evitar, precisamente, las restricciones. Los grandes perdedores serán los grandes supermercados financieros como JP Morgan Chase, Bank of America y Citigroup. Como explica Deloitte, el impacto se notará en toda la industria de los servicios financieros, no solo en la bancaria. Pero, en concreto, en las firmas que, como las antes citadas, tengan que separar las operaciones más arriesgadas. Y apuntan que los nuevos requisitos de liquidez conllevarán un margen de beneficio menor en el futuro de las actividades especulativas que ahora son más rentables. Pero el área más importante a la que no hace frente esta reforma es la referida al sistema hipotecario, y en concreto, las firmas semipúblicas Fannie Mae y Freddie Mac, que incentivaron a los bancos a ofrecer préstamos a gente que no se los podía permitir. Es uno de los puntos que destaca el FMI en su análisis de la economía estadounidense. Un sistema que considera "costoso, ineficiente y complejo" y que ha demostrado ser "insostenible". El senador republicano Judd Gredd, otro de los miembros más activos durante la negociación, también insiste en este punto como uno de los aspectos más "negativos" de la reforma, porque dice que se "está fracasando a la hora de afrontar un problema que explica gran parte de lo sucedido en el pasado y que seguiremos teniendo en el futuro". El Tesoro admite que es necesaria una reforma de Fannie y Freddie, pero no en este momento. Más allá de estas omisiones, el Fondo considera que en términos generales la reforma pactada en EE UU es un paso "mayor" en la buena dirección, que corregirá algunas de las "lagunas" que destapó la crisis en la regulación y en la supervisión. Sin embargo, también cree que "se pierde la oportunidad" para reducir el número de agencias actuales. El reto está ahora, añade, en aplicarla sin que "limite" el crédito, "para no minar el repunte". Y eso es lo que temen en el mundo de los negocios. No es tanto el contenido de la legislación, sino el momento en el que empiezan aplicarse las nuevas reglas en el sistema financiero y el impacto que tendrán en una economía muy débil, donde el crédito a las pequeñas y medianas empresas y las familias brilla por su ausencia. Y también por su efecto combinado con otras de las legislaciones bandera de la Administración de Obama, como la de la reforma sanitaria o la futura normativa energética. La Business Rountable -asociación que agrupa a los principales ejecutivos de las mayores corporaciones- teme que esta triple batería legislativa cree aún más incertidumbre y desanime a las empresas a contratar. Desde la Cámara de Comercio, su presidente, Bruce Josten, cree que el gran problema es que nadie entiende realmente cómo las nuevas reglas cambiarán el juego. Eso hará "que el capital se mantenga al margen durante años", dice. "Menos capital disponible y más caro", indica el republicano Robert Corker. Timothy Geithner dejó constancia de que la Administración de Obama tiene claro que "se necesitan bancos que asuman riesgos para que los negocios crezcan y sean prósperos". Pero también dijo que corresponde al Gobierno asegurar "que esos riesgos no amenacen la salud de la economía en su conjunto". Y en este sentido insiste en que la reforma "ayudará a que los bancos sirvan a las necesidades de sus clientes, no para tomar ventaja de ellos". Otra de las dudas concierne al peso de Wall Street como centro de negocios si los socios del G-20 no imponen reglas similares. Los analistas de IHS Global Insight no creen que la reforma vaya a suponer una seria desventaja competitiva para las grandes firmas estadounidenses en el mercado financiero global, porque "al final se impuso un hilo de sentido común, algo que fue difícil de detectar al inicio de la negociación".
105 Lo que preocupa a Judd Gregg y a algunos analistas es que para evitar todas estas restricciones, como en los derivados o las operaciones con recursos propios, los grandes bancos con presencia internacional "hagan estas actividades restringidas en el extranjero". Eso, añade, supone una desventaja competitiva para las firmas más pequeñas que concentran su negocio en EE UU y limitará el acceso de los estadounidenses al crédito. A pesar del rechazo casi frontal de los republicanos tanto en el Senado como en la Cámara de Representantes, el paquete final que esta semana será firmado por Barack Obama incluye enmiendas propuestas por el ala conservadora, orientadas a proteger las pequeñas entidades. Pero Richard Shelby, el negociador en la oposición, opina que "esto no es una reforma real". "Es ineficiente, anticompetitiva y amplía la burocracia", dice. Christopher Dodd admite que "no es perfecta". Y explica que tuvo "que anteponer lo posible a lo deseable". Para el demócrata, lo esencial es que se crea una arquitectura, con una nueva generación de reguladores, con instrumentos "que minimizarán los riesgos". "No se puede legislar la integridad, pero sí se pueden crear los mecanismos para protegernos y que nunca más pasemos por lo que hemos pasado durante los últimos dos años". Su compañero de filas Byron Dorgan destacó que se trata de un punto de partida, "no de un punto final". De hecho, ahora arranca otra fase en la que legisladores y supervisores deben transformar las miles de páginas en regulaciones específicas. La labor de lobby de Wall Street se espera intensa en este proceso, que puede durar entre 12 y 18 meses. Se trata de entender lo que significa la legislación y de limar asperezas que puedan ser contraproducentes. Ese esfuerzo por llevar la reforma del papel a la realidad, como dicen los analistas, es una labor titánica. Y ponen como ejemplo de la dificultad la nueva oficina de protección del consumidor, que, según la legislación adoptada, debe estar funcionando en un año. ¿Cómo se define su autonomía cuando va estar integrada en la Reserva Federal y financiada con sus recursos? ¿Y a quién deberá designar el presidente para dirigirla? Otro ejemplo es el desmantelamiento de la Oficina de Supervisión del Ahorro (OTS, por sus siglas en inglés), cuyas responsabilidades serán integradas en el Controlador de la Moneda (OCC, por sus siglas en inglés). Solo fundir las dos plantillas es todo un reto. Pero, sobre todo, será interesante ver cómo se define su nueva misión sin que eso cree duplicidades con el trabajo que hará la SEC y con el nuevo consejo de riesgos sistémicos. "Tenemos ya a grupos de trabajo planificando", indican desde la OCC. En total, habrá que llevar a la práctica 243 regulaciones incluidas en la ya bautizada como Ley Frank-Dodd. Son el triple que las que requería la Sarbanes-Oxley. Los reguladores deberán realizar a su vez 67 estudios, y los comités del Congreso, redactar casi un centenar de informes. Y a esto se sumarán las recomendaciones de la comisión independiente que investiga las causas que llevaron a Wall Street a crecer sin control. A Mike Konczal, miembro del Instituto Roosevelt, no le extraña que la legislación cree tanto escepticismo, porque al final, dice, no hay reglas verdaderamente duras. En su lugar, señala, se encarga a los reguladores hacer estudios, sobre los que se basarán para decidir dónde pondrán los límites cuando vean una amenaza a la estabilidad. Y a la vista de lo sucedido con AIG y Lehman Brothers, eso no es muy alentador, opina. Es ese margen de maniobra que se da a los reguladores para ir en diferentes direcciones lo que podría crear más incertidumbre ahora a los bancos. Austan Goosbee, consejero de la Casa Blanca, explica que lo que establece la legislación "son unos principios básicos para áreas en las que queremos unas reglas más justas". "Habrá costes para la banca, claro, pero, aquí, de lo que se trata es de proteger el sistema y al contribuyente", explicó.
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35B FIONA MAHARG-BRAVO Laboratorio de ideas
Cómo215B llenar la hucha
Las45B pruebas de estrés dirán si las entidades españolas necesitan más dinero FIONA MAHARG-BRAVO 18/07/2010 El sistema bancario de España se pondrá bajo una lupa cuando se hagan públicas las pruebas de resistencia el próximo 23 de julio. Puede que al final se recurra al fondo de rescate bancario para inyectar entre 20.000 y 30.000 millones de euros en total a los bancos, incluyendo los 11.000 millones que ya han pedido las cajas de ahorros. Pero el FROB, que es como se llama el fondo, solo ha recaudado hasta el momento 12.000 millones. Nadie sabe qué revelarán exactamente las pruebas de resistencia. Fitch, el organismo de calificación, cree que el sistema necesitará otros 12.000 millones de euros en su escenario base. Elena Salgado, ministra de Economía, ha afirmado que las necesidades del sistema financiero no serán demasiado importantes. Con anterioridad ha dicho que menos de un tercio del FROB -que tiene una capacidad teórica máxima de 99.000 millones de euros- sería suficiente para recapitalizar los bancos. En ese caso, el FROB tendría que recaudar otros 20.000 millones de euros, aproximadamente, en los mercados de deuda. El FROB, que cuenta con la garantía del Estado, ya está levantando 3.000 millones de euros en un crédito reserva de unos quince bancos. La idea es tener algo de capacidad de deuda disponible para los casos de emergencia. El FROB tendrá varias opciones una vez que se sepan los resultados de las pruebas de resistencia. Una de ellas sería posponer las inyecciones de capital con un esquema de protección de activos, especialmente sus activos inmobiliarios. Los gobiernos de Estados Unidos y Reino Unido utilizaron este mecanismo con algunos de sus bancos el año pasado. También se ha utilizado un pequeño programa en la compra de Cajasur por la BBK. Pero no está claro que España vaya a poder utilizar este esquema en cantidades grandes, dadas las actuales dudas sobre la situación financiera del Estado. Otra opción sería apechugar e inyectar más capital por adelantado. Es posible que el FROB no sea capaz de recaudar 20.000 millones de euros de una tacada. Pero las dudas respecto a la capacidad del fondo para recaudar efectivo parecen excesivas. Las recientes subastas de deuda del Gobierno han sido un éxito, a pesar de ser caras. Para finales de julio, la mayoría de las amortizaciones de deuda del año se reembolsarán. Pero más le vale al FROB ponerse manos a la obra. Los mercados son caprichosos y a lo mejor no se muestran tan dispuestos más adelante, en otoño, cuando los presupuestos generales del Estado para 2011 serán el tema principal y quizá sean necesarias más decisiones duras. Cuanto antes recaude su deuda, mejor.
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37B REPORTAJE: Empresas & sectores Información privilegiada
Objetivo:216B las agencias de calificación
Arrecian46B los ataques a estas sociedades en la UE por sus prácticas operativas
107 MIGUEL Á. NOCEDA 18/07/2010 El presidente del Banco Central Europeo (BCE), Jean-Claude Trichet, cargó el pasado martes, en una entrevista publicada en el diario francés Libération, contra el "oligopolio mundial" de las agencias de calificación Fitch, Standard and Poor's, Moody's. "Las agencias de calificación en general tienen tendencia a ampliar los movimientos al alza o a la baja de los mercados, lo que va en contra de la estabilidad financiera", según Trichet. Es la primera que se oye a la autoridad monetaria europea clamar en alta voz contra algo que se viene comentando desde hace tiempo. Probablemente ha tardado bastante; pero nunca es tarde. Lo que no podía pasar es que acabase la crisis y las agencias de calificación se fueran de rositas como en otras ocasiones. Parece que esta vez, las autoridades van en serio. Las tres grandes agencias anglosajonas, efectivamente, fueron blanco del vituperio en las crisis de Enron y las puntocom por su implicación directa. Sin embargo, nunca se tomaron medidas para prevenir su actuación. Al contrario, tuvieron más protagonismo. Los reproches han vuelto a surgir desde el comienzo de la crisis financiera, en 2007, y, sobre todo, por sus ataques a algunos países de la zona euro, como Grecia y España. La andanada de Trichet se produce en vísperas de la publicación de las pruebas de estrés de la banca europea, cuyo objetivo es ayudar a la transparencia financiera y recuperar la confianza de los mercados, como ocurrió en Estados Unidos. Y, también, en pleno debate sobre la creación de una agencia europea. "Probablemente es oportuno no seguir teniendo un oligopolio mundial de tres agencias", afirmó Trichet sin mencionar explícitamente la creación de una estructura europea sobre la que ya se han pronunciado varios dirigentes, entre ellos el comisario para Servicios Financieros, Michel Barnier. Esta agencia permitiría evaluar la deuda de los Estados con más precisión y sin las dudas que generan las tres agencias citadas. La intención de Trichet es ir "lo más lejos posible en materia de vigilancia precoz, de casi automaticidad de las sanciones, de forma que tengamos en la zona euro el equivalente de lo que tendríamos si estuviéramos en una federación presupuestaria". En cualquier caso, de lo que se trata es de evitar los conflictos de intereses que tienen las agencias en sus actuaciones: califican productos financieros emitidos por empresas a las que, a su vez, asesoran y ayudan a colocar esas emisiones, o prestan unos servicios y emiten informes sobre las perspectivas de las empresas que las contratan... Las agencias se han defendido hablando de la existencia de murallas chinas que impiden la comunicación entre departamentos; pero la realidad es que el sistema falla. Más explícito que Trichet fue, el 6 de julio, el presidente de la Comisión Nacional del Mercado de Valores (CNMV) española, Julio Segura, en el discurso de investidura como doctor honoris causa de la Universidad Menéndez Pelayo (UIMP) de Santander. Segura aplaudió que se hayan dado pasos para poner en marcha "registros obligatorios de esas agencias y de sus métodos de trabajo, que sus modelos de calificación sean conocidos y homologables, que se procesen con toda la información adecuada y que justifiquen los cambios de clasificación y el momento en que se producen". Pero no son sólo las agencias de calificación. También irrumpen en esta controversia financiera los bancos de inversión, las tasadoras y valoradoras, los fondos de pensiones y otros intermediarios como los hedge funds (fondos de alto riesgo). Precisamente, estas instituciones no están sometidas a supervisión y cuando se ha intentado, las autoridades se han encontrado con oposiciones frontales como la del ex primer ministro británico, Gordon Brown, en el intento de aprobar una norma de la UE para regularlos. Por su parte, Estados Unidos la tachó de proteccionista.
108 Brown comunicó a José Luis Rodríguez Zapatero, que no podía aceptar la propuesta de compromiso de la presidencia española, que sí contaba con el respaldo del resto de delegaciones. Londres se oponía prácticamente en solitario a la directiva por considerar que perjudicaba a la City, donde se concentran entre el 70% y el 80% de los fondos europeos. -
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109 ANÁLISIS: ANÁLISIS
La217B tercera España, 74 años después Parece claro que la Guerra Civil fue un choque entre fanatismos extremos
JOSÉ JUAN TOHARIA 18/07/2010 Hoy, 18 de julio, se cumplen 74 años del levantamiento militar que oficializó la irreconciliable fractura entre las dos Españas dispuestas a extirparse mutua e inmisericordemente de la convivencia nacional y que dio origen a nuestra última Guerra Civil. A estas alturas, - superados los oropeles propagandísticos y las mitificaciones simplistas- parece ya claro que aquél no fue un enfrentamiento con una inequívoca línea separadora de "buenos y malos" sino un choque entre dos fanatismos extremos que utilizaron el régimen republicano, legal y legítimamente existente, bien como pretexto en un caso, bien como coartada en otro, para intentar imponer sus respectivos radicalismos excluyentes. Y sin embargo, lo cierto es que por sí solas esas dos Españas cainitas no agotaban ni mucho menos lo que en aquella fecha era, en realidad, este país: junto a ellas, -o mejor dicho, entre ellas- existía una mayoritaria tercera España que braceó, sin éxito, por evitar el desgarro. No lo logró y quedó finalmente laminada. Entre otros, Andrés Trapiello se ha venido meritoriamente esforzando por rescatar del olvido a esta mayoritaria fracción de nuestra sociedad, especialmente ignorada pues ni a quienes finalmente resultaron vencedores o vencidos pareció nunca convenir el debido reconocimiento de su existencia. Ahora, tres cuartos de siglo después, un sencillo dato de una encuesta reciente permite detectar la huella clara de esa tercera España. Entre quienes ahora conforman este país, menos de la mitad dice que, al estallar la guerra, su familia se posicionó con uno de los dos bandos
110 contendientes (el 43% exactamente: 26% con el bando republicano, 17% con el bando franquista o nacional). La mayoría absoluta (57%) procede en cambio de familias que bien pueden ser caracterizadas, en bloque, como integrantes de la Tercera España. Por un lado, aquellos cuyas familias se vieron ideológicamente desgarradas por el conflicto, sin alinearse por tanto claramente con ninguno de los dos extremos enfrentados; por otro lado, el 21% que de forma explícita dice que su familia no se identificó con ninguno de los dos bandos (por más que quepa suponer que inicialmente sintieran alguna mayor lealtad hacia la legalidad vigente, pronto violentada por quienes decían defenderla); finalmente, un 19% ignora si hace siete decenios y medio su familia se inclinaba por algún bando y, de ser así, por cuál. Este tercer grupo entronca, sencillamente, con entornos familiares que verosímilmente optaron por un black out total sobre el tema, lo que parece revelar una voluntad de no implicación y de olvido, para ellos y, en lo posible, para sus descendientes. Un análisis algo más detallado de estos mismos datos de encuesta permite además comprobar lo forzada que resulta la tan frecuente -y alegremente- dada por supuesta línea de continuidad ideológica entre votantes socialistas y bando republicano, por un lado, y entre votantes populares y bando nacional, por otra. Ciertamente, entre los actuales votantes del PSOE abundan más que entre los votantes populares quienes dicen pertenecer a familias que en la Guerra Civil simpatizaban con el bando republicano: 35% frente a 7%. Inversamente, entre los votantes populares abundan más que entre los socialistas quienes proceden de entornos familiares identificados con el bando nacional: 28% frente a 12%. Pero de estas cifras no es lícito concluir que los votantes actuales de cada uno de los dos principales partidos de ámbito estatal sean herederos -exclusiva e inequívocamente directos- de uno u otro bando. En realidad en ambos grupos de votantes son mayoría quienes proceden de familias integradas en la tercera España: esto es, de familias ideológicamente divididas, o que no se identificaban con ningún bando, o que optaron por hurtar toda noticia sobre el tema a sus descendientes. Pero hay más: lo mismo cabe decir de quienes ahora se definen como católicos practicantes y como no creyentes -es decir, entre quienes se sitúan en los que cabe considerar como los dos polos opuestos de nuestro actual espectro religioso-. Ni los católicos practicantes actuales entroncan, directa y masivamente, con familias identificadas con el bando nacional ni entre los no creyentes constituyen mayoría absoluta quienes pertenecen a familias que simpatizaron con el bando republicano. En ambos grupos, por el contrario, se da la misma compleja y variada multiplicidad de líneas de afinidad e identidad ideológica que entre los votantes populares y socialistas: sus raíces básicas son comunes y se hallan en la tercera España.
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111 REPORTAJE: LIBROS
Europa218B empieza a escribirse a sí misma XAVIER VIDAL-FOLCH 17/07/2010 Por azar o por oportunidad, el semestre español de la UE ha alumbrado algunos buenos libros sobre la historia europea. Cuando un espacio, una sociedad o un artefacto político se convierten en objeto del interés de los historiadores es porque se han asentado. Es un indicio de que exhiben un perfil propio, susceptible de atraer a los lectores. En realidad, no hace tanto tiempo que Europa como tal -no este o aquel aspecto parcial de su trayectoria- se ha convertido es material historiable. Seguramente quien inauguró este saber fue la Escuela francesa de los Annales, y más concretamente uno de sus monstruos, Fernand Braudel, con su La Méditerranée et le monde méditerranéen à l'époque de Phillippe II (Armand Colin, París, 1949). Este libro y esta escuela lo revolucionaron todo. Aportaron una doble novedad, por cuanto estrenaban la lupa sobre la infraestructura social, económica y demográfica (con cierta distancia de la estricta ortodoxia marxista), por encima del azaroso puntillismo romántico enhebrado sobre la mera sucesión de acontecimientos; y compactaban el objeto del estudio más allá del Estado-nación. La siguiente generación de historiadores, de cuna inglesa, añadió a esos nuevos instrumentos un interés especial por los elementos de la historia cultural. Una de sus grandes figuras es John Elliott, a quien se debe el precioso España, Europa y el mundo de ultramar (1500-1800) (Taurus, 2010). Es un libro fascinante. Su apariencia modesta y su textura de patchwork, a base de pequeños ensayos y conferencias, engañan. Porque contienen las conclusiones condensadas de una fructífera carrera de más de medio siglo de existencia. Esa trayectoria es más que elegante. Se inició sobre una aventura finalmente perdedora (The revolt of catalans, a study in the decline of Spain, 1598-1640, Cambridge, 1963), que fascinó a bastantes universitarios españoles de los setenta. Se centró en la figura de un perdedor, el conde-duque de Olivares, cuando se percató de que su interés primigenio, su rival Richelieu, ya estaba más que biografiado: de ahí salió, entre otras obras, el magno retrato del valido de Felipe IV (El conde-duque de Olivares, Crítica, 1990), una plutarquiana vida paralela (Richelieu y Olivares, Crítica, 1984) y la ahora reeditada en bolsillo y actualizada La Europa dividida, 1559-1598 (Crítica, 2010). Para culminar en la crónica comparada de los poderíos español y británico durante más de tres siglos, Imperios del mundo atlántico, España y Gran Bretaña en América, 1492- 1830 (Taurus, 2006). Pues bien, España, Europa y el mundo de ultramar nos ofrece la quintaesencia de todos esos (y algunos otros) magníficos estudios. Sostiene Elliott que el discurrir de la Europa moderna y contemporánea demuestra el fracaso de todo intento de unidad continental "basada en el dominio de un Imperio universal o una Iglesia universal", e igualmente "pone en tela de juicio las interpretaciones al uso de la historia europea, concebida desde el punto de vista de un avance inexorable hacia un sistema de Estados-nación soberanos", pues "la mayor parte de los Estados" fueron "Estados compuestos, los cuales tenían más de un país bajo el dominio de un solo soberano". Ni dictaduras, pues, ni ensoñaciones jacobinas. Por ejemplo, en el caso español, Castilla, que era el Estado-núcleo, fue "incapaz de imponer una solución integradora permanente". El Estado unitario del Rey Sol fue la excepción, no la norma, pues "las monarquías compuestas mostraron una notable capacidad de resistencia y
112 supervivencia", ya que "ofrecían múltiples oportunidades además de múltiples limitaciones". A partir de esta tesis central, el resto de ensayos ilustra algunos aspectos concretos: cómo los ingleses aprendieron de los errores de los españoles; cómo el norte de Europa fue absorbiendo y sustituyendo la hegemonía del área mediterránea; cómo los diferentes modos de colonizar generaron distintas poblaciones blancas o mestizas, y ofrecieron o no oportunidades a los pueblos indígenas; cómo, en fin, la verticalidad borbónica, opuesta a la horizontalidad de los Austrias, prefiguró la ruptura con la metrópoli de los españoles de Ultramar. Junto a los historiadores de la Edad Moderna como Elliott, los del siglo XX, probablemente por exigencia de los planes de estudio, son los que más se han acercado a una historia total de Europa, no fragmentada por naciones o áreas. Barbarie y civilización, una historia de la Europa de nuestro tiempo (Ariel, 2010), de Bernard Wasserstein, es un buen ejemplo de texto útil, funcional, pulcro, algo más que un manual, pero un manual al cabo. Eso sí, no oculta a veces un cierto deje displicente, como en su trato a la revuelta de Mayo del 68, o una forzada equidistancia, como la empleada al sintetizar la guerra civil española. Pero describe ordenadamente los cuatro grandes imperios existentes al iniciarse en 1914 el siglo XX, relata imaginativamente la Gran Guerra como un tercer conflicto balcánico en el que estallan los equilibrios de poder, destripa con acierto la convulsa década de los treinta, y navega bien hasta las crisis petroleras y la democratización de la Europa mediterránea, primero, y de la oriental, después. Pespuntea las grandes líneas-fuerza de cada periodo con hábiles incursiones ilustrativas en las formas de vida, de consumo y de cultura, de las lavadoras a los espectáculos de masas: Alemania contaba "con 2.000 salas de cine en 1914", y en París, a principios de siglo, "había en torno a 30.000 cafés". Pero el relato carece de la agilidad, la audacia sintetizadora y la belleza de escritura de un clásico que le precede en ambición y título: Civilización y barbarie en la Europa del Siglo XX (Planeta, 1997), del maestro Gabriel Jackson. Y también de la pasión, capacidad dramática de retrato y pulsión fusionista, por ejemplo, entre la Europa occidental y la del Este, que exhibió Tony Judt (Postwar, a history of Europe since 1945, Penguin Press, 2005. Taurus, 2006), un texto arrebatador que mereció el Premio del Libro Europeo. El lector no encontrará nada equiparable a la extraordinaria, vívida, descripción que traza Judt de los países europeos humeantes y derruidos, y de sus supervivientes desbordados y descompuestos en 1945, nada de la trepidante historia paralela entre el derrumbe del imperio soviético y la consolidación de la bienestante Europa occidental. Pero a cambio, Wasserstein narra con mejor detalle, enfoca con más amplio encuadre y pone más adecuadamente en valor todo el proceso que en los años cincuenta conduce a establecer el mejor invento político del continente en toda su historia, las comunidades, hoy Unión Europea. Mientras que Judt lo minimizaba a la anglosajona manera, considerando, por ejemplo, que el Tratado de Roma era poco más que "una declaración de buenas intenciones". El tercer gran libro europeo del semestre, más que fascinante como el de Elliott, o funcional como el de Wasserstein, es un texto seductor y muy, muy ambicioso, al proponernos un viaje por más de trece siglos. Se titula Europa, las claves de su historia (RBA, 2010), y lo firma un medievalista que escribe ágil como un periodista, el profesor granadino-barcelonés José Enrique Ruiz-Domènec. Arrancando con Stefan Zweig, Ruiz-Domènec condensa el legado europeo en sus raíces cristianas, una cultura y un espacio comunes, el espíritu científico, la separación de lo secular y lo religioso, la evolución de las formas de gobierno y un brevísimo catálogo de mitos. "Europa fue el resultado de un encuentro de civilizaciones, la románica y la germánica", que fraguó en el siglo VII, resume. Confrontada exponencialmente con los turcos desde el XI, "creció en la tensión entre la guerra y el comercio", amagando su interés económico "por el control de las materias primas" en forma de cruzadas contra el islam. Fraguó el humanismo en el bullir de las ciudades y la ciudadanía, ese proyecto de "convertir la
113 ciudad en el espacio idóneo del ser humano", en contraste con el autoritarismo de los monarcas absolutos. Para su lectura muy crítica de la Revolución Francesa, el autor se guía por el revisionista François Furet contra el clásico Albert Soboul. Transita con menos incomodidad por los cambios de 1830, 1848 y la Gran Guerra. Y su relato de la crisis de los treinta exhibe sucinto pero certero aparato económico: lo más importante de la Gran Depresión fue "su efecto en la mente de los hombres, la pérdida de confianza en el dinero, la industria y las redes comerciales: el pánico constituyó la realidad a base de confusión". Después de la Segunda Guerra Mundial, palpitan bien en sus páginas las vías divergentes a cada lado del telón de acero: "Mientras el Plan Marshall llenó las arcas" de los occidentales, "las reparaciones de guerra exigidas" por Moscú a sus satélites "arruinaron a esos países y dificultaron cualquier sentimiento a favor de los soviéticos". Al cabo, la UE se reveló como un producto de la "rebelión de las élites" surgido "en un estado de debilidad, no de fuerza", que "realizó el milagro de negar la soberanía nacional en beneficio de una causa superior, suprimiendo fronteras". Y la unificación de Europa permitió reescribir su historia a la par que se retrazaban sus mapas. El relato de Ruiz-Domènec presta la (infrecuente) debida atención a lo periférico (los Balcanes, Rusia, Turquía) y sobre todo al devenir cultural, del culto trovadoresco a la dama, a la ópera de Mozart (pues "la música es el único arte realmente europeo"), pasando por el teatro de Shakespeare, aunque menos por Cervantes. Y si deja sentir una densa simpatía por los pensadores de la Ilustración (el Voltaire que interpreta el terremoto de Lisboa en 1756 como una catástrofe natural y no un castigo divino a los pecados de los portugueses), también exuda un indisimulado recelo hacia los revolucionarios: al decisivo abate Sieyès (¿Qué es el Tercer Estado?) apenas le dedica una cita ocasional.
Lo47B que aquí no se publica Aquí apenas se prodiga el ensayo-manifiesto, generalmente breve, contundente y de autor francés, aunque ahora los anglosajones también estén tomando la delantera en esas labores. No se prodiga, sobre todo (salvo el de textura académica), el ensayo de actualidad sobre Europa, palabra ante la cual bastantes editores y otros tantos lectores deben huir, despavoridos. Hay excepciones, aunque pocas y ya empiezan a ser añejas. Por ejemplo, la estupenda y desacomplejada obrita de Mark Leonard Por qué Europa liderará el siglo XXI (Taurus, 2005) en la que el joven británico desmontaba algunos tabús sobre la comparación de las economías de la UE y de Estados Unidos. Por ejemplo, el de que estos apalizan a los europeos en productividad por hora. Leonard proponía para Europa la meta de "crear una unión de uniones que congregue a todas" las organizaciones regionales. Así el siglo XXI sería europeo no porque Europa "vaya a gobernar el mundo a la manera imperial, sino porque el estilo europeo de hacer las cosas habrá sido adoptado en el mundo", sostenía. Este texto optimista merece una revisión. Como el del clintoniano Jeremy Rifkin (de ambición más amplia que el del británico) El sueño europeo (Paidós, 2004), como contraposición al american dream. Rifkin argumentaba, de forma concomitante, que Europa es el área mejor posicionada, a caballo entre el extremo individualismo norteamericano y el individualismo extremo de Asia, para liderar el camino hacia una nueva era. Libros de tesis y / o de combate como estos, pocos en nuestras lenguas hispánicas, ni siquiera traducidos, salvo error, omisión o despiste del crítico. Y los hay estupendos (¡a ver si se animan!). Un texto al que se ama enseguida, por irreverente e impertinente, es el de Phillipe Riès, L'Europe malade de la démocratie (Grasset, 2008), en el que, contra la tradición instaurada por Margaret Thatcher, no se atribuyen todos los males del continente a la
114 abrumadora burocracia de Bruselas, sino más bien a los Gobiernos, que encuentran en las instituciones comunitarias el adecuado chivo expiatorio para sus mezquindades nacionalistas. Lo bueno (y extraño) de Riès es que siendo francés acepta el liberalismo económico (aunque completándolo). Lo que le ayuda a desmontar la falsa percepción de que el euro encareció la vida: una percepción "ligada a la frecuencia de las compras". Y le acredita especialmente para dirigir todos sus afilados dardos contra la "escandalosa" Política Agrícola Común, una delicia, acompañada de dardos mayores contra las Farm Bills o leyes agrícolas proteccionistas de Estados Unidos. Otro reconfortante panfleto es el del judío universal Élie Barnavi, L'Europe frigide (André Versaille éditeur, 2008). A Barnavi no le importa ejercer de heterodoxo. Sea buscando dónde están los errores o los éxitos de la última ampliación. O rompiendo los esquemas de lo políticamente dominante sobre las raíces cristianas de Europa, que relativiza respecto a los valores de la Ilustración: "Ya no hay franceses, alemanes, españoles o incluso ingleses, aunque se diga lo contrario; no hay más que europeos", proclama con Rousseau. Y luego están los escritos de la presidenta del Movimiento Europeo en Francia, Sylvie Goulard. Como Le coq et la perle, 50 ans d'Europe (Seuil, 2007), que trata de combinar el europeísmo militante con la obediencia francesa a la hora de trazar un fresco sobre el medio siglo de la Unión. O el más reciente L'Europe pour les nuls (Éditions First, 2009), algo así como "Europa para inútiles", el último Premio del Libro Europeo, esa convocatoria también debida a Jacques Delors. Este es un libro distinto, de escritura desenfadada y afán pedagógico sobre el funcionamiento del club de los 27, para el público aludido en el título. Hay muchos más, pero oh paradoja con la política, los que declinan son los de factura euroescéptica.
• España,48B Europa y el mundo de ultramar (1500- 1800). John H. Elliott. Traducción de Juan Carlos Bayo y Marta Balcells. Taurus. Madrid, 2010. 384 páginas. 22 euros.
• La49B Europa dividida (1559-1598). John H. Elliott. Traducción de Rafael Sánchez Mantero. Crítica. Barcelona, 2010. 440 páginas. 11,95 euros.
• Barbarie450B y civilización, una historia de la Europa de nuestro tiempo. Bernard Wasserstein. Traducción de Isabel Ferrer y Carlos Milla. Ariel. Barcelona, 2010. 832 páginas. 40 euros.
• Europa.451B Las claves de su historia. José Enrique Ruiz-Domènec. RBA. Barcelona, 2010. 384 páginas. 29 euros.
http://www.elpais.com/articulo/portada/EurH opa/empieza/escribirse/misma/elpepuculbab/2 0100717elpbabpor_22/Tes
115 340B CRÍTICA: PENSAMIENTO
El219B estilo de los historiadores CARLOS GARCÍA GUAL 17/07/2010 Hay muchas maneras de dar cuenta del pasado o testimonio del tiempo en que se vive Los griegos, que inventaron la escritura de la Historia, no se preocuparon de su interés filosófico. Tucídides no usa nunca la palabra historía, y no se interesaba ni por el pasado lejano ni por la arqueología, sino por lo que la gran guerra que él vivió a fondo revelaba sobre la psicología de la condición humana. Más tarde Aristóteles escribió, como de pasada, que la poesía -léase "la ficción literaria"- resultaba "más filosófica que la historia", porque trascendía lo particular, lo acontecido. (Aunque el Estagirita no desdeñaba el enfoque histórico: él y Teofrasto fundaron la "Historia de la Filosofía"). Con sobrada razón Jacobo Muñoz destaca bien que la Filosofía de la historia es una invención de pensadores modernos. Voltaire es el primero en usar ese término de rápido auge entre ilustrados y románticos, y en definir su horizonte teórico. Aunque tal vez cierta reflexión al respecto apuntaba ya en las Historias del helenístico Polibio, quien, desde la atalaya romana del círculo de los Escipiones y con un bagaje filosófico no desdeñable, tiende su mirada crítica sobre el pasado que parece conducir a la grandeza de Roma e interpreta esa marcha como un signo del progreso universal. (Como a otros historiadores, el exilio estimulaba su afán histórico). Unos siglos después se impone una interpretación distinta en los historiadores cristianos, desde san Agustín hasta finales de la Edad Media, al representar la Historia como el desarrollo del designio de un dios omnipotente. Lo que, visto luego, es un notable retroceso intelectual, pues desde su origen helénico la historía (o "investigación sobre lo visto") se definía por el rechazo del mythos. En el escenario épico cabían los dioses; en el histórico, no. Ya Heródoto prescindía de suponer cualquier intervención mítica en los sucesos narrados. (Si habla alguna vez de "lo divino", "perturbador y envidioso", y si cuenta algún prodigio, es sólo por su gusto por las noticias novelescas). Que un Dios omnipotente actúe detrás del telón de la Historia Universal es una idea no sostenida por los historiadores griegos ni romanos, en contraste con los textos hebreos, de furor nacionalista y tesón profético. Que la Historia traduzca los designios de Dios (y ganen los buenos y haya castigo para los malos) es un espejismo de escritores aficionados a la Teología y a la propaganda religiosa. La auténtica Filosofía de la Historia surge sólo desde la Ilustración y cobra un impulso vibrante en el idealismo de Hegel, y refuerza su horizonte utópico en Marx, y se colorea en otros pensadores de la modernidad con luces y sombras diversas, como demuestra J. Muñoz con sus inteligentes análisis y pertinentes notas. Sin embargo, he de confesar que siempre me ha interesado más la historiografía real que la filosofía de la historia -sin duda por ser un lector frívolo- y me apasiona más la lectura de los diversos historiadores, de una y otra época, viejos maestros del relato en ese género literario. Un género que se enfrenta a la dura y efímera realidad para indagar su sentido y reflejarla (Tucídides se presentaba como un austero "notario") con rigor y precisión. Pero cada gran historiador tiene su voz y su mirada, aunque intente dar una versión desapasionada -sine ira et studio- de cuanto selecciona y transmite lo que cree preciso "salvar del olvido para el futuro" (Heródoto). En toda historiografía late esa apuesta por el relato objetivo, pero es inevitable el acento propio, un estilo subjetivo y una impronta personal. Algunos historiadores fueron grandes escritores; pero incluso los de plumas más grises tienen su estilo propio (y, de propina, su valor literario).
116 La Historia no fue nunca una ciencia exacta, sino un método para recobrar y reflejar el pasado. No una epistéme, sino una téchne, como se decía en griego. Y se articula como una serie de "historias", tal como aclara muy bien el admirable libro de John Burrow: Historia de las historias (desde Heródoto al siglo XX), que nos ofrece una panorámica de la tradición historiográfica occidental. El libro tiene cinco apartados: Grecia, Roma, la Cristiandad, el Renacer de la Historia Secular y el Estudio (moderno) del Pasado. Es una amena galería de finos retratos de los historiadores: de Heródoto a los de la Escuela francesa de los Annales. Están Tucídides, Polibio, Salustio, Livio, Tácito, Beda, Gregorio, Froissart, Maquiavelo, Bernal Díaz, Gibbon, Hume, Montesquieu, Michelet, Burkhardt y Ranke, entre otros. (Incluso Godofredo de Monmouth, el inventor del reino de Camelot). Con sus rasgos de época, sus ideas, su método, su estilo, su impronta. El historiador no habla de sí mismo, pero firma su obra (los griegos dan su nombre al comienzo) como garantía de veracidad. Esta narrativa se hace crítica en Tucídides -como destacó Nietzsche en su Consideración intempestiva- y tiende a la mirada severa: el historiador es testigo y, en teoría, un juez insobornable. Con tono cáustico, como Tácito, o irónico, como Gibbon; pero siempre da un sentido a lo narrado. Estupenda y larga es la travesía intelectual que la historia ha trazado en esos textos inolvidables, huellas magníficas de su inquieta conciencia crítica. Por otra parte, el relato histórico avanza y se diversifica en variados horizontes temáticos (historia de las mujeres, de la lectura, del cuerpo, de las imágenes, etcétera). En otras nuevas Formas de hacer Historia. (Como reza el excelente título de P. Burke).
— Filosofía452B de la historia. Origen y desarrollo de la conciencia histórica. Jacobo Muñoz. Biblioteca Nueva. Madrid, 2010. 34 páginas. 18 euros.
— Historia453B de las historias. De Heródoto al siglo XX. John Burrow. Traducción de F. Meler Ortí. Crítica. Barcelona, 2007. 668 páginas. 35,90 euros.
— Formas45B de hacer Historia, P. Burke (editor). Traducción de José Luis Gil Aristu y Francisco Martín Arribas. Alianza. Madrid, 2003. 336 páginas. 25,20 euros.
http://www.elpais.com/articulo/portada/es341BH tilo/historiadores/elpepuculbab/20100717elpba bpor_28/Tes H
117 El Gobierno chino da un voto de confianza al euro
Angela45B Merkel pide en Pekín más acceso para las empresas alemanas
| Pekín 16/07/2010 La canciller alemana, Angela Merkel, ha llegado a Pekín en un viaje de cuatro días de duración, destinado a reforzar las relaciones entre los dos países. Se trata de la cuarta visita que realiza al país asiático y, como en otras ocasiones, la economía es uno de los puntos clave del programa, que ha incluido sendos encuentros con el primer ministro, Wen Jiabao, primero, y el presidente, Hu Jintao, después. A pesar de que el viaje esté centrado en los intereses alemanes, con todo un abanico de contratos firmados, de campos que van de la energía al automóvil, los encuentros fueron una buena noticia para toda la eurozona. "Europa superará sus dificultades", ha dicho Wen, en una demostración de la confianza de China hacia la economía europea y el euro. "El mercado europeo ha sido, es y será una de las principales plazas de inversión para las reservas chinas de divisas extranjeras", ha añadido el primer ministro. Suficiente para que el euro superara la barrera de 1,30 dólares por primera vez en dos meses. La dirigente alemana ha instado a Pekín a que abra más su economía y elimine las barreras con las que todavía se encuentran muchas empresas extranjeras. "Las compañías chinas, como las de muchos otros países, disfrutan de muy buen acceso al mercado alemán. Esperamos que las empresas alemanas puedan gozar del mismo acceso al mercado chino", ha dicho tras su reunión con Wen.
118 Alemania es el primer socio comercial de China dentro de la Unión Europea, con unos intercambios que han crecido rápidamente en los últimos años: 70.700 millones de euros en 2009, frente a 32.000 millones en 2001. Sin embargo, la balanza comercial ha cambiado y se ha inclinado de forma decisiva hacia el lado chino. Las exportaciones de Pekín al país europeo ascendieron a 42.700 millones de euros el año pasado, mientras en sentido contrario fueron de 28.000 millones. Wen Jiabao ha asegurado que su Gobierno busca un comercio "equilibrado y ordenado". China superó el año pasado a Alemania como primer exportador del mundo, con bienes cifrados en unos 930.000 millones de euros, frente a 860.000 millones de su socio europeo. Merkel ha dicho que, a los ojos de Europa, China no cumple aún las condiciones necesarias para que le sea concedido el estatus de economía de mercado, una condición que permitiría a Pekín reducir las posibilidades de acciones comerciales en su contra. La canciller ha afirmado que debe hacer más para abrir sus mercados y garantizar la protección de los derechos de propiedad intelectual. Entre la decena de acuerdos firmados, destaca el alcanzado por los grupos Siemens y Shanghai Electric para crear una empresa mixta en el sector de turbinas de vapor y de gas para centrales energéticas, que la agencia china Xinhua valoró en 2.700 millones de euros. El lado alemán ha negado esta cifra, pero no ha facilitado otra. También fue sellada una alianza entre la empresa Foton y Daimler-Benz para fabricar camiones en China para el mercado local y la exportación. Foton utilizará en su marca Auman la tecnología de Daimler en motores diésel, lo que le permitirá cumplir las exigentes normas europeas contra la contaminación. Xinhua cuantificó el acuerdo en 729 millones de euros. Los dos Gobiernos han pactado también crear un fondo por valor de 96 millones de euros para impulsar las energías limpias. JOSE REINOSO El Gobierno chino da un voto de confianza al euro Angela Merkel pide en Pekín más acceso para las empresas alemanas 16/07/2010 http://www.elpais.com/articulo/economia/GobierH no/chino/da/voto/confianza/euro/elpepuint/20
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119 342B
El20B CIS otorga a Zapatero la victoria frente a Rajoy en el debate sobre el estado de la nación
La456B diferencia entre ambos líderes es de seis puntos y es la quinta vez consecutiva que el presidente del Gobierno se impone al líder del PP EL PAÍS | AGENCIAS - Madrid - 17/07/2010 El presidente del Gobierno, José Luis Rodríguez Zapatero, ganó el debate sobre el estado de la nación por quinta vez consecutiva al líder del PP, Mariano Rajoy, con una diferencia de más de seis puntos, según la encuesta del CentroH de Investigaciones Sociológicas (CIS) H hecha pública hoy. Del estudio del CIS se desprende que un 26,1% de las personas que siguieron las intervenciones creen que Zapatero ganó el debate celebrado esta semana en el Congreso, frente a un 19,18% que opinan que Mariano Rajoy fue el vencedor, mientras que el 36,5% estiman que no ganó ninguno de los dos. La encuesta difiere de otras realizadas en los últimos días, como la realizada por MetroscopiaH para EL PAÍS H que otorgaba a Rajoy una victoria por la mínima. Según el estudio flash de Metroscopia, el líder de la oposición venció por tres puntos a Zapatero. El líder de la oposición resultó más convincente para su electorado (para el 66%) que el presidente para el suyo (50%). Los españoles dan ventaja a Zapatero pues consideran que demostró más sensibilidad que Rajoy hacia los problemas de los españoles (50,9% frente a 49,1%), más moderación (69,3% frente a 43,1%), más capacidad de comunicarse con los ciudadanos (53,2% frente a 37,6%) y de encajar las críticas (61,3% frente a 38,5%), y más iniciativa política (40,6% por 38,9%). En 2009, Zapatero también resultó vencedor del debate para el 37,6% de los ciudadanos, frente al 14,4% que dieron la victoria al líder de la oposición; en 2007, con un 44% frente al 16%; en 2006, con el 50% de apoyo, frente al 14%, y en 2005, con el 46% frente al 15%. La encuesta del CIS se ha realizado sobre una muestra de 1.518 entrevistas realizadas en un total de 496 municipios de la geografía española repartidos en 50 provincias.
http://www.elpais.com/articulo/espana/CIS/otorgH a/Zapatero/victoria/frente/Rajoy/debate/estad o/nacion/elpepuesp/20100717elpepunac_5/Tes H
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La21B presión sobre la deuda española se reduce con fuerza
La457B prima de riesgo baja a 185 puntos básicos mientras la rentabilidad de los bonos a dos años se reduce en un cuarto de punto en una sola jornada EL PAÍS - Madrid - 16/07/2010
El buen resultado obtenido ayer enH la subasta de bonos,H la última antes de afrontar el vencimiento de casi 25.000 millones de euros, ha permitido disipar las dudas sobre las
120 finanzas de España. Hoy, por segunda jornada consecutivo, el alivio se ha traducido en un acusado descenso de la rentabilidad que los inversores exigen para comprar títulos españoles, un factor positivo para las arcas del Estado, ya que reduce la factura por intereses que ha de pagar el Gobierno por su deuda. El mayor apetito por los bonos de España se ha traducido en un recorte de 15 puntos básicos en la rentabilidad de los bonos a 10 años hasta el 4,462%. Aunque el descenso ha sido mayor en los títulos a un plazo menor. En el caso de la deuda que vence en 2015, su interés ha bajado 19 puntos básicos hasta el 3,26% mientras, en las letras a dos años, ha sido de un cuarto de punto porcentual, con lo que a media tarde su tipo se situaba en el 2,26% en los mercados secundarios de deuda. Gracias a este recorte, la prima de riesgo, el indicador que permite evaluar la confianza que genera la economía española en los inversores, se ha reducido hasta los 185 puntos básicos. Esta cifra es 20 puntos básicos inferior al cierre del miércoles y lejos del récord que marcó en 221 puntos básicos el 16 de junio, hasta la fecha su nivel más alto desde que España entró en el euro. Gracias al descenso de las últimas dos jornadas, la rentabilidad de los bonos españoles ha vuelto a los niveles de finales de mayo. Sin embargo, lo que realmente llama la atención es la velocidad que ha alcanzado en esta trayectoria a lo largo del día de hoy. "Esta es la prueba de que en el mercado se están disipando las dudas sobre la capacidad de España para hacer frente los vencimientos de julio", explica José Carlos Díez, economista jefe de Intermoney. Lo normal es que los intereses que se pagan por los títulos a corto plazo se aproximen más a los de los tipos oficiales del Banco Central Europeo; mientras que los del largo plazo se ajusten a las previsiones de inflación y crecimiento. Así aunque la distorsión todavía es grande -los tipos oficiales están en el 1% y la rentabilidad de los bonos a dos años es del 2,5%- lo cierto es que se ha ido corrigiendo en las últimas semanas.
El458B euro supera los 1,30 dólares por primera vez desde mayo El euro ha logrado superar hoy los 1,30 dólares por primera vez desde el 10 de mayo, aunque luego ha moderado su repunte y volvía a cotizar sobre los 1,29 dólares por los datos desalentadores sobre la actividad económica en Estados Unidos y que mermaron el ánimo comprador en la Bolsa de Nueva York.
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El2B precio de la vivienda solo cae un 12% desde máximos M. V. GÓMEZ - Madrid - 17/07/2010 Quienes esperaban grandes caídas del precio de la vivienda para lanzarse a un mercado inmobiliario todavía prohibitivo para muchos, tendrán que esperar. O desistir. Desde que la vivienda libre tocara techo en los primeros tres meses de 2008 hasta el segundo trimestre de este año, cuando el metro cuadrado se paga a 1.848,9 euros, el precio apenas ha caído un 12%,
121 según el Ministerio de Vivienda. También el Instituto Nacional de Estadística recoge un retroceso de una magnitud similar. Ambos son datos oficiales, de cuya calidad se ha dudado desde muchas tribunas, entre ellas el Banco de España. Pero incluso una caída del precio 12% queda lejos del 30% que vaticinaron el BBVA o el Fondo Monetario Internacional. O del desplome de Estados Unidos, donde las estadísticas hablan de retrocesos del 32% al 23%, según la fuente. Hubo momentos en que se pudo pensar que la corrección del precio de la vivienda iba a ser más rápida de lo que está siendo. Pero lo cierto es que desde hace un año el descenso se ha ralentiza cada vez más. En junio de 2009 la caída respecto al ejercicio anterior era del 8%. En cambio, este año la caída ha sido del 3,6%. Un poco mayor ha sido la caída del precio de la vivienda libre, que cayó un 3,7% frente a 2009. A la hora de explicar qu los vaticinios catastrofistas no se vean en las estadísticas oficiales hay que echar mano de los bajos tipos de interés y los impuestos, sobre todo estos últimos. El aumento del IVA este mes del 7% al 8% ha podido contribuir a estimular la compra de viviendas durante la primera mitad del año. Mientras que la deducción fiscal por las hipotecas que se aplica a la renta finaliza este año.
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La23B caída de la prima de riesgo española se acentúa EL PAÍS - Madrid - 17/07/2010 El dinero de los inversores sigue fluyendo hacia los bonos españoles. Ayer, la rentabilidad exigida a los títulos de deuda pública españoles siguió reduciéndose con fuerza tras el éxito de la última subasta de bonos del mes de julio por parte del Tesoro. Eso acortó el diferencial o prima de riesgo frente a los bonos alemanes. En la referencia más seguida, el bono a 10 años, la rentabilidad del título español cayó 16 puntos básicos (hasta el 4,46%) y la prima de riesgo con Alemania se redujo a 185 puntos básicos (1,85 puntos porcentuales). Pero donde más rápidamente se está reduciendo la prima de riesgo española es en los plazos más cortos. Así, en los títulos a dos años la rentabilidad se redujo 23 puntos básicos hasta el 2,3%. Hace solo un mes, el mercado llegó a exigir a esos títulos una rentabilidad del 3,4%. En los bonos a cinco años, la prima de riesgo ha pasado de 244 a 167 puntos básicos en un mes. La caída de la prima de riesgo española se acentúa17/07/2010 http://www.elpais.com/articulo/economia/caida/pH rima/riesgo/espanola/acentua/elpepueco/2010
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Movistar24B dará Internet de 100 megas en otoño
La459B operadora ofrecerá la conexión por fibra óptica por 65 euros al mes E.P. - Madrid - 12/07/2010
MovistarH H ofrecerá conexión a Internet con velocidades de hasta 100 megas de subida y 10 megas de bajada a través de fibra óptica durante otoño a un precio de 64,87 euros al mes, según ha informado la operadora. A partir del 7 de agosto estrenará, dentro de su oferta 'Futuro', acceso de 50 megas. En concreto, el paquete 'Movistar Futura', con velocidades de bajada de 50 megas y 5 de subida, estará a disposición de los clientes de la compañía por 54,87 euros al mes. Además, durante el lanzamiento, los clientes podrán disfrutar de una promoción por 43,87 euros al mes y cuota de alta gratuita durante los primeros seis meses. En cuanto a los precios para la oferta de los 100 megas, los nuevos clientes que estén en cobertura podrán contratar el paquete 'Movistar Futura' por 64,87 euros al mes. Asimismo, como parte de la promoción, durante los primeros seis meses la cuota de alta será gratuita y el precio de 43,87 euros mensuales. Para los clientes que quieran disponer además de Televisión, la compañía lanzará 'Imagenio Familiar DVR' con 100 megas a un precio de 85,77 euros al mes y con una promoción de 68,87 euros durante los seis primeros meses y cuota de alta gratuita. El precio para la oferta de 50 megas es de 75,77 euros al mes con una promoción de seis meses a 54,87 euros al mes. Los precios incluyen la cuota de abono de 13,97 euros. De esta forma, la oferta actual de fibra de la operadora de 10 megas de bajada con 800 kbps de subida mejora hasta los 50 megas de bajada y 5 megas de subida, mientras que los 30 megas de bajada con 1 mega de subida se incrementa hasta los 100 megas de bajada y 10 megas de subida. La compañía ha indicado que con el desarrollo de esta tecnología se podrán ofrecer más servicios y además Telefónica podrá superar a la competencia con más velocidad y precios "muy competitivos". Telefónica espera superar el millón de hogares con esta tecnología, que ahora llega a 300.000 hogares en cobertura, durante el año que viene, aunque no precisó la fecha exacta, y prevé que de tres a cinco años la cobertura alcance el 50%.
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Griñán25B sobre Cajasur: "No es una buena noticia, pero se ha cumplido la ley"
El460B presidente andaluz arremete contra la Iglesia y el Banco de España, que "podría haber hecho más" EFE - Madrid - 17/07/2010 El presidente de la Junta de Andalucía, José Antonio Griñán, ha afirmado hoy en relación a la decisiónH de Banco de España de que BBK se quede con Cajasur:H "No es una buena noticia, pero se ha cumplido la legislación vigente". Griñán, que cambió su agenda ayer tras conocer la noticia de la adjudicación, ha dicho en una rueda de prensa que "Cajasur dejó de ser andaluza cuando una mayoría de su Consejo de Administración prefirió la intervención a la fusión con Unicaja", una decisión que, ha recordado, en su momento el Banco de España calificó como "suicida". "Todos tenemos responsabilidad, pero la frustración de la operación se debe a una historia de desavenencias, que no son razonables", ha añadido. "No he entendido en ningún momento por qué se dice que no [a la fusión con Unicaja], por qué la iglesia pierde una posición que tenía ganada en la entidad resultante, por qué se pierde la propia naturaleza andaluza, a cambio de nada". El presidente andaluz, que fue informado personalmente por el gobernador del Banco de
España, Miguel Ángel Fernández Ordoñez, a primeras horas de ayer deH la decisión,H ha arremetido también contra la entidad reguladora. "Se podría haber hecho algo más, y habría sido mejor", ya que "no se habrían utilizado recursos públicos, se habría quedado la Caja en Andalucía, se habría mantenido la obra social en la Comunidad y ya estaría hecha la fusión". Griñán ha reconocido el esfuerzo de Unicaja en la puja, "con una buena oferta", y ha recordado que lo que pedía la propuesta de la entidad malagueña era menor que lo que en su día era necesario para hacer la fusión con Cajasur. Por otro lado, el presidente ha explicado que ya ha hablado con el director general de BBK, Mario Fernández, y que éste le ha trasladado su intención de "conservar el mayor nivel posible de empleo y mantener la obra social en Córdoba". Además, ha dicho que pedirá a la caja vasca que "la entidad financiera resultante radique en Andalucía", aunque ha reconocido que "el régimen fiscal vasco es más favorable" que en el resto de las Comunidades.
http://www.elpais.com/articul346BH o/economia/Grinan/Cajasur/buena/noticia/ha/cumplido/ley/ elpepueco/20100717elpepueco_2/Tes H
124 347B La reestructuración financiera
Ordóñez26B entrega Cajasur a la BBK
La461B caja resultante será la séptima por activos y recibirá 392 millones del Estado por gestionar la entidad quebrada - La malagueña Unicaja pierde la subasta Í. DE BARRÓN / L. LUCIO - Madrid / Sevilla - 17/07/2010 Mario Fernández, presidente de la vizcaína Bilbao Bizkaia Kutxa (BBK) ha logrado su objetivo. El veterano banquero (ha trabajado en el BBV y después en el BBVA) está convencido de que el tamaño es un factor decisivo para el futuro en el sector financiero y ha vivido de cerca las fusiones. Por eso arriesgó y fue el que menos ayudas pidió para hacerse cargo de la quebrada Cajasur. Mario Fernández, presidente de la vizcaína Bilbao Bizkaia Kutxa (BBK) ha logrado su objetivo. El veterano banquero (ha trabajado en el BBV y después en el BBVA) está convencido de que el tamaño es un factor decisivo para el futuro en el sector financiero y ha vivido de cerca las fusiones. Por eso arriesgó y fue el que menos ayudas pidió para hacerse cargo de la quebrada Cajasur. Ayer, el Banco de España anunció que había elegido a BBK para traspasarle la gestión de la caja cordobesa, intervenida el 21 de mayo pasado, tras negarse a fusionarse con Unicaja. El proceso de venta fue dirigido por el banco de inversión Nomura. El Fondo de Reestructuración Ordenada Bancaria (FROB), responsable de la gestión, comunicó que la BBK había pedido en la subasta 392 millones a fondo perdido. Con este dinero, tendrá que hacer frente a los activos morosos que afloren en la entidad que estaba dirigida por la Iglesia católica. Su máximo rival, la malagueña Unicaja, pidió ayudas y financiación por unos 600 millones. Cajasur tiene 800 millones en su capital que pertenecen al FROB. Este dinero será devuelto al fondo, por lo que al contribuyente la quiebra de la entidad le costará 392 millones. Esta cifra es sensiblemente menor que la que pidió Unicaja cuando negociaba la fusión pactada con Cajasur. Entonces, la entidad presidida por Braulio Medel pidió 550 millones a fondo perdido y un préstamo de 450 millones. Este rescate ha costado mucho menos dinero que el de Caja Castilla La Mancha (CCM), que arrastra una factura de 3.775 millones y más de 15 meses de negociación. La agilidad ha venido por la aprobación del FROB. La BBK y Cajasur formarán una entidad con activos de 48.000 millones, lo que la convertirá en la séptima caja de España. Con este capital llega al nivel de los casi 50.000 millones que el supervisor estableció como el adecuado para trabajar en el nuevo escenario macroeconómico. Como Cajasur llega sin capital, BBK le cederá parte del suyo. La entidad vasca tiene exceso de capital por lo que el grupo consolidado mantendrá los niveles adecuados: el core capital, capital de máxima categoría, es el 14,6% (el más alto del sistema) y la morosidad del 2,49% (de las más bajas) pese a la crisis. Para el secretario de Estado de Economía, José Manuel Campa, el proceso de subasta ha sido "rápido, transparente y competitivo", lo que "es bueno" y genera confianza en el sistema financiero. En su opinión, tras esta fusión y otras que se están llevando a cabo, se abre una etapa que "requerirá esfuerzo, tiempo, y que va a tener baches en el camino". La BBK tiene un duro trabajo de reestructuración por delante. La entidad cordobesa pierde unos 40 millones al mes y en 2009 tuvo números rojos de 596 millones contra unos beneficios de 288 millones de BBK. Según los sindicatos, sobran unos 900 empleados. La reducción se
125 podría hacer mediante prejubilaciones y bajas incentivadas. Algunas fuentes cifraron en más de 150 millones el coste de estas reducciones. Las diferencias de plantilla son importantes: la entidad de Mario Fernández tiene 2.430 empleados para gestionar una entidad de casi 30.000 millones de activos. Cajasur, que es mucho más pequeña con 18.000 millones de activos, cuenta con 3.012 trabajadores. En cuanto al número de oficinas, BBK tiene 412 y la cordobesa 474. La BBK hará su compra mediante un banco, 100% de la caja, que integrará los activos y pasivos de Cajasur en Andalucía y quizá también los de la costa levantina. Las sucursales de la cordobesa que estén fuera de Andalucía pasarán a formar parte de la red de BBK. Con esta fórmula, la entidad vasca puede ser la primera que utilice el real decreto ley y tendrá un banco filial con la mitad de su negocio. En el futuro podría traspasarle toda la actividad financiera e incluso cotizar en Bolsa, aunque comercialmente siempre se denominará caja. La caja vizcaína dijo que "desde unos excelentes ratios de solvencia, BBK presentó un proyecto sólido y realista, que garantiza la viabilidad futura de Cajasur". Además, tras destacar que la caja andaluza tiene una cuota de mercado cercana al 46% en Córdoba y comprometerse a mantener su obra social en la región, añade que "BBK inicia con esta operación su objetivo de ganar tamaño sin renunciar a sus ratios". La decisión del Banco de España ha causado una auténtica conmoción en Andalucía. Desde que los canónigos de Cajasur decidieran, no se sabe muy bien por qué, la noche del 21 de mayo pedir la intervención del Banco de España en lugar de preferir su fusión con Unicaja, se ha producido algo muy infrecuente en esta comunidad: el consenso de todos los partidos, sindicatos, empresarios y organizaciones sociales, sobre todo las de Córdoba, pidiendo al Banco de España que la entidad se quedara en Andalucía. El varapalo para el Gobierno de José Antonio Griñán es, a decir de muchos, "brutal". Horas antes de que se conociera la decisión del Banco de España, el presidente andaluz dijo en Canal Sur Radio que la adjudicación de Cajasur a Unicaja "sería como restablecer el orden ilógicamente perturbado". Tras la decisión del FROB, la valoración vino del lado del imperturbable consejero de Economía andaluz, Antonio Ávila, quien mostró el "máximo respeto" por la decisión, aseguró que la noticia no es ni buena ni mala para Andalucía, sino "un hecho" y negó que supusiera "un fracaso" para el Ejecutivo andaluz.
De507B error en error Muy alejado de esta opinión se situó el resto de interlocutores. Al contrario de lo que se esperaba, el líder del PP andaluz, Javier Arenas, mantuvo un tono comedido, acusó a Griñán de "ir de error en error" y lamentó que ni Unicaja ni Cajasol se hayan podido hacer cargo de Cajasur. Las dos entidades andaluzas habían intentado, forzadas por el Gobierno andaluz, presentar una oferta conjunta. Esta operación no fue posible por las dificultades financieras y económicas de casar ambos proyectos en apenas 10 días, pero también porque, sobre todo, la entidad que preside Braulio Medel estaba convencida de que su oferta era la mejor. IU habló de "incapacidad e inutilidad" de Griñán en este proceso, mientras que los andalucistas también insistieron en la falta de peso político de Griñán en las esferas del Gobierno central. Aunque sin salir a la palestra con nombres y apellidos, fuentes políticas y financieras andaluzas ligan la decisión de adjudicar Cajasur a la BBK a la necesidad de Zapatero de contar con el PNV, que tiene el control de la caja vasca, para sacar adelante los próximos Presupuestos. El que de manera más clara lo verbalizó fue el líder de CC OO de Andalucía, Francisco Carbonero, quien confío en que la adjudicación a la BBK "no sea a cambio" del
126 apoyo del PNV al Gobierno central. Según varias fuentes, Griñán se ha movido todo lo que ha podido para que Cajasur se quedara en Andalucía, aunque según opinan algunos de manera tan "ostentosa" que ha sido contraproducente. Unicaja, que cosecha su tercer fracaso en una operación de fusión, emitió un comunicado, en el que considera que queda en una "posición óptima" para otras estrategias. El empeño de Griñán ahora es que Unicaja y Cajasol se unan.
348B http://www.elpais.com/articulo/economia/OrH donez/entrega/Cajasur/BBK/elpepueco/2010
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349B La reestructuración financiera
El27B Banco de España fuerza a la dirección de CAM a aceptar la fusión
El462B organismo supervisor lanza una amenaza velada a los directivos sobre su continuidad y asegura que no habrá ayudas para las cajas que sigan solas R. BIOT / Í. DE BARRÓN - Alicante / Madrid - 17/07/2010 El Banco de España dejó claro ayer a Caja Mediterráneo (CAM) que no tiene otra opción que continuar la alianza pactada a finales de mayo con Cajastur. Y le dio de plazo una semana, es decir hasta el próximo 24 de julio. El supervisor llegó incluso a realizar una amenaza velada de retirar de sus cargos a los dirigentes de la entidad sin intervenir la misma, señalaban ayer fuentes financieras. El Banco de España dejó claro ayer a Caja Mediterráneo (CAM) que no tiene otra opción que continuar la alianza pactada a finales de mayo con Cajastur. Y le dio de plazo una semana, es decir hasta el próximo 24 de julio. El supervisor llegó incluso a realizar una amenaza velada de retirar de sus cargos a los dirigentes de la entidad sin intervenir la misma, señalaban ayer fuentes financieras. El Banco de España también subrayó que la autorización de fondos y el aval de la Unión Europea les concede poderes sobre los ejecutivos de la entidad, que no tiene marcha atrás. El supervisor dejó claro que no habrá ayudas para la caja si sigue en solitario. Y es que, un mes y medio después de que Caja Mediterráneo (CAM), Cajastur, Caja Cantabria y Caja Extremadura anunciaran un pacto que podría crear la tercera caja de ahorros a través de una fusión fría, el acuerdo está en jaque. Cajastur dio ayer por roto el pacto para constituir un SIP (Sistema Institucional de Protección) ante la negativa de la CAM a que los poderes del nuevo consejero delegado, cargo previsto para el presidente de la entidad asturiana, Manuel Menéndez, sean irrevocables. Ante esta situación, el Banco de España convocó por la tarde a las cuatro cajas para tratar de resolver unas diferencias que el supervisor cree salvables. La reunión se produjo tras un cruce de declaraciones. "Los contratos se aprueban o se rechazan en su integridad, pero no por partes", señalaba ayer por la mañana un portavoz oficial de la caja asturiana. Con esta declaración, hacía explícita referencia al acuerdo adoptado el jueves por el Consejo de la CAM, que si bien ratificó su "decisión firme e inequívoca" de formar un SIP con las citadas entidades, también dejó claro que no está de acuerdo en la delegación de las facultades en el consejero delegado. La CAM esgrimió que "reafirma la necesidad de que la soberanía que ceden las cajas la reciba y administre el Consejo de Administración del banco y, a través de este, el consejero delegado". Cajastur dejó claro que el pronunciamiento "pone en peligro y al borde del fracaso" el pacto. La CAM, mientras, insistió ayer en su voluntad de formar el SIP y expresó su disposición a continuar negociando hasta alcanzar un acuerdo.
127 La delegación de todas las facultades en el consejero delegado ha sido el principal caballo de batalla entre la CAM y Cajastur en las negociaciones mantenidas durante las últimas semanas para cerrar los flecos del contrato de integración. Fuentes de la caja alicantina argumentan que la cesión de todos los poderes de forma irrevocable al consejero delegado no se recogía en el protocolo de intenciones ni tiene precedentes. Por el contrario, fuentes cercanas a la operación, conocedoras de la postura de Cajastur, defendieron que "los poderes del consejero delegado están explicitados ante el Banco de España". Si la ruptura fuera irreversible, afectaría a los casi 1.500 millones de ayuda del Fondo de Reestructuración Ordenada Bancaria (FROB) concedidos a finales de junio para financiar la operación. El acuerdo inicial de creación del SIP prevé un banco participado en un 40% por la CAM -que prácticamente dobla los depósitos y activos de la asturiana-, otro 40% para Cajastur -una de las entidades más solventes del país-, en un 11% por Caja Extremadura y el 9% restante para Caja Cantabria.
http://www.elpais.com/articulo/economia/Ba350BH nco/Espana/fuerza/direccion/CAM/aceptar/f usion/elpepueco/20100717elpepieco_3/Tes H
128 351B Medvédev ve en Alemania el socio clave para la modernización de Rusia
El463B presidente ruso y Angela Merkel intensifican las relaciones económicas PILAR BONET - Moscú - 16/07/2010 Rusia considera a Alemania como el país clave para su nueva política exterior, según confirmó ayer el presidente Dmitri Medvédev en presencia de la canciller Angela Merkel al finalizar una cumbre bilateral en la ciudad de Ekaterimburgo. Rusia considera a Alemania como el país clave para su nueva política exterior, según confirmó ayer el presidente Dmitri Medvédev en presencia de la canciller Angela Merkel al finalizar una cumbre bilateral en la ciudad de Ekaterimburgo. El lunes, ante los embajadores rusos convocados en Moscú, el líder del Kremlin informó de que las nuevas prioridades internacionales del Estado pasan por la modernización tecnológica y la incorporación de elementos innovadores en la economía, y también por una actitud más constructiva y abierta frente al mundo. En el contexto de las llamadas "alianzas de modernización", Rusia, según su presidente, "quiere colaborar con países como Alemania, Francia, Italia, la UE en su conjunto y EE UU". En mayo, en Rostov del Don, Rusia y la UE firmaron un primer documento conjunto para desarrollar ese nuevo marco de relación. Refiriéndose a las "alianzas de modernización", Medvédev dijo ayer que Alemania ocupa el "número uno en la lista". "Tenemos unas magníficas relaciones económicas y por eso en la alianza para la modernización, Alemania debe ocupar el lugar más digno", afirmó en un vehemente alegato. Merkel correspondió al entusiasmo de Medvédev, afirmando que se sentía "obligada" y esperaba ser merecedora del puesto que Rusia le ha asignado. Los dos líderes estaban acompañados por un amplio séquito de políticos y empresarios. Los contratos más notables firmados durante la cumbre correspondieron a la Siemens, que por 2.600 millones de euros abastecerá a los ferrocarriles rusos con 240 trenes durante diez años. La Siemens modernizará además estaciones de ferrocarril y centros de articulación de trenes, mediante un contrato por 600 millones. Medvédev expresó su confianza en que Siemens participe en Skólkovo, el proyecto para fundar una tecnópolis dedicada a la investigación en las afueras de Moscú. Medvédev apoyó los proyectos de Siemens de construir un centro de investigación energética y biológica y de participar en los órganos de dirección de Skólkovo. La Siemens y dos empresas rusas (Rostecnologia y Rosgidro) han creado una empresa mixta para producir instalaciones de energía solar. Además, Airbus, del consorcio EADS, entregará aviones A330 a la compañía rusa Aeroflot por más de 2.000 millones de euros. Alemania es el primer socio comercial de Rusia y en los cuatro primeros meses de 2010 el intercambio ha aumentado un 50% -hasta alcanzar 15.200 millones de euros- y, según Medvédev, ha superado la crisis y está prácticamente al mismo nivel que en 2008. En Rusia trabajan 6.000 empresas alemanas y las inversiones acumuladas son de cerca de 16.000 millones de euros. Las inversiones rusas en Alemania son inferiores, pero Medvédev dijo tener "deseo y dinero" de invertir en ese país que resulta "confortable", ya que los rusos tienen bastante menos dificultades que en otros Estados de la UE. El mandatario ruso insistió en la necesidad de suprimir los visados. Merkel, por su parte, apoyó la simplificación de procedimientos para facilitar visados, pero considera que la supresión de los mismos es una tarea de más largo plazo.
129 Entre los temas que Merkel y Medvédev debatieron el miércoles hasta altas horas de la noche estuvo la investigación del asesinato de Natalia Estemírova, la activista de derechos humanos secuestrada y asesinada en Chechenia hace exactamente un año. Medvédev manifestó que la investigación continúa "a toda marcha" y afirmó que se conoce el nombre del ejecutor del crimen, contra el que hay orden de búsqueda y captura. Sus palabras sorprendieron a los colegas de Estemírova, de la organización no gubernamental Memorial, ya que la tesis oficial es que el asesino fue Aljazur Basháev, un guerrillero muerto en una operación policial en noviembre en Chechenia. En Memorial consideran que el instigador del crimen es el presidente checheno, Ramzán Kadírov. Medvédev y Merkel discutieron la ley que amplía las competencias del Servicio Federal de Seguridad. La ley, en proceso de aprobación en la Duma Estatal, prevé la legalización de la "conversación preventiva", una práctica soviética que da a los servicios de seguridad prerrogativas para citar a un ciudadano que, a su juicio, podría cometer un delito. La relación entre Medvédev y Merkel es fluida. Ambos se tutean y en su cena nocturna el miércoles en Ekaterimburgo hablaron del campeonato del mundo de fútbol y, según el líder ruso, se comieron al hermano del pulpo Paul, que pronosticó la derrota de Alemania. Según Medvédev, una parte importante de la delegación rusa en la cumbre de Ekaterimburgo iba a favor del equipo alemán.
http://www.elpais.com/articulo/internacional/MH edvedev/ve/Alemania/socio/clave/modernizaci on/Rusia/elpepuint/20100716elpepiint_3/Te H
130
riday, July 16, 2010 Wonkbook: Assessing FinReg; Goldman suit settled; oil gusher stopped Good day for the Obama administration yesterday: FinReg found final approval in the Senate (hope you're ready to start talking Basel III, now), Goldman Sachs settled the SEC's civil suit against it for a lot of money and a statement of "regret," and BP has successfully stopped the oil well from leaking three months after it started. Happy Friday. Welcome to Wonkbook. Top Stories FinReg passed the Senate and is headed for Obama's signature. WaPo's package: Brady Dennis explains what's next for regulators: http://bit.ly/c8gngoH ;H David Cho looks back at the last financial overhaul: http://bit.ly/asb7oIH ;H a graphical guide to the bill's provisions:http://bit.ly/94GyjAH H
Goldman Sachs will pay $500 million to settle the SEC's suit against it, reportsH H Zachary Goldfarb: "The fine is the largest the SEC has ever assessed against a financial company. But the settlement also is striking because Goldman agreed to a host of changes to how it does business and because the bank, while not admitting wrongdoing, agreed to express 'regret' for including 'incomplete information' in marketing materials touting the investment to clients. By doing so, Goldman acknowledged 'the fundamental basis of our complaint,' SEC enforcement director Robert Khuzami said at a news conference, standing with 10 colleagues who worked on the case."
Oil is no longer spewing into the Gulf of Mexico, reportsH H Joel Achenbach: "As part of what BP calls an 'integrity test,' a robotic submersible slowly closed a valve on the well's new sealing cap. That choked the flow until the plume, a fixture of cable TV and many a nightmare, disappeared...Whether the well remains 'shut in,' to use the industry term, depends on the analysis of pressures in the well. Engineers and scientists hope to see high pressure hold steady during the 48-hour period allotted for the test. That would suggest that the well bore is physically intact. Lower pressure would hint of breaches in the casing and leakage into the surrounding rock."
Classic cover interlude: The Kills playH "Pale Blue Eyes".H Still to come: Ben Nelson says he will vote against beginning debate on a climate bill with a carbon price; Chris Dodd wants the Fed to get aggressive on growth; the court challenge to Arizona's immigration law has begun; and the dawn of Sharktopus. FinReg
Daniel Indiviglio highlightsH H the positives and negatives of each provisions, and what the bill leaves out: "Leverage: The House bill would have limited bank leverage to 15 to one. The final bill does not. So unless the systemic risk council decides to impose such a requirement, the culture of high bank leverage will continue. No Break Ups: Many believe that part of the systemic risk problem was created by allowing financial institutions to grow too large. This bill wouldn't explicitly require any to be broken up, though the council may be able to do so under certain circumstances."
131 A survey of economists shows an even split on the bill: http://bit.ly/apWJydH H Tim Geithner and the bank lobby offered praise: http://bit.ly/bI0aFdH H The GOP is already calling for repeal: http://politi.co/b8Ij7XH H
Simon Johnson looksH H at the international future of finance: "Bankers and hedge fund managers are fond of saying, "if you place restrictions on our activities in New York, we'll just move elsewhere ¿ like London." This makes attitudes towards the financial sector in other countries ¿ particularly the UK ¿ highly relevant for American public policy debate on this issue." You can actually download a free book on international fnancial regulation, including an essay from Johnson: http://bit.ly/bZMZxBH H
Time to start thinking about Basel III, writesH H Kevin Drum: "And now for a post on the world's most boring topic: Basel III. This, you might recall, refers to the ongoing talks to update the Basel II Accord, which in turn was an update of the Basel I Accord ¿ all three of which govern the amount and quality of capital that banks are required to hold. Roughly speaking, the more capital they're required to have, the lower their leverage and the higher their safety. To a considerable extent, this is the real ground zero for bank safety, not the financial reform bill that passed the Senate today."
When Basel III happens, FinReg pushes it into law, writesH H Felix Salmon: "[FinReg] includes Congressional authority for regulators to adopt all the Basel III standards. In other words, there's no risk of Basel III getting caught up in Congressional opposition, as Basel II did. Once it's agreed in Switzerland, US regulators are free to implement it immediately. "We got all the authority that we needed in this legislation that just passed," [Michael] Barr said. "The regulatory community will be ready to implement it in the US." Timothy Geithner opposes Elizabeth Warren's nomination to lead the consumer protection agency, writesH H Shahien Nasiripour: "Her increasing public profile could make it difficult for Geithner, who will oversee the unit until it's transferred to the Federal Reserve. His role would involve trying to balance her advocacy on behalf of borrowers with the demands of the nation's major financial institutions, his traditional constituency. Geithner's objections to Warren taking over that role also involve her views on Wall Street, sources say. The longtime professor believes the nation's megabanks are Too Big To Fail and have been among the biggest abusive lenders in the country. Her toughness on giant banks is said to be a longtime source of tension with Geithner." More round-up: Matthew Yglesias thinks what is in the bill shouldn't be overshadowed by what is not: http://bit.ly/dd4X2yH ;H Clive Crook thinks it's only a start, but better than nothing: http://bit.ly/cP5KcPH ;H Ezra Klein warns not to confuse FinReg and Wall Street Reform: http://bit.ly/cZDqzBH ;H Douglas Elliott argues that regulators need to work with their international counterparts to implement the bill: http://bit.ly/cZdzODH ;H Edmund Andrews rebuts charges that the bill will hurt farmers: http://bit.ly/cFiGGBH H Energy
Ben Nelson will seek to block debate on any climate bill with a carbon price, Hreports H Darren Samuelsohn: "Nelson has long been known as an opponent of proposals for tackling greenhouse gases with a cap-and-trade plan. But his opposition to the procedural vote stands out given party discipline that at least allows the majority leader to take a bill up on the floor. Environmentalists tracking the debate said earlier this week that they expect most Democrats will vote for the motion to proceed out of deference to Reid and President Barack Obama."
Some are doubting the administration's ability to promote electric cars, reportH H Anne Kornblut and Peter Whoriskey: "To stimulate demand for electric cars, which are more expensive than their conventional or hybrid counterparts, the government is offering consumers a $7,500 tax incentive. Even advocates of federal support for the industry express grave doubts about expanding battery production capacity so far ahead of the demand, at the expense of other investments. Estimating that by 2015 the U.S. share of the world market will be no more than 10 percent, Anderman suggested that the United States delay efforts to broaden capacity and use the money for pilot projects and research instead."
The support for electric cars is spurring a larger debate on industrial policy: http://bit.ly/bzAFecH H
132 Climate talks between utility companies and environmentalists are moving forward, reportsH H Darrel Samuelsohn: "Claussen and the other sources declined comment on the specifics of the negotiations taking place at Duke Energy Corp.'s downtown Washington offices. But they confirmed that industry and environmental officials are wrestling with an industry demand for regulatory relief from several existing Clean Air Act provisions as a point of entry for agreeing to go first in a climate change program. They also are debating exemptions from EPA climate regulations and allocation of valuable emission allowances needed for compliance with a mandatory greenhouse gas cap."
But some environmentalists are saying the negotiations are failing: http://bit.ly/8ZmbXwH H
Utility companies' preferred pollution deal is a no-go, writesH H Brad Plumer: "It doesn't make much sense to allow power plants to keep churning out a whole bunch of other toxins that cause a lot of health problems--like mercury or nitrogen oxide--so long as they're making headway on greenhouse gases. Now, one possible compromise would be to fold in proposedH legislation H by Tom Carper and Lamar Alexander that would set up a separate cap-and-trade system for sulfur-dioxide, nitrogen- dioxide, and mercury. Many clean-air groups like that approach. But that would actually have to get included in the energy legislation. Otherwise, utilities are just getting a free pass."
John Deutsch arguesH H a natural gas revolution is upon us: "Even 10% penetration in the next decade or two would displace 1.2 million barrels of oil per day...Natural gas can also be transformed into liquid fuels, such as methanol, for transportation or industrial use at a production cost that I estimate to be approximately $45-$60 per barrel of product. This is expensive, but lower than the likely price of crude oil and the anticipated cost of synthetic liquids from coal or shale (plus it has less carbon emissions)."
Great moments in movie trailers interlude: SharktopusH H - part shark, part octopus, all danger. Economy/ FinReg
Chris Dodd nudged Obama's Fed nominees to support more stimulative action, reportsH H Neil Irwin: "'While the economy is growing, it is not growing fast enough to help the millions of Americans who lost their jobs as the result of the crisis,' said Dodd, chairman of the Senate Banking Committee. He noted that the unemployment rate remains very high, business investment is subdued and that some price measures 'suggest that we are moving toward price deflation.' 'It is evident that the economy is going to need all the help the Fed can provide over the coming year,' he said." Janet Yellen agreed that job creation is the "top priority" of current monetary policy: http://bit.ly/chTV1cH H
Budget experts outlineH H what's first up for new OMB director-to-be Jack Lew. Maya MacGuineas: "The president can't expect Congress to lead on crafting the specifics. Instead, the White House will have to offer a detailed proposal (think defense cuts, Social Security reform, a strict health- care budget and the reduction of a slew of tax breaks), cooperate with both parties to hash out a workable plan and find ways to offer political cover for those willing to step up." David Greenberg looks back at how Woodrow Wilson and Theodore Roosevelt constrained business: http://bit.ly/dm7iHoH H
Paul Krugman arguesH H that the GOP's obsession with tax cuts is dangerous: "There has always been a sense in which voodoo economics was a cover story for the real doctrine, which was 'starve the beast': slash revenue with tax cuts, then demand spending cuts to close the resulting budget gap. The point is that starve the beast basically amounts to deliberately creating a fiscal crisis, in the belief that the crisis can be used to push through unpopular policies, like dismantling Social Security."
Floyd Norris explains why a fiscal crisis can't "sneak up" on the US: http://nyti.ms/br6c1BH H
http://blogs.wsj.com/economi28BH cs/2010/07/15/economists-split-over-financial-overhaul/ H
133 TheH Future of Finance: The LSE Report H
The352B Future of Finance: The LSE Report
Download the book
TheHU Future of Finance: The LSE Report U Download by chapter
PrefaceHU UH Richard Layard
ChapterHU 1: U What do banks do? Why do credit booms and busts occur and what can public policy do about it?
AdairH Turner
ChapterHU 2: U What is the contribution of the financial sector: Miracle or mirage?
AndrewH Haldane, Simon Brennan and Vasileios Madouros
ChapterHU 3: U Why are financial markets so inefficient and exploitative – and a suggested
remedy H Paul Woolley
ChapterHU 4: U What mix of monetary policy and regulation is best for stabilising the economy?
SushilH Wadhwani
ChapterHU 5: U How should we regulate the financial sector?
CharlesH Goodhart
ChapterHU 6: U Can we identify bubbles and stabilise the system?
AndrewH Smithers
ChapterHU 7: U What framework is best for systemic (macroprudential) policy?
AndrewH Large
ChapterHU 8: U Should we have “narrow banking”?
JohnH Kay
ChapterHU 9: U Why and how should we regulate pay in the financial sector? H Martin Wolf
ChapterHU 10: U Will the politics of global moral hazard sink us again?
PeterH Boone and Simon Johnson
Organised by:
134 Deuda29B pública española
La35B fuerte demanda extranjera se consolida en la subasta a 15 años
El46B Tesoro colocó ayer 3.000 millones en bonos a 15 años y recibió peticiones por 7.721 millones, más del 50% de inversores no residentes, que confirman su creciente interés por la deuda española. El 70% de las peticiones, en las que tuvieron un peso notable los bancos centrales, se concentró en sólo tres mandatos. La prima de riesgo de España cayó hasta los 197 puntos básicos.
CapacidadH probada para afrontar los vencimientos H Cristina de la Sota - Madrid - 16/07/2010 La excelente acogida que tuvo ayer la subasta de obligaciones a 15 años del Tesoro y su buena evolución en el mercado secundario confirman el interés del inversor final por la deuda española. Un claro reflejo de la creciente confianza en España. "Ha habido mucho interés antes y después de la subasta, lo que ha repercutido en los precios del secundario. Había posibilidades de emitir más del máximo de 3.000 millones anunciado", explican desde una entidad. "Alrededor del 50% de la demanda ha venido de fuera. Ha habido una concentración alta en pocas peticiones a muy buenos precios. Los inversores han pagado unos 50 céntimos por encima de los precios de mercado antes de la subasta para garantizarse la adjudicación. Eso demuestra que el interés era real", comentan fuentes del mercado. La alta demanda garantizó, así, que el interés de la subasta no se encareciera en exceso para el Tesoro. El tipo marginal de la colocación -el máximo de todas las ofertas- se situó en el 5,145%, un precio superior al 4,44% de la subasta de abril pero mejor de lo esperado. "Ha habido una presión de demanda brutal y por eso los tipos son mejores de lo que se preveía. Es una señal de confianza", añade José Carlos Díez, economista jefe de Intermoney. Fuentes del mercado comentan, además, que el 70% de la demanda -5.400 millones de euros- estuvo centrada en tan sólo tres peticiones. "Esto indica que probablemente hay un banco central detrás", añaden desde otra entidad, algo que el Tesoro no quiso confirmar ayer, pero que se daba por hecho en el mercado después de que la semana pasada el 19,3% de la oferta sindicada de 6.000 millones la acapararan bancos centrales, con un especial protagonismo del Banco Central de China. La apuesta de los extranjeros y la buena evolución de la emisión de ayer en el mercado secundario son indicios claros del creciente interés de los inversores. La emisión de ayer se cerró a un tipo marginal del 5,145% y al cierre de la sesión quedó en el 5,067%, lo que implica que el precio -que se mueve a la inversa que la rentabilidad- aumentó durante la sesión por la compra de inversores no satisfechos con lo recibido. "El movimiento de compra de deuda se ha dado en todos los plazos del secundario. Es una buena noticia que el mercado empiece a poner en precio de forma más adecuada el riesgo de España", explica Pablo Guijarro, analista de AFI. "La demanda se ha consolidado tras el éxito de la operación sindicada de la semana pasada", añade José Luis Carranza, de Caylon Crédit Agricole. La buena acogida de la subasta contribuyó así a reducir la prima de riesgo y el diferencial de la deuda española a 10 años (4,62%) con la deuda alemana al mismo plazo (2,648%) se redujo en 10 puntos básicos ayer para situarse en los 197,12. En el tramo a 15 años este diferencial
135 también se estrechó al pasar de los 229 a los 216 puntos básicos. "Es una buena señal que tras las subastas los diferenciales se contraigan porque indica que quienes compran deuda pueden ganar dinero", dice Alberto Matellán, de Inverseguros. Los expertos recuerdan, no obstante, que la gran prueba de fuego llegará la próxima semana con la publicación de los test de estrés a la banca. "Si el riesgo a corto plazo cae es factible que el diferencial de la deuda soberana española se estabilice o corrija algo. Con las últimas tensiones, se ha marcado un techo", añade Guijarro.
Capacidad465B probada para afrontar los vencimientos El nerviosismo que se percibía en el mercado hace unas semanas ante los vencimientos de deuda que afronta el Tesoro este mes ha remitido. La buena evolución de las últimas emisiones de deuda confirma la capacidad de financiación del Estado y aleja el temor a posibles impagos. "El miedo que había a que España no pudiera hacer frente a sus vencimientos de deuda estaba fuera de lugar. España no ha registrado los problemas de Grecia y con los recursos captados no había riesgo de refinanciación", explica Pablo Guijarro, de AFI. Este mes el Tesoro afronta obligaciones por 24.663 millones y ahora el mercado sí confía en su capacidad de pago. Cristina de la Sota La fuerte demanda extranjera se consolida en la subasta a 15 años16/07/2010 http://www.cincodias.com/articulo/mercados/fuerte-demanda-extranjera-consolida-subasta- anos/20100716cdscdimer_2/cdsmer/ Mercado de divisas
El354B euro despunta hasta los 1,29 dólares Cinco Días - Madrid - 16/07/2010 La divisa europea encontró ayer dos valiosos aliados que permitieron que llegara a cotizar sobre los 1,29 dólares: el éxito de la subasta de obligaciones a 15 años del Tesoro español y la debilidad de los indicadores económicos conocidos ayer en Estados Unidos. El euro recuperó así un nivel que no recordaba desde el pasado 4 de mayo, justo cuando comenzó a acusar con mayor rigor la preocupación por la economía griega y por la propia sostenibilidad de la zona euro. La fuerte demanda registrada en la subasta del Tesoro, y el interés que mostraron los inversores extranjeros, fue el motor inicial para el avance del euro, que se sumaba además a la buena reacción que ya tuvo la divisa europea al regreso de Grecia al mercado el pasado martes, cuando realizó su primera subasta de deuda desde que pidiera apoyo a sus socios europeos, a principios de mayo. Portugal e Italia también realizaron el miércoles subastas con éxito. El euro, que en lo que va de año todavía cae el 9,8%, reforzó su avance frente al dólar tras conocer el índice de la Fed de Filadelfia, que mide la actividad industrial en esta región estadounidense y que defraudó las expectativas. El billete verde se resentía también de la advertencia de la Reserva Federal, conocida la víspera, de que el crecimiento económico será más lento de lo esperado. Dudas en EE UU Las referencias macro conocidas en Estados Unidos han frenado la escalada del dólar frente al euro. Con todo, la moneda única retrocede el 9,8% respecto al dólar en 2010. El mercado espera hoy la publicación al otro lado del Atlántico del IPC de junio. http://www.cincodias.com/articulo/mercados/euro-despunta-129- dolares/20100716cdscdimer_3/cdsmer/
136
July 15, 2010, 2:45 PM ET
Economists230B Split Over Financial Overhaul
Economists surveyedH by The Wall Street Journal this week H were evenly split on whether they would have voted in favor of the financial-regulatory bill that passed in the Senate on Thursday. Some 21 of those surveyed said they’d vote yes; 22 said they’d vote no.
Getty Images Senate and House leaders hammer out the final details of financial-regulation overhaul. Asked how much the legislation will do to prevent a repeat of the global financial crisis, the majority (58%) said the overhaul would reduce the risks “just slightly and only 6% think it will have a “significant” impact. Among those who said they would vote against the bill, Diane Swonk of Mesirow Financial raised concerns about moving too fast. “The legislation is outpacing our understanding of the crisis, and I would like to make sure that we learn something from what went wrong before we legislate a new problem,” she said. Others echoed concerns about unforeseen risks resulting from the overhaul. “Minor reduction in financial risk is not worth a major overhaul, which will generate unintended consequences,” said Brian Wesbury of First Trust Advisors. Many of those who said they would vote to pass the legislation weren’t enthusiastic . “Better it than nothing,” said Allen Sinai of Decision Economics, “though [the proposal] is very imperfect.” “Human nature makes more financial crisis inevitable. Hopefully the legislation will make them milder,” said Dana Johnson of Comerica Bank, who supported passage. “It does much more good than harm,” he added. On the impact of the bill, some, such as Mark Nielson of MacroEcon LLC, were skeptical that any regulation could help. “Anything Congress puts in place will in the short run be undone at the trading level and in the long run will become captive of the cozy high finance industry,” he said Michael Niemira of International Council of Shopping Centers raised concerns that the bill is too busy fighting the last war. “It is unlikely that the source of the next financial crisis will be identical to the last — it rarely is,” he said.
http://blogs.wsj.com/economics/2010/07/15/H economists-split-over-financial-overhaul/ H
137 OpinionH H
July 15, 2010
Redo231B That Voodoo
By564B PAULH KRUGMAN Republicans are feeling good about the midterms — so good that they’ve started saying what they really think. This week the party’s Senate leadership stopped pretending that it cares about deficits, stating explicitly that while we can’t afford to aid the unemployed or prevent mass layoffs of schoolteachers, cost is literally no object when it comes to tax cuts for the affluent. And that’s one reason — there are others — why you should fear the consequences if the G.O.P. actually does as well in November as it hopes. For a while, leading Republicans posed as stern foes of federal red ink. Two weeks ago, in the official G.O.P. response to President Obama’s weekly radio address, Senator Saxby Chambliss devoted his entire time to the evils of government debt, “one of the most dangerous threats confronting America today.” He went on, “At some point we have to say ‘enough is enough.’ ” But this past Monday Jon Kyl of Arizona, the second-ranking Republican in the Senate, was asked the obvious question: if deficits are so worrisome, what about the budgetary cost of extending the Bush tax cuts for the wealthy, which the Obama administration wants to let expire but Republicans want to make permanent? What should replace $650 billion or more in lost revenue over the next decade? His answer was breathtaking: “You do need to offset the cost of increased spending. And that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans.” So $30 billion in aid to the unemployed is unaffordable, but 20 times that much in tax cuts for the rich doesn’t count. The next day, Mitch McConnell, the Senate minority leader, confirmed that Mr. Kyl was giving the official party line: “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject.” Now there are many things one could call the Bush economy, an economy that, even before recession struck, was characterized by sluggish job growth and stagnant family incomes; “vibrant” isn’t one of them. But the real news here is the confirmation that Republicans remain committed to deep voodoo, the claim that cutting taxes actually increases revenues. It’s not true, of course. Ronald Reagan said that his tax cuts would reduce deficits, then presided over a near-tripling of federal debt. When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash. But we’re talking about voodoo economics here, so perhaps it’s not surprising that belief in the magical powers of tax cuts is a zombie doctrine: no matter how many times you kill it with facts, it just keeps coming back. And despite repeated failure in practice, it is, more than ever, the official view of the G.O.P.
138 Why should this scare you? On paper, solving America’s long-run fiscal problems is eminently doable: stronger cost control for Medicare plus a moderate rise in taxes would get us most of the way there. And the perception that the deficit is manageable has helped keep U.S. borrowing costs low. But if politicians who insist that the way to reduce deficits is to cut taxes, not raise them, start winning elections again, how much faith can anyone have that we’ll do what needs to be done? Yes, we can have a fiscal crisis. But if we do, it won’t be because we’ve spent too much trying to create jobs and help the unemployed. It will be because investors have looked at our politics and concluded, with justification, that we’ve turned into a banana republic. Of course, flirting with crisis is arguably part of the plan. There has always been a sense in which voodoo economics was a cover story for the real doctrine, which was “starve the beast”: slash revenue with tax cuts, then demand spending cuts to close the resulting budget gap. The point is that starve the beast basically amounts to deliberately creating a fiscal crisis, in the belief that the crisis can be used to push through unpopular policies, like dismantling Social Security. Anyway, we really should thank Senators Kyl and McConnell for their sudden outbursts of candor. They’ve now made it clear, in case anyone had doubts, that their previous posturing on the deficit was entirely hypocritical. If they really do have the kind of electoral win they’re expecting, they won’t try to reduce the deficit — they’ll try to make it explode by demanding even more budget-busting tax cuts.
PAULH KRUGMANRedoH That Voodoo July 15, 2010 http://www.nytimes.com/2010/07/16/opiniH on/16krugman.html?ref=paulkrugman H
July 15, 2010, 9:13 am Carter, Reagan, Revenue July 15, 2010, 9:13 am One common reaction of conservatives, when you point out that the experience of the last 20 years offersH zero support H for the idea that tax cuts pay for themselves, is to start shouting “Jimmy Carter! Reagan! Supply side roolz!” So I thought it might be worth presenting a bit of evidence from an earlier 20-year stretch. Here’s real federal revenue, in 2005 dollars, from 1970 to 1990. I’ve plotted the log, because it’s easier to look at trends: BEA A couple of points. First, the Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy; there was a nasty recession starting in 1979, largely thanks to an oil shock, but overall growth was respectable and revenue growth reasonably high. Second, the revenue track under Reagan looks a lot like the track under Bush: a drop in revenues, then a resumption of growth, but no return to the previous trend. This is exactly what you would expect to see if supply-side economics were just plain wrong: revenues are permanently reduced relative to what they would otherwise have been. July 14, 2010, 6:23 pm
139 Cassandra35B Time
Has it really been 16 months sinceH I wrote this?H So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed. But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked. Yes, the recession ended in a technical sense. But still. I wish I had something constructive to propose. But as I feared right from the beginning, there was only one chance at doing this on a sufficient scale. And the administration didn’t take that chance.
http://krugman.blogs.nytimes.com/2010/07/14/cassandra-time/H H July 14, 2010, 6:10 pm
Legal356B Question Does the Fed have the right to do a helicopter drop, i.e., just hand out cash? My guess is not: it’s empowered to buy assets, which is what it does in an open-market operation, but not just to give stuff away. So to do the equivalent of a helicopter drop, the Fed would have to work with the Treasury: it would have to buy government debt, and the Treasury would then hand out the money. But the Treasury can’t do this without enabling legislation. And enabling legislation can’t pass without Ben Nelson.
I think we have a problem here. There’sH a hole in the bucket. H However, the Fed can change its inflation target any time it likes.
http://krugman.blogs.nytimes.cH om/2010/07/14/legal-question/ H July 14, 2010, 5:59 pm
My357B Obama Problem
JohnH Boehner,H March 2009: It’s time for government to tighten their belts and show the American people that we ‘get’ it
BarackH Obama,H yesterday: “At a time when so many families are tightening their belts, he’s going to make sure that the government continues to tighten its own,” Obama said. “ We’ll never know how differently the politics would have played if Obama, instead of systematically echoing and giving credibility to all the arguments of the people who want to destroy him, had actually stood up for a different economic philosophy. But we do know how his actual strategy has worked, and it hasn’t been a success. July 14, 2010, 5:26 pm
140 What358B Is The Fed Thinking?
OK, so the JuneH Fed minutes H are out. Here are the economic projections: When reading this, in addition to looking at the projections for 2010, 2011, and 2012, you want to look at the long run projections for unemployment and inflation. In past releases, the Fed has been clear that the long-run unemployment projection represents Fed views on the NAIRU, the unemployment rate consistent with stable inflation, and that the long-run inflation projection should be viewed as a target. Also, the Fed generally looks at core inflation rather than the headline number. With that in mind, here’s what the Fed expects: unemployment far above normal, core inflation well below target, for years to come. I’d quarrel with those projections, a bit: I have no idea why Fed presidents expect core inflation to rise over the next two years. Historically, high unemployment has been associated with falling, not rising inflation. In fact, my bet is that we will be near or into deflation by 2012. But even given the Fed’s own projections, it’s not doing its job, it’s missing its targets. Yet it apparently sees no need to act.
http://krugman.blogs.nytimes.com/2H 010/07/14/what-is-the-fed-thinking/ H July 14, 2010, 10:19 am
Nobody359B Understands The Liquidity Trap (Wonkish)
Sigh. In an otherwiseH useful article H about divisions in the Fed, Jon Hilsenrath says this: The Fed is better equipped to solve some economic problems than others. As Mr. Bernanke noted in a now-famous 2002 speech, the Fed has the power to fight deflation—or falling wages and prices—by printing money. But the bank’s tools aren’t perfectly suited to reducing unemployment, which is influenced by a range of factors including fiscal policy, regulation and global demand. Sorry, but that’s totally wrong. The question is whether, at the zero bound, the Fed has the ability to increase aggregate demand — full stop. If it can increase aggregate demand, it can fight both deflation and unemployment; if not, not. In a way, the problem with Bernanke’s speech was that he made increasing demand and fighting deflation sound too easy. The Fed can print money, if you increase the supply of something its price will fall, end of story.
But asH I tried to point out H a long time ago, this simple story breaks down when short-term interest rates are near zero. Here’s one way to think about it: when the Fed conducts an open-market operation, buying short-term debt with newly printed money, this normally affects the short rate because bonds and money are imperfect substitutes: money yields less, but has the advantage of being something you can use directly to make payments, that is, it’s more liquid. But when you have bought so much debt and created so much money that rates are near zero, the public is saturated with liquidity; from that point on, they’re holding money simply as a store of value, which makes it no different from bonds — and hence a perfect substitute for bonds. And at that point further open-market operations do nothing — they just swap one zero-interest asset for another, with no effect on anything.
141 So why not forget about open-market operations, and just drop the stuff from helicopters? Well, remember that at this point cash and short-term bonds are equivalent. So a helicopter drop is just like a temporary lump-sum tax cut. And we would expect people to save much or most of such a tax cut — all of it, if you believe in full Ricardian equivalence. In my simple 1998 model, there’s only one way the Fed can affect things at all: by promising, credibly, to print more money in the future, when the zero lower bound no longer binds. In practice, things are more complicated, because long-term bonds aren’t perfect substitutes for short-term — so the Fed can get some traction by buying at longer maturities. But I always felt than Ben was overstating the effectiveness of such purchases. It’s worth noting that inH his
“it” speech H Bernanke’s more-or-less specific proposal was to set a ceiling on the yield on two- year securities. How much would that accomplish now, when evenH the 2-year yield H is only 0.67 percent? Anyway, back to the original point: it’s depressing to realize that two years into liquidity trap economics, the WSJ still doesn’t seem to understand the basic point of why the zero bound is a problem. Nobody Understands The Liquidity Trap (Wonkish) July 14, 2010, 10:19 am http://krugman.blogs.nytimes.com/2010/07/14/nH obody-understands-the-liquidity-trap-wonkish/ H July 14, 2010, 9:43 am
Delusions360B About Debt Dynamics
Via MarkH Thoma,H Dean Baker catches Erskine Bowles vastlyH overstating future federal interest payments.H This reminded me of DanH Senor’s similar blooper H regarding Japanese interest payments. And I think they have a common cause. Both Bowles and Senor want to scare us about the short-run deficit (as opposed to longer-run budget concerns). And both are turning to an argument that sounds compelling: debt dynamics. The story goes like this: the more the government borrows, the more interest it has to pay, which requires even more borrowing, and before you know it the debt explodes. Sounds terrible, until you think about it a bit harder and look at the numbers. Consider what happens to the ratio of debt to GDP –which I’ll call DR, for debt ratio — over time. There are three things affecting the growth in DR. One is the “primary” budget deficit — spending other than interest payments minus revenue. The second is interest payments. But there’s a third factor: growth in GDP, which increases the denominator of D/GDP. The equation looks like this: Increase in DR = primary deficit as % of GDP + [(r-g) * Previous year's DR] where r is the interest rate on debt, and g is the growth rate of GDP. And here’s the thing: for major advanced countries, r-g is a small number: interest rates on government debt are at most a bit larger than the economy’s growth rate. In fact, at the moment they’re actually less: the realH interest rate onH long-term US government debt is 1.8%, which is below most estimates of long-run growth. So the debt dynamics coming out of interest payments on existing debt aren’t anything like the explosive force the austerity crew would have you believe. Even after all these years of borrowing, the overwhelming determinant of growth in Japan’s debt is still the primary deficit, not interest payments on past debt.
142 The real message here is that people like Bowles and Senor are so eager to tell deficit horror stories that they don’t bother to check their facts. July 14, 2010, 9:19 am
Tax361B Cut Delusions Hmm. It looks like delusion Wednesday. I have at least two posts to put up about widespread economic delusions. So here’s post #1, about tax cuts.
A number of people have reacted to MitchH McConnell’s defense of Jon Kyl,H with his remarkable claim that the Bush tax cuts paid for themselves. In a rational world, the failure of the economy to do anything special after those tax cuts, following a boom period after the Clinton tax hike, would have cast strong doubt on any claims about the favorable impacts of tax cuts on the economy, let alone on the claim that these effects are so strong as to generate more revenue than the losses from the cuts. As thisH nice chart H shows, the actual path of revenue was pretty much what you would have expected if the Bush cuts had no supply-side effect at all.
But judging from the reaction both to myH post H and to MenzieH Chinn’s,H there are a lot of people who can’t handle the truth. Put up a simple chart of revenues or growth over time, and they start screaming that you’re cherry-picking data; that you’re a liar for not mentioning Jimmy Carter, or something; or, the all-purpose response, 9/11! 9/11! 9/11! Oh well. July 13, 2010, 7:14 pm
Invincible362B Ignorance Just in case you had some lingering notion that anyone in the Republican party was fiscally responsible, Mitch McConnell has weighedH in in support of Jon Kyl:H [T]here’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject. In a way you have to wonder what point there even is in trying to argue here. But anyway, look: it’s been a long time since Morning in America. We’ve now been through two two-term administrations, one of which raised taxes, the other of which cut them. Which looks like it presided over a more vibrant economy? And who in their right mind would describe the Bush economy as “vibrant”, anyway? Even during the peak of the housing bubble, it never achieved the kind of job growth that was routine in the Clinton years. Oh, and as for revenue: we have a growing economy, which means that revenue tends, other things equal, to rise over time. But here’s what real federal revenue looked like since 1992:
143
Rapid, steady growth in the Clinton years; much less thereafter, even if you stop the clock just before the housing bubble burst. In short, the notion that tax cuts pay for themselves has no empirical support. And yet the GOP leadership — which claims to be oh so worried about the deficit — is willing to stake America’s solvency on its belief that tax cuts are free. Update: Also, for those readers who complain that I’m too partisan, that I should admit that there are two sides to the issues, this is a prime example of my problem. How am I supposed to pretend that these are serious people? The facts really do have a well-known liberal bias. July 13, 2010, 9:51 am
Dani36B Rodrik Is Insufficiently Radical
Dani has a nice piece decryingH the obsession with market confidence.H But even he misses a trick. He writes, Today, markets seem to think that large fiscal deficits are the greatest threat to government solvency. Tomorrow they may think the real problem is low growth, and rue the tight fiscal policies that helped produce it. Today, they worry about spineless governments unable to take the tough actions needed to deal with the crisis. Perhaps tomorrow they will lose sleep over the mass demonstrations and social conflicts that tough economic policies have spawned. Um, even that isn’t true. Britain embarked on austerity even though there was no hint that bond markets were actually worried about its solvency. American politicians are saying that we have to cut now now now or become Greece, even though interest rates on US debt are at near-record lows. As I’ve written repeatedly, we’re running scared of invisible bond vigilantes. The point is that policy makers aren’t responding to what financial markets demand — they’re responding to what they believe, thanks to some mystical source of knowledge to which I’m not privy, markets will demand one of these days. This isn’t the tyranny of the bond market; it’s the tyranny of fiscal fantasies, of speculation about what the bond market might do.
144
Return23B of the Bond Market Vigilantes
By46B MarketBeat Staff, May 29, 2008, 9:19 AM ET They’re back. In a commentary sent to clients this morning, Ed Yardeni provides a short history of the bond-market vigilantes (a term, he points out, he coined in the early 1980s) and explains why, with the 10-year yield climbing above the 4% mark for the first time since early this year, they’ve made a comeback. “The Bond Vigilantes are becoming increasingly concerned that the Fed’s unprecedented moves to flood the financial system with liquidity since March may be setting the stage for a rebound in economic growth and inflation,” Yardeni writes. “Of course, headline inflation has rebounded along with energy and food prices, but it didn’t spill over into core inflation, which still remains remarkably subdued just north of 2%. The fear now is that it may finally be doing so. ” Bond investors have also been unnerved by “the resilience of the U.S. economy,” Mr. Yardeni writes. However, he says that the auto industry is now joining the housing sector in suffering a severe recession and that there are large parts of the economy that still look weak. “The Bond Vigilantes are threatening to offset the Fed’s efforts to revive economic growth,” Mr. Yardeni writes.
http://blogs.wsj.com/marketbeat/2008/05/H 29/return-of-the-bond-market-vigilantes/ H July 12, 2010, 6:15 pm
A364B View To A Kyl
Senator Jon Kyl, pretendH deficit hawk:H You do need to offset the cost of increased spending. And that’s what Republicans object to. But you should never have to offset cost of a deliberate decision to reduce tax rates on Americans. Nothing more need be said.
July 12, 2010, 5:51 pm
This365B Situation Is Different (Wonkish) One thing I’ve argued many times on this blog is that when assessing the record of fiscal policy, you have to make allowance for the fact that things are different when you’re in a liquidity trap.* Estimating the average effect of fiscal shocks in all regimes, as opposed to those rare occasions when you’re in a liquidity trap, tells you little about how things work now. That’s why I really liked the AlmuniaH et al work H on fiscal policy in the 1930s, which tried to focus on a period resembling where we are now.
So here’s another entry: CorsettiH et al H (pdf) use more modern data, but they try to distinguish periods with financial crises from other episodes, which at least partially gets at the difference
145 in conditions. And sure enough, the multiplier is much bigger: private spending, including investment, rises with government spending rather than being crowded out. *Yes, we are in a liquidity trap. The Fed has direct control over short-term interest rates, which it can move anywhere it chooses, as long as they stay positive. It doesn’t have anything like the same control over long-term rates; it can and should try to influence them, but not with any reliability. And positive long-term rates right now largely reflect option value: short rates can’t go below zero, but they can and will rise if we ever get a decent recovery.
http://krugman.blogs.nytimes.com/2010/07/12/H this-situation-is-different-wonkish/ H July 12, 2010, 5:38 pm
The36B Meaning of Credibility
In response to today’sH column,H a number of people have suggested that the Fed essentially defines credibility purely in terms of hitting its inflation target. Guys, you’re giving the Fed too much credit. It is now consistently missing its inflation target. The Fed has been fairly clear in recent years that its key inflation measure is the core PCE deflator, and that its target range for core PCE inflation is 1.7 to 2 percent. Here’s what has actually been happening:
Some wiggles there, which make me distrust the measure — I prefer the various trimmed-H mean H and Hmedian H measures out there, which seem less bouncy — but inflation is pretty clearly below target, and given the huge excess capacity, clearly trending down. So even if the Fed only cares about inflation, it’s falling short.
Why? Partly because there are some Fed types — both regional bank presidents and members of the board — who are constantly predicting inflation, no matter what. If you look at the
Hminutes from the April FOMC meeting H (pdf), you see that two bank presidents predicted above-target core inflation next year, presumably because they still think that deficits and money creation must be inflationary, even with persistent high unemployment. But they are a minority. What I suspect is going on is something that was all too obvious in Japan, more than a decade ago. Nobody can be sure how well a more aggressive monetary policy would work; there’s a chance that the Fed would buy up long-term bonds, raise its target inflation rate, and see the economy slump all the same. And that would be embarrassing. So the Fed sits on its hands, which means no risk of failure.
146 Of course, the Fed’s peace of mind comes at the expense of millions of unemployed workers, and the country quite possibly slipping into a long-run deflationary trap. But hey, gotta safeguard the institution. July 12, 2010, 11:13 am
Naan367B And Chocolate
Last month I posted from Interlaken, Switzerland, about the largeH number of Indians.H It turns out that there was moreH to the story H than I realized: For years, Bollywood’s producers and directors have favored the pristine backdrop of Switzerland for their films. The greatest of the Bollywood filmmakers, Yash Chopra, is a self-professed romantic who has made a point of including in virtually all his films scenes shot on location in this country’s high Alpine meadows, around its serene lakes, and in its charming towns and cities to convey an ideal of sunshine, happiness and tranquillity. In the process, they have created an enormous curiosity about things Swiss in generations of middle-class Indians, who are now earning enough to travel here in search of their dreams. By the way, I see no reason to mock Indians for wanting to visit places that have featured in films. A few years back Robin and I did a bike tour in the Austrian lake country (highly recommended), and everywhere you went real history and The Sound of Music were inextricably mixed: this is where Emperor Franz Josef kept his mistress, and this is where Maria got married. (There were busloads of Chinese tourists there — is the movie popular in China?)
And then there are the toursH of Sopranos sites,H including the Bada Bing club. You got a problem with that? July 12, 2010, 11:01 am
One368B Size Fits One
Reading these commentaries by EdwardH Chancellor H and HWolfgang Münchau,H (“Even Eurozone optimistic are nnot optimistic") it occurred to me that a lot of the issue can be captured by one picture. Here’s the total number of unemployed, in thousands, in Germany and Spain: Eurostat:2008M1-2011M3 Germany looks at this situation and says, where’s the problem? Unemployment never rose much, and it’s back to pre-crisis levels. Meanwhile, Spain suffers. But here’s the thing: European fiscal policy basically reflects Germany’s situation (with no allowance for the fact that this situation, too, is likely to worsen; see Münchau’s piece.) So does European monetary policy. When the euro was proposed, we worried about one-size-fits-all monetary policy. But the reality is worse: it’s one-size-fits-one.
One Size Fits One July 12, 2010, 11:01 am http://krugman.blogs.nytimes.com/2010/07/12/one-size-H fits-one/ H July 12, 2010, 10:50 am
147 A369B Devastating Critique
Some correspondents have asked me to reply to this articleH by Josef Joffe.H Indeed, it’s a devastating critique. As I understand the structure of the argument, Joffe ridicules me because 1. I have written a number of articles opposing fiscal austerity right now. This shows how foolish I am, because good economists never return to or elaborate on points they’ve made before. Milton Friedman wrote one article about the virtues of free markets, and never mentioned the subject again. 2. European political leaders aren’t taking my advice. This also shows how foolish I am, because politicians always make the right decisions about economic policy. Seriously, is there anything in Joffe’s article besides “You’re so annoying” and “La, la, la, Europe isn’t listening”? What, exactly, am I supposed to respond to? July 11, 2010, 6:25 pm
What370B Have We Learned? Sometimes it’s useful to step back slightly from the current fray and ask what we’ve really learned about macroeconomics over, say, the past year and a half. Here’s how I see it: in early 2009 there was a broad divide between two policy factions. One, of which I was part, declared that we were in a liquidity trap, which meant that some of the usual rules no longer applied: the expansion of the Fed’s balance sheet wouldn’t be inflationary — in fact the danger was a slide toward deflation; the government’s borrowing would not lead to a spike in interest rates.
The other side declared that we were in imminentH danger of runaway inflation,H and that federal borrowing would lead to H very high interest rates.H What actually happened?
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(The dip and rise in the interest rate represents the rise and fall of oh-god-we’re-all-gonna-die fears). Now, the guys who got it all wrong are winning the political argument, in large part because the Obama administration went for half-measures, and is now being punished for a weak economy — which people like me predicted would happen. But never forget that as far as the facts go, the Keynesians won this hands down.
http://krugman.blogs.nytimes.com/2H 010/07/11/what-have-we-learned/ H
149
ECONOMYH H JULY 14, 2010, 10:01 A.M. ET
Fed Sees Slower Growth. Officials Debate How to Respond if Recovery Falters; Softer 2nd Half Is Seen
By JONH HILSENRATH H Federal Reserve officials, who are likely to reveal Wednesday a cut in their assessment of the growth outlook, are divided on how aggressively the central bank should act if the economy slows further. ed officials still expect the U.S. economy to keep growing. But an updated forecast to be released Wednesday afternoon with the minutes of the Fed's late-June policy meeting is likely to show that officials have trimmed their second-half forecasts—as have many private forecasters. One topic under debate is the possibility that today's already-low inflation may turn into a debilitating bout of deflation, a broad drop in prices across the economy. Fed officials disagree on the risk of deflation. A few see it as a threat; others call it very unlikely, Fed officials said in recent interviews. For now, the Fed—and particularly its most-powerful member, Chairman Ben Bernanke, who has ultimate say—appears to be very much in wait-and-see mode. But differences among his colleagues are growing more evident. One problem: Having already cut interest rates to near zero, most of the Fed's options for spurring growth aren't very appealing. Some policy makers, including Fed governor Kevin Warsh and Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va., are reluctant to revive Fed purchases of U.S. government bonds or mortgage-backed securities, the most forceful action the bank could take if it decides the economy needs more help. Fed staff estimate that the purchase of $1.25 trillion in bonds in 2009 and early 2010 pushed down long-term interest rates by roughly half a percentage point. But somes skeptics inside the Fed don't believe the impact was that large and think a new round of purchases might have even less impact because markets are now on a more solid footing. Renewing the purchases would also leave the Fed with a bigger portfolio to shrink, when that time comes, and could backfire if it pushes expectations for future inflation sharply higher. "We're a long way away from needing to think about starting up asset purchases," Mr. Lacker said in an interview. "The recovery will take time. We just have to be patient and manage it carefully. I don't think this is a time to shift gears again." Other policy makers—among them Boston Fed President Eric Rosengren, New York Fed President Bill Dudley and, to a lesser extent, Atlanta Fed President Dennis Lockhart—see reviving the purchases as an option that needs to be kept alive, particularly if deflation becomes reality.
150 "Given the amount of substantial excess capacity that we have in the economy, there is some risk of further disinflation," Mr. Rosengren said in an interview late last week. "The risk of deflation has gone up and is more of a risk than I would like to see at this point." Inflation, excluding the volatile food and energy sectors, is running around 1%, below the Fed's informal objective of 1.5% to 2%. The Fed's June 22nd and 23rd meeting marked a pivot point for the central bank. In the first four months of the year, officials mostly discussed how best to unwind the extraordinary support the Fed provided the economy. But in June they began considering what they might do if the economic outlook worsens. Several developments give Fed officials pause, including Europe's government debt crisis and deepening budget strains on U.S. state and local governments. Financial conditions have tightened since the beginning of the year, though recent stock- market gains are likely to hearten Fed officials as they watch the recovery unfold. "This is a time to be patient with policy and to see how the economy evolves," Mr. Lockhart said in a recent interview. "This little halting period that we're in now simply brings home the point that economies can go in two directions and we should be considering what we would do under various scenarios." Private forecasters believe the Fed should sit tight, according to a new Wall Street Journal survey. Only eight of 52 analysts said the Fed should do more now to spur growth. The debate about whether the Fed should do more, and if so how, is likely to be in the spotlight for the next few days. On Thursday, a Senate committee will question President Barack Obama's nominees for the Fed board: Janet Yellen, president of the San Francisco Fed; Peter Diamond, a Massachusetts Institute of Technology economist; and Sarah Bloom Raskin, Maryland's bank regulator. Next week, Mr. Bernanke delivers the Fed's semi-annual update to Congress. In public comments, Mr. Bernanke has played down the risk of a double-dip recession. But he has been keeping his options open. The Fed is better equipped to solve some economic problems than others. As Mr. Bernanke noted in a now-famous 2002 speech, the Fed has the power to fight deflation—or falling wages and prices—by printing money. But the bank's tools aren't perfectly suited to reducing unemployment, which is influenced by a range of factors including fiscal policy, regulation and global demand. Besides reviving its bond purchases, the Fed could take less aggressive action. Officials see drawbacks in these steps, too. The Fed currently isn't reinvesting the cash it receives when mortgage-backed securities it has purchased reach maturity or the underlying loans are paid off. It could use that cash to buy new mortgage-backed securities, a signal of its intention to support growth. With mortgage rates already very low, it isn't likely this would have a big impact. The Fed has promised to keep short-term rates low for an "extended period," and could strengthen that commitment in order to encourage investors to borrow and take more risks.
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But several officials are uncomfortable with the language as it is, including Kansas City Fed President Thomas Hoenig, an inflation hawk who has formally voted to remove it. Moreover, it's not clear the Fed could say much beyond what markets already anticipate. Financial markets and forecasters now expect the Fed to keep its key short-term interest rate near zero well into 2011. The Fed also could push short-term interest rates lower. The federal funds rate—a Fed-influenced rate at which banks lend to each other over night—is a bit below 0.2%. By eliminating the 0.25% interest that the Fed pays banks to leave money on deposit with the central bank, the Fed could push the fed funds rate all of the way to zero. That, however, could disrupt the money market industry by eliminating revenues on funds the industry manages, which gives some Fed officials pause.
JONH HILSENRATH H Fed Sees Slower Growth. Officials Debate How to Respond if Recovery Falters; Softer 2nd Half Is Seen http://online.wsj.com/article/SB10001424052748703834604575365052129874156.html?modH
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July 13, 2010, 11:09 AM ET, By Jon Hilsenrath
Boston23B Fed’s Rosengren: Growth Slowing, Deflation Is Emerging Risk The outlook for U.S. economic growth has dimmed a bit and deflation is emerging as a risk that the Federal Reserve must stand guard against, Federal Reserve Bank of Boston President Eric Rosengren said in an interview with The Wall Street Journal.
Bloomberg News Boston Fed President Eric Rosengren
152 “If you were to look at the balance of risks and what we could do about those risks, the risk from a downside shock I would view as more of a problem than the risk of an upside shock of inflation or the economy overall,” Mr. Rosengren said in an interview late last week. “The core inflation rate is right around 1%,” he said. “Given the amount of substantial excess capacity that we have in the economy, there is some risk of further disinflation. And I would say the risk of deflation has gone up and is more of a risk than I would like to see at this point.” Mr. Rosengren is one of five regional Fed bank presidents currently with a vote on the Federal Open Market Committee. He is generally among the of “doves” among Fed policy makers, those who tend to be less concerned about the risk of inflation and more inclined to act against slow growth and falling inflation. Fed officials have begun debating whether the economy needs additional stimulus, and if so what kind. As is often the case, there are divisions on the FOMC on the question. Below are excerpts from the interview: ON INFLATION: “The core inflation rate is right around 1%. Given the amount of substantial excess capacity that we have in the economy, there is some risk of further disinflation. And I would say the risk of deflation has gone up and is more of a risk than I would like to see at this point. “We’re seeing core prices continuing to decline in Japan. We’re seeing some of the peripheral [European] countries like Ireland starting to see actual declines in prices as a result in part of a fiscal austerity. We have a number of other countries in Europe that are about to embark on a substantial fiscal austerity. We don’t want to be in a situation where countries other than Japan start worrying about deflation. “We have plenty of tools to tighten up if it turns out the economy grows faster and inflation becomes more of a concern. But it is a little uncertain how effective our tools are once the economy gets into a deflationary environment. The experience of Japan is sobering. They’ve spent a decade and a half dealing with an economy that has had falling prices and despite a variety of monetary and fiscal actions taken are still facing a deflation problem. “It just highlights that it is not straightforward for policy makers to break out of a deflationary environment. And so if you were to look at the balance of risks and what we could do about those risks, the risk from a downside shock I would view as more of a problem than the risk of an upside shock of inflation or to the economy overall.” ON THE ECONOMIC OUTLOOK: “I was probably a little more pessimistic than some to start out with and… incoming data has been a little bit weaker than many had anticipated. Many private sector forecasters have been downgrading their forecasts for the second half of the year. “If you look at final sales — which is just taking inventories out of GDP — final sales only grew by 0.8% in the first quarter and that is after two previous quarters that averaged below 2% as well. We’re getting to the point in the recovery where we wouldn’t expect as much support coming from the inventory side. If inventories start to ebb it becomes really essential for some of the other components of GDP to start to pick up at this time and there is some reason to believe that we may not get as much of a pick up as some had been anticipating earlier this year.
153 “One reason would be the labor market weakness. The employment to population ratio has dropped in the past two months. It is now 58.5% and is well down from where we were before the recession….We’re not seeing significant signs of improvement yet. “It looks like we’re going to see some near term fiscal restraint particularly at the state and local level, but it’s a little unclear how much restraint we might see both here and abroad. And the financial markets have become a little bit less supportive. The Libor rate has been drifting up since earlier this spring. Stock indexes have generally declined, despite the recent improvement. And credit default swaps for some of peripheral Europe remain elevated. “When I put all of that together I become concerned that the second half is going to be a little weaker than we might have anticipated a couple of months ago and…I’m not expecting to see that much progress on the unemployment rate over the course of the second half of this year. Ideally we’d be seeing growth north of 4% in order to be really pushing the unemployment rate down from its very elevated levels and we’re not seeing growth at nearly 4% at least for the second half this year. Unfortunately, it looks like it will be a good bit slower than that. It is quite possible we’ll be in the 2% to 3% range.” ON THE FED’S OPTIONS IF THE ECONOMY FALTERS: “There are several policy options if we think the economy is weaker than we would like. Reinvesting [proceeds from maturing mortgage bonds] is one option. Purchasing more [securities] outright is another option. Keeping rates low for a more extended period of time than others were anticipating would be another option. There are some options available. We should be moderating what our policies are reflective of how likely it is for us to achieve our mandate over a reasonable time period … If the economy ends up much weaker than we were anticipating, we would have to consider other policy alternatives, which would include potentially reinvesting funds or potentially doing additional purchases. We shouldn’t take those options off the table if we get a much weaker outcome than we were anticipating … We should be concerned about downside risk. I’m certainly in the camp where I’m worried about downside risks and policy needs to be thinking about contingencies. Part of central banking is to think about what the risks in both directions are and what the policy response would need to be.” ON WHAT IT WOULD TAKE TO CONVINCE HIM NEEDS TO DO MORE: “If it looks like we’re not going to meet either element of our objective in a two- to three-ear horizon, we need to start thinking about what else we could do or what else the fiscal authorities could do. But in the absence of fiscal action we’d have to think about what more we could do … if the economy gets weaker and the inflation rate gets lower, we should be thinking about alternative policies.” July 13, 2010, 11:09 AM ET, By Jon Hilsenrath Boston Fed’s Rosengren: Growth Slowing, Deflation Is
Emerging Risk http://blogs.wsj.com/economics/2010/07/13/bostonH -feds-rosengren-growth-slowing-deflation-is- emerging-risk/ H
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Companies pile up cash but remain hesitant to add jobs By Jia Lynn Yang Washington Post Staff Writer Thursday, July 15, 2010; A01 Corporate America is hoarding a massive pile of cash. It just doesn't want to spend it hiring anyone. Nonfinancial companies are sitting on $1.8 trillion in cash, roughly one-quarter more than at the beginning of the recession. And as several major firms report impressive earnings this week, the money continues to flow into firms' coffers. Yet all the good news from big business hasn't translated into much promise for jobless Americans, leading many to wonder: If corporations are sitting on so much money, why aren't they hiring more workers?
The answer to that question has become a political flash point between the HWhite House H and big business groups such as the U.S. Chamber of Commerce, which held a jobs summit Wednesday and accused the Obama administration of dumping onerous regulations on businesses. That has created an environment of "uncertainty," which is causing firms to hold back on hiring as the unemployment rate has hovered near 10 percent, the Chamber said. The White House countered that companies are wary of hiring not because of new regulations but because they're still waiting for consumer demand to return. The administration also claimed credit for 3.5 million jobs created by the stimulus bill from last year. The acrimony over jobs comes at a particularly tense moment in the relationship between business groups and the White House. With the midterm elections looming and polls showing
Americans expressing a lack of confidence in H President Obama'sH handling of the economy, White House officials are eager to demonstrate that their policies are helping, not hurting, the prospects for job growth and are making an extra effort to reach out to industry leaders. For the Chamber's jobs event, the White House said it asked for a speaking slot for senior adviser ValerieH Jarrett,H who acts as a liaison to the business community, but the Chamber turned down the request. Chamber officials said Jarrett's office called Tuesday afternoon, the day before the conference, and demanded a speaking slot immediately after remarks from Chamber chief executive Tom Donohue. The White House said that it did not ask for a specific slot. "There are going to be areas where we differ, but we do have different roles," Jarrett said in an interview. "Our job is to both protect the American people and foster a climate where companies invest and create jobs. Their role is to produce profits for their shareholders." White House officials also choreographed a competing set of images for Obama on Wednesday, having him meet separately with famed investor Warren Buffett and, later, with
BillH Clinton H as well as the chief executives of Bank of America and Honeywell. Obama aides said the business meetings were a coincidence and had been scheduled before they knew of the Chamber event. They said the meeting with Buffett had been in the works for a long time. (Buffett is a director with The Washington Post Co.)
155 The question of how to encourage companies to hire has challenged policymakers. A survey last month of more than 1,000 chief financial officers by Duke University and CFO magazine showed that nearly 60 percent of those executives don't expect to bring their employment back to pre-recession levels until 2012 or later -- even though they're projecting a 12 percent rise in earnings and a 9 percent boost in capital spending over the next year. When asked why companies are holding back so much, many economists cite broader uncertainty that goes well beyond anything happening in Washington. Firms aren't sure whether the economy can sustain a strong recovery. And as long as consumer spending remains low, there's not much incentive for companies to ramp up. The trend of companies holding more cash is not new. Between 1980 and 2006, the average cash-to-assets ratio for U.S. industrial firms more than doubled, according to research by finance professors. One explanation, said finance professor René Stulz at Ohio State University, is that as competition has become more global, it's become harder for individual companies to survive, and so they hold on to more cash to be safe. He added that companies have also increased their cash holdings in the wake of the financial crisis, particularly since the bankruptcy of Lehman Brothers in September 2008, as the banking system has become more fragile and credit has become scarce. Tech companies in particular tend to build large cash reserves. Intel, which reported on Tuesday its biggest quarterly profit in a decade, brought aboard 400 new employees worldwide in the last quarter, though it would not identify in which countries the hirings took place. Intel spokeswoman Lisa Malloy added that the firm expects to spend more money, from $4.5 billion last year to $5.2 billion this year, investing in capital projects around the world. And yet the firm has $1.7 billion more in cash than it had a year ago. Intel said it is enjoying strong demand for its chips, so low demand doesn't help explain the firm's mountain of cash. Alcoa, which reported strong earnings Monday, said it had $493 million more in cash this quarter compared with a year earlier. Spokesman Kevin Lowery said the company plans to keep its head count steady. Some analysts said it may be hard to create policy that compels companies to use some of their cash to hire workers. "CEOs don't like taking risks. They kind of move in packs," said Zachary Karabell, president of River Twice Research. "There's not a whole lot that you could do to entice companies to hire," he added. "You could cut taxes on them, but they're not going to hire just because they have the extra cash, because they already have the extra cash." Staff writer Michael D. Shear contributed to this report. Jia Lynn Yang Companies pile up cash but remain hesitant to add jobs July 15, 2010; A01 http://www.washingtonpost.com/wp-H dyn/content/article/2010/07/14/AR2010071405960.html?wpisrc=nl_pmheadline H
156 BusinessH Day H
July 15, 2010
Financial234B Overhaul Signals Shift on Deregulation
By56B BINYAMINH APPELBAUM H and DAVIDH M. HERSZENHORN
WASHINGTON — Congress approved a sweeping expansion of federal financialH regulation H on Thursday, reflecting a renewed mistrust of financial markets after decades in which Washington stood back from Wall Street with wide-eyed admiration.
The bill, heavily promoted by PresidentH Obama H and Congressional Democrats as a response to the 2008 financialH crisis,H cleared the Senate by a vote of 60 to 39, largely along party lines, after weeks of wrangling that allowed Democrats to pick up the three Republican votes to ensure passage. The vote was the culmination of nearly two years of fierce lobbying and intense debate over the appropriate response to the financial excesses that dragged the nation into the worst recessionH H since theH Great Depression.H The result is a catalog of repairs and additions to the rusted infrastructure of a regulatory system that has failed to keep up with the expanding scope and complexity of modern finance.
The bill subjects more financial companies to federal oversight, regulates many derivativesH H contracts, and creates a panel to detect risks to the financial system along with a consumer protection regulator. It leaves a vast number of details for regulators to work out, inevitably setting off another round of battles that could last for years. Over the last half-century, as traders and lenders increasingly drove the nation’s economic growth, politicians of both parties scrambled to get out of the way, passing a series of landmark bills that allowed financial companies to become larger, less transparent and more profitable. Usury laws were set aside. Banks were allowed to expand across state lines, sell insurance, trade securities. The government watched and did nothing as the bulk of financial activity moved into a parallel universe of private investment funds, unregulated lenders and black markets like derivatives trading. That era of hands-off optimism was gaveled to an end on Thursday as the Senate gave final approval to a bill that reasserts the importance of federal supervision of financial transactions. “The financial industry is central to our nation’s ability to grow, to prosper, to compete and to innovate. This reform will foster that innovation, not hamper it,” Mr. Obama said Thursday. “Unless your business model depends on cutting corners or bilking your customers, you have nothing to fear.” The White House said Mr. Obama would sign the legislation next week. Democrats, who celebrated with high fives and handshakes as the bill was packed in a blue box for delivery to the White House, argue that the government’s expanded role will improve the stability of the financial system without sapping its vitality. But that project faces considerable challenges. Many investors have withdrawn from markets like commercialH paper H that were
157 once seen as safe. Lenders have lost faith in borrowers. Politicians and central bankers are struggling to repair economies and restore the flow of credit. Even the bill’s political luster no longer seems certain. Despite public anger at Wall Street, the vast majority of Republicans opposed the bill with loud confidence, betting ahead of hotly contested midterm elections that the public dislikes government even more.
Senator RichardH Shelby,H Republican of Alabama, described the bill as “a 2,300-page legislative monster.” “It creates vast new bureaucracies with little accountability and seriously, I believe, undermines the competitiveness of the American economy,” Mr. Shelby said on the Senate floor before the final vote. “Unfortunately, the bill does very little to make our system safer.”
The three Republicans who voted in favor were New England moderates, OlympiaH J. Snowe H and SusanH Collins H of Maine and ScottH Brown H of Massachusetts. The one Democratic holdout was RussH Feingold H of Wisconsin, who said he voted against the bill because it was not tough enough. The bill expands federal banking and securities regulation from its focus on banks and public markets, subjecting a wider range of financial companies to government oversight, and imposing regulation for the first time on “black markets” like the enormous trade in credit derivatives.
It creates a council of federal regulators, led by the TreasuryH H secretary, to coordinate the detection of risks to the financial system, and it provides new powers to constrain and even dismantle troubled companies. It also creates a powerful new regulator, appointed by the president, to protect consumers of financial products, which will be housed in the FederalH Reserve.H The first visible result may come in about two years, the deadline for the consumer regulator to create a simplified disclosure form for mortgage loans. Officials are already working to prepare for the expansion of government, including finding buildings in Washington to house the new agencies. The rhythms of Washington have long dictated that crises beget legislation, but Democrats insisted Thursday that these changes also represented a long-overdue response to the evolution of the financial industry. “This is a public sector response to transformative changes in the private sector,” said
Representative BarneyH Frank,H Democrat of Massachusetts and a crucial author of the legislation. “You have to have rules that allow you to continue to get the benefit of the innovation but curtail abuses.” Democrats divided initially over how to pursue that goal. Some pushed to break apart large banks and curtail risky kinds of trading. Others sought a grander overhaul of federal regulation. The administration’s approach, which prevailed, instead is focused on giving existing regulators additional powers in the hope that they will produce better results. The legislation is painted in broad strokes, so like actors handed a script, those regulators have broad leeway to shape its meaning and its impact. “This is a framework that has the potential to be as modern as the markets, but its efficacy will certainly depend upon the judgments that regulators make,” said LawrenceH H. Summers,H the president’s chief economic adviser.
158 The legislation, for example, requires many derivatives to be traded through clearinghouses, a form of insurance for the traders, and it requires traders to disclose pricing data to encourage competition. But regulators will decide which derivatives, and how long traders can wait to disclose pricing information. The administration can shape that process through the appointment of new leaders for the various agencies. The Senate held confirmation hearings on Thursday for three nominees to the Fed’s board of governors. In addition to appointing a new consumer regulator, the president will nominate a new comptroller of the currency, responsible for regulating national banks. The same groups that fought to shape the legislation — bankers and business groups, consumer advocates and trade unions — already have turned their attention to the rule-making process, seeking a second chance to influence outcomes. Much of the work must be completed over the next two years, but the bill sets some deadlines more than a decade from now.
Senator ChristopherH J. Dodd H of Connecticut, who as banking committee chairman was a main architect of the legislation, said its success ultimately would depend on regulators’ performance. “We can’t legislate wisdom or passion. We can’t legislate competency. All we can do is create the structures and hope that good people will be appointed who will attract other good people,” Mr. Dodd said. Mr. Dodd said he would hold hearings beginning in September to check up on that work before he retires at the end of the year. The legislation will be carried out mostly by the same federal workers who were on duty as the financial system collapsed. The new consumer bureau, for example, mostly will be staffed with employees transferred from the consumer divisions of the existing banking regulators, which have been excoriated by Congress and other critics for failing to protect borrowers from obvious and widespread abuses. Administration officials said they were confident that providing new leaders for those employees and granting them new powers, would produce better results.
http://www.nytimes.com/2010/07/16/businesH s/16regulate.html?_r=1&th&emc=th H
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Eurointelligence235B Daily Morning Newsbriefing
Slovakia467BH abandons resistance to EFSF
16.07.2010 Confronted with massive pressure, Slovakia caves in, and reluctantly agrees to sign up to the EFSF; Italy’s Senate approved Giulio Tremonti’s austerity budget, but the communes are up in arms; Barclays Capital estimates that European banks need to raise some €85bn in new capital; the restructuring of the Cajas could costs 50,000 jobs; ECB urges banks not to pay dividends, and to raise capital; Marini says a 3% French deficit is unrealistic by 2013; the EU, meanwhile, experienced an Olsen-style coordination problem with its failure to set up web portals to allow companies to reclaim VAT.
16.07.2010
Slovakia371B abandons resistance to EFSF
FrankfurterH Allgemeine H reports that Slovakia has agreed to participate in the EFSF. Slovakia’s refusal to sign the agreement has delayed the start of the EFSF until the end of the month. It would have been possible to go ahead without Slovakia, but an opt-out would have been a damaging signal of disunity. The new Slovakian government remains uneasy about the process, and said it would not participate in the loan to Greece. The decision came amid massive pressure from other euro member states, according to Frankfurter Allgemeine. The new prime minister, Iveta Radicová said she would only sign, because she did not to damage the EU. But her personal view had not changed. She said she still believes the protective umbrella is a mistake. .
160 Italian Senate approves Tremonti’s austerity budget Italy’s €24bn budget cuts for 2011 and 2012 were approved by Italy’s senate in a vote of 170 to 136 – a reflection of the strong majority enjoyed by Silvio Berlusconi’s government coalition. Giuilio Tremonti said the government would now go ahead with the plan, adding that the measure enjoyed great public support. There was not a single day of strikes in protest at those reforms, he said. Due to the pension reforms, Italy had now one of the most sustainable economic systems in the EU, reportsH La Repubblica.H The communes, which have to front some of the cuts, are stepping up their protests. European banks may have to raise €85bn after stress tests Barclay’s Capital estimates that European banks may need to raise more than €85bn to bolster their capital after stress tests, reports the IrishH Independent.H Spanish savings banks, the cajas, may require €36bn, German Landesbanks could need €34.5bn, while the Greek banks may have to raise €8.6bn, and Portuguese may require €5.9bn. Cajas mergers likely to be expensive Spains’ ailing savings banks, the cajas, could cost more than 50000 jobs, many of which would go into early retirement as a result of the merger, BloombergH H reports. Some caja’s, are quite generous, offering its staff over 60 the chance to take 95 percent of their salary until the age of 64, a lump sum of €20500 plus pension contributions. Others offer workers 56 to 59 years old at get 85% of their salary plus a lump sum of €31000. This is in clear contrast to the Spanish government, which cut civil servants’ pay and froze pensions as part of an austerity drive to reduce its deficit. The merger is supported with €10bn from the government’s bank rescue fund. As many as 38 out of Spain’s 45 savings banks are involved seeking money from the rescue fund. ECB urges banks to retain earnings
ElH Pais H quotes from this month’s ECB bulletin that the ECB has requested that financial institutions do not to pay dividends, to raise capital and to extend credit. The quote is “the banks should retain earnings, turn to the market to strengthen further their capital bases or take full advantage of government support measures for recapitalisation.” El Pais says this is an unusual request, as recourse to the market is very difficult and government assistance is virtually completed in Europe. French deficit at 3% in 2013 – neither possible nor realistic Philippe Marini, rapporteur of the budget committee in the Senate, considers it neither possible, nor realistic for the French government to achieve 3% deficit in 2013, according to
LesH Echos.H Marini is critical in particular with respect to the growth assumption for 2011, saying that potential output is more likely to be 2%. He said that the elimination of tax advantages should to introduced as far as possible and not wasting time in negotiation with the beneficiaries, and should scrap the reduced VAT schemes. Greetings from Mancur Olson This is a classical example on what can happen if you leave the initiative for a joint project with member states, as reportedH by the FT:H Each member state was to set up its own webportal for the EU wide VAT system to allow businesses to reclaim their VAT for cross
161 boarder transactions. It was supposed to go online in January, but worked properly only for 7 countries. Others have introduced their system with much delay and with serious glitches. Only Finland and Sweden have been coordinating their preparations. Now the European Commission has to step in to get an estimated €8bn of annual VAT refund claims flowing. The failure to set up the electronic system properly has caused serious financial problems for some businesses, especially in the transportation sector
468B http://www.eurointeH lligence.com/index.php?id=581&tx_ttnews[tt_news]=2857&tx_ttnew s[backPid]=901&cHash=a362d2372e# H
Fixing236B Spain's Savings Banks Means Paying Workers to Play Golf By Charles Penty - Jul 15, 2010
Spain470B cut civil servants’ pay and froze pensions as part of an austerity drive to reduce its deficit, the third-highest in the region that uses the euro. Laid-off savings banks workers will fare
better. The centralH bank H has coaxed ailing savings banks to merge, financing the process with more than 10 billion euros ($12.9 billion) from a government bailout fund. Consolidating the lenders, known as “cajas,” may
The European Union flag, eventually cost as many as 50,000 Spain's469B prime minister Jose center, flies between jobs, with many workers taking Luis Rodriguez Zapatero. early retirement, said Carlos Spanish national flags at Denis Doyle/Bloomberg the Bank of Spain. Denis Trascasa, a partner at McKinseyH Doyle/Bloomberg & Co.H Caixa Catalunya, a lender with 62 billion euros in assets granted 1.25 billion euros of government funds to support its merger with two other cajas, is offering staff over 60 the chance to take 95 percent of their salary until the age of 64, said Carlos Domingo, a savings bank union official in Spain’s Catalonia region. They’ll also get 20,500 euros in a lump sum plus pension contributions as part of aH deal H that will form a template for negotiations at other cajas, he said.
“It’s a clear contradiction with the government’s austerity message,” said CarlesH
Campuzano,H spokesman for labor policy at Convergencia i Unio, a pro-business Catalan party, referring to the prospect of the mass early retirements. “It’s also goes against the official message that people should actually work longer before retiring.”
162 10-Year Boom The task of restructuring the cajas, foundation-based lenders that make about half of Spain’s loans, has taken on fresh urgency as defaults mount on credit linked to a 10-year property boom. The Bank of Spain seized CajaSur, an insolvent savings bank, in May. European regulators will publish results of stress tests on Spanish banks on July 23. Cleaning up bad loans and cutting costs at the cajas is just one part for the government’s drive to fix an industry that expanded lending more than fivefold during Spain’s decade-long property boom, making real estate and construction loans worth 241 billion euros. Banco Bilbao Vizcaya Argentaria SA, Spain’s second-largest bank, estimates the cost of fixing the “part” of the industry that needs repair will run to 50 billion euros. The cajas are negotiating early retirement deals as the government tries to help companies shed staff more cheaply. A decree passed in June makes it easier for struggling firms to let staff go with 20 days in compensation for each year worked, instead of the 45 days offered in most contracts. “It doesn’t really seem fair because they go home and get paid and younger staff come in to work for less,” Laura Garcia, 43, a market-research technician whose been out of work for 18 months said in an interview outside a Madrid job center. Golf and Tennis The cajas have long used early retirement to pare the workforce, a process that has been good for employees if expensive for the banks. Since a rule change in 2004, banks have had to charge their cost directly to earnings. Ignacio Barragan, 64, has spent much of his time playing golf and tennis since retiring at 54 from Caja Madrid in 1999 after a 33-year career that took him to the rank of regional director. He’s been earning 100 percent of his salary ever since and expects his income to drop about 25 percent when he starts drawing state and private pensions in August. “I chose to enjoy my hobbies and economically there was no obstacle to doing that,” Barragan said in a phone interview. “For me it was a great solution.” The combination of Caixa Catalunya with Caixa Manresa and Caixa Tarragona, two other Catalan cajas, will allow workers 56 to 59 years old at get 85 percent of their salary plus a lump sum of 31,000 euros if they stop working, said Domingo, the union official. ‘Shouldn’t Be Punished’ Employees can also opt to take a leave for four years and receive a quarter of their pay. The agreements affect 1,300 staff, or about 14 percent of the workforce of the three savings banks, he said. “Our members aren’t to blame for all that has happened in the industry, and they shouldn’t be punished for it,” Domingo said. The average salary in Spain’s banking industry was about
42,000 euros in 2008, the NationalH Statistics Institute H said. A spokesman for Caixa Catalunya declined to comment. The government and the savings banks have to take into account the need to fix the industry as quickly as possible to support economic growth when it returns, said Alvaro Cuervo, a business professor at Madrid’s ComplutenseH University.H While it would be better not to use public money to fund early retirements, another consideration is Spain’s unemployment rate of about 20 percent, the highest in the Euro zone, that makes it hard for staff to find work, he said.
163 Four-Way Merger “I think that if a company needs money, it should restructure in the cheapest possible way and in the end that’s good for the economy,” said InigoH Lecubarri,H who manages about $170 million at Abaco Financials Fund in London. “In principle, I hate the idea of early retirements, but I suppose you have to do what’s possible.” Caja Cantabria, a Santander, Spain-based that is combining with three others to create a lender with 135 billion euros in assets backed by 1.5 billion euros in government funds, will use the money to pay for early retirements and purge bad loans, General Director Javier Eraso said in an interview. Under the rules for the government bank restructuring fund set up last year, lenders can request funds that carry an annual interest rate of at least 7.75 percent and that have to be repaid within five years. Rising Borrowing Costs Savings banks are seeking to tap the rescue funds at a time when Spain faces a surge in its own borrowing costs on investor concern that the government may struggle to bring down a deficit that hit 11.2 percent of gross domestic product last year.
The government’s bankH rescue fund H may seek a credit line with banks to avoid having to issue more debt, a person with knowledge of its plans said June 15. As many as 38 out of Spain’s 45 savings banks are involved in 12 combination processes that are seeking money from the rescue fund, the Bank of Spain said. Access to the fund, known as FROB, is subject to lenders presenting a restructuring plan that the Bank of Spain approves. In mergers that include requests for government funding, the average proposals for staff cuts is 15 percent to 18 percent, said JavierH Ariztegui,H the central bank’s deputy governor. Caja Madrid, Spain’s second-biggest savings bank, and Bancaja, the third-biggest, will seek 4.5 billion euros in FROB funds as they merge with five smaller lenders to create a lender with 340 billion euros that will be Spain’s biggest deposit- gathering institution, they said last month. Santander Cuts The lender aims to cut general administrative costs by up to 12 percent by 2012 as it shuts branches and sheds staff, mainly through early retirements, as it also writes down bad assets earlier than planned, Caja Madrid said June 22. It said the restructuring would set it on course to earn 2 billion euros in profit by 2013.
Commercial banks have also used early retirements to cut costs. BancoH Santander SA,H the country’s biggest bank, has had an agreement with unions since 2003 that allows Spanish staff to seek early retirement from the age of 50 on at least 90 percent of pay, said Cesar Sanz, a union official. Santander last year used 463 million euros of one-time gains to fund costs including early retirements, the bank said. “It’s an expensive process and the bank needs a solid earnings base to support it,” said Sanz, adding 1,120 staff took early retirement last year. “With the cajas, it’s a much more complex issue because it’s public money.”
To contact the reporter on this story: CharlesH Penty H at [email protected] H
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164 Sondeo tras el debate sobre el estado de la nación 15-07-2010
165
Medvédev237B ve en Alemania el socio clave para la modernización de Rusia
El472B presidente ruso y Angela Merkel intensifican las relaciones económicas PILAR BONET - Moscú - 16/07/2010
La canciller alemana Angela Merkel y el presidente ruso, Dmitri Medvédev, en la cumbre bilateral celebrada ayer en Ekaterimburgo.- EFE Rusia considera a Alemania como el país clave para su nueva política exterior, según confirmó ayer el presidente Dmitri Medvédev en presencia de la canciller Angela Merkel al finalizar una cumbre bilateral en la ciudad de Ekaterimburgo. Rusia considera a Alemania como el país clave para su nueva política exterior, según confirmó ayer el presidente Dmitri Medvédev en presencia de la canciller Angela Merkel al finalizar una cumbre bilateral en la ciudad de Ekaterimburgo. El lunes, ante los embajadores rusos convocados en Moscú, el líder del Kremlin informó de que las nuevas prioridades internacionales del Estado pasan por la modernización tecnológica y la incorporación de elementos innovadores en la economía, y también por una actitud más constructiva y abierta frente al mundo. En el contexto de las llamadas "alianzas de modernización", Rusia, según su presidente, "quiere colaborar con países como Alemania, Francia, Italia, la UE en su conjunto y EE UU". En mayo, en Rostov del Don, Rusia y la UE firmaron un primer documento conjunto para desarrollar ese nuevo marco de relación. Refiriéndose a las "alianzas de modernización", Medvédev dijo ayer que Alemania ocupa el "número uno en la lista". "Tenemos unas magníficas relaciones económicas y por eso en la
166 alianza para la modernización, Alemania debe ocupar el lugar más digno", afirmó en un vehemente alegato. Merkel correspondió al entusiasmo de Medvédev, afirmando que se sentía "obligada" y esperaba ser merecedora del puesto que Rusia le ha asignado. Los dos líderes estaban acompañados por un amplio séquito de políticos y empresarios. Los contratos más notables firmados durante la cumbre correspondieron a la Siemens, que por 2.600 millones de euros abastecerá a los ferrocarriles rusos con 240 trenes durante diez años. La Siemens modernizará además estaciones de ferrocarril y centros de articulación de trenes, mediante un contrato por 600 millones. Medvédev expresó su confianza en que Siemens participe en Skólkovo, el proyecto para fundar una tecnópolis dedicada a la investigación en las afueras de Moscú. Medvédev apoyó los proyectos de Siemens de construir un centro de investigación energética y biológica y de participar en los órganos de dirección de Skólkovo. La Siemens y dos empresas rusas (Rostecnologia y Rosgidro) han creado una empresa mixta para producir instalaciones de energía solar. Además, Airbus, del consorcio EADS, entregará aviones A330 a la compañía rusa Aeroflot por más de 2.000 millones de euros. Alemania es el primer socio comercial de Rusia y en los cuatro primeros meses de 2010 el intercambio ha aumentado un 50% -hasta alcanzar 15.200 millones de euros- y, según Medvédev, ha superado la crisis y está prácticamente al mismo nivel que en 2008. En Rusia trabajan 6.000 empresas alemanas y las inversiones acumuladas son de cerca de 16.000 millones de euros. Las inversiones rusas en Alemania son inferiores, pero Medvédev dijo tener "deseo y dinero" de invertir en ese país que resulta "confortable", ya que los rusos tienen bastante menos dificultades que en otros Estados de la UE. El mandatario ruso insistió en la necesidad de suprimir los visados. Merkel, por su parte, apoyó la simplificación de procedimientos para facilitar visados, pero considera que la supresión de los mismos es una tarea de más largo plazo. Entre los temas que Merkel y Medvédev debatieron el miércoles hasta altas horas de la noche estuvo la investigación del asesinato de Natalia Estemírova, la activista de derechos humanos secuestrada y asesinada en Chechenia hace exactamente un año. Medvédev manifestó que la investigación continúa "a toda marcha" y afirmó que se conoce el nombre del ejecutor del crimen, contra el que hay orden de búsqueda y captura. Sus palabras sorprendieron a los colegas de Estemírova, de la organización no gubernamental Memorial, ya que la tesis oficial es que el asesino fue Aljazur Basháev, un guerrillero muerto en una operación policial en noviembre en Chechenia. En Memorial consideran que el instigador del crimen es el presidente checheno, Ramzán Kadírov. Medvédev y Merkel discutieron la ley que amplía las competencias del Servicio Federal de Seguridad. La ley, en proceso de aprobación en la Duma Estatal, prevé la legalización de la "conversación preventiva", una práctica soviética que da a los servicios de seguridad prerrogativas para citar a un ciudadano que, a su juicio, podría cometer un delito. La relación entre Medvédev y Merkel es fluida. Ambos se tutean y en su cena nocturna el miércoles en Ekaterimburgo hablaron del campeonato del mundo de fútbol y, según el líder ruso, se comieron al hermano del pulpo Paul, que pronosticó la derrota de Alemania. Según Medvédev, una parte importante de la delegación rusa en la cumbre de Ekaterimburgo iba a favor del equipo alemán.
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167 http://www.lesechos.fr238B
Le239B déficit à 3% du PIB en 2013 : "ni possible, ni réaliste", selon Marini [ 15/07/10 - 13H30 ] Le rapporteur général du Budget au Sénat, Philippe Marini (UMP), a estimé jeudi que la réduction du déficit public de la France à 3% du PIB d'ici 2013, engagement que Paris a pris auprès de Bruxelles, n'était "ni réaliste, ni possible", plaidant pour des hausses d'impôtsH .H "J'ai estimé que l'arrivée à 3% à fin 2013, avec les seuls efforts affichés par le gouvernement, n'est pas quelque chose de réaliste ni même de possible", a-t-il déclaré sur BFM. M. Marini conteste l'hypothèse de croissance retenue par le gouvernement pour 2011: "Je constate que la France a un potentiel de croissance de l'ordre de 2% par an. C'est ce que nous disent les macro-économistes". M. Marini s'est prononcé pour des hausses d'impôts: "Ce sont des mesures -les hausses d'impôts- que l'on ne prend jamais de gaieté de coeur. Mais si l'on veut que ce pays rééquilibre ces finances publiques, il faut commencer dès 2011". Sur les coups de rabot des niches fiscales annoncés par le gouvernement, il a déclaré qu'il fallait "raboter le plus large possible et ne pas trop passer son temps à négocier avec les bénéficiaires. L'intérêt général s'y retrouvera mieux". M. Marini s'est également prononcé en faveur d'un relèvement de la TVA réduite à 5,5%: "C'est la mesure qui serait la plus indolore et la plus productive pour les finances publiques".
Le240B déficit à 3% du PIB en 2013 : "ni possible, ni réaliste", selon Marini 15/07/10 - 13H30
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EU241B takes control of VAT refunds By Nikki Tait in Brussels Published: July 15 2010 23:05 | Last updated: July 15 2010 23:05 Brussels waded into the chaos that has surrounded the introduction of a new, EU-wide electronic value-added tax system on Thursday in an effort to get an estimated €8bn of annual VAT refund claims flowing more smoothly. The European Commission announced plans to intervene in the design and technical operation of all 27 national web portals in an effort to get them running properly. Because some taxpayers have not even been able to submit refund claims amid the technical mayhem, the commission said it would also extend the deadline for submitting 2009 expenses from September 2010 to March 2011. A new VAT system, switching from a paper-based to an electronic system was meant to come into force in January and speed up VAT refunds across EU borders. But delays by some EU countries in launching their national web portals and technical glitches with others have caused severe financial problems for many European companies. Business groups and tax advisers have been warning about the problems – and the knock-on cash flow implications for companies when economic conditions are already difficult – for the past six months. Firms such as transport companies – where VAT on diesel fuel is a significant proportion of operating costs – have been particularly badly hit. Tax advisers said that the commission’s announcement was welcome, but also underscored the problems that many firms had been facing. “The move by the commission is an admission of the difficulties companies have been experiencing in getting their cash back. At a time of particular money worries, this has been acutely painful for businesses of all sizes,” said Richard Asquith, head of TMF VAT Services. A survey by the International VAT Association found that, by the electronic system’s January launch, only seven EU countries had fully working electronic refund systems. Fourteen either did not have working portals or only partially working ones, and it could not obtain information from a further six countries. The association criticised the failure to conduct end-to-end testing of the IT system before it went live, and also the failure of countries to collaborate in building compatible portals – and cited Finland and Sweden as the only countries known to have worked together. Tax advisors also say that some countries did not launch portals until the second quarter of 2010; some have not been able to confirm receipt of VAT reclaims; and many portals have been unable calculate estimate tax refunds. Brussels admits that the last member state web portal only opened in mid-May.
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169
How24B and when to fsoc it to the hedge funds By Sebastian Mallaby Published: July 15 2010 23:17 | Last updated: July 15 2010 23:17
Among the regulatory headaches created by the Dodd-FrankH bill H which finally passed Congress on Thursday night, consider just one. Should the government fsoc it to hedge funds? Fsoc-ing is a term with which we are doomed to grow familiar. It derives from an offspring of the new law which is to issue hundreds of new rules, each one a Rubik’s cube of moving pieces: the Financial Stability Oversight Council, which will be set up to keep tabs on all systemically risky institutions. Until now, no single regulator has enjoyed such a broad mandate. So crises have often germinated outside the traditional regulatory net – in insurance subsidiaries, over-the-counter derivatives and so on. In future, the FSOC will have the right to shine its light on whatever looks risky.
It sounds good. But how should the FSOC decide whom to fsoc? HedgeH funds H seem an obvious candidate – they are opaque, growing like topsy and only lightly regulated. But hedge fund history teaches two lessons: only a tiny proportion deserves regulatory attention; identifying these risky exceptions is an inexact science. Most hedge funds are too small to threaten the financial system. Over the past decade, something like 5,000 went bust, and not one significantly destabilised markets or required a taxpayer bail-out. Because they are small enough to fail, hedge funds represent an appealing alternative to too-big-to-fail behemoths. If the FSOC were to burden hedge funds with oversight and hamper their growth, it would reduce the amount of risk that they absorb, paradoxically making the financial system less stable. Under certain conditions, however, hedge funds may reach a point where they do threaten stability. In 1998, the Nobel Prize-heavy Long-Term Capital Management famously went bust, scaring the New York Fed into browbeating bankers into recapitalising the fund. A fire sale of assets could have driven markets into a tailspin. How can the FSOC spot the next LTCM in time? Certainly not by looking at the amount of capital it manages.
LTCM’s equity, at a bit under $5bn, was half that of AmaranthH ,H a hedge fund that collapsed in 2006. Yet the systemic consequences of Amaranth’s demise were zero. Size measured by assets gets closer to the answer. Because of its high leverage, LTCM’s assets (not counting derivatives) came to an impressive $120bn. But that was a fraction of the combined $800bn managed by the black-box equity funds that went wrong in the so-called “Quant Quake” of August 2007. The $800bn quake fell far short of a systemic crisis. Beyond size, what other tests should regulators look at? One answer is the markets that a hedge fund trades in. LTCM’s failure was scary partly because of its penchant for complex over-the- counter bets that gave it exposure, for example, to the volatility of French stocks. Finally, regulators should consider whether a hedge fund has strayed from the private partnership structure. If yes, they should be more inclined to fsoc it. Managers of private partnerships tend to monitor risk carefully because they have their own skin in the game; by contrast, publicly listed hedge funds are likely to share the principal/agent problems that bedevil other financial companies. Equally, hedge funds that are subsidiaries of banks tend to take risk carelessly because they foresee deep-pocketed parents coming to the rescue. In 2007 Bear Stearns and Goldman Sachs were among the banks that recapitalised troubled hedge fund units. All this suggests a graduated response. Once a hedge fund amasses $120bn in assets – the size of LTCM – the FSOC should start to ask questions, notably about exposure to over-the-counter markets. Once it gets significantly larger regulators might want to impose capital requirements. Finally, when a hedge fund company goes public, the presumption of sound risk management must be diluted. But these guidelines suggest that, out of 9,000 or so hedge funds, fewer than 50 warrant regulatory scrutiny. With hedge funds, the FSOC may be tempted to cast a wide net: it will not be criticised for erring on the safe side. But it needs to resist such populist cop-outs. Scrutinising non-systemic players would be a costly distraction – especially for regulators who already have their work cut out implementing a 2,300-page law in all its vast complexity. The writer is author of ‘More Money Than God: Hedge Funds and the Making of a New Elite’
http://www.ft.com/cms/s/0/2d81eeb6-9049-11df-ad26-00144feab49a.html476BH H
170 MARKETS
372B ‘Bail-in’ will save the taxpayer from the bail-out By Gillian Tett Published: July 15 2010 16:09 | Last updated: July 15 2010 16:09 Another day, another round of nail-biting debate about financial reform. On Thursday, the US finalised its mammoth regulatory overhaul, the Senate approving it in a long-awaited final vote. But, even as the end looms, new evidence has emerged that voters are uneasy. A Bloomberg poll for example, shows half the US public question whether this bill will improve finance; instead, many fear the reforms will end up protecting Wall Street at the expense of Main Street. And while the banking industry itself vehemently disagrees, the crucial issue is the question of “too big to fail”. On paper, this bill is supposed to remove this, by including provisions to ensure banks are better run and better supervised – and thus less prone to collapse in the future. The bill also creates a resolution regime, to provide a way of handling a failed bank without sparking a systemic meltdown. But what is still unclear, even amid all the legislation, is whether this system will be robust enough to really prevent more big bank failures. Hence the lingering suspicion that taxpayers could soon end up back on the hook; and hence all that simmering anger. Is there any solution? One fascinating idea now provoking a chorus of behind-the-scenes debate among regulators and central banks is the concept of a so-called “bail-in”. This idea, mooted by Credit Suisse in an essay this year, argues that in essence the best way to handle a crisis at a large, systemically important bank is to force creditors – not taxpayers – to swallow losses if disaster strikes; and, more importantly, to do this while the bank is still operating as a going concern, so it does not collapse – and cause Lehman-style havoc. Banks would, in effect, do this by copying bankruptcy codes in other areas of business and issuing subordinated debt that could be wiped out, or turned into equity, if an institution became insolvent. But this would be done at the discretion of regulators rather than lawyers. In some respects, this echoes another set of ideas on the table around contingent capital, or
“cocos”. This suggests banks should issue bondsH that would automatically convert into equity H when certain triggers were breached, a long time before the point of potential collapse. But there is a crucial distinction: the “bail-in” scheme does not use automatic triggers, but instead lets regulators decide when to wipe out creditors, just before the moment of collapse (or “one minute to midnight”, as traders say). That would thus prevent banks from trying to game complex triggers, and investors from endlessly speculating about when triggers might be activated. Some banks hate this whole idea, fearing it would push up funding costs. But to my mind, at least, there are numerous merits to the scheme. Since it is designed to prevent a bank from going into bankruptcy, it offers regulators a way to deal with a failing cross-border bank
171 without grappling with the nightmarish question of reconciling different national bankruptcy codes. Better still, large banks have such fat cushions of subordinated debt that these should easily be able to absorb losses in a crunch, without the use of taxpayer funds. Credit Suisse, for example, reckons the top-20 US banks have about $3,400bn of debt that could theoretically be used for debt-for-equity swaps in a crunch. And even if some of that was ring-fenced (because, say, it has to be used to protect core liabilities), Credit Suisse reckons there is still at least a $2,000bn-odd cushion of debt in the US – and perhaps even more in Europe – that could absorb losses. However, another big attraction of the scheme is its simplicity. Unlike the coco idea, the “bail- in” concept does not involve complex triggers; nor does anybody need to contend with the law courts. On the contrary, the concept of getting creditors – not taxpayers – to foot the bill is simple enough for even a journalist or politician to grasp. Better still, it reinforces basic market principles and a concept that has been shamefully ignored in recent years: namely that creditors have a responsibility to conduct real oversight. So could the bail-in idea fly? That remains unclear. Some European regulators and central banks take the idea very seriously, and predict that it could be adopted by the Basel Committee in some form over the next year. In the US, some senior officials, such as Jeffrey Lacker, president of the Richmond Federal Reserve, are also warming to the idea of imposing haircuts on creditors. But that hefty US reform bill does not currently include any reference to “bail-in” schemes, and it remains an open question whether there is wider support for going down this path. I hope this idea does catch on. It is not a perfect solution to the too big to fail problem; but it is probably the best idea out there right now. And perhaps the most feasible way to create what has been lacking recently: a sense of justice – and real market discipline – in the banking world, that might assuage voter anger.
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Demand for financing leads global economic recovery toward 'wall of debt' By Howard Schneider Thursday, July 15, 2010; A14 It has been dubbed the "wall of debt." A massive wave of borrowing will start cresting this year when the U.S. and European governments sell an estimated $4 trillion in new bonds. The surge will course through the world financial system for several years as countries, corporations and banks borrow record amounts of money to repair the damage from the financial crisis and pay back loans from the boom that preceded it. One crucial concern about the nascent economic recovery is whether markets can smoothly absorb that new debt, or whether it will force less-creditworthy governments into a Greek-style crisis, push weaker banks and corporations into default, and possibly trigger another downturn.
172 Analysts are split on the prospects. Large amounts of cash around the world and the expectation of continued low interest rates have some predicting a trouble-free outcome, while the sheer level of debt involved has others spooked about a destructive competition for credit. But that wall of debt has become a source of concern among economists at the International Monetary Fund and others who are trying to anticipate where the next crisis might arise. "There will be a tightening of financial conditions," said Mohamed El-Erian, chief executive at bond-fund manager Pimco. He said his company expects that governments, corporations and leveraged buyout firms will all have to cope with stiffer requirements as they refinance maturing bonds, "some of which will not be refinanced on any terms." Warnings are there
In a series of recent reports, theH IMF questioned H the ability of governments and banks to raise the money they need as both collide in the markets with multitrillion-dollar tabs -- a dynamic of supply and demand that could raise interest rates as those selling bonds bid up the rate they are willing to offer investors. That potential for high levels of government borrowing to raise rates or even displace corporate bond sales -- depriving companies of an important source of financing -- is a key reason for the agency's call on governments to trim deficits. Ratings agencies such as Standard & Poor's already have begun warning of problems, particularly as bonds used to fund corporate takeovers during the boom years start to mature. Standard & Poor's said some $1.7 trillion in bonds are due in the next three years or so among the non-financial companies it rates. Much of that debt is below-investment-grade junk bonds that pay a high interest rate but might be difficult to refinance in an economic climate wary of risk. "Companies at the low end of the ratings scale may find it difficult to refinance at the rates they'll need for long-term survival, if they can find financing at all," Standard & Poor's wrote in a recent study. The issue is affecting firms large and small. The ratings agency recently downgraded the Great Atlantic & Pacific Tea Co. over doubts about its ability to refinance $188 million in debt next year. It also cautioned about the prospects for the holding company of Texas energy giant
TXU. The subject of the largest-everH leveraged buyout,H TXU faces a $20 billion balloon payment in 2014 on $40 billion in outstanding bonds. "The dollar amounts around the world that we are looking at are unprecedented," said Standard & Poor's Managing Director John J. Bilardello. "It was debt issued during the peak years [that] . . . originated in a fairly strong market" but is coming due in a much weaker one. The IMF, for example, has estimated that banks will need to sell about $5 trillion in bonds in the next three years, particularly in Europe, where the agency said the need for long-term financing is "bearing down" on a sector overly reliant on short-term cash from central banks. That amount is an increase of $2 trillion -- 66 percent -- over the value of bonds sold by financial firms from 2007 to 2009, according to data provided by the Securities Industry and Financial Markets Association. Between the money needed for its annual deficit and the refinancing of maturing debt, the U.S. government is expected to sell more than $2 trillion of bonds annually for at least the next two years -- about double its usual amount. Over the next six months, that will be part of what the IMF anticipates as a crush of government financing that includes Japan and heavily indebted countries in Europe.
173 The United States, as a classic safe-haven investment, has benefited from the current caution in the market, as investors plow money into U.S. Treasury securities and help keep interest rates at historic low levels. Other countries don't enjoy the same confidence. According to the IMF, a handful of the economically weakest European countries, including large nations such as Spain and Italy, will need to sell some $360 billion in bonds during the rest of this year, at the same time stronger nations such as the United States are crowding the market with their own sales. Greece's large refinancing needs this year sparked its recent crisis -- and threatened a larger and potentially global financial seizure when the country appeared at risk of default. Although the European Union and the IMF have set up a fund to guard against a recurrence of that sort of problem, the actual mechanism has not been tested, and the IMF noted that interest rates had begun rising again for Spanish, Italian and some other European government debt. Further ahead Some analysts play down the risk, arguing that the low-interest-rate policy pursued by the U.S. Federal Reserve effectively pulls down rates across a variety of markets -- including for some corporate debt. Corporations and banks have comparatively large cash reserves, they note, and investors who shun equity markets may put money into well-rated corporate, government or financial bonds. Even with the large amounts of government bonds to be sold, it was unlikely that the total demand for credit would outstrip supply by so much that interest rates are forced appreciably higher, said Larry Kantor, head of research for Barclay's Capital. "I am not saying some borrowers won't be squeezed, but how it turns out will turn on a bunch other factors -- what the Fed is going to do, whether economic conditions become more favorable," Kantor said. But it is the next few years -- not the next few months -- that the IMF is concerned about. Markets might cope with the current level of refinancing, but if economic growth rebounds -- if Europe recovers and its slower-growing nations start expanding -- then the private demand for financing will also increase. In its recent forecasts for the U.S. economy, the IMF even factored in a full percentage-point rise in Treasury rates -- an expensive proposition for the United States, in terms of its borrowing costs, and a sign that it expects credit markets to tighten. "The concern comes more when we get to the point where private-sector demand picks up and there is true competition," said David Robinson, deputy director of the IMF's Western Hemisphere department. "Then there will be pressure . . . and it could be quite substantive."
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174 COLUMNISTS
Allies243B may fret but Obama understands America’s role By Philip Stephens Published: July 15 2010 23:33 | Last updated: July 15 2010 23:33 Barack Obama’s foreign policy does not earn him many plaudits these days. Political opponents charge he is soft on America’s adversaries and inattentive of its friends. Critics on his own side of the aisle mutter about the absence of a grand strategy for the deployment of American power. Old allies grumble about soaring hopes disappointed. The funny thing is that Mr Obama’s administration has a more coherent theory of the world than any of its recent predecessors. Behind the scenes, there are signs it is being executed with some diligence. The risk is of it being lost to the political din at home and the array of intractable problems abroad. The president has better things to do than worry about brickbats from European allies. His own, and his party’s, pollH ratings H have fallen into treacherous territory. The economic recovery that was supposed to lift the Democrats before the midterm elections has turned out to be anaemic. ItH has not been creating jobs.H Democrats who had anticipated a mauling in November’s poll now fear it may be a meltdown. Europeans, in any event, will never be satisfied. They want to stand on the sidelines as America fixes things, but then cannot bear the idea of being left out. During the Bush era the charge was one of hegemonic unilateralism. This has elided seamlessly into the present grumbling that Mr Obama’s preoccupation with domestic politics has led to neglect of America’s global responsibilities. Domestic politics and foreign policy, of course, are not unconnected. Economic and political (the two go together) strength at home confers authority abroad. I have heard one senior US official remark that Israel’s Benjamin Netanyahu was never so content as when Mr Obama seemed bogged down in the congressional battle about healthcareH reform.H Heavy losses in the midterm elections would deliver a blow both to Mr Obama’s authority and to one of his biggest foreign policy ambitions – to reinvigorate the nuclear non-proliferation treaty. Republican hopefuls for the 2012 election are lining up against ratification of the new strategicH arms limitation pact with Russia.H They are promising to scupper approval of the comprehensive test ban treaty. The president, it should be said, has made his own foreign policy mistakes. His initial attempt to revive a Middle East peace process did not include a plan B against the possibility that Mr
NetanyahuH H would prove intransigent. The surge-and-withdraw strategy for Afghanistan is not quite as crude as that description suggests, but it has left Mr Obama looking as if he has one foot on the accelerator and the other on the brake. You know something is amiss when the national security adviser feels compelled to send round a note to cabinet members reminding them of the president’s policy.
175 Those critical of the treatment of adversaries and allies sometimes have a point. A Japanese prime minister toppled because of a dispute over US basing arrangements is not something to boast about in Washington. Mr Obama could hide his yawning impatience with European leaders. Hopeless as they often are, they are still allies. An improved relationship with Russia is a sensible strategic goal, but the price of this so- called reset must not be the return of Moscow’s suzerainty in the former Soviet space. It is one thing to say that democracy cannot be imposed at the point of a gun; another to abandon the promotion of universal values. The essential charge laid by Mr Obama’s opponents, though, is that he underestimates American power. Say what you like about George W. Bush, but he offered searing clarity: the US would remain forever pre-eminent and would not hesitate to use military might. Yet it is precisely here that Mr Obama has got the big story right. Of course, the US will remain one of the 21st century’s great powers – quite likely the most important. But that does not mean it can get its way by coercion.
It is one thing to say Mr Obama has been “soft” on IranH ;H quite another to produce a credible alternative response to Tehran’s nuclear programme. The war in Iraq weakened the US. That in Afghanistan may well do likewise. Bombing Iran is not an answer. A particularly thoughtful insight into Mr Obama’s thinking was offered on Wednesday by Strobe Talbott, the president of the Brookings Institution. The president’s theory of the case, as Mr Talbott put it in the Ditchley Foundation annual lecture, begins with recognition of a transformation in the nature, distribution and interaction of power in the world. In an age of new powers, weak and failed states, malign non-state actors such as al-Qaeda, and existential threats from nuclear proliferation and climate change, the old assumptions no longer hold. Mr Obama’s conclusion was that the US could best leverage its power by designing and building global and regional structures to buttress international security. The US national interest, in other words, resides in its role as a leader and organiser of multi- and mini-lateral alliances; in seeking to accommodate rather than contain rising powers and in promoting international norms and institutions. To Mr Talbott’s mind, “it is hard to imagine an American president more committed ... to the need for effective global governance.” That last phrase – global governance – encapsulates the perils of the course. There are still plenty of Americans for whom it implies a takeover by the United Nations; and plenty more who see multilateralism as synonymous with weakness. For his part Mr Obama has failed to articulate the strategy that attaches to the theory. There is plenty going on: from the “reset” with Russia and efforts to improve America’s standing in the Muslim world to closer relations with India and a search for common ground with China. But somehow it all looks a bit haphazard. A politician who got himself elected by demonstrating his personal global appeal has yet to persuade Americans to warm to his description of the world. The coincidence of bitter partisan politics in Washington and the bundle of crises running from the Middle East to North Korea could well see the Obama enterprise fail. Success requires a common purpose so far absent at home and abroad. That said, as far as I can see, no one has come up with a better idea.
http://www.ft.com/cms/s/0/7089dc547BH 0-9049-11df-ad26-00144feab49a.html H
176 07/15/2010 12:22 PM Lean Times for Great Britain
The37B Pain of Cameron's 40 Percent Savings Plan By Marco Evers Prime Minister David Cameron means business. His chancellor of the exchequer, George Osborne, has asked most ministries to lop 40 percent off their budgets, meaning the coming years are likely to be filled with protest and pain.
She is 84 and her husband is 89 -- after decades of hard work, now this: Her funds are running out. The amount of money the old lady still receives from the state is no longer enough to pay for the respectable lifestyle to which she is accustomed. The roof is leaking and the pipes are still made of lead. Removing the asbestos from the walls and ceilings is too expensive, and the furniture has clearly seen better days. At the moment, the mistress of the house is drawing on the reserves she invested in better days, but starting in 2012, even that money will run out. At that point, Queen Elizabeth II will have been on the throne for exactly 60 years and, for the first time, she might be just a little broke. As a private citizen, she will still be ranked among the world's richest people. But the relatively modest sum she receives from her government every year will no longer be sufficient to cover her official expenses as head of state. What happens then? Will the Queen sack her bagpipe player, who plays outside her window every morning between nine and 10 a.m.? Will she pawn the crown jewels? Or perhaps even go on strike? Absolutely not. Instead, Her Majesty will keep a stiff upper lip; she will economize, stretch a little and make compromises, and in the end, she will not be abandoned by the nation -- neither will her family and certainly not Queen Victoria's crumbling mausoleum near Windsor Castle, which is in urgent need of repair. But aside from that, certainty is currently in short supply in the United Kingdom. These are strange and uncomfortable times, both in Buckingham Palace and everywhere else.
Saving Until it Hurts The government, deep in debt and ruled by a new coalition of Liberals and Conservatives, plans to save until it hurts. The hardships and humiliations the British are likely to face could be worse than what Greece, a significantly smaller financial patient, is currently going
177 through. According to economist Mike Devereux of the University of Oxford, the austerity program unveiled by George Osborne, 39, the youngest chancellor of the exchequer in 120 years, is more radical than anything the Greek government has approved to date. Even the famously icy hand of former Prime Minister Margaret Thatcher in the 1980s felt, by comparison, gentle. Prime Minister David Cameron had announced a new "era of austerity" even before the election. Now he threatens to keep his word. These days, Cameron puts on a very serious face when he refers to the British, and warns his fellow citizens that no one will escape the cuts. "The decisions we make will affect every single person in our country. And the effects of those decisions will stay with us for years, perhaps decades to come," he said in a June speech. Of course, Cameron never forgets to assign the blame for all of this to the previous administration. He insists that New Labour destroyed the government's finances, and that the situation was far worse than expected when he came into office. And although he likes to point out that he has gained the approval of the G-20 nations and the European Union for his course of austerity, he neglects to mention the sharp criticism coming from the International Monetary Fund (IMF). It fears that the rigid cutbacks in public spending could jeopardize the economic recovery. Osborne, for his part, is playing the supreme commissioner of frugality, a role in which he seems to enjoy announcing bad news to the British public. Because of his age and lack of experience, he was long a target of derision, even from within his own ranks. But now he is coming back at his detractors with the inexorable vengeance afforded by position. "Daddy might not always be very popular," Osborne told his young son a few months ago. Forty Percent Budget Cuts This year, Great Britain has a record budget deficit of £174 billion, or about €197 billion ($248 billion), equal to 12 percent of gross domestic product. Osborne hopes to have almost completely balanced the budget by the next election in five years. First, he forced almost every cabinet minister in Whitehall to come up with detailed plans on how to save 25 percent of their budgets by the end of the legislative period. The wailing had hardly subsided before Osborne struck again, telling cabinet ministers that 25 percent wasn't enough, and that he wanted them to describe what they would have to do to reduce their expenditures by as much as 40 percent. The only public sectors Osborne intends to spare are the national health system and foreign aid. The bloodletting will also be less severe at the Defense Ministry. Everything else is potentially dispensable for Osborne. In the future, ministers will have to defend their budgets, million by million, before a tribunal made up of leading experts. Osborne, an old-school conservative, seems to relish the denationalization of Great Britain. He defends himself by insisting that his cuts are "unavoidable," and that his demands on the country as "tough, but fair." The financial markets, at any rate, are satisfied with him. The British pound, too, has gained in value. But in London's government district, tens of thousands of office jobs threaten to fall victim to the large-scale cutbacks. Tens of thousands of police officers are also likely to become unemployed soon. Streets will no longer be repaired quite so quickly, and streetlights will be switched off earlier at night. No new schools will be built, nor will there be any new hospitals
178 or prisons. Universities will have to reduce personnel, while libraries and theaters could shut down entirely. Grim Outlook Experts estimate that more than 600,000 people will lose their jobs in the public sector in the coming years. The salaries of most civil servants have already been frozen, and now even adjustments for inflation are off the table. The previous government's generous pension promises will be cancelled. And in January, everyone in Britain will be paying two-and-half percent more in value-added tax (VAT), at the new rate of 20 percent. Other taxes will also go up, while at spending on low-income housing will decline. With this grim outlook, Great Britain can expect a turbulent autumn. Labor unions have announced massive protests. "There will be more resistance than we've seen in decades," says Mark Serwotka, the head of the Public and Commercial Services Union, which represents many government workers. Some are already envisioning rioting in the streets, last seen in the 1980s. No government since the end of World War II has imposed such severe spending cuts on the population. Nevertheless, the timing couldn't be better for the conservatives, because there is practically no opposition at the moment. Since the resignation of former Prime Minister Gordon Brown, the Labour Party is leaderless and doesn't plan to elect a new chairman until the end of September. But by then it will be too late for Labour to take much action before the government releases its final list of spending cuts on Oct. 20 -- a list which could transform Great Britain into a different country. Until then, the only appreciable political resistance could come from the street -- and from within the ranks of the government itself, where there is growing unrest. A coalition is running the country for the first time in 65 years. Officially, the Liberal Democrats approve of the Cameron-Osborne plan, but their supporters do not. Currently only two-thirds of them say they would vote "LibDem" again. They have not forgotten that the left-leaning Liberal Democrats campaigned on a different platform. On the stump, for example, the party was vehemently opposed to a VAT increase. Salary Cuts for Keeper of the Privy Purse Still, Nick Clegg, the leader of the Liberals, has managed to achieve his most important goal. Next May, the British will vote in a referendum on reforms to their antiquated election system -- assuming, of course, that the current government still exists by then. Economists are now as deeply divided as politicians over the question as to whether Cameron and Osborne deserve applause or loathing for their austerity program. Should governments go on strict diets or should they continue to spend borrowed money to stimulate demand? The relatively conservative Economist concludes that both sides are guilty of gross exaggeration in this debate, but that the austerity lobby is clearly the more dangerous of the two. Although, as The Economist points out, the country is unlikely to face a 1930s-style depression, it is clear that those who favor sharp cuts in government spending will at least delay the recovery. Scheduled, apparently, for the midst of the crisis, festivities to celebrate the Queen's Diamond Jubilee in 2012 may be less ostentatious than originally planned, as the crown bows to the dictates of the chancellor of the exchequer. Her Majesty's experts are currently examining ways to cut costs -- by 25 percent or more. No one will escape the cuts. The Queen has reduced the salary of the Keeper of the Privy Purse, who manages the financial affairs of the royal household. She has imposed a hiring
179 freeze, and positions that become vacant are only filled in exceptional situations. She has also cancelled the 24-hour bodyguard service for two of her granddaughters, the Princesses Beatrice and Eugenie. The reward for such privations is that this year every Briton will be asked to spend only 62 pence for his queen -- 7 pence less than in the previous year. But according to a recent study, the Windsors, with a total budget of more than £38 million, or about €45 million ($57 million), remain Europe's most expensive royal family. Translated from the German by Christopher Sultan
URL:
• http://www.spiegel.de/iH nternational/germany/0,1518,706443,00.html H
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180
The24B Self-Defeat of the Keynesian Cross
Mises Daily: Tuesday, July 13, 2010 by PredragH Rajsic H
The Austrian business-cycle theory, initiated by Ludwig von Mises and further developed and elaborated by F.A. Hayek, is by many considered the cornerstone of this school of thought. However, in 1998, Paul Krugman plainly dismissed the theory as notH "worthy of serious study."H
More recently in his NewH York Times blog,H Professor Krugman claimed that the Austrian business- cycle theory fails to fully explain fluctuations in output and employment between recessions and booms. From this he concludes that the theory fails to demonstrate how a business cycle can be caused by government intervention. At the same time, he interprets this as a sign of Austrians' unconscious adherence to Keynesianism in explaining the booms but not the busts. Austrian economists, says Professor Krugman, seem to be "Keynesians during booms without knowing it." The assertions about the alleged inadequacy of the Austrian business-cycle theory have been addressed by RobertH Murphy H and will not be the focus of this article. Instead, I will demonstrate that the common interpretation of the theory that Krugman considers more worthy of studying seriously — J.M. Keynes'
GeneralH Theory of Employment, Interest and Money H — has serious logical flaws. Ironically, it turns out that these are the same flaws that Krugman attributes to the Austrian theory, namely the inability to explain continuous unemployment during a recession.
The374B Basics of J.M. Keynes' Theory Keynes based his 1936 treatise The General Theory of Employment, Interest and Money on one key assumption, that involuntary unemployment is a possible market-equilibrium outcome. He defines involuntary unemployment in this way: Men are involuntarily unemployed if, in the event of a small rise in the price of wage- goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would
be greater than the existing volume of employment.H[1] H
181 Next, Keynes describes the basic elements of his theory: This theory can be summed up in the following propositions: 1. In a given situation of technique, resources and costs, income (both money- income and real income) depends on the volume of employment N. 2. The relationship between the community's income and what it can be expected to spend on consumption, designated by D1, will depend on the psychological characteristic of the community, which we shall call its propensity to consume. That is to say, consumption will depend on the level of aggregate income and, therefore, on the level of employment N, except when there is some change in the propensity to consume. 3. The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment. D is what we have called above the effective demand. 4. Since D1 + D2 = D = φ(N), where φ is the aggregate supply function, and since, as we have seen in (2) above, D1 is a function of N, which we may write χ(N), depending on the propensity to consume, it follows that φ(N) − χ(N) = D2. 5. Hence the volume of employment in equilibrium depends on (i) the aggregate supply function, φ, (ii) the propensity to consume, χ, and (iii) the volume of
investment, D2. This is the essence of the General Theory of Employment.H[2] These propositions were later formulated by Paul Samuelson into what is now known as the Keynesian cross model.[3]H H This model has become one of the standard elements of undergraduate macroeconomics courses.
Figure 1. The Keynesian cross diagram Figure 1 shows a diagrammatic representation of the Keynesian cross, as generally presented in contemporaryH macroeconomics textbooks.H The horizontal axis represents the aggregate output or income, and the vertical axis denotes the aggregate expenditure. The aggregate demand, D, is equal to the sum of the consumption expenditure, pc·φ(N), and investment, D2. The consumption expenditure at
182 any level of employment, N, is a product of the propensity to consume, pc, and the income, φ(N). While Keynes avoids using any explicit units for the aggregate income, expenditure, consumption and demand, implicitly, they are treated in terms of money outlays. The 45° line represents the locus of points where the aggregate expenditure equals aggregate output. Consequently, the economy is in equilibrium at the output level φ(N0), and N0 is the equilibrium level of employment. At this point, the aggregate expenditure is E0. If we assume that N0 is the total amount of labour available in the economy, this equilibrium corresponds to full employment. From this, it follows that the consumption expenditure at full employment is pc·φ(N0). The next step in the application of this model generally involves assuming that propensity to consume, which is an exogenous variable, fluctuates between some minimum and maximum value. Let these values be pc1 and pc2. This is shown in figure 2. If the propensity to consume fluctuates around the level that ensures full employment, pc0, the model suggests that, in times when the propensity to consume is below pc0 (i.e., pc1), aggregate demand, Dl, is low and there will be a period of reduction in output and employment. In contrast, as the propensity to consume increases above pc0, aggregate demand, Dh, is high, full employment and maximum output is reached and a period of increases in output prices can be observed.
Figure 2. Changes in the aggregate demand due to the changes in propensity to consume This idea is graphically illustrated in figure 3. It shows cycles of price increases, output and employment loss, as the propensity to consume fluctuates over time. The periods of higher prices and output, according to this model, coincide with full employment while the periods of lower prices are accompanied by unemployment and a decrease in output. The typical interpretation of the model is that the observed cycles in output, prices, and employment are consequences of intertemporal fluctuations in the aggregate demand, caused by the changes in the population's propensity to consume in a market not stabilized by government intervention.
183
Figure 3. Fluctuations in output price, employment, and output over time, as commonly interpreted using the Keynesian cross model The suggested remedy for these fluctuations, according to the Keynesian theory, involves either fiscal or monetary policy. The fiscal policy remedy would be to increase taxes during the inflationary periods and run budget deficit during the recessionary period. The monetary-policy intervention would involve a reduction in the money supply during the inflationary periods and an expansion of the money supply during the recessionary periods. The intended effect of these policies would be to reduce the aggregate demand when it is too high and increase it when it is too low. This would make the government the primary body that balances the economic activity in order to bring about full employment. This interpretation, on the surface, sounds plausible. However, when the internal logic of the model is examined, a serious error can be found. The next section elaborates on this.
The375B Internal Contradiction N0 in figure 2 is the quantity of labor that produces the output/income φ(N0). The demand equation implies that, in equilibrium, some share of the total output, pc0, is consumed by the income earners — the employed laborers (N0) and the employers. Consequently, pc0·φ(N0) is the aggregate (accounting) value[4]H H of the consumption goods and services exchanged on the market. Following this logic, the same relationship needs to hold in any other equilibrium. Thus, if there is some other equilibrium at the level of employment, N1, and another propensity to consume, pc1, the consumption, C1 = pc1·φ(N1), is the aggregate accounting value of the consumption goods and services exchanged on the market. These are the goods and services produced by laborers, N1, and consumed by all those who earn income.
184 However, if pc1 is less than the propensity to consume that corresponds to full employment, there will be some unemployed labor, equal to the difference between N0 and N1. In order for this labor to be available at another point in time, when the (exogenous) propensity to consume returns back to the level needed for full employment, these unemployed laborers need to have some nonzero level of consumption while being unemployed. Let CU = e·N1 be this minimum consumption, where e is the physical quantity of output needed to sustain the life of an unemployed person. But consumption of the unemployed is not met by an equivalent expenditure because unemployed labor does not earn income. This physical output must be given to the unemployed without monetary compensation. However, nowhere in this model is it specified that there is some surplus production of physical output that will be given away to the unemployed without monetary compensation. Thus, it seems that the model assumes zero consumption for the unemployed, which directly implies that the unemployed will not be able to sustain their physical existence in a prolonged recession. If, on the other hand, one assumes nonzero consumption for the unemployed that is not included in the consumption expenditure of the employed, the actual physical output available for purchase at the level of employment, N1, is less than the quantity that results in the expenditure E1. In order to arrive at the actual value of goods exchanged on the market, say φ'(N1), the amount equal to the unpaid consumption of the unemployed must be subtracted from the existing supply: φ'(N1) = φ(N1) − P·CU, where P is the price of output. But this lowers the aggregate quantity of the goods and services available for exchange in the market below the quantity that corresponds to φ(N1). This means that the actual supply available for exchange no longer meets the effective demand of the income earners at pc1. Thus, assuming nonzero consumption of the unemployed that is not included in the expenditure of the employed is not an equilibrium situation in the model presented above. In order for this situation to move towards equilibrium, the propensity to consume of the employed and the employers needs to be reduced below pc1 to meet the consumption needs of the unemployed. However, propensity to consume is an exogenous variable and is not a subject of individual choice in this model. Even if propensity to consume was subject to individual choice, a further reduction in the propensity to consume would only lead to more unemployment and disequilibrium — since the reduction in the propensity to consume, according to the model, caused the recession in the first place. The only stable equilibrium in this situation is zero output for the whole economy, which amounts to a complete annihilation of the economy. Therefore, we cannot assume that the consumption of the unemployed is not included in the expenditure of the employed. Alternatively, if the consumption of the unemployed were to be included in the expenditure of the employed (i.e., the employed used a portion of their income as charity for the unemployed), we would end up with a paradox: that, as the propensity to consume reduces, the employed are more able to feed more unemployed by spending ever smaller portions of their income. Thus, it must be concluded that, in this model, the consumption of the unemployed is not included in the consumption expenditure of the employed. But the model at the same time implies that the consumption of the unemployed cannot be outside of the expenditure of the employed if the model is expected to produce a nonzero equilibrium output. This leaves the only remaining option — the consumption of the unemployed must be zero. Thus, according to this model, in any continuous economy free of external intervention, if the initial reduction in the propensity to consume below the level that ensures full employment persists for long enough, the economy returns to equilibrium at a lower, newly established level of full employment, N1. This is shown in figure 4.
185
Figure 4. A true restoration of equilibrium in the Keynesian cross model But, unlike the restoration of equilibrium where the unemployed find the yet undiscovered opportunities for employment, the true logic of the Keynesian model implies that the equilibrium is restored by the cessation of the physical existence of the unemployed (i.e., death). Any other outcome contains unresolved internal contradictions. No: INACTIVOS DESANIMADOS, QUE CONSUMEN MENOS, A COSTA DE LOS ACTIVOS. O SEA: EQUILIBRIO A UN NIVEL INFERIOR. ¿Como puede confundirse la pérdida de activos con la desaparición de la población? No conoce la existencia de la población inactiva. (ESTO PARECE UN JUEGO DE NIÑOS: ¿No existe en el ILVM alguien más capacitado pra rebatir a Krugman?)
Conclusion376B Contrary to the commonly used interpretation of the "Keynesian cross," continued fluctuations in output and employment cannot be produced by this model if its strict logic is coupled with the logic of human existence. In this case, the Keynesian model implies that prolonged business cycles could not persist in the absence of an intervention external to the market processes. However, for Keynes, government intervention was the cure, not the cause, of the business cycle. It then turns out that the Keynesians are Austrians during recessions "without even knowing it." Rhetoric aside, given the inadequacies of the Keynesian paradigm, anyone interested in explaining the origins of the business cycle would benefit from seriously studying other economic theories. This is why I cannot agree with Professor Krugman's statement that the Austrian business-cycle theory is not "worthy of serious study."
[1]H H Keynes, J. M. 2006. The General Theory of Employment, Interest and Money. Atlantic Publishers & Distributors: New Delhi, pp. 14.
IH have shown earlier H that this odd idea ignores the existence of undiscovered opportunities for cooperation in an economy consisting of thousands or millions of individuals.
[2]H H Keynes, pp. 23.
[3]H H Samuelson, P.A. 1948. Economics: An Introductory Analysis. New York: McGraw-Hill.
[4]H H The concept of accounting value should not be confused with the concept of economic value. The aggregate accounting value is a number constructed using the market data — quantities of goods and services exchanged and the corresponding exchange ratios. The economic, subjective value is the importance that that an individual attributes to his or her means and ends when making a choice.
Predrag Rajsic is a PhD candidate in the Department of Food, Agricultural, and Resource
Economics at the University of Guelph in Ontario, Canada. See his blogH .H Send him Hmail.H See
Predrag Rajsic's articleH archives.H
PredragH Rajsic H The Self-Defeat of the Keynesian Cross July 13, 2010 http://mises.org/daily/4552H
186
July 15, 2010 TG-774 Treasury Deputy Secretary Neal Wolin. Keynote Address at the Securities Industry and Financial Markets Association’s “Regulatory Reform Summit” July 15, 2010 As Prepared for Delivery Thank you for that kind introduction, Tim. It's a pleasure to be here this morning. An enormous amount has been said about financial reform over the past year– many ideas put forward, many proposals debated. The final bill, already passed by the House, is a strong bill – addressing the core problems that helped produce the financial crisis, laying the foundation for a stronger, more stable financial system, and aligned to a remarkable degree with the legislative proposal President Obama put forward almost exactly one year ago. Now – on the cusp of a final Senate vote – is an appropriate moment to step back and take stock of what the financial reform legislation actually does. First, this bill makes it possible to identify and manage systemic risk in a way that we could not do before. The bill creates a Financial Stability Oversight Council, chaired by the Secretary of the Treasury, and composed of the heads of the financial regulatory agencies. The Council has a critical role in the management of systemic risk: to designate firms for heightened supervision by the Federal Reserve, and to make recommendations concerning the establishment of heightened prudential standards – with a view not only to the safety of specific institutions, but to the stability of entire system. The Federal Reserve will have examination and enforcement authority over all bank holding companies over $50 billion, as well as any non-bank financial companies designated by the Council – so that the largest, most complex financial institutions will be subject to thorough oversight, regardless of their corporate form. The bill establishes an Office of Financial Research within the Treasury Department – to support the Council through the collection and analysis of data concerning risk in the financial system. The OFR will be able to develop analytic capacity not available elsewhere – looking across the whole financial system, and providing insight to the FSOC and to the Secretary of the Treasury. This legislation gives us the tools, for the first time, to look beyond the safety of individual firms or markets to the health of the broader financial system. Second, this legislation requires that regulators impose substantially stronger prudential standards.
187 Robust, risk-based capital, leverage, and liquidity standards will provide a more reliable buffer against both firm-specific failures and systemic shocks. And prudential requirements will be higher for the largest, most interconnected firms – requiring them to internalize the risks they impose on the system by virtue of their size and complexity. The bill will impose a new mandatory stress-testing regime on the largest bank holding companies and designated non-bank firms. It will require the largest firms to establish "living wills," laying out a credible plan for breakup and wind-down in the event of severe financial distress. Regulators will be able to require financial firms, including holding companies, to take swift action to remedy declines in capital levels and other critical measures of financial health. And there will be restrictions on certain risky activities by banks, as well as on the excessive growth by acquisition of financial firms. Third, this legislation establishes a comprehensive regulatory framework for the derivatives markets – the source of so much risk and uncertainty in the recent crisis. Standardized derivatives will be centrally cleared and traded. Derivative clearing organizations will be subject to conservative risk management standards to strengthen the core infrastructure of these markets, as well as public reporting requirements to increase transparency and efficiency. Regulators must impose strong prudential standards, including capital and margin requirements, and strong business conduct standards on over-the-counter derivative dealers and all other major OTC market participants. And the SEC and CFTC will have full enforcement authority – to monitor markets, set position limits and take action against manipulation and abuse. Through a narrowly tailored end-user exemption, the legislation ensures that commercial firms will be able to hedge their risks effectively and efficiently. Derivatives should reduce risk, not magnify it. They should be a force for stability, not contagion. By bringing the derivatives markets out of the shadows, the legislation will benefit every business that uses derivatives to manage real risks. Fourth, this bill will put an end to the problem of "Too Big to Fail." It gives the federal government the authority to shut down and break apart large non-bank financial firms whose imminent failure might threaten the broader system. Modeled on the FDIC resolution process, this resolution authority closes a gap that severely limited the federal government's options during the crisis. This authority is limited by procedural checks and balances, including a judicial review process, and is significantly consistent with the structure of claims under the bankruptcy code. It allows the FDIC to wind down a failing financial firm wiping out shareholders, firing culpable management, and allowing creditors to take losses while stabilizing the financial system. Any losses that cannot be covered through sales of the firm's assets will be recouped from the largest financial institutions. As a result, no firm will be insulated from the consequences of its actions. No firm will be protected from failure. No firm will benefit from the perception that taxpayers will be there to break their fall. The bill makes absolutely clear that taxpayers will never be asked bear the costs of a financial firm's failure. Fifth, this legislation establishes a single agency dedicated to consumer financial protection.
188 The Bureau of Consumer Financial Protection, an independent entity within the Federal Reserve, will have one mission: to promote transparency and consumer choice, and to prevent abusive and deceptive practices. The CFPB substantially consolidates the authorities of seven different regulators. This consolidation – into one agency with a single focus – will benefit not only consumers, but responsible actors throughout the financial system. Now, the bill does much more. But these are the core elements: a focus on systemic risk; heightened prudential standards; comprehensive regulation of derivatives; an end to "too big to fail;" robust consumer protection. Flaws in each of these areas helped precipitate or prolong the financial crisis. This bill fixes those fundamental flaws. Enactment of the legislation is, of course, not the end of the financial reform effort. Now we must turn to the important work of implementation. This bill does what good legislation should do: it creates a clear, full framework; it gives regulators the authority and also the explicit direction to act, and where appropriate it imposes requirements directly. Legislation always leaves some work to the implementers, the regulators. To legislate every detail of financial regulation – every issue of practical application – would be to create a fixed and brittle system. But this bill is thorough and specific. It sets a clear path forward. It will significantly reduce the uncertainty that has existed in the wake of the financial crisis. And it will replace a regulatory system that was deeply, fundamentally flawed; a regulatory system that brought us the worst financial collapse in generations, the devastation of which is still felt by millions of Americans every day. While we may have differed on some issues through this legislative process, we share a common interest in moving forward swiftly with the work of implementation once the financial reform bill becomes law. And as we move forward, we will remain focused on the goal I know we all share: making the financial system of the United States the most stable, the most trusted, and the most competitive financial system in the world. We have already begun a rigorous implementation planning process. That work cannot be done overnight. It will take time. But we are prepared to move on to the next stage with speed, with a strong sense of purpose, and with a commitment to ensuring that our financial system is both safe and vibrant. Though not the focus of this summit, I want to speak for a moment about the GSEs – Fannie and Freddie. As we now look ahead, it's important to make clear that we are very focused on the need for reform of the housing finance system. Designing and implementing practical solutions to the problems in the housing finance system will not be simple – particularly at this moment, when the housing market faces continued challenges in the wake of the crisis. Private capital has not returned to the market, and the GSEs' securitization and guarantee activities today play an outsized – but unfortunately necessary – role in housing finance. They have been essential in restoring stability in the housing market and maintaining the availability of mortgage credit. But it is obvious that the housing finance system cannot continue to operate as it has in the past. We have already begun a broad review of the housing finance system. Our objective is comprehensive and effective reform – reform that delivers a more stable housing market with more effective regulation, and with less risk borne by the American taxpayer.
189 Early next year, we will put forward a paper outlining our proposals and recommendations. We will undertake this work in parallel with the work of implementing the financial reform bill. Given the broad range of interests that all Americans have in ensuring that we have a strong and stable housing market, we are wide open to ideas, to discussion and to collaboration from all corners. The stakes are high and getting it right will be essential. We aim to have as inclusive a process as we can. In closing, I'd like to share a quote from Silas Strawn, President of the Chamber of Commerce at the time of the New Deal. Speaking of the financial reform effort then pending in Congress – the Securities Exchange Act of 1934 –Strawn said the following: "For several weeks the Stock Exchange Bill has received more attention in and out of Congress than any other pending measure. This bill is intended to eliminate unwise and destructive speculation. But it is the opinion not only of Stock Exchange brokers, but of thoughtful business men that its sweeping and drastic provisions would seriously affect the legitimate business of all members of Stock Exchanges and investment banks, with resultant disastrous consequences to the stock market; would greatly prejudice the interest of all investors; would tend to destroy the liquidity of banks and would impose on corporations of the country serious handicaps in the practical operation of their business." Looking back, it is safe to say that Strawn's warnings were more than a little overdone. Far from weakening American firms, destroying the liquidity of American banks, and handicapping the operation of business, the '34 Act – along with the '33 Act, passed the year before – helped lay the foundations for the most stable, most competitive, most innovative, most transparent and most trusted financial system in the world. Undoubtedly, in a piece of legislation as comprehensive as the financial reform bill, reasonable people will disagree on some details, just as reasonable people will undoubtedly have different opinions on the details of rules and other implementation work going forward. But like the securities laws of the 1930s, the Dodd-Frank legislation lays the foundation for a stronger, safer financial system – innovative, creative, competitive, globally leading, and far less prone to panic and collapse. Later today, the Senate is scheduled to take its final vote. The President looks forward to signing financial reform into law as soon as possible. And we look forward, in the months ahead, to working together to ensure that the United States' financial system and capital markets remain the envy of the world. Thank you very much.
http://www.treas.gov/press/releases/tg774.htmH
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Thursday, July 15, 2010
Wonkbook: FinReg to pass; Fed to sit; Reid's climate deal; Dems lose rec The financial-regulation bill might pass today. Or, if republicans filibuster and force Reid to file cloture (which requires two days to "ripen" into an actual vote), it will pass Saturday. Either way, by the week's end, financial-regulation reform will join health-care reform, the stimulus, tobacco regulation, Ted Kennedy's Serve America Act, and much more in the 111th Congress's outbox. This has been, by far, the most productive Congress in memory. Whether that's a good or a bad thing will depend on your perspective. Wonkbook includes a range of perspectives today on the financial-regulation bill. In the end, it's both much more and much less than "Wall Street Reform," which is the Democrats preferred term for the bill. In the "more" column, the legislation creates a Consumer Financial Protection Bureau, which will have authority over everything from credit cards to payday lenders, influencing many industries that we tend to think of as Main Street businesses. In the "less" column, the structure and size of Wall Street will, with some exceptions relating mainly to the Volcker rule and derivatives, remain intact. The biggest transformations will take place among the overseers: A regulatory structure is being created to help regulators detect and avert crises, and, if that fails, respond once they've begun. As part of that, the Federal Reserve is gaining new powers, a systemic risk council is being formed, resolution authority is being created and defined, and shadow banks are being brought out into the sunlight. Will it work? As you'll see, there are a range of opinions on that. Meanwhile, the Fed is likely to sit on its hands even as its own forecasts say the economy is deteriorating; Reid is trying to broker a deal between utility companies and environmental groups; Democrats' inability to agree on a budget means they won't be able t use budget reconciliation on a jobs bill next year; and Minority Report's tech inches ever closer to reality. Welcome to Wonkbook. Top Stories
A 12-pageH summary H (pdf, but worth it) from Deloitte advising its financial clients as to what they can expect from the new law: "Because the new U.S. law is complex, it can be helpful to remind ourselves that its underlying purpose is relatively simple and has two powerful strands: 1. 'De-risk' the financial system by constraining individual organizations' risk-taking activities and capturing a broader set of organizations', including the so-called "shadow" banking system, in the regulatory net 2. Enhance consumer protections." "As the details of the new law turn into specific regulatory requirements, there will be business impacts across all of financial services, not just banking. Some of those impacts are obvious. For example, the need for "arm's-length" swap desk affiliates combined with the move from
191 over- the-counter to exchange trading for derivatives, tighter constraints on leverage and risk- taking, and higher liquidity requirements imply lower profit margins in future from those activities." Despite lowering estimates for economic growth and inflation, the Fed won't pursue additional stimulus, reportsH H Neil Irwin: "Fed leaders expect the jobless rate to be 9.2 to 9.5 percent in the fourth quarter, and to still be 8.3 to 8.7 percent at the end of 2011, both slightly higher than in April forecasts. But they see little threat from inflation, forecasting that prices will rise 1 to 1.1 percent this year...Still, the minutes make clear that Fed leaders still anticipate a continued economic recovery, suggesting that most of the policymakers would still resist any push to take new steps to support growth."
What the Fed could do to spur growth, but won't: http://bit.ly/dxxnmOH H Harry Reid is brokering a climate deal with utility companies and environmental groups, reportH H Darrel Samuelsohn and Coral Davenport: "Majority Leader Harry Reid's top energy aide, Chris Miller, nudged the small group to the bargaining table earlier this month in the hope they could resolve more than a decadeH of dispute H on Clean Air Act regulations and reach agreement on a first-ever cap on greenhouse gas emissions. So far, sources close to the talks said, the two sides are holding firm in their demands. The power companies want relief from the air pollution rules as a price of entry into negotiations if they are going to accept a mandatory carbon limit that won't apply to other industries. The environmentalists are saying no." Democrats are forgoing a budget, and thus losing the chance to use budget reconciliation on a jobs bill in 2011, reportsH H Annie Lowrey: "While the distinction between an enforcement resolution and a full budget is largely technical, there is one crucial difference: Under the enforcement resolution, Democrats can no longer use a parliamentary tactic known as budget reconciliation next year ¿ a process Democrats had hoped might allow them to pass key pieces of legislation, such as a jobs bill, with 51 votes in the Senate, as opposed to the usual 60 needed to overcome a filibuster."
Genre bending interlude: The Morning Benders coverH Joanna Newsom and J Dilla at the same time.H Still to come: FinReg special; The BP cap test faces further delay; a new CEA report says the stimulus has created over three million jobs; the GOP wants Senate hearings on Donald Berwick; and Minority Report's sci-fi tech becomes a reality. FinReg
Simon Johnson thinksH H it will fundamentally change American banking: "Just over a hundred years ago, the United States led the world in terms of rethinking how big business worked - and when the power of such firms should be constrained. In retrospect, the breakthrough legislation - not just for the US, but also internationally - was the Sherman Antitrust Act of 1890. The Dodd-Frank Financial Reform Bill, which is about to pass the US Senate, does something similar - and long overdue - for banking." Despite canning a $19 billion fee, FinReg will still include charges on banks: http://bit.ly/cSGGO3H H
Harvey Pitt arguesH H it won't help federal regulators: "What was, and is still needed, is a regulatory regime with better flexibility that is more nimble, and able to spot potentially damaging trends before those trends become full-blown crises. Instead, what we have is a bill that makes government less nimble, and more ponderous. The systemic regulator--the FSOC--
192 can override decisions of individual regulators. The Consumer Financial Protection Agency can bog down any other agency by encumbering agency rules or policies."
FinReg vastly improves crisis response, writesH H Ezra Klein: "By placing derivatives on exchanges and clearinghouses, by creating a systemic risk council, by forcing banks to provide "funeral plans" that explain how to unwind them in the event of a failure, by creating an Office of Financial Research to collect daily data and provide quick analysis on transactions, there's much less chance that a financial crisis would leave regulators totally confused about what's going on, and who owes what to whom."
Paul Volcker gives FinReg a solid 'B': http://nyti.ms/bEPGLBH H
The U.S. Chamber of Commerce remainsH opposed:H "The final bill leaves the regulators with quiteH some work to do H -- 533 regulations, 60 studies and 94 reports. To put this into perspective, Sarbanes-Oxley required 16 new regulations and 6 studies. That's right, the Dodd- Frank bill is over 30 times the size of SOX." Daniel Indiviglio looks at how FinReg could either end or encourage the market's preference for mega-banks: http://bit.ly/dhfxXwH H
What matters is the regulators, writesH H Tim Fernholz: "Unlike battles in Congress, where organizers have a short time to exert political pressure, rule-making is a war of attrition in the trenches, often over years. Without someone at the top committed to real reform in the agencies, reformers don't have a chance."
The Roosevelt Institute publishes a range of takes: http://bit.ly/aABjSIH H
Americans for Financial Reform make their case for the bill: http://bit.ly/a5nNR9H H Economy The Council of Economic Advisors estimates the stimulus has saved or created three million jobs and will save 500,000 more this year, reportsH H Jared Favole: "The report, which will be fully unveiled by Vice President Joe Biden late Wednesday morning, shows that for every dollar spent under the Recovery Act for renewable energy and other projects the private sector is spending $3, according to a White House official." Read the report (PDF): http://bit.ly/9KUl3YH H
Greg Mankiw is skeptical: http://bit.ly/bVXM2DH H There will be yet another Senate vote on unemployment benefits on Tuesday: http://politi.co/9ABnUfH H
China is beginning to adjust to an era of slower growth, reportH H Andrew Batson and Bob Davis: "Higher wages at home and low-wage competition from other countries will make it harder for China, already the world's largest exporter, to maintain rapid export growth. Real- estate bubbles have developed in places like the tropical island province of Hainan, prompting the government to take steps to try to cool those markets so they don't threaten the financial system. The favorable demographics that have supplied manpower for economic growth are changing. ..The labor pool is expected to peak around 2015, and then decline, according to U.N. projections."
Max Baucus is pushing for a permanent extension of some Bush tax cuts, reportsH H David Rogers: "'With today's budget picture, it's no longer clear that we can afford large tax cuts for the most well-to-do,' he said, opening a Finance Committee hearing on the subject Wednesday. But in wrap-up comments later, Baucus made clear that he will push for a permanent extension of those provisions that affect middle- and working-class families.. Senate liberals are increasingly agitated, after being hammered by Republicans for months regarding health care
193 and spending. Vermont independent Sen. Bernie Sanders, for example, wants an estate levy even stricter than that of the House."
Raghuram Rajan explainsH H how economic inequality fueled the financial crisis: "the political response to rising inequality - whether carefully planned or the path of least resistance - was to expand lending to households, especially low-income households. The benefits - growing consumption and more jobs - were immediate, whereas paying the inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly."
Dani Rodrik saysH H a specter of "market confidence" is spooking policymakers: "Few can predict which way market sentiment will move, least of all market participants themselves. Even with hindsight, it is sometimes not clear why markets go one way and not the other. Similar policies will produce different market reactions depending on the prevailing story, or fad of the moment. That is why steering the economy by the dictates of market confidence is a fool's errand."
Matt Miller argues Obama's hardly too tough on business: http://bit.ly/aO4PW7H H
David Wessel searchesH H for politically palatable stimulus spending: "There's talk in Washington about a federal highway and surface transportation bill, the one form of spending about which some deficit-phobes are enthusiastic. Or perhaps a public-private infrastructure fund of some sort that would leverage taxpayer money and draw some cash out of corporate coffers, and might help beleaguered state governments at the same time."
TED interlude: The scientific advisor to Minority Report shows that theH film's computer interfaces are no longer science fiction.H
http://view.ed4.net/v/OH 914NF/CJP16/L9N01PH/NJYRCH/MAILACTION=1 H
GREG245BH MANKIW'S BLOG Random Observations for Students of Economics
Wednesday,37B July 14, 2010
The478B CEA's Impossible Job The ARRA, the fiscal stimulus act passed last year, gave the Council of Economic Advisers an impossible job: measuring how many jobs the act created. HereH is the CEA's latest attempt.H As far as I can tell, there are two kinds of evidence here. First, there are model simulations. That is, the CEA took a conventional Keynesian-style macroeconomic model and used those set of equations to estimate the effect the stimulus should have had. Essentially, the model offers an estimate of the policy's effect, conditional on the model being a correct description of the world. But notice that this exercise is not really a measurement based on what actually occurred. Rather, the exercise is premised on the belief that the model is true, so no matter how bad the economy got, the inference is that it would have been even worse without the stimulus. Why? Because that is what the model says. The validity of the model itself is never questioned.
194 (Moreover, the fact that other organizations simulating similar models come to similar conclusions is no evidence about the validity of the model's simulations. It only tells you the CEA staff did not commit egregious programming errors when running their computer simulations.) Second, the CEA offers some statistical evidence that things got better after the stimulus passed. Some of this evidence comes early in the document in the form of simple graphs. Some comes later by examining deviations from forecasts based on a two-variable vector autoregression. But the nature of the evidence is basically the same: PostH hoc ergo propter hoc.H Of course, there were a lot of other things going on in the economy at this time. Monetary policy, for example, has gone to extraordinary measures to get the economy going. TARP was also an unusual intervention that seems to have done its job of returning the economy to some degree of financial normalcy (even if leaving the bad taste of increased moral hazard). Giving credit for the economic improvement to the fiscal stimulus is a large leap. In the end, I do not find this CEA document very persuasive. At the same time, I feel the CEA's pain. The stimulus act instructed them to do the (nearly) impossible. Perhaps someday someone will conduct a study that credibly measures the macroeconomic effects of this particular fiscal stimulus. But it won't be easy. And it won't look much like the study released today.
http://gregmankiw.blogspot.comH /2010/07/ceas-impossible-job.html H
195 miércoles, 14 de julio de 2010 9:02
Greetings from RGE! In 2009 and the first half of 2010, low interest rates and an uncertain global outlook led to strong, volatile capital inflows into some of Asia’s most promising economies. Policymakers in these places—which include, among others, Hong Kong, Taiwan, Singapore, South Korea, Indonesia and India—have searched for the best ways to control the on/off switch, to prevent volatility from undermining their economic growth. We examine this trend in a recentH analysis,H available to RGE clients, which surveys the measures implemented in each of the countries noted above. In 2011, capital flows could turn even more volatile if investors begin reversing carry trades in anticipation of G3 rate hikes. With growth risks derailing emerging Asia’s monetary tightening schedule, more and more policy makers will battle credit and asset bubbles and inflows that create external vulnerabilities, like short-term private and sovereign debt inflows, to reduce the threat from capital outflows to liquidity, currencies, asset markets and capex financing. However, the region's capex financing needs, weakened current account balances and elevated sovereign and corporate debt issuances will tie policymakers' hands and prevent them from imposing punitive capital controls or taxes. The root cause of volatile capital flows is debatable: Low interest rates abroad and expectations of domestic currency appreciation attract carry trade and external borrowings, but domestic conditions may be exacerbating emerging market (EM) Asia’s inability to cope with heavy, volatile short-term capital flows. Several regional economies currently are characterized by less liquid FX and capital markets, inadequate asset market diversification for foreign investors, partial capital account convertibility, weak business climates for FDI, inadequate sterilization and monetary and exchange rate policies that encourage speculation. Since structural reforms to enable flexible exchange rates and deepen financial markets can be implemented only in the medium term, prudential measures are becoming Asia's short-term policy tool of choice to cope with capital inflows. Macroprudential measures could reduce volatility from speculation in the very specific asset markets they target, but their long-term effectiveness in containing total capital inflows, currency appreciation and general volatility might be limited. This is especially true for regulations targeting equity and bond inflows. Empirical evidence from Asia suggests that measures targeting corporations’ and domestic and foreign banks’ FX and derivative positions could somewhat reduce short-term capital inflows, external debt and associated vulnerabilities such as maturity and currency mismatches and systemic risks in the banking sector. The experiences of South Korea and Indonesia, for instance, show that advance warnings and gradual implementation can reduce negative market reactions to such restrictions. But regulations only will be effective if the countries' targeted inflows account for a large share of total capital inflows and if investors perceive the measures to be permanent and are unable to
196 shift to other short-term asset classes within the country. Plus, the costs of inflow regulations must be far higher than foreign investors' expected returns, as well as interest and exchange rate arbitrage for external borrowings of domestic banks and companies. Tighter real estate regulations, especially those related to mortgage lending, have tempered the surge in prices and/or sales in several countries and eased risks of asset bubbles or sharp market corrections in the event of capital outflows. However, home prices and sales in the luxury sector continue to be driven by capital inflows and speculation, suggesting a need for further regulatory tightening. Rate hikes by Asian policy makers could contain equity market bubbles, but they also could attract more inflows related to bonds and external borrowings.
Nonetheless, our analysis leads us to conclude that many Asian economies needH to tighten monetary policy H sooner rather than later. New inflows from the rest of the world might prove problematic, but at present low or negative real interest rates seem to be fueling speculative investment by domestic players, and that too is a dangerous dynamic.
ANALYSIS
With246B Limited Options, EM Asia Turns to Prudential Measures to Tame Inflows By Arpitha Bykere and Adam Wolfe 7/6/2010 | Last Updated EXECUTIVE SUMMARY As low G3 interest rates and an uncertain global outlook have led to strong, volatile capital inflows into Asian Tigers (Hong Kong, Taiwan, Singapore, South Korea), Indonesia and India, policy makers in 2009-10 have responded with macroprudential measures. These factors will continue to drive tumultuous capital inflows into Asia throughout 2010, though total inflows could be well below those of 2009. In 2011, capital flows could turn even more volatile if investors begin reversing carry trades in anticipation of G3 rate hikes. With growth risks derailing[...]
http://www.roubini.com/analysis/123531.phpH H
Tail247B Risk Wags the Dog: Rising Correlations, Part I By David Nowakowski, Natalia Gurushina, Arnab Das and Gina Sanchez 7/15/2010 | Last Updated EXECUTIVE SUMMARY While the most intense phase of the recession and financial market volatility are over a year behind us, markets are not de-coupling. In fact, correlations are higher than ever. The causes include cyclical deceleration as balance sheet constraints bite and/or fiscal adjustment begins in the US, UK, and EZ; monetary tightening across Emerging Markets including a policy-led deceleration in China; and above all, the persistence of event risk in EZ sovereign credit and the euro itself. This combination of cyclical and structural risks has the potential to become binary[...]
http://www.roubini.com/analysis/124603.phpH H
197
Posted at 10:36 AM ET, 07/15/2010
Dodd378B implies Fed must act at hearing for governor nominees By Neil Irwin Is a key senator trying to encourage the Fed to pursue a looser monetary policy? In his opening statement at a confirmation hearing for three nominees to be Federal Reserve Board governors, Sen. Christopher Dodd (D-Conn.) came pretty darn close to calling for the central bank to take new steps to support growth. "While the economy is growing, it is not growing fast enough to help the millions of Americans who lost their jobs as the result of the crisis," said Dodd, chairman of the Senate
Banking Committee. He noted that the unemployment rate remains very high, businessH investment is subdued H and that some price measures "suggest that we are moving toward price deflation." "It is evident that the economy is going to need all the help the Fed can provide over the coming year," he said. That's not the same as calling for specific measures, such as new purchases of Treasury bonds or other long-term assets, to stimulate the economy. Dodd, like most senators, respects the independence of the Fed's monetary policy enough not to put explicit pressure on the board to take a given policy action. But the implicit suggestion of his statement is pretty clear: This economy is drowning, and you guys ought to do something about it. Janet Yellen, the San Francisco Fed president and nominee for vice chairman of the central bank, added her two cents to the debate over more fiscal stimulus in her confirmation hearing moments ago. Her message: If Congress wants to do more on the fiscal front to boost the economy in the short run, it should be paired with longer-term deficit reduction. Responding to a question, Yellen said: "As Congress considers the option for further fiscal stimulus now, which is natural given the outlook, I would emphasize that it's very important and Congress will have more flexibility to move in the short run to support the economy if, simultaneously, it can put in place and show credibility on taking the measures necessary to attack the long-term deficit, which is widely understood to be an unsustainable situation that requires painful policy action."
For the record, Fed Chairman Ben Bernanke expressed essentially the same ideal at a hearingH last month.H As the confirmation hearings began at Dirksen 538, Yellen was joined by nominees Peter Diamond and Sarah Bloom Raskin.
198 Nothing too shocking in the (fairly short) prepared statements from each nominee. Each promises fealty to the dual mandate that Congress has assigned the Fed, of maintaining price stability and maximum employment. Each also stresses the independence of the Fed from political influence and the Fed's transparency and accountability to the public. From Yellin's prepared testimony: "My approach going forward, as in the past, will be to bring a thoughtful and independent voice to [Fed policy deliberations], drawing on the insights of business and community leaders throughout the country, and thoroughly analyzing macroeconomic trends that affect the domestic outlook and the risks to our forecasts." She concludes with, "I strongly support Fed independence in monetary policy, and I am committed to enhancing the transparency that is essential to accountability and democratic legitimacy." Peter Diamond, an MIT economist who does not have a traditional academic background in macroeconomics or monetary policy, says that as a member of academic economics departments, "I have gained a wide knowledge of a variety of economics topics" and that "as a consequence, I have considerable awareness of the development of economic analyses of monetary policy and its impacts on both inflation and employment, as well as studies of the determinants of financial crises." Diamond explains his fitness for the Fed this way: "A central theme in my research career has been how the economy deals with risks, both risks at the individual level and risks that affect the entire economy. In all of my central research areas, I have thought about and written about the risks in the economy and how markets and government can combine to make the economy function better for individuals. If confirmed, this background should be very helpful at the Federal Reserve as part of the process of addressing our heightened awareness of the dangers of systemic risks." He adds that his background in behavioral economics and law and economics should be helpful on consumer protection and financial literacy issues. Raskin, the Maryland commissioner for financial regulation, explicitly stresses the need for the Fed to combat unemployment. "We need to strengthen this recovery by expanding its foundations. This means that, in addition to maintaining stable inflationary expectations and keeping a vigilant eye on the emergence of new bubbles, the Fed must seek to fulfill the other part of its statutory mandate by addressing unemployment, which has pervasive social costs."
Neil248B Irwin Dodd implies Fed must act at hearing for governor nominees10:36 AM ET, 07/15/2010 http://voices.washingtonpost.com/political-H economy/2010/07/fed_governor_nominees_head_int.html H
199 What Bernanke and the Fed won't be doing to stimulate economic growth By Neil Irwin July 14, 2010; 6:00 AM ET
I wroteH last week H about what actions the Fed would consider taking if the economic recovery continues losing steam. In reporting that story, I also vetted some other actions the central bank might take to try to support growth -- but concluded they are not viewed within the Fed as desirable options, for a variety of reasons. So here are the things the Fed probably won't be doing to try to strengthen the economy, and why. Endorse more fiscal stimulus. Chairman Ben Bernanke gave crucial momentum to fiscal stimulus actions in early 2008 and early 2009 with his backing. He could put his credibility to use and prod Congress toward taking more action to boost growth. He even has a high-profile venue at which to do it with his semiannual monetary policy testimony next week.
But don't hold your breath. Bernanke, to the degree he wades into fiscal policy at all, hasH been urging Congress H to work to reduce the long-term budget deficit in recent months. That isn't necessarily inconsistent with more short-term economic stimulus, and in fact Bernanke has suggested that he's OK with short-term simulus if it is paired with long-term deficit reduction. ("If you decide to do more fiscal stimulus," Bernanke told the House Budget Committee last month, "it would be very helpful to combine that with . . . with a plan for the fiscal exit strategy.") But Bernanke is unlikely to come out and explicitly endorse short-term stimulus, for two reasons. The first is that he views fiscal policy as the province of Congress and the president, and just as he expects them to keep their fingers off monetary policy, he doesn't want to get in the mix of tax and spending decisions. The second reason: Even if he delivers a nuanced message that short-term stimulus should be combined with long-term deficit reduction, when that is translated into newspaper headlines and politicians' talking points, it would likely translate to the more simplistic "Bernanke endorses stimulus." His predecessor, Alan Greenspan, experienced that in 2001 when he testified in favor of the Bush tax cuts, but with the caveat that the cuts should have triggers so they might be eliminated if expected budget surpluses did not materialize. His comments were widely interpreted as a more general endorsement of the tax cuts, which were passed without any such triggers, and the budget deficit soared. New unconventional lending programs. New York Times columnist Paul Krugman
Hmentioned "buying private-sector debt" H as a tool the Fed could use to stimulate the economy. Goldman Sachs economists have mentioned the idea of a "TALF-like structure," combining Fed and Treasury resources to buy private assets. (TALF is the Term Asset-Backed Securities Lending Facility, a Fed program to prop up lending markets launched during the crisis). Neither is under serious consideration.
200 The Fed can buy corporate bonds or other private assets only by using its emergency lending powers, known as 13(3) for the section of the Federal Reserve Act that authorizes it. The central bank turned to this power repeatedly during the financial crisis, but it has limits: It can be invoked only in "unusual and exigent" circumstances and when other credit is unavailable. In other words, so long as markets are functioning reasonably normally, as they are now, the Fed doesn't have the authority to intervene; it's hard to argue that a mere desire to push down various interest rates qualifies as "unusual and exigent" circumstances. In other words, don't expect to see the Fed buying corporate bonds or other private securities unless there is a breakdown in market functioning, as opposed to weak economic conditions. Cutting the discount rate. Back in February, the Fed raised the rate it charges banks for emergency loans at its discount, to 0.75 percent from 0.5 percent, as part of its exit strategy from unconventional policy enacted during the crisis. It could reverse that action and lower the rate. But it's not clear that cutting the discount rate would do any good for the economy; banks just aren't using the discount window now -- only $41 million was outstanding at the discount window last week, down from $35 billion the same time last year. Fed leaders view tweaks to the discount rate as a tool to help market functioning during periods when bank liquidity is the problem, and that just isn't the case now. One caveat to all of this: If the economy enters a true double-dip recession (as opposed to just a sluggish recovery), all bets are off. If there's one thing we learned about the Bernanke Fed during the last three years, it's that if things get bad enough, it is willing to throw out the playbook. Neil Irwin July 14What Bernanke and the Fed won't be doing to stimulate economic growth July 14, 2010; 6:00
AM ET http://voices.washingtonpost.com/political-H economy/2010/07/what_the_fed_wont_be_doing_to.html H
201
Are Democrats painting themselves as the lesser of the evils? By Dana Milbank Wednesday, July 14, 2010; A02 It would not be accurate to say that Democrats are worried about losing control of the House in November. It would be accurate to say that Democrats are in a screaming panic about losing control of the House in November. The panic threshold was crossed Sunday morning on "Meet the Press," when White House press secretary RobertH Gibbs H said, "There's no doubt there are enough seats in play that could cause Republicans to gain control." Gibbs spent part of the next two days claiming that he was merely pointing out the obvious. But when the president's chief spokesman points out the "obvious" fact that his party is in big trouble, it becomes self-fulfilling. On Monday, House Republican Whip H Eric Cantor H (Va.) gleefully agreed that "we're going to retake the House, as Mr. Gibbs suggested." On Tuesday, as Democratic lawmakers limped back into town from a 10-day recess, a grim
StenyH Hoyer (Md.),H the House majority leader, sat at the end of a long conference table in his office and was quizzed by reporters about the Gibbs-induced panic. "Do I think he is right in there are enough seats in play?" he asked himself. "Probably close," he answered. Hoyer agrees with Gibbs that the party could lose the House. It was enough to cause Democrats to assume the Edvard Munch position. The majority leader hastened to insist that "I don't think we are going to lose the House" -- a clarification Gibbs himself belatedly added -- but everything about Hoyer's defensive and somber 30 minutes with reporters hinted otherwise. He thought it "unfortunate" that voters have not come to appreciate all the good things in the Democrats' economic stimulus legislation. He said the Democrats "regrettably" could not pass a budget with a target for deficit reduction. And he said the Democrats have a "very difficult" political argument to present to voters before November's elections. "I am sure you are going to ask me about the recent poll in The Washington Post; I am not happy about it," Hoyer submitted, preemptively, in his opening statement before taking questions. Unfortunate, regrettable, very difficult and unhappy: These are not the words of a party leader who anticipates victory. "I think Americans are angry," he went on. "Their economy is still not working the way it ought to work. We agree with that." Hoyer tried to explain how the anger has "unfortunately" - - that word again! -- been misdirected at innocent Democrats rather than at "the Bush/Hastert/Boehner/McCain policies." The Post-ABC News poll that caused Hoyer's unhappiness found that six in 10 voters lack confidence in President Obama to make the right decisions, and -- of more immediate concern
202 to House Democrats -- a majority of voters say it's more important to have Republicans in charge of Congress as a check on Obama's policies. Hoyer, perhaps inadvertently, illustrated why things are so bleak for the Democrats: They have little tangible evidence that their policies have worked. The best they can do is claim that things were worse under the Republicans, or that things would have been worse without the Democrats' policies. "My view is that it is very difficult -- I understand that as a political argument, to say things would have been worse," Hoyer allowed. "You know a guy who doesn't have a job or a gal who doesn't have a job and hasn't had a job for six months or a year or 18 months says to themselves, 'Mack, I don't think things could be worse.' But, in fact, most economists agree that they would have been substantially worse. So we have to make that argument." Proposed bumper sticker: "Vote Democratic. Things might have been even worse without us." Hoyer's other campaign theme was only slightly better: asking Americans "to focus on whether they want to go back to the failed policies of Bush and the Republican Congress. . . . Employment was the worst performance since Herbert Hoover, and unemployment was staggering, having lost 3.8 million jobs the last year that that economic policy was in place." Proposed bumper sticker: "Vote Democratic. Because Republicans are even worse than we are." Hoyer is, by all accounts, a very nice man. But at a time when Democrats desperately need a strong campaign theme, the message he delivered Tuesday for House Democrats returning from recess was oddly off-key. He devoted the bulk of his lengthy opening statement to a discussion of the accounting method known as "paygo." He could be heard uttering "the Appropriations Committee then allocates that number, which is called a 302(a) allocation, to a 302(b) allocation, which is a subset to each one of the 12 subcommittees." He could also be heard providing the wisdom that "the budget enforcement resolution" made "the House statutory paygo rule compatible with the statutory paygo rule." Proposed bumper sticker: "Vote Democratic. We made the House statutory paygo rule compatible with the statutory paygo rule." No wonder Gibbs is scared.
http://www.washingtonpost.com/wp-H dyn/content/article/2010/07/13/AR2010071305395.html?wpisrc=nl_pmheadline H
203 BusinessH Day H
July 14, 2010
After249B Crisis, Show of Power From JPMorgan
By56B ERICH DASH
JamieH Dimon H is not the modern-day John Pierpont Morgan. He is not the new king of
Wall Street, and he’s certainly not PresidentH Obama’sH BBF (best banker friend).
At least, that’s what he will tell you over lunch at the Park Avenue
headquarters of JPMorganH Chase,H the descendant of the House of
Morgan that came through the global financialH crisis H bigger, stronger and healthier than its rivals. But taking a victory lap, or even basking in the adulation he has received while his fellow bank chiefs have been pounded, is the last thing Mr. Dimon claims to want. He knows all too well the dangers of swaggering in the footsteps of former Wall Street kings like
SanfordH I. Weill,H his onetime mentor, who helped build CitigroupH H
into an institution so unwieldy it nearly went bankrupt, or LloydH C.
Blankfein,H the GoldmanH SachsH chief whose crown has been tarnished by accusations of double-dealing under his watch.
Instead, Mr. Dimon worries openly that new financialH regulations,H which are expected to be passed by the Senate on Thursday and signed by Mr. Obama shortly thereafter, will cost his bank billions and that the jittery economy may suffer another setback. And that rivals, lurking in every corner of the world, are devising new ways to “clean our clocks.” In fact, in a lunchtime interview, his outlook was so cautious, his tone so subdued, that it prompted a senior aide to gently interrupt: “Jamie, how about mentioning a few of our positives, too?” For all the talk of gloom and doom, the postcrisis era looks brighter than Mr. Dimon is willing to acknowledge. In Washington, the financial industry was largely successful in blunting the toughest legislative proposals. On Wall Street, the deluge of losses is slowing and ultra-low interest rates are helping all banks make money. JPMorgan, in particular, is poised to increase its profit and gain market share in several businesses as many of its competitors continue to struggle to get back on their feet. The crisis cemented Mr. Dimon’s reputation as a financial superstar — a bold dealmaker who buys when others are selling, a strict risk manager who resisted the type of exotic businesses that felled others and a charismatic leader who charms lawmakers and credit traders alike. He is now commonly referred to by a single name, like Pelé or Madonna. “Right now, there are virtually no giants on Wall Street except maybe Jamie,” said David M.
Rubenstein, a founder of the CarlyleH Group H and a longtime financial and political hand. Mr. Dimon earned that distinction by playing as much defense as offense during the housing boom, which insulated JPMorgan more than most when the boom went bust. Then, when the
204 bust became a full-blown financial crisis, Mr. Dimon went hunting for bargains, significantly expanding his position in investment and retail banking while others were shrinking. Now, those efforts are paying off. Even with a slowdown in trading, analysts are forecasting a profit of 70 cents a share when JPMorgan reports its second-quarter earnings on Thursday, about the same as a year ago. At age 54, Mr. Dimon has only begun trying to build the kind of global banking empire he initially set out to create with Mr. Weill at Citigroup. While JPMorgan’s share price fared better than most of the banking sector through the turbulence of the last few years, at around $40.35, it remains roughly where it was when Mr. Dimon took over as chief executive in December 2005. And analysts point out that while JPMorgan’s overall operation is in better shape than most, the bank does not enjoy a top position in any single business.
“They are not WellsH Fargo H when it comes to retail banking. They are not AmericanH Express H when it comes to credit cards. They are not BlackRockH H when it comes to asset management,” said Michael Mayo of CréditH Agricole H Securities. “And JPMorgan is not Goldman Sachs in emerging markets.” Mr. Dimon is trying to make up that lost ground. Over the last three years, he has plowed more than $10 billion into his main businesses. He recently announced plans to build up his corporate bank and make an aggressive push into Brazil, China and a dozen or so other emerging markets that were growing at a faster pace than developed economies. That would put him toe to toe with banks like Citigroup, HSBCH H and HStandard Chartered,H which have been in these markets for decades. “We are prepared, and we are already good at it,” says Mr. Dimon, ever-confident but also careful not to overpromise. (He notes the plan will unfold over several years.) It is an approach right out of the Dimon playbook, mixing competitive paranoia with hardball deal-making and careful management of investor expectations. He made a name for himself as Mr. Weill’s young operations whiz, helping assemble Citigroup in the late 1990s through a series of flashy mergers. After arriving at Bank One in 2000, he spent the next few years fixing the ailing regional lender. Then, after Bank One’s merger with JPMorgan in 2004, he orchestrated a similar turnaround. He spent three years stitching together the banks’ disparate computer systems and getting a handle on the financial risks lurking on its balance sheet. Every step of the way, he told investors that he was focused not on lifting quarterly profits but on building a strong company for the long haul. Mr. Dimon has refined that formula in recent years, seizing more than a few opportunities to reposition his bank while his rivals were in deep distress.
With his purchase of the teetering BearH Stearns H — subsidized by taxpayers and steeply discounted at $10 a share — Mr. Dimon filled in crucial gaps in his investment bank. Where JPMorgan had traditionally been a big bond house, the addition of Bear invigorated its stock and commodities trading operations and added a lucrative prime brokerage business, which provides financing to hedge funds, that had been high on his wish list.
He took HWashington Mutual H off the government’s hands for a mere $1.9 billion, giving his retail bank a giant share of the nation’s deposits and turning it, overnight, into a major player in California. (It helped, of course, that nobody else entered a bid.) As panic gripped the financial industry, consumers and big corporations saw JPMorgan as a safe place to park their cash, even if it meant accepting a savings rate close to zero percent.
205 With few competitors free to lend, JPMorgan’s bankers demanded big premiums from corporate borrowers to finance deals. While rivals were retrenching during the crisis, Mr. Dimon ordered his lieutenants to expand. Although they closed scores of Washington Mutual branches, Chase opened more than 300 new retail locations over the last three years and added about 3,000 bankers to its ranks. One of every 13 bank branches opened since 2009 has been a Chase branch, according to SNL Financial. Chase Card Services, meanwhile, has introduced three new types of credit cards in the last year. In the second quarter alone, it mailed out an estimated 164 million applications, according to data from Synovate, a research firm. That was more than twice the number sent out by American Express, the next most active issuer, and made up nearly one-third of the industry’s total mailings. When the head of the credit card division offered to scale back as losses spiraled, Mr. Dimon was emphatically opposed. “We don’t want to do stupid things because we are losing a lot of money,” Mr. Dimon said, anticipating a rebound in the card business. “Hell no. We are going to do the right thing as fast as we can.” Mr. Dimon was aggressive in dealing with Washington, too. Whereas the heads of Citigroup and BankH of America H struck a conciliatory tone with policy makers, Mr. Dimon was downright confrontational. JPMorgan’s 12-person Washington office was spending more than $7.7 million on lobbying over the last five quarters, more than any other bank, according to the Center for Public Integrity. Meanwhile, in speeches and in private meetings with lawmakers, he criticized credit card legislation, protested a proposed bank tax and complained that JPMorgan — which, he reminded them, accepted bailout funds with reluctance — was being unfairly punished for the sins of its competitors. The result? A sweeping financial overhaul bill that most analysts say will not fundamentally change the way the industry does business. Many of the harshest measures were significantly watered down or delayed. JPMorgan, for example, will be allowed to retain its giant hedge fund unit, Highbridge Capital Management, and its status as a derivativesH H powerhouse. Despite his semi-victory, Mr. Dimon says being the chief is less fun these days, now that politics are so intertwined with his job. Mr. Dimon insists that the closeness of his relationship with Mr. Obama has been “greatly exaggerated,” as was the portrayal of any fallout with the White House. Still, he remains adamant that Washington’s “indiscriminate vilification” of all banks was wrong. “What I object to is the blanketing blame,” he said. “I think it is not accurate and leads to bad policy.” Andrew Martin contributed reporting.
http://www.nytimes.com/2010/07/15/business/15chase.html?th&emc=thH H
206 BusinessH Day H EconomyH H July 14, 2010
Fed250B Leaders Show Division Over Deflation
By567B SEWELLH CHAN
WASHINGTON — The FederalH Reserve H disclosed on Wednesday that its chief policy makers were divided on whether the weak economy faced a new, potentially
dangerous threat in the form of deflationH .H The dissent within the Fed emerged as the White House released a report estimating that its economic stimulus program had saved or created 2.5 million to 3.6 million jobs since it was enacted, over nearly unanimous Republican
opposition, at the start of PresidentH Obama’sH term. The estimates in the report were in line with those of the
nonpartisan CongressionalH Budget Office H and independent experts. But Senate Republicans, who have blocked legislation to extend unemployment benefits, continued to portray the administration as fiscally reckless and the stimulus as ineffective. “I know what they’re against, but I don’t know what they’re
for,” Vice President JosephH R. Biden Jr. H said of the Republicans as he unveiled the report. “I mean that literally.”
The568B New York Times With Congress deadlocked over fiscal policy, attention has shifted to monetary policy as a tool for attacking the 9.5 percent unemployment rate. But on that score, the Fed is also divided, though its disagreements are expressed in a far more genteel manner. On Wednesday, the Fed lowered its estimate of economic growth for this year, to a range of 3 to 3.5 percent, from the 3.2 percent to 3.7 percent forecast in April. Inflation has been running well below the Fed’s unofficial target of nearly 2 percent, so much so that a few officials fear that the United States is at risk of the kind of deflationary spiral that has hobbled the Japanese economy for the better part of two decades.
The Fed’s chairman, BenH S. Bernanke,H has not embraced that Jim569B Lo Scalzo/European Pressphoto Agency Christina Romer said most view, but even those who disagree with it say the Fed, whose experts agreed that the stimulus modern institutional culture was built around fighting had helped employment. inflation, now confronts a distinctly different problem of high joblessness “If federal fiscal policy is approaching its political or economic limits, some believe that the Federal Reserve should do more, including expansion of its balance sheet,” Kevin M. Warsh, a Fed governor who is close to Mr. Bernanke, said in a recent speech to the Atlanta Rotary Club. “In my view, any judgment to expand the balance sheet further,” by acquiring mortgage bonds and debt, “should be subject to strict scrutiny.”
207 The central bank has already held interest rates lower for longer than at any time since theH
Great Depression,H keeping the benchmark short-term interest rate near zero since December
2008. Since the start of the financialH crisis,H the Fed has more than doubled its balance sheet, to
$2.3 trillion, by buying mortgage bonds and TreasuryH H debt to keep long-term interest rates low. But, as Mr. Bernanke pointed out in a speech in 2002, when he was a Fed governor, a central bank that has run out of ordinary tools to prop up the economy, like lowering short-term interest rates, still has other options to prevent deflation. By resuming its purchases of assets or by being more explicit about its intentions to keep interest rates low, the Fed could lower inflation expectations and long-term interest rates. That could further stimulate borrowing and spending by companies and individuals. The minutes released Wednesday from the June 22-23 meeting of the Federal Open Market Committee, the Fed’s crucial policy body, cited the threat of deflation in the United States for the first time in a year. “A few participants cited some risk of deflation,” the minutes noted. “Other participants, however, thought that inflation was unlikely to fall appreciably further, given the stability of inflation expectations in recent years and very accommodative monetary policy.” http://www.federalreserve.gov/newsevH ents/press/monetary/fomcminutes20100623.pdf H (Minutes of the Federal Open Market Committee June 22-23, 2010, pg. 9) The minutes, which are carefully worded to avoid the appearance of discord, nonetheless made clear a growing divergence in views. “Several participants noted that a continuation of lower-than-expected inflation and high unemployment could eventually lead to a downward movement in inflation expectations that would reinforce disinflationary pressure,” the minutes stated. “By contrast, a few participants noted the possibility that a potentially unsustainable fiscal position and the size of the Federal Reserve’s balance sheet could boost inflation expectations and actual inflation over time.”(p 9) The direction of monetary policy will probably be raised at a hearing on Thursday, at which the
Senate Banking Committee will take up the nominations of JanetH L. Yellen,H president of the
Federal Reserve Bank of San Francisco; PeterH A. Diamond,H an economist; and Sarah Bloom Raskin, a banking regulator, to seats on the Fed’s seven-member board of governors. While the Fed debate continues, the White House is combating skepticism over the $787 billion stimulus program. In the latest CBSNews poll, almost three-quarters of Americans said the stimulus had not improved the economy. A new poll by The Washington Post and ABC also found that more than half of respondents said the government should not provide additional stimulus. “More debt only subtracts capital from the private markets that could be used for loans, to hire more people and create more jobs,” Senator LamarH Alexander H of Tennessee, the chairman of the Senate Republican Conference, said in an interview. He said the administration’s proposals on health care, regulation, energy and trade had discouraged private sector growth. To shore up support for the stimulus program, the White House has been promoting what Mr. Biden has called the “summer of recovery.”
The new report, by the CouncilH of Economic Advisers,H showed that the pace of fiscal stimulus had accelerated, with spending growing to $116 billion in the second quarter, from $108 billion in the first quarter and $80 billion in the final three months of 2009.
208 The report also estimated that grossH domestic product,H a measure of overall economic output, was 2.7 to 3.2 percent higher than it would have been without the stimulus. “I am absolutely confident we are moving in the right direction, absolutely confident,” Mr. Biden said. He said federal money had been used to stimulate emerging industries like clean energy. “None of this would have been possible if our friends on the other side — as my mother would say, God love them — our friends on the other side had gotten their way,” Mr. Biden said. The report used historical data and statistical modeling to arrive at the estimate of jobs saved or created, but ChristinaH D. Romer,H chairwoman of the Council of Economic Advisers, acknowledged that there was some uncertainty over the job estimates, which rely on reporting from recipients of federal aid. “I suspect the true effects of the act will not be fully analyzed or fully appreciated for many years,” she said, adding that most experts agreed that the stimulus had had a “significant, beneficial impact on employment and output over the past year.” Mr. Biden acknowledged public frustration over the economy, but noted that the crisis predated the administration. “Before we walked in the West Wing, we were handed a deficit, a bill for that year, for over $1 trillion,” he said. Real G.D.P. started growing in the second half of last year, and private sector payrolls have increased by nearly 600,000 since their low point in December. But that has been barely enough to keep pace with the normal rate of growth of the work force.
SEWELLH CHANFedH Leaders Show Division Over Deflation http://www.nytimes.com/2010/H 07/15/business/economy/15econ.html?_r=1&th&emc=th H
209 OpinionH H July 14, 2010
Economics251B Behaving Badly
By570B GEORGE LOEWENSTEIN and PETER UBEL IT seems that every week a new book or major newspaper article appears showing that irrational decision-making helped cause the housing bubble or the rise in health care costs. Such insights draw on behavioral economics, an increasingly popular field that incorporates elements from psychology to explain why people make seemingly irrational decisions, at least according to traditional economic theory and its emphasis on rational choice. Behavioral economics helps to explain why, for example, people under-save for retirement, why they eat too much and exercise too little and why they buy energy-inefficient light bulbs and appliances. And, by understanding the causes of these problems, behavioral economics has spawned a number of creative interventions to deal with them. But the field has its limits. As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics. Take, for example, our nation’s obesity epidemic. The fashionable response, based on the belief that better information can lead to better behavior, is to influence consumers through things like calorie labeling — for instance, there’s a mandate in the health care reform act requiring restaurant chains to post the number of calories in their dishes. Calorie labeling is a good thing; dieters should know more about the foods they are eating. But studies of New York City’s attempt at calorie posting haveH found that it has had little impact H on dieters’ choices. Obesity isn’t a result of a lack of information; instead, economists argue that rising levels of obesity can be traced to falling food prices, especially for unhealthy processed foods. To combat the epidemic effectively, then, we need to change the relative price of healthful and unhealthful food — for example, we need to stop subsidizing corn, thereby raising the price of high fructose corn syrup used in sodas, and we also need to consider taxes on unhealthful foods. But because we lack the political will to change the price of junk food, we focus on consumer behavior. Or take conflicts of interest in medicine. Despite volumes of research showing that pharmaceutical industry gifts distort decisions by doctors, the medical establishment has not mustered the will to bar such thinly disguised bribes, and the health care reform act fails to outlaw them. Instead, much like food labeling, theH act includes “sunshine” provisions H that will simply make information about these gifts available to the public. We have shifted the burden from industry, which has the power to change the way it does business, to the relatively uninformed and powerless consumer. The same pattern can be seen in health care reform itself. The act promises to achieve the admirable goal of insuring most Americans, yet it fails to address the more fundamental problem of health care costs. Instead of requiring individuals to pay out of pocket if they choose to receive expensive and unproven interventions, the act tries to lower costs by promoting incentive programs that reward healthy behaviors.
210 Prevention is certainly a worthy goal; it is much better to prevent a case of lung cancer than to treat it. But efforts to improve public health, even if enhanced by insights from behavioral economics, are unlikely to have a major impact on health care costs. Studies show that preventive medicine, even when it works, rarelyH saves money.H Our over-reliance on behavioral economics is not limited to health care. A “gallons-per-mile” bill recently passed by the New York State Senate is intended to help drivers think more clearly about the fuel consumption of the vehicles they purchase; research has shown that gallons-per-H mile is a more effective means H of getting drivers to appreciate the realities of fuel consumption than the traditional miles-per-gallon. But more and better information fails to get at the core of the problem: people drive large, energy-inefficient cars because gas is still relatively cheap. An increase in the gas tax that made the price of gas reflect its true costs would be a far more effective — though much more politically painful — way to reduce fuel consumption. Similarly, Prime Minister David Cameron of Britain recently promoted behavioral economics as a remedy for his country’s over-use of electricity, citing what he claimed were remarkable results from a study that reducedH household electricity use by informing consumers of how their use compared to that of their neighbors.H Under closer scrutiny, however, tests of the program found that better information reduced energy use by a mere 1 percent to 2.5 percent — modest relative to the hopes being pinned on it. Compare that with the likely results of a solution rooted in traditional economics: a carbon tax would instantly bring the price of energy into line with its true cost and would unleash the creative power of the marketplace to generate cleaner energy sources. Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks. But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges. George Loewenstein is a professor of economics and psychology at Carnegie Mellon University. Peter Ubel is a professor of business and public policy at Duke and the author of “Free Market Madness: Why Human Nature Is at Odds With Economics.”
http://www.nytimes.com/2010/07/15/opiniH on/15loewenstein.html?th&emc=th H
No. Puede hacer mucho más: desechar los modelos de predicción económica que parten de los postulados de expectativas y comportamientos racionales. Desarrollar, en cambio los modelos y la investigación empírica que supone mercados imperfectos (o sea, keynesianos).
211 Economists25B Do It With Models
Warning:379B “graphic” content…
Reader380B Question: Is (Behavioral) Economics Behaving Badly?
July509B 20th, 2010 A number of readers emailed, tweeted, sent carrier pigeons, etc. to ask what I had to say regarding aH recent NYT op-ed piece by George Loewenstein and Peter Ubel that discusses the limitations of using behavioral economics to drive policy.H The authors summarize their central thesis as follows: But the field has its limits. As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics. Loewenstein and Ubel then go on to use the mandatory calorie labeling plans in places like New York City as an example of a case where “fashionable” behavioral nudges are being written into policy at the expense of more substantive and (theoretically) effective legislation. (Seriously, it’s just easier to read the article and then come back here.) There are two things that are important to keep in mind when mulling over the article’s logic.
First, the divide between behavioralH economics H and traditional microeconomics is not nearly as wide or as clear as the wording in the above quote implies. Put simply, the difference between traditional and behavioral economics is that traditional economics assumes that individuals are always able to maximize their long-term utility and aren’t swayed by silly things like discrepancies between short-term and long-term happiness, the framing, wording or context of their choices, self-control problems, cognitive limitations and the like, and behavioral economics…well, doesn’t. (When economists refer to “irrational” behavior, you can roughly interpret it as “behavior in conflict with one’s objective long-run utility or well-being,” though personally I tend to envision a hysterical 1960’s Betty Draper-type female.) In the calorie labeling example, the rationale is that people are making “bad” choices because they are either unaware of the characteristics of the products they are choosing from (rational but ignorant) or they are willfully ignoring those characteristics and seeking immediate gratification at the expense of long-term happiness (irrational). Any Economics 101 course will tell you that a required condition for markets to be efficient (read, value-maximizing for society) is that consumers have full information about the products they are considering consuming. In this way, the calorie-labeling legislation is helping to push the fast food market in the direction of efficiency as much as anything else. What’s so behavioral-y about that? This is why I get annoyed when the calorie-labeling laws are reported as failures. A failure at what exactly? The law was supposedly put in place in order to give people easy access to information so that they can make better choices for themselves, and it certainly succeeds in this regard. It’s not really the law’s fault that people still want their Big Macs and super-size fries even when they have the calories staring at them in the face. (It’s also kind of funny to see the upper middle-class mostly white lawmakers struggle with the notion that not everyone is obsessed with being as thin and wrinkle-free as possible. Just wait until this sort of issue reaches the House of Representatives and Nancy Pelosi gets her hands on it.) Maybe those
212 people still eating the Big Macs are being irrational and are going to regret it later, or maybe- shocker- the Big Macs are utility-maximizing despite the squishiness that they induce. If policy-makers are attempting to enact legislation under the guise of “saving people from themselves,” they should at least consider the possibility that people actually are doing what is best for them and don’t need or want to be saved. It’s interesting to note, however, that studies have reported that the calorie-labeling laws have caused people to make healthier choices for their children, which (weakly) suggests that people may still be having trouble making the best long-term choices for themselves but is far from being conclusive evidence. The second, and more important, point is that the framing of the difference between the two lines of policy thought as “behavioral” versus “traditional” masks the inherent functional differences between the policy ideologies. When a government uses information and choice architecture to encourage what it feels is good behavior, it is subscribing to a philosophy of libertarian paternalism (yes, that’s actually a thing) whereby the regulator is nudging without restricting consumers’ options in any way. For example, the consumer has exactly the same set of choices available to her regardless of whether calorie counts are on the menus or not. Because of this feature, it’s hard to argue that this sort of legislation is significantly bad for anyone- here, the worst-case scenario is that some people keep eating unhealthy food but are no longer blissfully ignorant and instead feel guilty. This is different from, say, a tax on fast food, which would raise the price of food and thus limit the choices available to consumers. Given this difference, why shouldn’t lawmakers try to achieve their goals via legislation that doesn’t impose monetary costs and doesn’t force people’s hands via the almighty dollar before resorting to the blunt kick in the pants that taxes usually end up being? The idea of saving people from themselves is nice and all, but, in reality, the main motivation and justification for intervening in the fast-food market is that eating fast food imparts costs on the health-care system that end up being paid in part by people who didn’t specifically choose to live on Double Quarter Pounders with Cheese. (negative externatlities, in economic terms) Again, Economics 101 textbooks will tell you that when negative externalities are present in a market, putting a tax in place can actually increase overall societal welfare. The tax is theoretically helpful because it causes people to internalize the costs that their actions have on others, and these people produce and consume less of the thing with the negative side effects as a result. However, improving overall societal welfare doesn’t necessarily correspond with making everyone in the society better off- for example, requiring that a person be sacrificed so that his organs can save the lives of multiple individuals waiting for transplants would also increase this textbook definition of societal welfare, but we’d certainly think twice before implementing this sort of plan. Are there reasons that a government should think twice about implementing a fast-food tax as well? The fact of the matter is that, by putting a fast-food tax in place, the government is raising the price of food. (This is true even if people end up switching away from the fast food.) The people who are going to feel this price increase the most are those who consume more fast food, and these people are generally of the lower-income variety, except perhaps for my friend Brian who takes his Ferrari through the Taco Bell drive-thru on a regular basis. I’m all for encouraging healthy eating and whatnot, but something doesn’t quite sit right when it comes to artificially raising the price of food for people who are likely struggling to feed their families in the first place, especially when the justification is that the rest of us don’t have to look at their fat as…er, so society doesn’t have to foot the bill on health care costs. (Yes, I also get that the people will live longer and healthier to some degree, but that’s sort of like saying “hey, you know how you’re struggling to get by and all? Well, guess what? We’re going to make life harder for you now so that you can keep struggling for longer. You’re welcome!!!”) It’s not surprising that the discussion usually takes a philosophical turn pretty quickly- one
213 could argue that it’s not fair for poor people to pay $1 more for their food so that Bill Gates can put $1 less into the health care system, but it’s also not really fair that Bill Gates has to pay extra money into the health care system because other people chose to eat a ton of bacon cheeseburgers. The other issue with bluntly using a tax to correct for the externalities of unhealthy food is that fast food is not like pollution- it’s not like I am adding some small amount to the costs of the health care system every time I have my chicken McNuggets. Therefore, taxing me each time I eat said McNuggets is not the right approach, and it is not necessarily the case that taxing in this way will even lead to an improved outcome for society. (For the wonks in the audience: The reason that a tax can be a good thing is that it decreases the cost of the externality by more than the deadweight loss that it creates. However, if the people that change their behavior due to the tax are in large part those who weren’t creating the externality in the first place, society will see the downside of the tax without a whole lot of the upside.) Maybe this is just me being bitter about having to pay because other people can’t handle their McNuggets, but I don’t really want to hear about most of these “sin taxes” until someone figures out a reasonable way to specifically tax excess consumption. The bottom line is that designing good legislation that limits people’s choices and hits them where it hurts is harder than simply nudging people in the right direction. Done right, it might also be more effective, but from the above discussion it should be clear that “doing it right” is a tall order. Make no mistake, however, that the distinction is between easy and hard much more so than it is between “behavioral” and “traditional.”
To read more about nudges and libertarian paternalism, I recommend Nudge:H Improving
Decisions About Health, Wealth, and HappinessH by Richard Thaler and Cass Sunstein. You can also read a response to the NYT article on the Nudge blog hereH .H
http://www.economistsdoitwithmodels.com/H 2010/07/20/reader-question-is-behavioral- economics-behaving- badly/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+economistsdo itwithmodels+%28Economists+Do+It+With+Models%29 H
214
Eurointelligence253B Daily Morning Newsbriefing
Zapatero479BH warns of more budget cuts
15.07.2010 Zapatero says more budget cuts were needed to restore confidence in the Spanish economy, while opposition leader Mariano Rajoy calls for early elections; Wolfgang Schauble has difficulties securing majorities for Germany’s more extreme governance reform proposals, including an insolvency procedure, and a withdrawal of voting rights; but there may be agreement on automated; the euro managed to hang on to its international role during 2009, according to an ECB report; an Irish parliamentary committee criticised the governance reform proposals for the EU as insufficient; an FT editorial makes the case for a euro area exit clause; Calculated Risk has attempted a calculation on the total expected losses on sovereign risk; Michael Pettis, meanwhile, says the big instability danger is not China withdrawing capital from the US, but pouring more capital in.
15.07.2010
Zapatero381B warns of more budget cuts
Jose Zapatero and opposition leader Mariano Rajoy crossed swords yesterday in the state of the nation debate. Zapatero warns more budget cuts are needed to restore confidence in Spain
and said that pension age will have to rise (BBCH News).H Rajoy accused Zapatero of being unfit to govern (quote from FT) and called for early elections ahead of their scheduled date of
2012. A pollH among El Pais readers H show that 65% are against early elections at this stage
(this might not tell us much as there is most likely a selection bias towards the socialists). H El
Pais H writes that Rajoy had his chance and missed it. FT and Le Monde say that Zapatero looks more and more isolated. The debate continues today.
215 Germany’s insolvency proposals are getting nowhere
FrankfurterH Allgemeine H writes that Germany’s proposals for a reform of the eurozone governance procedures is going nowhere. Wolfgang Schauble admitted that he has yet to persuade a large number of his European colleagues of the virtues of an EU-wide insolvency procedure. Germany’s proposals for non-monetary sanctions, including a withdrawal of voting rights, also has insufficient support. The van Rompuy task force will thus not recommend those proposals, but focus only on those (minimal) issues on which the eurozone can achieve consensus, which is the reform of the stability pact, and the inclusion of private sector imbalances in the calculations (but beware, there will be no penalties for countries with excessive private sector surpluses, and no targets for those). Germany’s proposals for “automatic” sanctions, are still on the table. The euro managed to increases its international role last year We have always taken a strong interest in the ECB’s annual reports on the international role of the euro, which over the years has produce a steady though unspectacular upward trend.
According to the latestH report,H the international role of the euro remained stable throughout 2009. Here is a useful summary by the ECB: “Between end-2008 and end-2009, the share of euro-denominated instruments increased by around half a percentage point in global reserve holdings, remained virtually unchanged in foreign exchange transactions and in total cross-border deposits and declined by 1.3 percentage points in the outstanding amount of international debt securities (narrow measure) and by 1.6 percentage points in the outstanding amount of cross-border loans. Changes of that order of magnitude are fully in line with normal fluctuations observed in the years prior to the global economic and financial crisis.” Irish parliament report criticised Commission and Council over eurozone proposals
AnH Irish parliamentary report H (hat tip IrishH economy blog)H into the country’s future of the eurozone produced some criticism of the current system, and makes proposals that significantly extend beyond those currently under discussion. It said the proposals by the Commissions and the Council had “serious omissions that must be addressed.” Specifically, it proposed that national government should establish national fiscal councils. Here is an extract from the executive summary: “The reformed pact must recognise overall levels of national debt and display flexibility for economies with more sustainable debt levels. A ‘one size fits all’ debt rule does not recognise sustained levels of responsible debt management. The reformed pact should track the development of structural budget deficits and make more allowances for growth promoting policies that can lead to a reduction in structural deficit levels. Measures of ‘real economic performance’ such as productivity, competitiveness and labour market policies must be included in a reformed pact. This is essential.” The case for a euro exit clause
In an editorialH ,H the FT makes the case for a formal exit clause from the euro area. It writes there is no formal exit clause now, but it should invented in case the need arises in the future. The editorial says the political commitment to the euro area is not as strong as it used to
216 be, and it may in fact have fallen in Greece, partly because of the hesitant reaction of other eurozone members to help out. The article says Greece is the eurozone’s weakest link, and its depature would rid the eurozone of its weakest link. How much is the total of sovereign risk default Calculated Risk has been running an interesting series from an anonymous – though very well informed – reader about the extent of sovereign default risk in the system, and how to assess default probabilities. In the latest version, the reader provides an estimate of the total expected loss on sovereign bonds for the world as a whole, and arrives at a range of $1.3 to $1.8 trillion, which is implied by today’s prices, historic recovery rates, etc. This is about the amount of the outstanding debt of France, Germany or China. While that number seems low, one should also consider the indirect effects: if Greece defaults, then Irish bonds will also underperform, giving rise to losses for Irish bondholders. The real danger presented by China
MichaelH Pettis H has a very interesting, and very long post, on the danger posed by China’s capital exports. He says people should be less attention to the so-called nuclear option, the idea that China would sell its US government bonds and switches to euro or yen assets. He goes through each scenario and concludes that it either has no negative effect on the US, or that it is self-defeating for China. Far more worrying is a return to global imbalance. The real danger posed by China for the US is not a withdrawal of existing funds, but a tsunami of new funds. “The US, in other words, is not likely to face the “nuclear option” of a Chinese disruption of the US Treasury bond market. It is far more likely to be swamped by a tsunami of foreign capital. This tsunami will bring with it a corresponding surge in the US trade deficit and, with it, a rise in US unemployment. It will also force the US Treasury to increase the fiscal deficit as more of the jobs created by its spending leak abroad. Therein lies the problem. A reduction in net foreign capital inflows means a welcome decline in the US trade deficit, but the US is likely to see just the opposite. Foreign capital will push desperately into US markets and as an automatic consequence the US trade deficit will surge. So the problem isn’t too little capital inflow or a sudden boycott of USG bonds. On the contrary, the US will see too much capital inflow.”
http://www.eurointelligence.com/index.php?idH =581&tx_ttnews[tt_news]=2855&tx_ttnews[ba ckPid]=901&cHash=731e6e9890# H
217
ft.comH /H
lex254BH H Dis-memberingH the euro
The possibility of a departure has been awakened – policymakers should be ready
The25B Lex Column: Dis-membering the euro 15-07-2010 Gepubliceerd 09:26 15-07-2010 | Laatst bijgewerkt 09:51 The most significant aspect of the eurozone crisis is that the risk of the bloc breaking up is no longer perceived to be zero. The possibility that a member might quit is acknowledged by euro supporters and may have helped to sustain the divergence of bond market spreads. For a decade, the euro delivered cheap credit to fuel an economic boom. Now Greece, Portugal, Ireland and Spain - the euro’s biggest beneficiaries - are facing years of austerity to restore lost competitiveness. At some point one of them might decide that the euro is no longer worth the pain. There is no formal mechanism for exiting, so one will have to be invented if the need arises. That makes it a political decision as much as an economic or financial one. Eurosceptics Eurosceptics underestimate the political commitment to the eurozone project. But that commitment may not be what it was, especially in Athens. Greece is the least integrated of the European Union’s older members and the hostility of its EU “friends” when the crisis broke can hardly have helped. It is the eurozone’s weakest link. Greece’s departure would rid the bloc of a less than optimal member and give others an even greater incentive to do whatever it took to avoid the same fate. Weighing up the severe shock of an instant devaluation against the hope of improved growth later from a boost to competitiveness is no easy call. ING estimates the Greek economy would shrink by 7.5 per cent in 2011 if it exited the euro at the end of this year (in nominal terms). That compares with current forecasts of only a 2 per cent decline within the euro. Of course, a lack of competitiveness, heavy debts and resultant austerity measures would probably put off an economic recovery for longer but it is impossible to know for sure. Just as doubts about its sustainability rise, the eurozone is about to expand to include Estonia from January. But the possibility of a departure has been awakened. Policymakers should at least be ready for it.
http://www.z24.nl/economie/artikel_156797.z24/The_Lex_Column__Dis-256BH membering_the_euro.html H
218 COLUMNISTS
382B Even eurozone optimists are not optimistic By Wolfgang Münchau Published: July 11 2010 19:34 | Last updated: July 11 2010 19:34
Is pessimismH about the eurozone overdone,H as Jean-Claude Trichet, president of the European Central Bank, argued last week? When trying to answer that question, one should distinguish between the short-to-medium- term economic outlook and the long-term sustainability of monetary union. So let us disentangle, and focus on, the first of these only. What kind of recovery, if any, are we going to get?
During the first half of 2010, the eurozoneH H enjoyed nominal short-term interest rates of near zero, a big fall in the euro-dollar exchange rate and an expansive fiscal policy. Those three factors contributed to a recent increaseH in industrial orders in Germany,H and resurgent optimism in that country’s business community. As we enter the second half of the year, two of the three factors are changing. First, we are now seeing a policy-driven tightening in monetary policy. Mr Trichet is quite wrong to claim that the rise in interest rates has nothing to do with the ECB’sH monetary stance.H He cannot have it both ways.
When criticised last year for notH pushing the official policy rate H down to zero, the ECB correctly pointed out that what matters is the Euro Overnight Index Average (Eonia) money market rate, which until recently had been trading at 0.3 per cent. As a result of a recent shift in liquidity policy, the Eonia rate spiked to 0.5 per cent last month, and has since fallen to 0.4 per cent. Some economists, who have done the maths on this, have calculated that the tighter liquidity conditions will gradually push the Eonia close to the repo rate, the ECB’s official policy rate – which is currently 1 per cent. In other words, by doing nothing, the ECB will effectively raise interest rates by almost three notches of a quarter point each. To keep the Eonia at close to zero will require either a big cut in the main refinancing rate, a significant increase in the purchase of government bonds, or a return to more expansive liquidity support for the banks. I would rule out the first two, and there is, at present, no consensus for the third. Second, the recent increase in the euro-dollar exchange rate means that the euro is no longer heading in a direction that would generate a positive demand shock for products manufactured in the eurozone. The eurozone’s economic recovery strategy, which depends on an increase in competitiveness against the rest of the world, could be critically undermined by a rising exchange rate. Third, the only good news, for now, is that fiscal policy is still loose – contrary to austerity rumours. The ratio of government deficit to gross domestic product will contract moderately in 2011 – by 0.5 per cent in Germany, Italy and Spain, and probably less for France. This will be followed by a further modest fiscal contraction in the years ahead.
219 If we were at the beginning of an ordinary cyclical recovery, the combined fiscal and monetary policy response would be reasonable. But considering the depth of the recent economic downturn and the continued presence of a financial crisis, I think it would have been wiser to postpone the combined monetary and fiscal exit until the recovery is firmly entrenched. But even I do not expect that the fiscal consolidation will produce a double-dip recession. Alan Blinder, a former vice-chairman of the US Federal Reserve, pointed out last week that if you grow at only 1 per cent, then a half percentage point consolidation would get you uncomfortably close to a recession. My fear is that the eurozone may end up in a low- growth equilibrium for quite a long time, similar to Japan in the 1990s. So what is the material difference between the optimists and the pessimists? The pessimists believe that a strong global recovery is unlikely given the persistence of financial stress, and the deleveraging of the private and public sectors across the industrialised world. The optimists divide into two groups. There are those who have difficulties counting to zero, who cannot add up the global private, public, and foreign balances, which must equal zero by definition. And then there are the rational optimists, whose expectations of resurgence in private sector demand must surely rest on the assumption of a return to even greater global imbalances than before the crisis, to which the eurozone will this time contribute actively. But this is surely not a sustainable position. The pessimists would argue that global demand growth will not be sufficiently strong to support a self-sustained recovery in the eurozone. Even the rational optimists, who believe that this is possible, would probably conclude that these imbalances are not sustainable, and may trigger another financial crisis down the road. And if that is what you expect, you are not really an optimist. If that analysis is correct, this is a debate between pessimists who worry about the long term, optimists, who are not really optimists, and optimists who can only say: hey, our sentiment indicators look good. In other words: an optimistic case that adds up beyond the very short term has yet to be made.
http://www.ft.com/cms/s/0/833134c6-8d14-11df-bad7-00144feab49a.html257BH H
220 TheH Irish Economy
Committee38B on European Affairs Report on EMU
This post was written by KarlH Whelan The Joint Oireachtas Committee on European Affairs has produced a report titled “European
Monetary Union: Challenges and Options”. The report is available hereH H and the executive summary is hereH .H Senator Paschal Donohoe acted as Rapporteur on the Report, which was drafted in association with my former UCD colleague, Rodney Thom
Executive258B Summary
1. Introduction – Our New National Question - The New National Question is about how we maintain our prosperity and security, when so many of the national policy tools that deliver more immediate results, such as exchange and interest rate adjustments are no longer available to us. - A concrete manifestation of this new challenge is the current debate in relation to the reform of the Stability and Growth Pact. - This report firmly argues that Ireland has nothing to fear from future reforms. We should be assertive in stating that a pact that allows the national delivery of strong national finances is in our national interest. We must also be assertive in stating that the current suggested reforms are a missed opportunity to broaden the measures of economic success and to recognise good budgetary practice in Member states. 2. The Launch of the Stability and Growth Pact - In monetary union poor fiscal decisions taken by one or a group of countries can generate consequences which impact on the entire union area via higher interest rates, higher inflation and ultimately bail-out costs. - The Maastricht Treaty attempted to deal with these issues by requiring aspirant members of the euro area to satisfy a series of criteria which became know as the Maastricht Convergence Criteria. In addition to criteria relating to inflation, interest rates and exchange rate stability, EU member States where also required to meet two fiscal criteria, namely that budget deficits should not exceed 3 percent of GDP and that debt-to-GDP ratios should be at most 60 percent or, if above that level, declining towards the reference value. - The Stability and Growth Pact was introduced to maintain fiscal discipline once Member States joined the eurozone. 3. The Stability and Growth Pact 1999 to 2010 - In its initial years the SGP appeared to maintain the fiscal consolidation achieved under the Maastricht Convergence Criteria with the majority of countries recording either a budget surplus or a deficit comfortably within the 3 percent limit. However, this was against the backdrop of a benign economic environment. - By 2003 five euro economies had deficits in excess of the 3 percent reference value with the overall deficit for the euro area rising from an almost balanced position in 2000 to 3.1 percent of GDP in 2003. - As a result, the Excessive Deficit Procedure was invoked against Portugal and Germany in 2002, France in 2003, the Netherlands and Greece in 2004 and Italy in 2005.
221 - By late 2003 it became clear that their deficits were continuing to rise and that neither France nor Germany would meet their targets. Neither Member State faced sanction due to this non compliance. These cases pointed to obvious credibility and enforcement problems for the SGP. If the two largest euro area economies fail to comply with the rules then why should smaller countries do so? - Most Member States continued to experience rising structural deficits. Progress was made in reducing structural debt levels. This modest trend towards fiscal consolidation was dramatically reversed by the financial crisis and severe economic downturn in 2008 and 2009. - Nearly all euro area economies have recorded structural deficits since 2008 implying that deficits would persist even if an upswing in economic activity removed the cyclical components of the actual deficit.
4. Reforming the Pact - Criticisms of the SGP can be grouped under four headings: enforcement and surveillance; inflexibility; asymmetry; and its impact on public investment and economic growth. - Not only did the Council fail to enforce the full weight of the EDP against France and Germany in 2003 but between 2002 and 2006, years of moderate to good economic growth, five Member States (France, Germany, Greece, Italy and Portugal) had deficits consistently above or very close to the 3 percent threshold but sanctions were not imposed in any case. - The SGP has also been criticised on the grounds that it lacks flexibility in that it focuses on the actual deficit without consideration of the underlying circumstances and differences between Member States. - The SGP is asymmetric in that it penalises countries for running excessive deficits during recessions but provides few incentives for enhanced fiscal consolidation during periods of high and rapid growth. - While the 2005 reforms allow for ‘other relevant factors’ such as expenditure on research and development to be taken into account when assessing budgetary positions, compliance with the Close to Budget Surplus (CBS) rule still implies that expenditures on capital projects which may improve the economy’s productive capacity must be financed from current revenues raised from taxation on the current generation. As a consequence, the SGP may act as a disincentive to undertake public investment projects to the detriment of future generations. - Proposed changes to the SGP can be classified under three headings: institutional and procedural reforms; the quality of public finances; and greater focus on the debt criterion. - The European Council has now established a Task Force on Economic Governance with the objective of “strengthening budgetary discipline through the Stability Pact”. This work has focused heavily on the role of sanctions in delivering fiscal compliance. - One of the most commonly discussed changes to the SGP is the so called golden rule proposal which requires that the overall budget be split into two components, a current account and a capital account. Under the golden rule the current budget should be kept in balance over the course of the business cycle and borrowing should be permitted only to finance productive investment. - Many commentators have proposed modifications to the SGP which would let the threshold value for the deficit vary inversely with the debt ratio so that countries with low debt-to-GDP ratios can be permitted higher deficits and vice-versa. 5. Recommendations and Conclusions - A stability pact that delivers fiscal coordination and consolidation of public finances is essential to the success of monetary union with the recent experience of Greece, and to a lesser extent Ireland and Spain, clearly demonstrating that fiscal ill discipline in even small to medium sized economies can be highly destabilising and costly to the monetary union as a whole.
222 - Even before the recent global downturn and financial crisis it was clear that the Europe’s Stability and Growth Pact was not delivering these benefits and that there was a clear case for reform. - The current European economic crisis makes it very likely that the Pact will be reformed by the end of this year. Ireland should not fear a reformed pact. The emergence of a substantial current borrowing requirement and the development of a structural budget deficit are posing massive challenges to our country. Any process which reduces the possibility of this happening again in the future should be embraced. - However, the proposals published recently by the European Commission and under active consideration by the European Council’s Task Force on Economic Governance which aim to reform the Pact have serious omissions that must be addressed. These omissions can be summed up as the need for more ‘carrot’ as well as a more effective ‘stick’.
- To improve surveillance procedures, national governments should establish National Fiscal Councils charged with the role of assessing budgetary policies and providing independent forecasts for economic growth and government revenues and expenditures. These steps should firstly be taken at national level. - The new pact must recognise overall levels of national debt and display flexibility for economies with more sustainable debt levels. A ‘one size fits all’ debt rule does not recognise sustained levels of responsible debt management. - The reformed pact should track the development of structural budget deficits and make more allowances for growth promoting policies that can lead to a reduction in structural deficit levels. - Measures of ‘real economic performance’ such as productivity, competitiveness and labour market policies must be included in a reformed pact. This is essential.
http://www.irisheconomy.ie/index.php/2010/07/1H 4/committee-on-european-affairs-report-on-emu/ H
223 OPINIONH ASIA H JULY 11, 2010
The259B China Capital Surge
The384B U.S. doesn't have to worry about Beijing dumping Treasury bonds anytime soon.
BY480B MICHAEL PETTIS Of the many nightmares that keep investors awake, fear that China's central bank will start to sell its piles of U.S. Treasuries is the most unlikely. Not only would that action cause far more damage to China, the real risk to investors is precisely the opposite problem—that more, not less cash will flood into America. The People's Bank of China cannot simply sell Treasury bonds, pocket the cash and go home. If it wants to reduce its holdings, it must swap them for something else. There are broadly four options. First, Beijing could sell U.S. Treasury bonds and buy other ...
The385B China Capital Surge The U.S. doesn't have to worry about Beijing dumping Treasury bonds anytime soon.
JULY 11, 2010http://online.wsj.com/article/SB10001424052748703580104575360392705729652.htmlH H
China260B Financial Markets China’s financial and monetary links to the world
The386B capital tsunami is a bigger threat than the nuclear option
Jul 14th, 2010 by Michael Pettis Since this is another long posting, it might make sense to summarize briefly its two parts. In the first part, expanding on an OpEd pieceH H of mine published by the Wall Street Journal on Monday, I argue that China’s “nuclear option”, which has generated a great deal of nervousness among investors and policy-making circles in the US, is a myth, and what the US should be much more concerned about is its diametric opposite – a tsunami of capital flooding into the country. I try to discuss the economic implications and perhaps the implications for asset prices. In the second part of this posting I discuss the slowing of the Chinese economy within the context of what I believe to be its stop-go approach to economic policymaking. The one- minute take: I think policymakers will soon be stomping again on the accelerator, although there seems to be a real debate going on about whether this would be the proper policy response. ——— An awful lot of investors and policymakers are frightened by the thought of China’s so-called nuclear option. Beijing, according to this argument, can seriously disrupt the USG bond market by dumping Treasury bonds, and it may even do so, either in retaliation for US protectionist measures or in fear that US fiscal policies will undermine the value of their
224 Treasury bond holdings. Policymakers and investors, in this view, need to be very prepared for just such an eventuality So worried have many been that last week SAFE even had to come out and calm people down. According to an articleH H in the Financial Times: China has delivered a qualified vote of confidence in the dollar and US financial markets, ruling out the “nuclear option” of dumping its huge holdings of US government debt accumulated over the last decade. But the State Administration of Foreign Exchange, which administers China’s $2450bn in reserves, the largest in the world, also called on Washington and other governments to pursue “responsible” economic policies. The statement on Wednesday, one of a series that Safe has issued in recent days in an apparent effort to address criticism about its lack of transparency, also played down the chances of China making major further investments in gold. It’s good that SAFE is trying to soothe worried investors and policymakers, although, as I have pointed out many times before, the last thing China needs right now is for the US “to pursue responsible economic policies” if that means bringing the government’s debt level down and, with it, US overconsumption and the US trade deficit. But the idea that Beijing can and might exercise the “nuclear option” is almost total nonsense. This cannot and will not happen. In fact the real threat to the US economy is not the dumping of USG bonds. On the contrary, in the next two years the US markets are likely to be swamped by a tsunami of foreign capital, and this will have deleterious effects on the US trade deficit, debt levels, and employment. Investors and policymakers should be far more worried that China and other capital exporting countries are trying their hardest to maintain and even increase their capital exports, while the capital importing countries are either going to see capital imports collapse, or are trying desperately to bring them down. June trade On Sunday, for example, China released its trade figures for June. Here is what Bloomberg had to sayH :H China’s trade surplus widened to the highest this year and exports climbed more than estimated to a record in June, adding pressure on the government to let the currency gain after the U.S. said the yuan “remains undervalued.” The gap increased 140 percent to $20.02 billion from a year earlier, the nation’s customs bureau said yesterday. That compares with the $15.6 billion median estimate of 24 economists Bloomberg News surveyed. Exports surged 44 percent and import growth moderated for the third month, rising 34 percent. People’s Daily take on the numbers was a little different, stressing not the surge in June’s trade surplus but rather the relative decline in the trade surplus for the first half of 2010: China’s trade surplus fell by 42.5 percent in the first six months this year from a year earlier to 55.3 billion U.S. dollars, the General Administration of Customs (GAC) said Saturday. In the first half of 2010, exports rose 35.2 percent to 705.09 billion dollars while imports were up 52.7 percent to 649.79 billion dollars, the GAC said in a statement posted on its official website. The trade surplus earlier in the year was low, at least in part I think because of a surge in commodity stockpiling which, in my opinion, should be treated as capital investments rather than as imports, but however you look at it, and especially when you consider the crisis in
225 Europe, June’s trade surplus was very large, and I have little doubt we are going to see more big numbers over the rest of the year.
Needless to say, the US trade deficit has widened sharply. HereH H is Wednesday’s Financial Times: A surge in imports from China pushed the US trade gap sharply wider in May, adding to a stream of weak data that has put Barack Obama’s administration under pressure for its inability to right the faltering economy and stimulate the stagnant jobs market. The trade deficit grew by 4.8 per cent to $42.3bn, according to commerce department figures, the highest since November 2008 and at odds with the consensus of economists, who forecast the gap would shrink in May. Trade surpluses must be recycled What does all this have to do with foreign funding of USG bonds? Everything. The larger China’s trade surplus, the more capital it must invest abroad. This might not seem evident from the change in the PBoC reserves. Another articleH H in Sunday’s Bloomberg had this to say: China’s foreign-exchange reserves, the world’s largest, rose at the slowest pace in 11 years in the second quarter as expectations for a yuan appreciation diminished and the European sovereign debt crisis saw capital move out of emerging markets. The nation’s holdings rose by $7.2 billion to $2.454 trillion yuan at the end of June from the end of March, the People’s Bank of China said today, the smallest increase since the second quarter of 2001. Reserves dropped 2 percent in May, according to data posted on the central bank’s website, the first monthly decline since February 2009. PBoC reserves were up by a very small amount compared to the visible inflows. Part of this may be explained by losses on non-dollar reserves – which has no flow impact – but probably at least part of the reason may be hot money outflows, which seem to be picking up, and much of this is likely to end up anyway in the US markets. Clearly the PBoC and (other Chinese entities) are continuing to accumulate huge amounts of USG bonds. So why not worry about Beijing’s “nuclear option”? For a start, unlike you or me the PBoC cannot simply sell Treasury bonds, pocket the cash, and go home. Dollar bills are just as much obligations of the US government as are USG bonds, only that they pay no interest. If the PBoC wants effectively to reduce its holdings of USG bonds it must swap them for something else. How to sell USG bonds There are broadly four ways it could arrange such an exchange. First, it could swap US Treasury bonds for other US assets. How would this work? Let us say that the PBoC decides to sell USG bonds and buy Manhattan real estate or IBM stock. Obviously the seller of that real estate or stock will now have a bunch of money that he needs to invest. Directly or indirectly (by buying another USD asset and so passing the problem onto someone else) the money becomes part of the pool of US savings that are available to fund the USG market. In other words this swap would have little net impact on the US market except perhaps to cause a slight increase in Treasury yields and an equivalent, and welcome, contraction in US risk premia. What if instead of leaving his money in US assets the seller uses the money to buy foreign assets? That will have the same effect as the second way the PBoC can swap out of USG bonds. In the second way the PBoC could reduce its USG holdings, the PBoC could swap USG bonds for assets denominated in euros or yen. Of course any major exchange would immediately
226 cause the dollar to drop sharply, giving the US economy an export-related boost as European or Japanese exports collapse and imports surge. There might be a short-term rise in US interest rates in this case, but this would be tempered because the expansionary effect of a surge in US exports would reduce the need for the US Treasury to borrow – remember it is borrowing in order to create domestic employment, and the less the employment it creates leaks abroad through the trade deficit, the less it needs to borrow. Aside from the fact that a large swap of this sort would ensure that the PBoC sells dollar assets at artificially low prices and buys euro or yen assets at artificially high prices, there is a larger political problem with this kind of transaction. Europe and Japan would not be happy if PBoC purchases were truly significant and both countries would almost certainly retaliate strongly against Chinese trade. They might also increase their purchases of USG bonds in order to reduce the currency impact of the PBoC’s purchases, which has the effect of recycling PBoC purchases into USG purchases anyway. Remember if Europe or Japan do not intermediate PBoC-related inflows back into the US, this is the same as saying that the US trade deficit migrates to a very unwilling Europe or Japan. In fact recent reports that the PBoC has increased its purchase of yen is already causing worry about its exercising the nuclear option, although that is a mistaken reading. First, the numbers are small, and second, they are more likely to be shifting out of euros than out of dollars. Here is what the Financial Times said in an articleH H last week: China bought a record amount of Japanese government bonds in May, in an apparent move to shift more of its massive foreign exchange reserves into Japanese debt. Chinese net purchases of Japanese government bonds soared to Y735.2bn ($8.3bn) in May, far outpacing the Y541bn in JGBs bought from January to April, according to Japanese finance ministry figures. The increase in JGB purchases comes as China appears to be diversifying more of its $2,400bn in foreign exchange reserves away from US Treasuries and, more recently, euro- denominated assets, because of sovereign debt problems in Europe. Notice I have ignored the possibility that the PBoC buys assets other than in euros or yen, but aside from the fact that no other market is nearly deep enough to absorb significant purchases by the PBoC, the net result is no different. The destination country would be forced either to recycle the inflows back into the US (counteracting the effect of PBoC selling of USG bonds) or it would have to absorb the US trade deficit – something no other country is capable of doing. The third way the PBoC could swap out of its USG bonds is to exchange them for hard commodities. Because of the positive correlation between Chinese growth and commodity prices, stockpiling commodities is a bad balance sheet decision for China. Why? Because by locking in relatively “cheap” commodities if Chinese growth subsequently surges, or relatively “expensive” commodities if Chinese growth subsequently stalls, it will only exacerbate volatility in China’s already incredibly volatile economy. Remember that most analysts believe that quarterly growth, if correctly accounted, plunged from the low double digits in the last quarter of 2007 to zero or even negative in the last quarter of 2008, for example, before surging to low double digits again the last quarter of 2009. This is already an very volatile economy. This exacerbation of volatility is made worse by the widespread suspicion that China has already stockpiled huge amounts of commodities, but the main point is that even if the PBoC were to do this, it does not change anything material. It simply reassigns the problem to
227 commodity exporters, with almost the same net results, because if Brazil, say, sells more iron ore to China, Brazilians now have more dollars, which they must either spend on US imports – thus boosting US employment – or invest in US assets. In this case Brazil simply intermediates the former PBoC purchases of USG bonds. It’s all about the export surplus Finally the PBoC could sell US Treasury bonds and purchase assets in China. This would be most damaging for China because it would mean a drastic reversal in the country’s currency regime. The PBoC currently sells huge amounts of renminbi to Chinese exporters in order to keep down the value of its currency. Suddenly to switch strategies and to buy renminbi would cause the value of the renminbi to soar. This would wipe out China’s export industry and cause unemployment to surge. So basically any sharp reduction in China’s Treasury bond holdings is likely either to be irrelevant to the US or to cause far more damage to China than to the US. I really don’t think we should waste a lot of time worrying about the nuclear option. But that doesn’t mean there is nothing to worry about. In fact the problem facing the US and the world is not that China may stop purchasing US Treasury obligations. The problem is exactly the opposite. The major capital exporting countries – China, Germany, and Japan – are desperate to maintain or even increase their net capital exports, which are simply the flip side of their trade surpluses. The major capital importing countries, on the other hand, are likely to see their imports plummet. China, for example, is unwilling to allow the renminbi to rise against the dollar because it wants to protect and even increase its trade surplus. I already discussed the June trade numbers, and it is pretty clear that China is in no hurry to bring its trade surplus down. Remember that whether the surplus ends up as an increase in reserves or as hot money outflows makes no difference. One way or another the full current account surplus – most of which is the trade surplus – must be recycled abroad. Japan is in a similar position. In Japan, consumption growth has been glacially slow, and any contraction in its trade surplus will lead almost directly to reduced production and higher unemployment, so Japan, too, is eager to maintain capital exports. Finally Germany, like China, has been reluctant to put into place policies that boost net demand, and in fact the collapse of the euro means that Germany’s trade surplus will almost certainly grow. Needless to repeat, if the German trade surplus grows, so must its export of capital. So who will import capital? All the major capital exporting countries, in other words, are eager to maintain and even increase their capital exports. But the balance of payments must balance, and all that exported capital must be imported somewhere else. So what about the net importers of capital – aren’t they eager to absorb these flows? Here the situation is dire. The second largest net importer of capital until now has been the group of highly-indebted trade-deficit countries of Europe – including Spain, Greece, Portugal, and Italy. The Greek crisis has caused a sudden stop to private capital inflows, as investors worry about insolvency, and it is only official lending that has prevented defaults. These countries are unlikely soon to see a resurgence of net capital inflows. The world’s second-
228 largest net capital importer, in other words, is about to stop importing capital very suddenly. I discuss this more generally in my May 19 blog entryH .H This leaves the US. Because it has the largest trade deficit in the world it is also the world’s largest net importer of capital. So what will the US do? At first nothing. As net capital exporters try desperately to maintain or increase their capital exports, and deficit Europe sees net capital imports collapse, the only way the world can achieve balance without a sharp contraction in the capital-exporting countries is if US net capital imports surge. And at first they will surge. Foreigners, in other words, will buy more dollar assets, including USG bonds, than before. But remember that an increase in net US imports of capital is just the flip side of an increase in the US current account deficit. This means that the US trade deficit will inexorably rise as Germany, Japan and China try to keep up their capital exports and as European capital imports drop. I have little doubt that as the US trade deficit rises, a lot of finger-wagging analysts will excoriate US households for resuming their spendthrift ways, but of course the decline in US savings and the increase in the US trade deficit will have nothing to do with any change in consumer psychology or cultural behavior. It will be the automatic and necessary consequence of the capital tug-of-war taking place abroad. The US, in other words, is not likely to face the “nuclear option” of a Chinese disruption of the US Treasury bond market. It is far more likely to be swamped by a tsunami of foreign capital. This tsunami will bring with it a corresponding surge in the US trade deficit and, with it, a rise in US unemployment. It will also force the US Treasury to increase the fiscal deficit as more of the jobs created by its spending leak abroad. Therein lies the problem. A reduction in net foreign capital inflows means a welcome decline in the US trade deficit, but the US is likely to see just the opposite. Foreign capital will push desperately into US markets and as an automatic consequence the US trade deficit will surge. So the problem isn’t too little capital inflow or a sudden boycott of USG bonds. On the contrary, the US will see too much capital inflow. All this may turn out to be very bad for the US economy, but in the past massive capital recycling has usually been very good for asset markets. Might we see a surge in the US asset markets, at least until next year when Congress starts getting tough on the trade deficit? I would be willing to bet that we do. ———— To move on to the second subject of today’s posting, net new lending for June was RMB 603 billion. This is a huge drop from last June’s RMB 1,530 billion but, before we get too scared, remember that last year saw an astonishing explosion in lending. June 2008’s total new lending was a more typical RMB 332 billion. That leaves us with new lending year to date at 62% of 2010’s total quota. It is hard to read too much into this ratio. By this time last year we had already disbursed 77% of the year’s total, although a lot of that was short-term loans made to beat the quota. By comparison in 2008 total new lending in the first half of the year accounted for 50% of the annual total, What’s more, these new lending numbers may be totally distorted. Charlene Chu and her team at Fitch Ratings, as usual way in front when it comes to sniffing out rotten things in the banking system, in a July 2010 report (“Chinese Banks: Informal Securitisation Increasingly Distorting Credit Data’) warns that there is an awful lot more “securitization” (also known as
229 moving loans off the balance sheet) going on than is being recorded. Included in their rather disheartening report is this chilling passage: Data on the sale and repackaging of loans into CWMPs has always been sparse, but, historically, observers have been able to track activity by the number of CWMPs issued each month using information collected by small third-party data providers. However, as public scrutiny of informal securitisation has risen, Fitch has observed a noticeable worsening of Chinese banks’ already poor disclosure of this activity. Some banks very actively engaged in transactions last year are showing up in 2010 data as minimally involved, yet the bank’s own salespeople (responding to Fitch’s enquiries) state that business remains as strong as ever. Meanwhile, private placements of products to institutional investors are becoming more commonplace, most of which are never disclosed to any entity but the CBRC. Because of this worsening in disclosure, data from third-party providers is capturing less and less transaction flow, with as much as 40% of deals in H110 going uncaptured, versus less than 10% prior to end 2009. I have no idea of whether or not something risky is happening here, but I usually take it as an article of faith that when bankers spend more time obfuscating transactions (for example, check out Naked Capitalism’s worrying takeH H on the European Financial Stability Facility), it is because there is a lot more they prefer us not to see. Of course, I might just be wrong. Real estate declining At any rate credit creation drives growth in China, especially credit in the real estate market, and the slowdown in lending compared to last year seems to be having an effect. Average real estate prices across the country officially declined in June, with many of us believing that there is a lot more to come. Here is the relevant articleH H in Monday’s South China Morning Post: Mainland property prices in June recorded their first monthly fall since February last year, providing further evidence that a government drive to let the air out of an inflated market is working. Average prices in 70 cities edged down 0.1 per cent from May, lowering the annual property inflation rate to 11.4 per cent in June from 12.4 per cent in the year to May and April’s reading of 12.8 per cent, the National Bureau of Statistics said on Monday.
Monday’s People’s Daily was a little less negative. The entire articleH H says: Housing prices in major Chinese cities rose 11.4 percent year on year in June, one percentage point lower than the increase in May, the National Bureau of Statistics said Monday. Apartment sales are way down in most big cities and last week’s South China Morning Post reportedH H a “shocking” number of empty apartments: Mainland’s property market remains dangerously overheated and failing to tame the speculative bubble could threaten financial and social stability, a prominent economist said in an official newspaper on Friday. Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a government think tank in Beijing, noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country, many of them bought up by people wagering on a constantly rising property market. In the overseas edition of the People’s Daily, Yi said the ”shocking” level of empty housing showed the dangers brought by the country’s property boom, which the central government has been trying to cool.
230 And it is not just the real estate sector that seems to be slowing. John Garnaut has a very good
(as usual) articleH H in Tuesday’s Sydney Morning Heraldabout the hard economic choices China faces. He points out the recent decline in steel production and discusses what seems like major misallocation of capacity in wind power generation – a symptom perhaps of the haste to invest in prestige projects without clear economic benefits. Meanwhile, perhaps as a harbinger of the coming debate about currency appreciation, China’s textile lobby group is issuing dire warnings. according to an article in Tuesday’s People’s Daily: Half of China’s textile companies risk going to the wall if the yuan appreciates 5 percent against the US dollar, an industry lobby group warned.China National Textile and Apparel Council Vice-President Gao Yong attributed this knife-edge existence to the industry’s thin profit margins of around 3 to 5 percent. ”If the yuan actually appreciates 5 percent against the US dollar, over half of China’s textile companies will go bankrupt,” Gao said. …More than 20 million people are directly employed in China’s textile industry, while a further 140 million are involved in cotton farming, according to the Ministry of Commerce. Therefore, a large upward revaluation of the yuan could cost millions of jobs. Time to relax? In this context it is interesting, and significant, I think, that I am hearing rumors that there is an increasingly urgent argument within policymaking circles about the whether or not we need to maintain relative tightening, especially in lending and real estate. One group – perhaps include the next generation of leaders? – has been arguing that it is too soon to start relaxing and that Beijing needs to keep its foot on the brakes. The other group is claiming that the economy is decelerating too quickly, and it is time once again to reverse course. The head of one of China’s Big Four banks, for example, seems to agree with the latter. According to an articleH H in Monday’s Financial Times: Faltering confidence in the Chinese economy could threaten the plans of the country’s banks to shore up capital reserves, the head of China Construction Bank, has warned. …Guo Shuqing, the chairman of China Construction Bank, said overall confidence in the economy was more of an issue than the availability of investor funds. “The risk is not the volume of issuance that will come from the banks, such as ABC’s IPO. It’s more people’s confidence, how worried they are about the Chinese economy in general,” he said. Mr Guo played down concerns about China’s property bubble and the damage that could do the banks’ asset quality, saying “the value of mortgages is only about 15 per cent of GDP, much lower than in Europe and the US.” …He also rejected alarm generated by a recent wave of reports about sky-high local government debt in China, which some analysts have put as high as Rmb7,000bn ($443bn). Mr Guo confirmed that the regulator had asked banks to slow lending to local government companies but said that many of them were in fact cash-generative businesses which could service their loans. “Quite a lot of these companies are commercial companies, which are operating businesses with cash flows, like tollways, ports and railways. Many of these cities and counties are developing very fast, so there is no problem in paying back these funds.” Mr Guo quoted estimates of local government debt of Rmb3,000bn, only about one-third of which were to companies which are not generating cash flow. “The total government debt to GDP is very low in China. Even if it increased by about 10 percentage points, it would only be about 30 per cent. So it is very affordable.”
231 Obviously Mr. Guo has very different estimates – or at least definitions – of government debt levels than mine, but clearly he and many like him seem much less concerned about overheating than about a too-sudden stop. Regular readers knowH H that in my view for the past two years we have veered from panic to panic – stomping on the accelerator at one time and then stomping on the brakes as few months later – and I think it is only a question of time before growth slows sharply, and we panic once again and stomp on the accelerator. Perhaps not every research analyst agrees with me. In the the SCMP article cited above they quote a very welcoming Merrill Lynch as saying, about the renewed push among Chinese banks to expand real estate lending,“Banks always like to test the resolve of policymakers. We are glad to see more people are coming around to our view that there will be no policy reversal and policy easing very soon on the property front.” But I am not sure there will be much alternative. Beijing wants to keep growth stable while reducing China’s reliance on the “bad” growth caused by real estate bubbles, unsustainable borrowing, and more excess capacity. But what if the only growth we’ve got is bad growth?
http://mpettis.com/2010/07/the-capital-tsunami-iH s-a-bigger-threat-than-the-nuclear-option/ H
What387BH do banking crises have to do with consumption?
Jul 4th, 2010 by MichaelH Pettis H Just three days after returning to Beijing from New York, I had to leave again, this time to a series of conferences in Torino, Italy, so it is hard to do much writing for my blog, especially since I won’t spend my free time in the hotel when there is so damned much food out here that urgently needs sampling. Still, I did want to write a hurried note about a topic of conversation that came up a lot while I was in the US and even more here in Italy. For the next several years, as Keynes reminded us in the 1930s, savings is not going to be a virtue for the world economy. It is more likely to be a vice. In order to regain growth the world desperately needs less savings and more private consumption, but I think it is not going to get nearly enough to generate growth. Why? Because in all the major economies the banking systems are largely insolvent, or about to become so, and desperately need to rebuild capital. For reasons I discuss below, this will have a large adverse impact on private consumption. Let’s go through the major banking systems. First, the crisis started in the US and, perhaps as a consequence, US banks have already identified a lot of their problem loans and have been the most diligent about rebuilding their capital bases. They nonetheless still have a long ways to go, even though a large part of the bad loan problem was directly or indirectly transferred to the US government. By the way, transferring bad loans to the government may be good for the banks but will have the same adverse impact on consumption. I try to explain why below. Second, in Japan, during the past twenty years the Japanese government and the beleaguered Japanese household have been tasked with keeping the banking system alive. I don’t know whether or not the banking system has finally been cleaned up, but for the purpose of my calculations it doesn’t really matter. The Japanese government has been saddled with a huge nominal debt burden, which is only bearable because interest rates are kept artificially low. Forcing down the interest that depositors and bondholders receive means that borrowers are getting (albeit not visibly) substantial amounts of hidden debt forgiveness funded by household depositors.
232 Third, in China, even if you believe that all the NPLs currently in the banking system have been correctly identified (a claim which few Chinese bankers believe), no one doubts we are about to see a surge in NPLs thanks to the out-of-control lending expansion of the past two years. But things are even worse than the nominal numbers imply. As I discussed in my April
6 entryH ,H when we are trying to estimate the cost of a banking crisis we need to think about more than simply the ability of borrowers to meet current obligations. This is because, as in the case of the Japanese government obligations, when borrowers are able to benefit from artificially low interest rates, the effect is of hidden debt forgiveness which must be paid for by the net lenders, who are, as in the case of Japan, the beleaguered households. In other words, if you want to know how much real bad debt there is out there that must be cleaned up, you need to calculate what share of the loans would go bad if interest rates were raised by at least 300-400 basis points, the minimum needed to bring Chinese interest rates in line with an appropriate rate. This suggests that the Chinese banks, if obligations were correctly counted, might have much larger amounts of bad debt than any of us realize, and this needs directly or indirectly to be cleaned up. Finally, Europe probably has the biggest banking problem of all. European banks are stuffed with bonds issued by Greece, Spain, Portugal, Italy and a number of countries that are either insolvent for all practical purposes or dangerously close to becoming so. The numbers are so big that the only reason we are likely to pretend that these countries aren’t insolvent is because recognizing the obvious would mean throwing the banks of Germany, France, Spain, and most of the rest of Europe into the trash can. Who will clean up the mess? So what does this have to do with consumption? A whole lot, unfortunately. Like it or not we are going to spend the next several years cleaning up the major banking systems of the world, and guess who gets to pay to clean them up? Let’s go through the clean-up options: 1. In order to prevent a collapse of the banking system, the government can effectively assume the bad debt and take it on the government balance sheet. They can do this by buying the debt at well above their true market value, or by giving the banks gifts of capital, or by a number of other mechanisms the net effect of which is the same: these bad loans now become the obligations of the government. How are these obligations serviced? Basically there are three ways governments can treat the cost of the debt. • Governments can default or restructure their debt, and receive significant debt forgiveness. This does not resolve the debt problem so much as pass the burden on (in the form of losses) to banks and investors. In the case of countries like Greece, much of the burden will go abroad to German and other European banks. • Governments can raise taxes to repay their debt. In this case the burden of cleaning up the banking system goes directly to taxpayers, who are ultimately households (corporate taxpayers of course pass the cost on to households). Raising household taxes reduces disposable income, and so will directly reduce future household consumption. • Governments can hide the taxes by forcing down the borrowing rate. This effectively grants the government debt forgiveness and passes on the cost to net lenders. This doesn’t work in market economies in which investors have savings and investment alternatives to bank deposits, like the US, but it is the preferred way that countries like China and Japan use to cover the cost of government borrowing. This just means that the cost of the government debt is passed on to net savers – of course the household
sector – and so reduces their wealth. As I discussed in an April 20 postH ,H the wealth
233 effect in China of a reduction in interest rates means that Chinese consume less and save more. 2. They can force the banks to recapitalize. Again there are a few ways they can do this: • The can force the banks to raise money in the capital markets, but this is only a partial solution at best since investors are not willingly going to provide the capital needed to clean up the NPLs. They will only invest to the extent that the true losses are borne by others. • The most powerful way of raising bank capital is for the monetary authorities to set interest rates so that banks can make money easily. In the US and Europe, the typical way is to engineer a steep yield curve, with very low short-term rates. Since commercial banks are in the business of mismatching maturities, they can profit from an artificially steep yield curve at the expense, of course, of depositors. This is basically how US money center banks regained solvency during the LDC Debt Crisis of the 1980s. Of course the cost of this policy is borne by net short-term lenders, who for the most part are household depositors. • In countries like China and Japan, there is a much more powerful way to do the same thing. Since the monetary authorities set both the lending and deposit rates, they can very simply set the minimum spread between the two. In China, the maximum deposit rate is 300 basis points or more below the minimum lending rate. Combine this with an upward sloping yield curve, and Chinese banks make a huge profit on the back of their suffering household depositors, who have few alternatives to bank deposits. Households, of course Astute readers will have noticed that every solution to a banking crisis eventually boils down to the same solution: force households to clean up the banking system, either in the form of explicit taxes or in the form of hidden taxes. Before we get too cynical about this, it is worth remembering that there are huge benefits to having a functioning banking system, so that the high costs of cleaning the banks up are probably worth paying. But one way or the other, banking crises lead to increased claims on future household income and wealth. By reducing future disposable income, this also automatically leads to downward pressure on future household consumption. So here is the problem. Surplus countries like Germany, Japan and China save too much and already have significantly deficient domestic consumption. They rely heavily on foreign net demand to absorb their excess capacity and, for reasons I have discussed many times, they are going to find it very difficult to change the structure of their economies to rebalance demand.
On the other hand, as I explain in my May 19 entryH ,H deficit Europe will see a collapse in its net consumption as it struggles to maintain positive net capital inflows. This means that the US remains as the only large economy that is providing net demand, but high unemployment will ensure that it attempts tor reduce the amount of demand it provides to the rest of the world. One way to think about this excess savings is to think about the pressure for exporting capital. China, Germany and Japan export huge amounts of capital and desperately need to continue to do so or else they will see their export industries collapse. Deficit Europe used to import huge amounts of capital, but these capital imports are set to collapse and may soon even become capital exports. The US is the only large importer of capital left, and it wants desperately to reduce these capital imports. So even before we worry about the impact of the banking crises, we have to wonder who is going to absorb all these savings?
234 But the banking crises make matters much worse. With all of the major economies facing banking crises, they must clean up the banks by forcing the household sector to pay the bill. This will put downward pressure on household disposable income and wealth for many years. But we are all betting on the consumer – and inexplicably enough (to me, anyway) many of us are betting most heavily on the hapless Chinese consumer – to come surging back and bring us the growth that we so desperately need. I am pretty skeptical that this will happen. There is an awful lot of banking mess that households are going to need to deal with first, and only after the mess is cleaned up will consumption come roaring back. Look at Japan. For twenty years Japanese consumption growth has limped along at well under 2% on average while Japanese households dealt with (i.e. paid for) the consequences of their banking crisis. China too provides a worrying story. Chinese consumption dropped from a very-low 45% of GDP ten years ago to an astonishing 36% last year just as — no coincidence — Chinese households were forced to clean up the last banking crisis. Why should the future be any different? Until the banking messes are cleaned up, I think we shouldn’t count on household consumption to save us. The only solution I can think of for this problem is if governments — especially China, Germany and Japan — use their resources of wealth to clean up the banking mess without forcing households to do it. How? they need to privatize their vast holdings of assets and use the proceeds either to clean up the banks or to prop up household wealth. This will require a major political reform, especially in countries like China, but I have no doubt that eventually we will get there. Privatization is sort of a bad word today, especially in places like China, but I bet it will become eminently respectable again in a few years. But until then, and as long as the banks are in such bad shape, do not expect consumers to ride to the rescue.
http://mpettis.com/2010/07/what-do-banking-H crises-have-to-do-with-consumption/
What38BH might history tell us about the Greek crisis?
Jun 24th, 2010 by MichaelH Pettis H With the PBoC’s currency announcement last Saturday and the surge (!) in the value of RMB on Monday (all very kindly timed to add zest to my meetings this week in Boston, New York, and Washington), you would assume that today’s entry would be all about the RMB and the effect of the PBoC announcement. But aside from a brief aside to say that I am a little skeptical that this announcement adds up to much beyond a desire to head off China-bashing at the G20 meeting – bad news for Germany, who will now have to absorb much of the heat – I plan instead to discuss what I think the history of sovereign debt crises might tell us about the recent events in Europe. The Greek crisis may in many ways seem unprecedented, but of course it isn’t. I think by now everyone already knows that Greece has spent much of the past 200 years – more than half by some counts – in default or in one form or another of debt restructuring, but in fact there are plenty of other periods of sovereign default and restructuring that can tell us something about what is happening and what will happen. I would suggest that there at least five things we can “predict” with some degree of confidence from looking at historical precedents: 1. The euro will not survive in its current form.
235 We should always have been skeptical about the survivability of the euro. There is a history of currency unions from which we can draw two reasonable conclusions. First, without fiscal integration such as occurred in the US after the Civil War or in the German Customs Union under Prussian dominance, currency unions are no more permanent than other forms of monetary integration, such as adherence to gold or silver standards. Without robust mechanisms to absorb imbalances that emerge in different parts of the economy, and Europe embodies many very different economies, countries normally are forced to rely on monetary adjustment. The European currency union eliminates this type of adjustment mechanism, leaving countries with only two, brutally difficult options for adjustment besides opting out – sovereign default or long periods of deflation and unemployment. So along with very high levels of capital mobility (which Europe possesses to some extent) and labor mobility (of which it has much less), Europe also needed to assign a substantial amount of fiscal sovereignty to some entity. I have already explained elsewhereH H why I think this was always very unlikely. Difficult as it might be, opting out of the euro is likely to be much less unpalatable for many countries than sovereign default or long periods of high unemployment. Second, when currency unions are successful, it is almost always during periods of rising global liquidity and expanding international capital flows. No currency union has been able to survive the great monetary contractions that spell the end of a globalization period. The 19th Century’s Latin Monetary Union and the Scandinavian Monetary Union, to take the most obvious examples, were both once considered great successes, but were forced into retreat when global monetary conditions turned sour. So when will countries opt out of the euro? Ernest Hemingway once described the process of going broke as “Slowly. Then all at once.” That is not a very precise description, I know, but I would guess that support for the euro will erode very slowly until suddenly it seems inevitable and then the process will happen breathtakingly quickly. 2. This is the big one One of the myths that we often hear repeated is that financial crises have been occurring with increased frequency in the past one or two decades. I think we only believe this because we remember the big crises of the past, which seem to occur every twenty to thirty years, and then look back all crises of the past two decades – Mexico in 1994, East Asia in 1997, LTCM and Russia in 1998, Brazil in 1999, the Internet Bubble in 2000, the Sub-Prime crisis in 2007, and Greece in 2010 – and conclude that there are an awful lot more crises nowadays.
But in my book, TheH Volatility Machine,H I made sure to distinguish between the short-term liquidity crises that occur within globalization cycles, of which there are a lot and seemed to occur every two or three years, and the long-term liquidity contractions that spell the end of each of the major globalization cycles. The former can be brutal, but they are usually short- lived and the overall market recovers very quickly. So, for example, although most of us know that the world experienced a deep and long-lasting crisis in 1873, which began a long period of contracting international trade, reduced capital flows, and the massive bankruptcies of the high technology companies of the period, including most notably the railroads, very few people seem to know about the Overend Gurney crisis of 1866, which seemed pretty horrific at the time but from which the markets recovered fairly quickly. Likewise the great and well-known LDC debt crisis beginning in 1982 was preceded by several smaller crises, most importantly I think in 1976 by a Mexican peso crisis, which two years later had all but been forgotten by the market.
236 In my opinion the current set of crises, beginning with the sub-prime crisis in the US and spreading throughout the world, is not a short-term liquidity crisis like LTCM, the Asian Crisis, or the Mexican crisis of 1994. I think this is likely to be one of those big events, one that represents a major re-adjustment in the world during which time the massive imbalances that had been built up during the long globalization cycle that started around the late 1980s and early 1990s are finally worked out. Not only will Greece, in other words, get worse, but it is by no means the end of the crisis. A lot more countries in Southern Europe, Latin America and Asia are going to be caught up in this before it ends. 3. The European crisis will be accompanied by a trade shock. In the early 1980s Latin America countries were suddenly cut off from funding during what was subsequently called the LDC Debt Crisis, or the Lost Decade. These countries had been running large current account deficits, and of course current account deficits require capital account surpluses. These surpluses were financed by the the huge petrodollar recycling of the 1970s, when commercial banks around the world made staggeringly large loans to many developing countries. Of course after 1981-82 it became clear that the loans exceeded the repayment capacity of the borrowing countries, and suddenly financing dried up – almost overnight. What’s worse, the debt crisis had already been preceded by flight capital, so that when financing dried up, a capital account surplus quickly became a capital account deficit. Of course once Latin America began to experience capital outflows, its trade deficit necessarily had to become a trade surplus. This is exactly what happened. The deficit countries of Europe, whose combined trade deficits are nearly two-thirds the size of the US trade deficit, will also be forced into a rapid contraction in their trade deficits for the very same reasons – they are going to find it hard enough simply to refinance themselves, let alone receive net capital inflows. Without a capital account surplus, however, they simply cannot run current account deficits. This contraction must, one way or another, be absorbed by the very unwilling rest of the world. I describe what this will entail in a May 19 entryH .H 4. The economic recovery in the countries hit by crisis will not begin until they are recognized as insolvent and receive debt forgiveness from their creditors. Preceding every sovereign default is the fiction that the obligor country is simply facing a short-term financing problem, and that with a lot of discipline and a little bit of good will it will be able to work its way out of the crisis. During this period a number of restructuring “solutions” are proposed – all of which involve increasing debt, and often in the most financially destabilising way – which inevitably make the final resolution of the crisis much more difficult and which sharply raise financial distress costs. The most notorious recent example of these terrible “solutions” was Argentina’s disastrous debt swap in 2001, in which it dramatically increased the country’s total obligations while it desperately tried to maintain the fiction that it could somehow grow its way out of its impossible debt burden. Greece, and probably two or three other countries, simply cannot repay their outstanding debt amounts. Ultimately they are going to default, and then in the restructuring process they will receive enough debt forgiveness that allows them to return to a sound footing and with a reasonable repayment prospect. But as long as they maintain the pretence that they can and will repay the full outstanding amount, and struggle with the burden, the resulting distortions in the economy will mean that businesses will disinvest and the country will not grow.
237 Historical precedence makes it clear that as long as the sovereign borrower is forced to struggle with an unrepayable debt burden, it will not grow. Eventually, as has happened in nearly every previous case, creditors and borrowers will acknowledge reality and will work out a debt forgiveness plan that will allow the economy to return to growth. Until then, expect weak growth, high unemployment, and constant battles over debt. How long will it take for the world to recognize the inevitable? That leads us to the fifth thing we can learn from historical precedents. 5. Greece’s insolvency will not be recognized for many years. When most of the obligations of an insolvent sovereign were widely dispersed among a wide variety of bondholders, market forces acted relatively quickly to force debt forgiveness. Defaulted bonds trade at deep discounts, and it is a lot easier for someone who bought the debt at one-quarter its face value to agree to 50% debt forgiveness than for someone who made the original loan. But things are different with the current crop of insolvent European sovereign debts, as they were with the sovereign loans of the 1970s. They are heavily concentrated within the banking system, and the banks cannot recognize the losses without themselves collapsing into insolvency. That cannot be allowed to happen. The LDC debt crisis of the 1980s raged on nearly a full decade – a decade of stopped payments, capital flight, and agonizingly low growth – before creditors formally acknowledged that most struggling borrowers could not repay their debt and would need partial debt forgiveness. The first formal recognition of debt forgiveness occurred with Mexico’s Brady Plan restructuring in 1990. Growth returned to most countries only after it became clear that they would receive debt forgiveness. Why did it take so long? Were the banks stupid? No, banks knew full well that they weren’t going to get their money back as early as the mid-1980s, but to have acknowledge this would have required them to set aside more capital to absorb the losses than most of them possessed. The recognition of the obvious had to wait nearly a full decade so that banks could build a sufficient capital cushion to absorb the losses. So too with the European crisis. Much of the Greek debt is held by European banks, and they simply do not have enough capital to absorb losses on Greek debt, let alone if Greece were to be joined by Portugal, Spain and others. The banks will need first to rebuild their capital bases before they can admit the obvious, and this could take several years. So we are condemned to spend much of the next decade postponing a resolution of the crisis while banks rebuild their capital base. Until they do, we will all pretend that Greece isn’t insolvent and that other European countries will not face a crisis. Meanwhile none of these countries will be able to grow.
http://mpettis.com/2010/06/what-might-hisH tory-tell-us-about-the-greek-crisis/ H
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Boletín de Universia-Knowledge@WhartonH H http://www.wharton.universia.netH H 14 -27 Julio, 2010 La revaluación del dinero chino: Un pequeño paso con un gran impacto C. Fred Bergsten, director del Instituto Peterson de Economía Internacional (PIIE) –un think tank con sede en Washington D.C.-, hacía unas declaraciones previas a la Cámara de los Diputados de marzo echando la culpa a la “severa” infravaloración de la moneda china contra el dólar (alrededor del 40%) tanto de las pérdidas de empleos en Estados Unidos como de los desequilibrios comerciales globales. Bergsten también exponía un plan de acción, incluyendo la creación de una coalición de ayuda multilateral de países o incluso la subida de aranceles para los productos chinos si China no suavizaba el estricto control de su divisa y permitía que el renminbi (RMB) se fortaleciese. “Un incremento significativo del valor del renminbi es necesario e inevitable”, decía. “Se necesita una apreciación de entre el 25 y el 40% para que el superávit por cuenta corriente de China se sitúe en el 3-4% de su PIB. Este reajuste provocaría una reducción de 100.000 a 150.000 millones de dólares del déficit por cuenta corriente estadounidense”. Y eso fue lo que hizo el Banco Popular de China, el banco central del país, el 19 de junio; al menos en parte. El Banco Popular anunciaba que abandonará el sistema de tipo de cambio que mantiene el RMB vinculado al dólar y que permitiría que el RMB respondiese de manera más natural a las fuerzas de la demanda y oferta. Aunque su efectividad fuese inmediata, el país empezaría a adoptar un régimen cambiario flotante –aunque estrechamente gestionado-, similar al empleado entre 2005 y 2008, basando el valor del RMB en una cesta de divisas –en lugar de únicamente el dólar-, dentro de una banda muy estrecha al alza o la baja. Pero las noticias del día siguiente daban al traste con las esperanzas de muchos observadores: los responsables de la política económica insistían en que cualquier apreciación que permitan del RMB, cuyo tipo de cambio es 6,38 por dólar desde julio de 2008, será “gradual”. Esto ha sido interpretado por los analistas como únicamente unos pocos puntos porcentuales al año. Suavizar la política cambiaria “es adecuado para China”, dice KentH Smetters,H profesor de Gestión de Riesgos y Seguros de Wharton. “Para ellos no va a haber muchas diferencias. La demanda de dólares va a seguir siendo alta y además pueden presumir de ser buenos chicos; pero ahora mismo en realidad apenas tienen costes”. La decisión, hecha pública una semana antes de la reunión del G20 en Toronto y en medio de diversas campañas para las elecciones estatales de Estados Unidos, ha sido muy bien recibida por los socios comerciales de China. Cada vez había una mayor presión internacional para que los responsables de las políticas resolviesen lo que los detractores de la política económica China denominan “manipulación de la divisa”, algo inaceptable para el Fondo Monetario Internacional y otras organizaciones multilaterales, así como el voraz apetito de China por comprar dólares estadounidenses con los baratos RMB para formar parte de su reserva de divisas. Independientemente de la cuantía de la apreciación –o depreciación- del RMB, según los
239 expertos la decisión de China es importante no sólo en los debates sobre la importancia futura del dólar y del RMB en el comercio y política global, como para corregir los desequilibrios económicos globales. Sin terapia de choque En medio de este sentir general, “es bastante comprensible por qué China está volviendo a esta sistema de tipos de cambio flotantes pero gestionados”, dice Whang Jianmao, profesor de Economía y decano de la Escuela de Empresa Internacional China Europa (CEIBS) en Shanghai. “Daremos pequeños pasos y esperaremos a ver los resultados. No importa cuánto presione la comunidad internacional; no espero ningún tipo de terapia de choque o similar en China”. Según Wang, varias lecciones vividas en el pasado en China y otras partes del mundo explican por qué China está adoptando este enfoque. Pensemos por ejemplo en el yen japonés. Con una divisa permanentemente infravalorada y una economía que depende de las exportaciones que floreció durante los 70 y mediados de los 80 –similar a la situación actual de China-, “los japoneses intentaron retrasar la apreciación de su moneda y al final tuvieron que reajustar demasiado rápido su tipo de cambio debido a las presiones de Estados Unidos”, explica. Aunque gracias al acuerdo Plaza Accord de 1985 el dólar estadounidense se depreció contra el yen y el marco alemán, el yen volvió a recuperarse, traspasando incluso las fronteras del país para enfrentarse a una burbuja de los precios de los activos que iba a explotar drásticamente. También se aprenden lecciones dentro de casa. “Desde el año 2005 hemos acumulado muchos conocimientos con las revaluaciones de nuestra divisa”, dice Wang. “Nos damos cuenta de que en los últimos años -2007 y 2008-, la velocidad con la que el RMB se ha depreciado ha sido demasiado elevada”. Una apreciación gradual “no significa necesariamente un movimiento unidireccional lento”, añade. “Habrá altibajos, aunque la tendencia general será al alza”. Apostar únicamente por la apreciación del RMB podría tener consecuencias negativas –aunque también positivas-, si los inversores (incluyendo los especuladores) se meten en el mercado chino, pero Wang predice que cualquier flujo monetario podría ser “gestionable”, en particular si se aprueba un impuesto que grave las ganancias del capital. Es más, “podría ocurrir que, a pesar de sus limitadas oportunidades de inversión, una apreciación gradual convierta al RMB en una atractiva divisa de reserva”.
Para FranklinH Allen,H profesor de Finanzas de Wharton, este último escenario sería muy favorable. “En los próximos 10-15 años, China debe hacer que el RMB sea totalmente convertible y se convierta en una divisa de reserva”, dice. “Desde que dieron comienzo los problemas con el euro, el verdadero problema en la arquitectura internacional es que el dólar se ha convertido en la única divisa de reserva; pero necesitamos tres divisas que representen tres regiones. Estaría bien tener más, pero tres es un buen comienzo”. El gobierno Chino ha de soportar una presión todavía mayor: el impacto de la revaluación de sus enormes reservas extranjeras, de las cuales el 70% son dólares. “Gran parte de esas reservas se financian con deuda en RMB. Así, si el RMB se aprecia, en términos prácticos están perdiendo”, dice Allen. Cualquier cambio –incluso si es gradual-, provoca un cambio significativo en el valor de sus reservas, que en marzo superaban los 2.500 billones de dólares, más o menos la mitad de su PIB. Si se produce una revaluación de 10% contra el dólar, esto equivaldría al 5% del PIB, una cuantía muy importante como para perderla. Deben pensar con cuidados sobre su estrategia a largo plazo”. ¿En qué posición va a quedar el dólar? “Para China, decir que van a abandonar el sistema de tipos de cambios fijos realmente significa que no van a intentar comprar suficiente
240 deuda estadounidense para mantener el nuevo tipo de cambio”, señala Smetters. “El problema es que Estados Unidos seguirá intentando vender deuda en los próximos años, y eso generará demanda de dólares. La demanda de dólares va a seguir siendo bastante fuerte porque el dólar es un refugio seguro”. Exportando desempleo ¿Tendrá la revaluación del RMB consecuencias para el ciudadano medio? En Estados Unidos muchos observadores creen que sí. En su opinión, la política cambiaria de China ha supuesto una ventaja competitiva artificial para las empresas chinas en comparación con sus rivales de otros países. En consecuencia, “China está exportando grandes dosis de desempleo al resto del mundo –tanto a Estados Unidos como a muchas otras economías emergentes como Brasil, India, México o Sudáfrica”, señalaba Bergsten en su testimonio en el Capitolio. En un blog publicado en enero, el columnista del New York Times y premio Nobel Paul Krugman escribía que el “mercantilismo chino” ha costado a Estados Unidos 1,4 millones de puestos de trabajo. Krugman, Bergsten y otros muchos detractores de la política económica china afirman que aunque permitir la apreciación del RMB provocará que los consumidores estadounidenses y de otras partes de mundo paguen mayores precios por los productos chinos, también ayudará a aumentar el atractivo de las exportaciones estadounidenses, tanto en casa como en el extranjero, lo cual al final supondrá una reactivación del empleo. En su testimonio Bergsten afirmaba que “detrás de cada 1.000 millones de dólares de exportaciones hay unos 6.000-8.000 puestos de trabajo (bien pagados) del sector manufacturero en la economía estadounidense”. Pero no todo el mundo está tan seguro sobre el papel que desempeñó el valor del RMB durante la recesión económica global ni es tan optimista sobre los efectos de la nueva política de China. “América necesitaba un chivo expiatorio para echarle la culpa de la crisis”, dice Simon J. Evenett, profesor de Comercio Internacional y Desarrollo Económico en la Universidad de St. Gallen en Suiza. En su opinión, el debate sobre el tipo de cambio aún seguirá vigente durante un largo periodo de tiempo. “Tiene todos los ingredientes de un drama de largo plazo”. Mientras tanto, la ventaja competitiva de las empresas chinas podría fortalecerse en lugar de debilitarse. “Si el incremento en el valor del RMB es gradual, esto fomentará que muchas empresas chinas mejoren la calidad de sus productos, no que desaparezcan, tal y como esperan los americanos. Los principales perdedores serían las empresas estadounidenses”. En cuanto a los trabajadores en Estados Unidos, Evenett predice que un RMB revaluado no derivará necesariamente en mayores exportaciones y menores importaciones, escenario que mucha gente espera. Evenett citaba las investigaciones que ha llevado a cabo junto con Joseph Francois, profesor de Economía de la Universidad Johannes Kepler de Linz, Austria, sobre empleo y producción en Estados Unidos. Por ejemplo, en sus investigaciones la mayoría de las exportaciones chinas a Estados Unidos no tienen como destino los consumidores americanos; se trata de componentes y bienes semi-elaborados con destino a las empresas. “No sólo se cumple en el caso de China, sino también para todas las importaciones”, escribían en un artículo publicado en abril en Voxeu.org, una página web de análisis político. “En consecuencia, las importaciones de China y otras partes del mundo se incorporan a la estructura de costes de la economía estadounidense y por tanto afectan a la competitividad global de las empresas estadounidenses”. Es más, “en un mundo donde sólo se vendiesen bienes acabados –donde el principal efecto de las revaluaciones fuese sobre el precio de las exportaciones-, entonces se podría vincular
241 revaluación, mejoras en la balanza por cuenta corriente y creación de empleo. Sin embargo, este no es el mundo en el que vivimos”. Evenett y Francois calculan que unos 420.000 empleos podrían perderse si el RMB se revaluase un 10%”. Punto de inflexión ¿Qué debería esperar China de la revaluación? Wang de CEIBS infravalora su importancia cuando se tiene en cuenta otro gran cambio: el incremento de los salarios chinos. “China está en un punto de inflexión”, dice. “Durante los últimos 25 años los salarios han crecido menos que el PIB. Esto ha provocado un mayor problema en China” que la actual política cambiaria. El superávit por cuenta corriente del 15% del PIB –causado por un desequilibrio crónico entre el ahorro y el consumo-, ha tenido un impacto negativo en la salud de su economía. “A menos que los salarios crezcan más rápido que el PIB, no creo que podamos conseguir el reequilibrio interno”, señala. “Y son los desequilibrios internos lo que provocaron desequilibrios externos”.
MarshallH W. Meyer,H profesor de Gestión de Wharton, está de acuerdo en que el papel del incremento de los salarios es crucial. “El incremento de los salarios es una puerta de salida de emergencia de la revaluación del RMB. Estoy seguro de que los precios aumentarán junto con los salarios, los cuales tendrán que trasladarse a los consumidores, que es a grandes rasgos el efecto de una revaluación del RMB. A menos que, obviamente, las empresas chinas aumenten su eficiencia en productividad o en procesos productivos, lo cual significa que los precios para los consumidores no aumentarán tanto”. Pero tal y como Wang y Meyer señalan, el gobierno ha estado acorralado en una esquina en cuanto a los salarios. “El gobierno no puede evitar un incremento de los salarios. Soy muy consciente de su papel al lado del pueblo”, dice Meyer. Y aunque aún desee luchar para mantener la trayectoria de crecimiento del PIB, el único modo en que el gobierno puede conseguir reducir su dependencia de las exportaciones y al mismo tiempo aumentar el consumo doméstico es fomentando mayores salarios, añade. Tal y como señala Wang, “realmente deben controlar la velocidad con la que se produzcan los cambios, lo cual significa que no pueden dejar que el tipo de cambio aumenta demasiado deprisa. Mucha gente perdería su empleo. Así pues, un suave incremento de los salarios –ligeramente por encima del crecimiento del PIB-, resolvería el problema”. En términos de si un RMB más fuerte podría tener como consecuencia la pérdida de negocios para los exportadores chinos en mercados internacionales clave y provocar algunos despidos, Wang cree que es muy poco probable dada la fuerte presencia china en Estados Unidos y otras partes del mundo. “Tienes que darte cuenta de que no existen sustitutos a corto plazo de las importaciones chinas. Tal vez dentro de diez años los importadores tengan elección, pero ahora mismo simplemente tendrán que pagar más”, dice. “Ningún otro país puede saltar al terreno de juego a gran escala. Algunos países lo intentarán, pero crear todo un sector manufacturero y toda la infraestructura necesaria – transporte, energía, toda la cadena de valor hasta el bien final-, es un trabajo de muchos años”. La revaluación de una divisa no puede por sí misma resolver los grandes retos globales. En opinión de Bergsten, “para llevar a cabo con éxito ajustes internacionales… son necesarias acciones correctoras por parte de Estados Unidos -en especial en relación con su déficit presupuestario y la baja tasa de ahorro nacional- y otros países, así como en China. Pero es imposible que los países con déficit logren reducir sus desequilibrios sin que los países con superávit reduzcan los suyos”. http://www.wharton.universiaH .net/index.cfm?fa=printArticle&ID=1917&language=SpanishH
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Publicado el: 14/07/2010 La tasa bancaria y los tests de estrés: Momentos de nuevos desacuerdos y de intranquilidad
Los órganos reguladores de los bancos europeos han estado analizando dos iniciativas para tranquilizar aún más a los mercados después de la crisis de la deuda soberana que sacudió el continente y al mundo a principios de año. Una de esas iniciativas, la creación de un impuesto global sobre los bancos, no fue muy bien recibida en el encuentro del G- 20 del mes pasado. La otra, la prueba de estrés a varios bancos de la Unión Europea, se conocerá a finales de este mes. Algunos observadores están preocupados por los posibles resultados de la prueba. Ambas iniciativas pretenden dar mayor transparencia al sistema bancario internacional. Pero las heridas que con ello pretendían cicatrizar todavía quedarán abiertas durante algún tiempo.
La última reunión de los veinte países más ricos, a finales de junio en Toronto, no ha despejado las dudas sobre cuándo, cómo y dónde se aplicará la polémica tasa sobre el sector financiero. La declaración final del G-20 se ha limitado a reiterar que la banca debe compensar los rescates multimillonarios que los Estados han repercutido a sus contribuyentes, pero da libertad absoluta a cada país para decidir cómo grava a sus entidades. Por lo tanto, el planteamiento es todavía muy difuso y reconoce la existencia de escenarios distintos para que la banca “contribuya de manera justa y sustancial” a su propio rescate. Las condiciones están tan poco acotadas que el G-20 ni siquiera se ha reafirmado en los plazos que con anterioridad se habían fijado, y que establecían la aplicación de esta tasa global a partir de 2011.
La falta de concreción es un jarro de agua fría para la Unión Europa (UE), que aboga por un acuerdo global y que antes de la reunión de Toronto –entre el 23 y el 27 de junio- ya había anunciado un acuerdo para la imposición de la tasa. Pero como en cumbres anteriores, cuando los países emergentes mostraron su rechazo, la propuesta ha caído en saco roto. La cuestión es si la tasa es justa aplicada bajo el criterio de café para todos y, por otra parte, si es un mecanismo realmente efectivo para devolver a la sociedad una parte del esfuerzo financiero que ha supuesto mantener con vida a los bancos más castigados por la crisis.
“La tasa me parece lógica e interesante, ya que el sector ha generado una burbuja que ha sido la base de la crisis que sufrimos. Lo razonable es que las entidades financieras paguen por sus errores. Pero la tasa tiene que estar orientada a evitar el riesgo sistémico”, dice el director del sector financiero del IESE, Manuel Romera. No obstante, teme por un excesivo intervensionismo del sector público. “Hablamos de un asunto que lleva coleando 30 años. Es necesario que el mercado esté regulado y que haya una reglas del juego claras, pero debe ser el sector privado el que lo gestione”.
Uno de los mayores problemas a los que se enfrente la propuesta es la falta de consenso.
243 Los países emergentes y Canadá, los que menos han sufrido la crisis internacional, se niegan a que sus bancos soporten más obligaciones. Por lo tanto, uno de los mayores riesgos para los países que tomaran la decisión de seguir adelante con la tasa es dejar a su sistema financiero en situación de inferioridad en términos de competitividad frente a los que renuncian a aplicar el impuesto. En realidad, el fondo de la cuestión es si es justo aplicar la tasa a todos los sistemas financieros, sin distinción entre los sanos y los contaminados. José Vicente Santamaría, profesor de Economía de la Universidad Carlos III, cree que “si se tratara de una especie de tasa de retorno por los anticipos, créditos o subvenciones a fondo perdido que los Estados han otorgado y otorgan a la banca, me parecería correcto”. Y abunda en que “podría introducirse un factor de corrección para no perjudicar a los bancos más eficientes y menos onerosos para las arcas públicas; de tal manera que se aplicase ese principio de que pague más quien más ha recibido”.
En Estados Unidos, incluso el Congreso está siendo poco receptivo a los esfuerzos de Obama para sacar adelante la tasa. La realidad dice que casi todas las entidades han devuelto ya al Estado las ayudas recibidas, con las grandes excepciones de Citigroup y AIG.
MauroH F. Guillén,H director del Lauder Institute de Wharton, cree que la iniciativa tiene valor desde el punto de vista político, ya que “todo el mundo quiere que la banca rinda cuentas por su responsabilidad en la crisis económica”. Sin embargo, vislumbra dos riesgos si la tasa sale adelante. El primero es puramente económico: “Aumentaría el coste financiero tanto para las empresas como para los ciudadanos de a pie”. El segundo es de índole moral, ya que Guillén considera que “si el banquero pone parte de su dinero en un fondo se puede creer legitimado a arriesgar más”.
España es uno de los grandes partidarios de que el sector financiero financie futuras crisis. En un escenario en el que el mayor riesgo es que cada Estado europeo haga la guerra por su cuenta, el Gobierno español ha dado las primeras indicaciones de cómo se canalizaría el cobro de esta tasa. Aún no hay ni mucho menos un modelo definido, pero la última novedad es que el Gobierno está barajando la posibilidad de que los bancos aumenten su aportación al Fondo de Garantía de Depósitos (FGD) siempre en relación a los riesgos que asuman esas entidades. Lo que en definitiva propone el Gobierno es que eleven la contribución al Fondo desde el actual 0,01% de los depósitos y que paguen más quienes más riesgos adquieran. Otros pasivos como las emisiones de los bancos y los productos del mercado interbancario también podrían verse afectados por la tasa. El Gobierno cree que el FGD necesita una revisión porque ya no responde a las necesidades de un sistema mucho más complejo, con productos cada vez más sofisticados. Bajo la idea subyace la filosofía general defendida también por países como Reino Unido y Francia de que es el sector financiero el que debe hacer el esfuerzo económico que permita garantizar que se puede financiar el coste de una futura crisis.
Respecto al escepticismo de las propias entidades financieras, que temen que si se llega a un acuerdo sobre la aplicación de la tasa cada país la aplique según su propia interpretación, Romera cree que hay que debatir el papel de los reguladores. “Se nos ha olvidado el papel del regulador. Ha estado demasiado callado y es necesario que esté mucho más presente a la hora de fijar las reglas de juego. Hasta ahora, se ha permitido demasiado juego sucio, ha habido demasiado chivo expiatorio”, asegura. Y añade que “es necesario que haya reguladores supranacionales, porque cada país establece sus propias políticas de control y supervisión a través de sus propios bancos centrales. A día
244 de hoy no se ha conseguido una coordinación real porque no se ha trabajado seriamente en esa dirección”.
Mientras, da la sensación de que Toronto ha dado una importancia relativa a la tasa y se ha centrado sobre todo en poner el foco en el ajuste del gasto público. La reducción del déficit público de los 20 países más ricos es ya un compromiso compartido y con fecha en el calendario: 2013.
El impacto de los tests de estrés
Mientras el debate sobre la tasa continúa, los test de resistencia o test de estrés para evaluar la calidad de los balances y la solvencia de las entidades se han convertido en el gran caballo de batalla con el que la UE quiere dar a los mercados financieros argumentos para tranquilizar a los inversores más desconfiados. El 23 de julio se conocerá el resultado de las pruebas, que se han realizado a más entidades de las previstas inicialmente. Las que se realicen a los 25 mayores bancos no deberían deparar grandes sorpresas. Los resultados de algunos de ellos, como los españoles o los alemanes, ya se han filtrado. Santander y BBVA son, por esté orden, los que mejor parados salen de las pruebas, mientras que los alemanes Deutsche Bank, Commerzbank y BayernLB también han superado el test con éxito.
Pero otra cosa bien distinta es el estado de salud que las pruebas dictaminen para el conjunto de las 91 entidades que van a ser objeto de análisis gracias a la presión ejercida por el Banco Central Europeo y la Comisión Europa. Por lo tanto, se van a someter a la prueba de los bancos centrales un amplio número de bancos medianos y, en el caso concreto de España, también las cajas de ahorros, entidades que dedican parte de sus dividendos a fines sociales y tienen representación política en su seno. El casi centenar de entidades de 20 países representa el 65% del sector bancario de la Unión Europea. España es quien más entidades va a poner a prueba, 27, de las cuales 18 son cajas.
Hay observadores que temen que las cañas se vuelvan lanzas. Es decir, que los mercados acusen el golpe si de las pruebas se deduce que los balances y las cuentas de resultados que hoy conocemos de una buena parte del sector no representan fielmente el impacto de la crisis en las entidades. No se debate si es necesaria esta dosis extra de transparencia, sino sobre las condiciones en la que realiza y hacia dónde debe ir encaminada. “Las pruebas de estrés tienen todo el sentido, se han hecho siempre y cuando más públicas se hagan, mejor. Para mí, eso se llama competir”, asegura Manuel Romera que, no obstante, previene del “riesgo sistémico que esta publicación puede provocar”.
Los precedentes dicen que el impacto puede ser positivo. De momento, la única referencia válida es la de las pruebas que el Departamento del Tesoro de Estados Unidos aplicó a sus entidades financieras en plena zozobra por la quiebra de Lehman Brothers. El resultado fue excelente. El test sirvió para que los mercados estadounidenses recuperaran una parte de la estabilidad perdida. ¿A qué se enfrenta España? Descartadas las tensiones en la gran banca, la duda está en el resultado de aquellas entidades sobre las que pesa la sospecha de que han sido duramente golpeadas por la crisis. La mezcla de grandes, medianos y pequeños bancos en los test preocupa a Santamaría. “Utilizando el símil futbolístico, de las entidades españoles que van pasar las pruebas de estrés, unas juegan en la Champions (que disputan los mejores equipos europeos) y otras son de Segunda B (tercer nivel del campeonato nacional español). Habrá que separar a los
245 grandes (bancos) del resto y a las cajas buenas de las contaminadas. Si no se discrimina, será malo para España”. Respecto a las dudas sobre qué pasaría si hay sorpresas negativas, Santamaría distingue en el caso español entre los bancos medianos y las cajas de ahorros. “Son dos mundos distintos. Los bancos pueden fusionarse en cuestión de días si es necesario porque no tiene condicionantes políticos. En cualquier caso, son dos sectores en plena reestructuración”.
En España, añade Santamaría, “la diferencia con lo que ha ocurrido en otros países es que los controles de riesgos son muy sofisticados. En la gran banca no se ha detectado ningún agujero e incluso las entidades han sido muy trasparentes a la hora de comunicar y provisionar los activos inmobiliarios que se han adjudicado desde que empezó la crisis. Ha habido momentos de dificultad puntuales, como el caso Madoff que afectó a Banco Santander, que se han resuelto muy rápidamente”.
No obstante, el debate sube de tono cuando se plantea cuál es el nivel de exigencia y de transparencia de las pruebas. Hay ciertas dudas sobre qué tipo de escenarios ha elegido el supervisor para valorar el estado de salud del sector y, sobre todo, se desconfía de que algunos elementos claves de los resultados no lleguen a la opinión pública. De momento, se sabe que el 23 de julio los datos de cada banco se comunicarán de forma individual. Sin embargo, se desconoce el nivel de detalle que se pondrá a disposición de los mercados. Santamaría es “partidario de que el regulador aplique criterios de transparencia en el sistema financiero de la UE, pero que estos criterios sean conocidos, su metodología avalada por reconocidos expertos y que no entren en colisión con los criterios de agencias de rating o los supervisores nacionales”.
Conviene ser prudente porque, como señala Santamaría, la clave está “en si la mayoría de la gente va a dar crédito a los resultados de las pruebas a las 91 entidades. Es decir, si los grandes inversores, la clase política y los líderes de opinión tendrán claro que el diagnóstico es válido. Y para eso las políticas de los supervisores deben ser armonizadas. Con el simple hecho de que se hagan los test, no basta”.
De momento, los escépticos no dejan de plantear dudas sobre la transparencia y por lo tanto la efectividad del proceso. Los medios de comunicación anglosajones han sido muy críticos en las últimas semanas con la operativa que Bruselas ha puesto en marca para la realización de las pruebas. Periódicos como el Wall Street Journal y el Financial Times discrepa del método porque no dice qué medidas se van a tomar con los bancos que no superen el test. Y bajan a lo concreto cuando se preguntan por qué no se ha hecho pública la metodología de las pruebas y qué requisitos deben cumplir, como sí hizo Estados Unidos. La otra gran crítica es que se desconoce cómo se va a medir la exposición de las entidades a la deuda soberana de los países. Dicho de otra forma, creen que los inversores están obligados a hacer un acto de fe mientras crece la sospecha de que las pruebas no van a ser todo lo exigentes que deberían. Muchos se preguntan si se contempla un escenario como el cierre total de los mercados de financiación.
Ganadores y perdedores
“La transparencia es lo que da tranquilidad, porque los mercados están preocupados y quieren saber qué banco está mejor o peor. Hasta ahora, la banca no ha publicado estos datos porque, en el fondo, son una oligarquía encubierta. Además, los reguladores no están unidos y cada banco central europeo tiene sus peculiaridades”, asegura Romera.
246 Conviene recordar que no es la primera vez que los bancos del Viejo Continente se someten a pruebas de estrés. Ya ocurrió en 2009, en plena crisis internacional, pero entonces los resultados del sector se presentaron en bloque, no de forma individualizada como se va a hacer ahora.
Sí parece claro que los mercados van a medir a los bancos con un distinto rasero cuando los test de resistencia sean públicos. En este escenario, los dos grandes españoles tienen mucho que ganar. “Se está midiendo qué nivel de solvencia tienen los bancos, no la liquidez, la calidad de los activos o la bondad de los préstamos per se. En este escenario, Santander y BBVA tienen una gran capacidad para generar beneficios y se han podido autofinanciar durante la crisis, con ampliaciones de capital en el caso de Santander. Pero conviene no olvidar que aunque sus recursos son muchos, la calidad de sus préstamos no es mejor que la de la competencia. Las garantías reales de esos préstamos no son tan buenas”, explica Manuel Romera. Efectivamente, sobre la banca española pesan los casi 100.000 millones de euros de créditos dudosos y una morosidad que está en el nivel más alto de los últimos catorce años. La exposición del sector financiero al negocio de ladrillo es muy importante. Y Santander, el primer banco español, es también la entidad que más activos inmobiliarios se ha adjudicado desde que empezó la crisis. Un dato que demuestra que los problemas son, en mayor o menor medida, para todos.
Por lo tanto, el impacto positivo que genera que las dos entidades sean las mejor valoradas en las pruebas de estrés puede ser cercenado en parte por el hecho de ser españolas en un momento en el que la percepción internacional del país no es la mejor. “Los grandes bancos están muy diversificados porque el 40% de su negocio está fuera de España. Por lo tanto, la mala imagen exterior de España tiene una influencia relativa”, dice Romera. Por su parte, Mauro Guillén considera que “las grandes empresas españolas cada vez se están desacoplando más de la economía del país. Cada vez obtienen una parte mayor de sus beneficios de fuera y en términos de accionariado también dependen cada vez menos de España. Por lo tanto, sus intereses no están alineados con la economía española. Si ésta no soluciona sus problemas, quizás no quieran que se las relacione con España”.
De momento, las bolsas han recogido con significativas subidas las buenas expectativas que generan las pruebas. Y, más concretamente, las cotizaciones de los bancos españoles cuyos resultados en las pruebas de resistencia han sido filtrados, aunque sin detalles. Tras la filtración, durante la última reunión del Consejo Europeo, que sitúa a Santander y BBVA como los dos grandes bancos más solventes de Europa disparó su cotización un más de un 5% y casi un 7%, respectivamente, en apenas dos sesiones. Los mercados festejaron la posición de liderazgo de los dos bancos más importantes del país, líderes de un sector financiero, el español, con un ratio BIS o coeficiente de solvencia del 13,6% frente al 11,9% de la media europea. Conocido el resultado de los test de estrés en los dos bancos españoles, el miembro del comité ejecutivo del Banco Central Europeo (BCE), José Manuel González Páramo, manifestó a los medios que las pruebas son necesarias porque “va a añadir información allí donde ahora mismo todo es rumor y, por tanto, contagio”. Y recordó que algunas entidades muy solventes se han visto obligadas a pagar “primas de financiación enormes por llevar el nombre de un país del Sur de Europa”, en clara referencia a España, muy afectada por el impacto de la crisis de Grecia y Portugal y, en menor medida, Italia.
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Eurointelligence Daily Morning Newsbriefing
Ecofin481BH edges towards compromise on financial regulation
14.07.2010 Finance ministers accept that European supervisory can make binding decision under certain circumstances: for example, when national supervisory breach EU law; also accept that EU supervisory can issue a temporary ban on products; Moody’s cut Portugal’s sovereign debt rating by two notches; Klaus Regling says EFSF will be up an running by end-July, and says the conditions for a AAA-rating are in place; facility will expire after three-years, if unused, or once the last loan is repaid; the FT says Germany’s proposals for a European debt resolution mechanism are too Draconian; Zapatero faces an important show-down today on his budget vote; the Ecofin expresses extreme happiness about the Spanish fiscal adjustment programme; the Greek central bank is accused of facilitating short selling of government bonds; Fitch has conducted a stress test for the Spanish banking system, and finds that the state recapitalisation fund is large enough to cope even with extreme scenarios; Wolfgang Münchau warns that the crisis is not yet over, despite the EFSF, the stress tests and the recent cyclical improvement; three well-know labour market economists, meanwhile, argue that labour market reform has been a cause of high youth unemployment in Europe. 14.07.2010
Ecofin389B edges towards compromise on financial regulation
European finance ministers decided to move a millimetre towards the European Parliament, by agreeing that the pan-European financial supervisory agency should be given decision powers during emergencies – but only if the member states is in flagrant breach of EU law. The European Parliament wanted much wider-ranging powers, including the powers by EU supervisors to take binding decisions during financial crises. This was rejected, among others, by Germany and the UK. The final legislation has to be worked out by an arbitration process between the Council and the Parliament, both of which have to approve the legislation. The FT quotes EU officials as saying that they hope a final deal could be ready by the end of this month. Uncontroversial is the European systematic risk board, while most of the controversy was about the three supervisory agencies – for banks, insurance, and
248 financial markets. Parliament also wanted to move all of them of Frankfurt. The Council also accepted a proposal from the parliament, that the authorities should have the right to ban certain products and activities during emergencies. Moody’s cut Portugal sovereign rating Just when you thought that the sovereign debt crisis was over, Moody’s cut Portugal sovereign debt rating by two notches from A1 to AA2. The reason for the downgrade is the expected deterioration of the country’s financial strength over the medium-term, as both debt-to-GDP and debt-to-revenue ratios have risen rapidly over the last couple of years – partly due to the government’s anti-crisis measures. Moody’s expects the government’s debt metrics to continue to deteriorate for at least another two to three years, with the debt-to-GDP and debt-to-revenues ratios eventually approaching 90% and 210%, respectively, FTH Alphaville H said. There are additional concerns about Porgual’s medium-term growth potential. The market reaction was muted, though Portuguese CDS moved up slightly. ESFS confident to get triple A in August The eurozone’s €440bn sovereign rescue fund will be operational by the end of the month and expects to be awarded a triple A rating, Klaus Regling told the FT and Frankfurter Allgemeine Zeitung. Specific measures had been taken to ensure the top rating, including a build-up of a cash reserve and a guarantee by member countries to pay up to 20% more than their agreed shares of the fund. With the results of stress test results to be revealed next week, the fund would not be used directly to shore up ailing banks, although governments drawing on the facility could use the money for bank recapitalisation. Regling said the fund could be extended beyond its intended three-year lifespan if any loans to eurozone governments were outstanding. The EFSF will operate in Luxembourg with a dozen staff. Germany’s debt management agency will issue the bonds, while the EIB will provide accounting and legal functions. Mr Regling said the EFSF would close after three years if it made no loans. Otherwise it will remain in existence until the last loan is repaid. FT on German idea of a sovereign resolution authority
An FTH editorial H comments on the German new idea to create a sovereign resolution authority that would manage an orderly restructuring. Its main criticism is about its draconian sanctions: In an event of default the authority would appoint an external expert to safeguard the debtor’s financial affairs, obliging it to surrender some sovereign powers during the exercise. The article argues that this would place the debtor nation in a position of colonial submission. Instead, one should set out clear rules for negotiating an orderly default. Zapatero faces show down ahead of budget vote In Spain Jose Zapatero faces a showdown with Parliament today that may determine how much longer his six-year-old Socialist Cabinet can hang on, BloombergH H reports. The annual state of the nation debate will generate proposals for parliament to vote on next week, and ElH Pais H writes that parties are prepared to increase their price for support to Zapatero’s budget proposal to be voted in September. The main problem are Catalan parties, disappointed and ready to capitalise on the regions’ unrest ahead of regional elections. If Zapatero does not get his budget through, it might signal the end of this government, Bloomberg says. Everybody is happy with Spain
249 It was a day of dishing out complements in Brussels yesterday. Germany’s finance minister congratulated Spain both on winning the World Cup, and on starting structural and budget reforms. Spain had followed the advice of the Ecofin in full. El Pais has the story with lots of quotes about everybody being very happy with Spain. Greek central bank accused on short selling
TheH FT reports H from Athens about an accusation by Vasso Papendreou, a former European Commissioner, who said the Greek central bank had facilitate naked short selling on Greek government bonds, by extending the settlement period for transactions on its electronic trading platform. She was quoted as saying: “The bank did exactly the opposite of what the [European Central Bank] and other institutions recommended ... It also ignored the advice of its own legal department ... This is a very serious issue.” She also said that a decision abolishing penalties for failed trades on the platform had further encouraged short selling. The quotes the Bank of Greece as denying any wrongdoing. More unofficial stress tests
FTH Alphaville H has a lot of fun with the stress tests, reporting on an exercise by Fitch on Spanish banks, and found that the Spanish rescue fund of €99bn is sufficient to guarantee a 6% common equity to assets ratio for the overall Spanish banking system, under a variety of stress scenarios, including further distress in the real estate market, on a scale similar to the collapse in Irish property prices, and in Japanese property prices during the 1990s. FT Alphaville has all the details of how Fitch calculated the test. The blog also noted that the rescue fund itself needs to raise cash on the capital markets, and its risk is correlated with that of the Spanish government. It also made the point that the restructuring of the Spanish cajas adds further complications for anyone who wants to carry a system-wide stress test. The downside of labour market reforms
SamuelH Bentolila, Tito Boeri and Pierre Cahuc H write in VoxEU (hat tip WallH Street Journal
Real Times Brussels Blog)H that labour market reforms introduced aimed at increasing flexibility had a big downside: more employment volatility. Among their finding is: Euro zone youth unemployment climbed to 20% in May from 15% before the crisis. In Spain 4 out of 10 yough are unemployment. For Italy,the ratio is one-in-three, and for France and Sweden it is one-in-four. The problem is the parallel markets in these countries. Workers who enjoy a high degree of protection do not get fired. The proposed solution is a graded job security that will increase security over time. Wolfgang Münchau on where are now In his FT Deutschland column, Wolfgang Münchau warns against too much optimism about the state of crisis resolution. He says the stress tests are unlikely to change much, and certainly not in Germany, where the financial sector was chronically under-capitalised even before the crisis. The ESFR is modelled on the structured finance products of the credit boom, and is unlikely to produce long-term stability in southern European bond markets, especially once the ECB ends its bonds purchasing programme. And the Europeans may also be overestimating the state of the cyclical recovery. He concludes the crisis continues, and will continue for as long as the problems remain unresolved.
http://www.eurointelligence.com/index.php?id=581&tx_H ttnews[tt_news]=2853&tx_ttnews[backPid]=901&cHas h=8bf75d8b1a# H
250 vox261BH Research-based policy analysis and commentary from leading economists
Ending26B the scourge of dual labour markets in Europe
SamuelH Bentolila H TitoH Boeri H PierreH Cahuc H 12 July 2010
Many economists across Europe agree on the need for labour market reform. In this column economists from France, Italy, and Spain argue that while the reforms of the 1980s increased flexibility, they also led to a two-tier system with ultra-secure permanent workers and vulnerable temporary workers – increasing unemployment in the downturn. In order to complete the reform path, governments should fight dualism by making job security provisions increase smoothly as workers acquire tenure. Never before has a crisis been so concentrated on youth in a large part due to labour market dualism – i.e. situations where there is a big difference between temporary- and permanent- contract workers. During this crisis there has not only been a hiring freeze but also mass layoffs of temporary-contract workers (typically held by younger workers). As a result: • Eurozone youth unemployment climbed to 20% in May from 15% before the crisis, • in Spain 4 youngsters out of 10 participating in the labour market are unemployed, • in Italy it is one out of three, • in France and Sweden, two other countries with dual labour markets, the ratio is one in four. And the worse is yet to come – unless labour market reforms are completed. There is no time to waste if we do not want to lose an entire generation. European Governments made substantial efforts to reform labour market institutions when walking away from the Euro-sclerosis of the 1980s. During the 25 years preceding the Great Recession, there were some 200 reforms of employment protection in the EU15 countries, increasing labour market flexibility in over half of cases (fRDB-IZA 2010). One effect of these reforms is to increase employment volatility (Bentollia 2008). Employment grows more during upturns than before the reforms. This contributed to the outstanding employment performance of the EU between 1995 and 2007. Unemployment fell by one fourth, long-term unemployment halved, and 21 million new jobs were created. This is the good side of flexibility. It’s bad side has become all too clear in the recession. The responsiveness of employment to declines in output has increased markedly in reforming countries. In other words, job losses would have been lower without the reforms. But the reforms have only gone half way and it is time for governments to complete them. To achieve political viability, the reforms mostly entailed changing the rules only for new hires and introducing a wide array of new flexible, fixed-term, contractual types or expanding their scope where they already existed. There were almost no changes in rules on regular, open- ended, contracts.
251 This created two parallel labour markets – a labour market largely insulated from shocks (workers with permanent contracts) and a labour market of temporary workers, where all risks are concentrated. A striking example of this dualism is provided by the Spanish construction sector which was hit hard by the bursting of the housing bubble and the recession. In 2009, dependent employment fell by 25%, with losses of a 35% among fixed-term employees, whereas permanent workers’ real wages actually increased by some 4%. Besides raising important equity issues, this asymmetry is highly distortionary. The coexistence of strong protection of permanent jobs with temporary jobs induces an inefficient labour turnover because firms are reluctant to transform temporary jobs into permanent jobs. Temporary workers receive much less training, since neither workers nor employers see any future in their relationship. This loss of human capital formation is likely to become more acute in the years to come. Recoveries from financial crises are usually associated with a large use of temporary contracts, since uncertainty and liquidity constraints discourage firms from making long-term commitments. The experience of Japan and Sweden in the 1990s is quite revealing. Upon leaving the recession, these two countries experienced a strong rise in the share of temporary contracts, which also meant less skill acquisition at the workplace for new generations of workers. In most European countries workers on permanent contracts are strongly shielded. To give a few examples, in Italy permanent employees are protected from the start by norms forcing employers to reinstate workers in the firm in case of unfair dismissal. In France, economic dismissals are almost impossible when firms make positive profits. In Spain, economic dismissals are routinely challenged in Court, where employers lose in three- fourths of the time, so that they typically avoid going to Court by paying the worker severance at a penal rate upfront. Severance can be as high as 36 months of salary in Italy and 42 months in Spain. Court procedures are very slow and costly in all these countries. In order to complete the reform path, Governments should now fight dualism in European labour markets. Measures taken so far are far from satisfactory. For example, on 16 June the Spanish Government approved a labour market reform lowering severance payment for permanent contracts. This will not solve the problem of dualism in the Spanish labour market, however, since administrative and court procedures for dismissals still make temporary contracts attractive for firms. A better strategy is to allow for graded job security. In particular, governments could promote entrance to the permanent labour market in stages, making job security provisions increase smoothly as workers acquire tenure, with details to be defined on the basis of national legislations. By making job security provision increase smoothly with seniority, it is possible to avoid the gap between jobs with a different status, which induces inefficient labour turnover, and take into account the psychological costs associated with job loss, which are typically increasing with time in the job. Flexibility would be preserved without the need for a perverse dual labour market structure.
References263B
• fRDB-IZA (2010). fRDB-IZA H Social Reforms Database.H
• Bentolila, Samuel (2008). “LiftH the ban on Spanish labour reform”,H VoxEU.org, 28 November.
http://www.voxeu.org/index.php?q=node/5289H H
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ft.comH /H alphavilleH H All times are London time
Stressing390B Spanish banks out, with Fitch
Posted by JosephH CotterillH on Jul 13 09:30.
Here’s a late addition to FT Alphaville’s collectionH H of unofficial European bank stress tests being put out in advance of the actual certified versions on July 23.
ThisH one’s from Fitch.H The test focuses on Spanish banks’ domestic loan books — for which read the country’s crateringH H real estate market. Here’s what the rating agency tested (our emphasis): Fitch Ratings has carried out three different stress tests focusing on the Spanish banking system’s end-December 2009 domestic loan portfolio (57% of total assets). According to Fitch’s estimates, under all scenarios, the total funds available under the Fund for Orderly Bank Restructuring (FROB) of EUR99bn are more than sufficient to achieve a 6% common equity to assets ratio for the overall Spanish banking system, helped by the existence of loan impairment and other reserves of EUR68bn at end‐2009. Here are the results, in graph form (click to enlarge):
And here’s how Fitch got them:
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Fitch obtained end-2009 data on lending, foreclosed and other acquired real estate assets, loan impairment and other reserves and equity for the entire banking system and its constituents from the Bank of Spain Statistical Bulletin and its Financial Stability Report of March 2010. The agency then carried out three different stress test scenarios that comprised a base case scenario which is a reasonable estimate of what could take place, another which replicates the collapse of the Irish property sector since 2008 and, lastly, one that contemplates the decline in residential land prices in Japan between 1991 and 2005. Mutating Spain into Ireland (or Japan). Now that is stressful. However — some caveats from Fitch: At end-2009, the system’s gross domestic loan portfolio totalled EUR1,837bn, accounting for around 57% of total assets. Of this amount, around 59% was made up of mortgages. The remainder of the balance sheet largely related to foreign lending and to the fixed‐income and equity securities portfolios. The latter have increased since end-2007, in line with liquidity management needs. When stressing domestic assets, Fitch has only focused on credit losses that could derive from the system’s domestic lending exposure and foreclosed and acquired real estate assets, as these assets are more sensitive to the current sluggish economic cycle in Spain and to the collapsed domestic property sector… Fitch is not able to estimate the amount of substandard or restructured domestic loans as at end- 2009, as this information is not readily available. The amount of these loans could potentially become problematic, increasing the initial PD above the reported figure; however, Fitch assumes that these loans are included in the stressed NPL figure. And now for some caveats of our own. Fitch’s estimates of how much FROB money might be needed in extremis is indeed well within the €99bn total funds on offer — even the €57bn-odd needed to achieve 6 per cent equity to assets in the Japanese scenario. But FROB must raise amounts north of €9bn via borrowing on capital markets. As a sub-sovereign issuer, FROB’s performance there is correlated with that of Spain itself. Not the best role model at the moment. There’s also the wider uncertainty that policy over restructuring the cajas remains a multifarious mess at the moment, as Fitch itself notes: While processes appear to be speeding up, mergers have been slow as the cajas’ ownership structures are unclear and there are opposing political interests within their governing bodies. Of the 45 existing Spanish cajas, 37 are involved in 12 different processes, seven of which are outright mergers, while the remainder are integrating under an Institutional Protection Scheme mechanism (cross‐guarantee or SIP). The cajas’ de facto privatisation is also proceeding apace with new laws enabling them to issue equity to private investors, asH Ibex Salad observes.H Possibly a workable mess then. But a mess for stress- testing all the same.
Nevertheless, we’re keen for more unofficial stress-tests. For example, if only there was a crackH
German analyst H — ideally one with a fantastic forecasting record — who could take on the Landesbanks…
http://ftalphaville.ft.com/blH og/2010/07/13/283681/stressing-spanish-banks-out-with-fitch/ H
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BusinessH Day H
July 13, 2010
Financial264B Reform Bill Limps Toward Vote
By571B DAVIDH M. HERSZENHORN WASHINGTON — It was supposed to be the one major piece of legislation this year that Republicans and Democrats could see eye to eye on, and vote aye on together in broad numbers. Instead, the sweeping overhaul of the nation’s financialH regulatory system,H a response to the economic crisis of 2008, will barely squeak through the Senate. Senate Democrats on Tuesday said they had cobbled together the bare minimum of 60 votes needed to close off debate and advance to a final vote later this week. Supporters included three
Republican centrists from the Northeast, Senator ScottH Brown H of Massachusetts, SusanH Collins H of Maine and OlympiaH J. Snowe,H also of Maine. The three Republicans may be joined by others, but the bill is still certain to fall far short of the wide bipartisan majority that some Congressional leaders had predicted given the unanimous agreement among lawmakers in both parties that the rules for Wall Street needed to be rewritten. In the House, only three Republicans supported the bill. “I think it’s just the times we’re in,” said Senator ChristopherH J. Dodd,H Democrat of Connecticut and chairman of the banking committee, a main author of the legislation along with Representative BarneyH Frank,H Democrat of Massachusetts and chairman of the Financial Services Committee. With a fiercely competitive midterm election cycle under way, the shared goal of tightening regulation of the financial industry gave way to charges by Republicans that Democrats were overextending the reach of government and failing to address the root cause of the crisis by not dealing with the mortgage giants FannieH Mae H and Freddie Mac. Democrats levied countercharges that Republican Congressional leaders were more interested in blocking PresidentH Obama’sH legislative agenda and denying Democratic lawmakers the ability to boast of another achievement during the fall campaign than they were in safeguarding the financial system and protecting consumers. In the end, even lawmakers known for working across the aisle said they were perplexed — and discouraged — that the financial regulation bill ultimately did not generate wider bipartisan support. “It’s disconcerting,” Ms. Snowe said. “It doesn’t engender the kind of public confidence in an initiative of this scope without having broad support because it raises questions.” Instead of joint news conferences heralding passage of the bill, Senate leaders have bickered for weeks and engaged in protracted procedural skirmishing that delayed the measure, which Mr. Obama had hoped would be done before the Fourth of July. Mr. Obama on Tuesday declared the securing of the needed Senate votes “a breakthrough” and praised the Republicans who agreed to support the bill.
255 “Three Republican senators have put politics and partisanship aside to support this reform, and I’m grateful,” he said, adding “What members of both parties realize is that we can’t allow a financialH crisis H like this one that we just went through to happen again.” But Democrats struggled even to hold their own ranks; Senator Ben Nelson, Democrat of Nebraska, seemed to waver at the last minute, after previously voting in favor of the bill. He later announced on Tuesday that his concerns had been addressed and that he would stand with his party in delivering the needed 60 votes to close debate.
A fourth Republican who voted for an earlier version of the bill, Senator CharlesH E. Grassley H of Iowa, said in a Bloomberg television interview on Tuesday that he remained undecided. The bill seeks to avert future crises by giving government regulators the power to seize control of failing financial institutions, break them apart, sell off the assets and put them out of business, with shareholders and creditors taking losses. The legislation would create a system risk council comprising the most senior government regulators to try to identify potential dangers in the financial system. It would create a powerful consumer financial protection bureau to be housed in the Federal Reserve and would impose a new regulatory framework on the trading of derivativesH ,H the complex instruments that were at the center of the 2008 downturn.
The bill would also strengthen the SecuritiesH and Exchange Commission H by giving it new authority over creditH rating agencies,H hedge funds and privateH equity H companies.
The Senate Republican leader, MitchH McConnell H of Kentucky, said that Democrats were to blame for their unwillingness to compromise on numerous provisions in the bill, and that the legislation would still allow financial institutions to be so big and interconnected that their collapse could endanger the entire system. “I think what happened with financial regulation is the bill stayed on the far left and therefore was not in the end appealing to most of my members,” Mr. McConnell said at a news conference at the Capitol.
The Senate majority leader, HarryH Reid H of Nevada, said Republicans had turned their backs on Americans by voting against the financial regulatory bill and by blocking an extension of unemployment benefits. “Wall Street reform is preventive care; unemployment insurance is emergency care,” Mr. Reid said, adding, “I’m grateful that a few brave Republicans are doing the right thing for our country, but it’s still disappointing that you can count on one hand the number of Republicans willing to fix the system that caused the recessionH .”H A procedural vote on ending debate is scheduled for Thursday morning, and Mr. Reid expressed hope that a final vote could be held later that day. If Republicans object, he said, the vote could be scheduled for Saturday — a highly unlikely prospect in the summer of a midterm campaign year.
http://www.nytimes.com/2010/07/14/busH iness/14regulate.html?th&emc=th H
256 BusinessH Day H July 13, 2010
Financial265B Bill to Close Regulator of Fading Industry
By572B BINYAMINH APPELBAUM WASHINGTON — Congress creates federal agencies, expands them, sometimes renames or overhauls them. But it almost never gets rid of them. So perhaps the most remarkable piece of the financialH regulation H bill that Democrats hope to send the president this week is the directive to dismember and close the Office of Thrift Supervision. The decision is all the more remarkable because it cuts against the grain of a bill devoted to expanding federal regulation, and because it has had virtually no opposition, save for the obligatory protests of the agency’s senior management. The official explanation is that the agency failed to police the nation’s “thrifts,” specialists in mortgage lending better known as savingsH and loan H associations. The unspoken truth is that the agency is being buried with its industry. The desperate struggle to compete with banks and other lenders is finally winding down after death throes that have lasted three decades and helped to set off two major financial crises, in the 1980s and in 2008. The largest savings and loan associations failed or were sold for salvage during the latest crisis, including HWashington Mutual,H IndyMacH H and CountrywideH Financial.H What remains of the industry that once dominated mortgage lending are several hundred small institutions scattered across the country. Even the trade association has closed its doors.
Once PresidentH Obama H signs the bill into law — the final version must first survive a Senate vote, which may come on Thursday — the government has 18 months to distribute the agency’s work and 1,000 employees among other regulators. “Its time had come and we should not lament its passing,” said William Longbrake, a longtime industry executive now in residence at the UniversityH of Maryland’sH business school. “It’s going to be increasingly difficult to say that there’s any true thrift industry any longer.” In the 1980s, the industry still had enough friends in Congress to preserve its regulator, then called the Federal Home Loan Bank Board, after the savings and loan debacle. Lawrence D. Kaplan, a board employee, remembers going out with colleagues in 1989 to watch President
GeorgeH H. W. Bush H announce that the agency would be closed and replaced by the Office of Thrift Supervision. He remembers returning to the office to find that managers had placed a new sign by the front door. He remembers that almost nothing else changed. Congress has again chosen to preserve savings and loan associations as a separate category of financial institutions. But Mr. Kaplan said that placing the remnants of the industry under the supervision of banking regulators created a glide path for gradual assimilation. “There’s going to be a homogenization,” said Mr. Kaplan, now a lawyer at Paul Hastings. “There’s not going to be a need for the thrift charter anymore.” The housing boom that followed World War II was the golden age for S.& L.’s, thanks to a combination of economic tranquillity and legal protections that largely kept banks and other financial companies from making mortgage loans. The industry has been struggling to get back to that garden ever since. Financial markets were gradually deregulated. Interest rates started bouncing up and down. Competition was a two-
257 way street, but when savings and loan associations plunged into commercial banking in the 1980s, the result was a crisis that wiped out more than 700 institutions. But by the late 1990s, consolidation had produced a generation of supersize S.& L.’s like Washington Mutual, which boasted that it could match the scale and sophistication of large banks and mortgage companies. If the first golden age was defined by protective regulation, this new boom was defined by the freedom to lend money to almost anyone. Agency officials embraced a policy of deregulation, arguing that lenders were better equipped than the government to set appropriate boundaries. Officials urged employees to treat savings and loan associations as “customers.” “Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion,” James E. Gilleran, then the agency’s director, said during a 2004 speech in Washington. John M. Reich, Mr. Gilleran’s successor, e-mailed an acquaintance in May 2007 that he needed to cancel lunch plans so he could dine with Kerry K. Killinger, the chief executive of Washington Mutual. “He’s my largest constituent,” Mr. Reich wrote. Financial companies returned the embrace. Countrywide, the nation’s largest mortgage lender, moved under the agency’s supervision. LehmanH Brothers H and MerrillH Lynch H established S.& L. subsidiaries. At the AmericanH International Group,H the traders whose bets on mortgage-related securities eventually sank the company worked in a unit regulated by the Office of Thrift Supervision. The agency also made a general practice of embracing industry innovations, including some with the greatest risk. The Option ARM mortgage, for example, worked like a credit card. Borrowers could pay less than the balance due each month, and the remainder was simply added to the loan, with interest, until the total hit a preset limit. Moreover, lenders often did not ask borrowers to prove that they could afford the full monthly payment. One IndyMac form reminded borrowers not to provide income information. When other regulators started expressing concerns, agency officials battled to delay a rule requiring lenders to verify that borrowers could afford the full monthly payment. Countrywide later estimated in an investor presentation that the delay allowed it to make an additional $138 billion in loans. “In hindsight, I regret it,” Mr. Reich told a Senate committee in April. And the agency failed to require S.& L.’s to set aside adequate reserves to absorb losses. As borrowers defaulted, the industry imploded.
BankH of America H swallowed Countrywide. Wachovia bought Golden West, the second-largest S.& L., only to find that it, too, could not survive. The largest, Washington Mutual, became the largest failed financial institution in American history. The agency oversaw 863 savings and loan associations with total assets of almost $1.5 trillion at the beginning of 2006. By the end of this March, the total had dwindled to 757, with assets of $950 billion, reflecting the disproportionate loss of the larger institutions. The bill dictates that the agency’s 1,000 employees cannot be let go for up to four years. Most of them will be moved to the OfficeH of the Comptroller of the Currency,H which supervises national banks, where they will continue to oversee the same companies.
258 James R. Barth, a former chief economist for the Office of Thrift Supervision, said that new management would make a critical difference. Several investigations have found that agency employees flagged problems at S.& L.’s, including Washington Mutual, only to be rebuffed by supervisors. “The problem was not with the lower-level people but with the leadership of the agency,” said Mr. Barth, now a senior fellow at the Milken Institute. “We all know the story about Apple and
SteveH Jobs.H A few people at the top can make a big difference.”
http://www.nytimes.com/2010/07/14/businH ess/14thrift.html?src=me&ref=business H
YourH Money H
July 9, 2010
‘Daddy,26B Are We Rich?’ and Other Tough Questions
By573B RONH LIEBER There is nothing like an inquisitive child to make you realize just how complicated the topic of money is. That’s what I ended up thinking after my 4-year-old daughter a few weeks ago stomped her feet, turned red and demanded to know whyH we did not own a summer house.H It might have been funny if it hadn’t totally knocked the wind out of me. My wife handled it better, noting that if we had spent money on a second home, our daughter wouldn’t have been able to go to the New Orleans Jazz and Heritage Festival this year or on a beach vacation. My wife also pointed out that it was generous of our friends to share their weekend home. But it reminds me that while it may be possible to dodge the subject of money in polite adult company, there is no denying children and their often relentless follow-ups. Children ask tough questions — whether their families are rich, why they can’t have an iPodH H Touch like their friends do. So below you’ll find an introduction to five of the most difficult questions. There are many more where these came from, and we’ll be discussing them one by one in a series of posts on ourH Bucks blog H this weekend and for the rest of the month. Please join us there to improve upon anything you see below or to suggest new questions.
HOUSEHOLD INCOME HowH much money do you make?H As with any financial question, your first response ought to be, “What made you think of that?” Your children may not be looking for a number, especially if they’re young and have no context for five- or six-digit figures. They may just be worried about running out of money or wondering why you don’t live in a mansion. Also, asking the nature of the inquiry gives you time to compose yourself if you’re rendered speechless or haven’t prepared for this query.
Brent Kessel, a financialH planner H in Pacific Palisades, Calif., and the author of “It’sH Not About the Money,”H says he believes that most questions about salary spring from the schoolyard.
259 “There is so much comparison going on there,” he said. “Who is best looking? Who is most popular? And money just plugs right into that system. Who has the richest parents?” He has not yet answered his oldest child’s question directly. Why not? “The honest answer is my own fear about my son sharing it with his friends and it creating pain for them or emotional shame for their parents,” he said. “Why is Brent telling my kid that he makes that much? Does Brent’s ego really need to rub it in?” Indeed, the problem with disclosure in this context is that many younger children will immediately tell someone (or everyone). And the automatic social reflex is often a flash of shame among people who hear the number and make less, Mr. Kessel noted, or arrogance among those who make more. Who truly wants to put others in either situation? If older children persist with their questioning, try instead to use this as a lesson in budgeting.
Gary Shor, a financial planner with the AmericanH Economic Planning Group H in Watchung,
N.J., breaks down household expenses like Hmortgage H payments, electricity and food costs. He and his wife help their children add other discretionary items to the list. “They then get a sense of how much income someone needs to support this lifestyle,” he said. “We then discuss occupations that bring in that kind of income and the path to that career.”
A RICH LIFE Questions about income are often about something larger: AreH we rich?H But younger children are often merely trying to figure out a definition of the term. So you could start by suggesting one, reminding your children that they are rich if their family loves them and that they are better off in many ways than much of the world’s population. This may not work as well for teenagers, who care mostly about whether they have as much stuff as their friends. Susan Beacham, who lives in Lake Forest, Ill., and runs the educational company for children MoneyH Savvy Generation,H invited her 16-year-old daughter to sit in on a financial planning meeting with her and her husband. And her daughter’s observation at the end of that first meeting? “She said she learned that if you want to live it up later, you can’t really live it up now,” she said. In other words, if you want to be rich one day, you may have to sacrifice now. THE MOST TOYS Younger children, however, may not grasp the idea of delayed gratification when asking whyH the family doesn’t have a second car H or takeH nicer vacations.H Jonathan Katz, a father of five in Clayton, Mo., answers simply: the family is saving money so the children won’t have to borrow to pay for college. “They seem to accept this, perhaps because it tells them they are the beneficiaries,” he said. Given a particular request to return to a beloved but expensive vacation spot, David Blackburn of Montclair, N.J., stole a lesson from kindergarten class, where his son had been learning about bar charts. The two sat down and sketched out some things the boy was familiar with, including one week’s allowance ($1.25), a Lego set ($20) and sushi for the family ($60). But a night for four at the Mohonk Mountain House in New Paltz, N.Y., was so expensive that it required a few extra pieces of paper to graph it in proportion. “His eyes got big,” Mr. Blackburn said. “And he asked a lot less about going to Mohonk.” CUTTING BACK When families must make do with less, children may not be able to grasp the bigger picture, or they Hmay be frightened by it.H So how best to handle it when they ask why they can’t do things or go to places that they could just a few months ago? “Money is very abstract to kids, and you have to make it concrete,” said
260 Ms. Beacham. “Yes, mom lost her job, but it doesn’t mean we won’t have groceries. It may mean we won’t eat out.” With older children, you might involve them, letting them choose where to scale back or asking for help planning a vacation that costs half of last year’s. “A lot of parents just try to take care of it for them,” Ms. Beacham said, simply making arrangements without consulting the children or explaining the decisions. THAT SUMMER HOME While my wife and I managed to placate our daughter, those of you who own second homes may be faced with far more complicated questions from older children. Doug Garr, who lives in Manhattan, said that once his son was old enough to understand that the family had two homes, his son suggested giving one to a homeless person. “His logic was sound,” Mr. Garr recalled. “Why should we live in two homes when so many live in none? I had no answer for that one.” Or your child may wonder why you have twice the home you need. Kevin Salwen and his wife were so taken by their daughter’s conviction in this particular matter that their family of four decided to sell their 6,500-square-foot home. They bought a new one less than half the size and are giving away about $850,000, more than the price difference between the homes. And what if your child gets an idea like that? If you’re not ready to uproot, encourage them to think of other things they can give. “We never encourage anybody to sell their house,” said Mr.
Salwen, who wrote a book with his daughter called “TheH Power of Half”H about the family’s experience. “That was just the thing that we had more than enough of. For others it may be time, or lattes or iTunes downloads or clothes in their closet. But everyone has more than enough of something.”
http://www.nytimes.com/2010/07/10/your-mH oney/10money.html?src=me&ref=business H
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Obama nominates Lew to head Office of Management and Budget By Anne E. Kornblut and Ed O'Keefe Washington Post Staff Writer Wednesday, July 14, 2010; A03 President Obama named Jacob Lew on Tuesday as his nominee to head the Office of Management and Budget. Lew, who will replace Peter Orszag, held the same job in the Clinton administration, and Obama praised him for helping to balance the federal budget in the 1990s. He "handed the next administration a record $236 billion budget surplus," the president said, and called on his new appointee to "use his extraordinary skill and experience to cut down that deficit and put our nation back on a fiscally responsible path." In choosing Lew, an official at the State Department and a favorite of Secretary of State Hillary Rodham Clinton, Obama also accelerated a personnel shuffle. Clinton and other senior State Department officials had resisted the move for weeks. Obama acknowledged this in his remarks, joking that he "had to trade a number of Number One draft picks" to get Clinton to release Lew. Lew, 54, known as Jack, has a long Washington résumé. A lawyer who served as an adviser to House Speaker Tip O'Neill (D-Mass.), he went on to various government posts. He helped launch President Clinton's AmeriCorps public service program before joining the OMB in 1994, and served as the agency's director from 1998 until the end of the Clinton administration. He currently serves as deputy secretary of state for management and resources, a post with a large portfolio and access to Secretary Clinton. Among other things, Lew has helped to manage the State Department's policies in Afghanistan, a big push in aid to Pakistan and the transition to civilian control in Iraq. Widely admired as a manager and policy wonk, Lew is expected to win easy Senate confirmation. Secretary Clinton, in a letter to State Department employees on Tuesday, described her deputy's appointment as "bittersweet." She wrote, "While I was hoping never to have to replace Jack, the President and our country need his leadership at OMB." Senators may ask Lew about his pay package from Citigroup, where he served as an executive between his stints in the Clinton and Obama administrations. He received $1.1 million in salary and discretionary cash compensation in 2008 as a managing director of the banking giant -- which took tens of millions of dollars in government bailout money -- and he earned hundreds of thousands of dollars in restricted stock upon his departure, documents show. In the job of OMB chief, Lew would be responsible for drawing up a budget plan by February to reduce the federal deficit to 3 percent of the size of the economy by 2015. The current deficit is $1.3 trillion -- more than 9 percent of the economy. To meet the goal, he probably would have to entertain the possibilities of tax increases and cuts to popular entitlement programs such as Social Security and Medicare. His job would be made more difficult by Obama's 2008 promises not to raise taxes on families making less than $250,000 a year. The president has also proposed making permanent a series
262 of tax cuts enacted during the George W. Bush administration, which otherwise would expire at the end of this year, and preventing the alternative minimum tax from hitting millions of additional taxpayers. The administration has yet to show how it can reach the 3 percent target. Under the budget plan Obama announced in February, the federal deficit would sink to no lower than 3.9 percent of the economy over the next 10 years and begin to rise again by 2020. Indeed, just hours after Obama nominated Lew, the Treasury Department reported that the deficit had topped $1 trillion -- with three months left in the budget year. The Congressional Budget Office has said that letting the Bush taxes expire, and finding a way to pay for the changes to the alternative minimum tax, would get the administration close to its goal. A year and a half into Obama's term, the pace of turnover has started to speed up, either through firings or normal attrition. Many more openings are expected by the end of the year, including on the economic team. Some officials said it is possible that Lawrence H. Summers, director of the National Economic Council, and Christina Romer, chairman of the Council of Economic Advisers, could decide to leave before next year. Elsewhere in the administration -- from the NSC to the political staff to the cabinet agencies -- officials expect to see further departures after November's midterm elections. It is unclear who will replace Lew at the State Department, officials said. His confirmation hearings will probably occur in the fall, with an acting OMB director running the budget process until then. Staff writers Karen DeYoung and David Cho contributed to this report.
http://www.washingtonpost.com/wp-H dyn/content/article/2010/07/13/AR2010071302611.html?wpisrc=nl_headline H
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China hopes social safety net will push its citizens to consume more, save less By Keith B. Richburg Washington Post Staff Writer Wednesday, July 14, 2010; A10 HOULIANG VILLAGE, CHINA -- Ninety-year-old Li Jian fought with his local militia on the Communist side in the 1940s civil war and later volunteered to fight in Korea. "I contributed so much for the country," he said. But he added, with just a hint of bitterness, "The government never took care of me." That is, until now. In January, Li received his first pension payment -- about $40 for five months -- and he gets $7.38 more in monthly welfare payments because he is so poor. It's not much, he said, but it buys him cigarettes and the occasional drink. This is China's version of the welfare state, an expanding web of programs designed to help the sick, the elderly, the poor and the unemployed. Aside from the individual benefits, there is a larger economic imperative to the new social programs. The country's leaders want to persuade Chinese citizens to spend more and save less, a goal that analysts say could be achieved if the government provided a safety net. Increasing domestic consumption would decrease China's reliance on the American and European export markets for its growth -- a goal also being pushed by Washington and China's other Western trading partners. The key reason Chinese save so much and consume so little, experts say, is because without dependable government payments, they need to sock away money for the future -- for medical emergencies, for children's educational expenses, as a guarantee against a job loss or to help elderly parents. "When a person has no medical insurance, unemployment insurance or endowment insurance, how can that person dare spend all their money?" said Tang Jun, a sociology researcher with the China Academy of Social Sciences. "The Chinese people are a nationality that likes saving money. . . . Ordinary people will only feel relieved about consuming if they don't have to worry about not having money when they get old and not having money to go to the hospital."
264 In the past three decades, since China's great leap into capitalism smashed the old socialist concept of the "iron rice bowl," poor farmers such as Li scrimped by on society's margins -- bypassed by China's growing prosperity and without the helping hand of the state. Lacking any social safety net, the rural poor relied on meager savings and the generosity of their children, who often worked as migrant laborers in the towns. President Hu Jintao and Premier Wen Jiabao, who came to office in 2003, have made the catchphrase of their tenure "social harmony," which most often means closing the yawning income gap between the cities and rural areas, providing wider access to health care and education, and assisting those left behind by China's breakneck economic growth. As part of that effort, the government has taken in recent years its first steps toward weaving together a social safety net that includes, for the first time, pensions and medical insurance covering 830 million farmers, expanded unemployment insurance and direct cash payments -- known as a "dibao" -- for the poorest of the poor. Last year, the government put $9 billion into the dibao system, nearly a 70 percent increase over the previous year. 'The future is uncertain' Analysts say the programs are too new, and the amounts spent too meager, to show any discernable effect in spending habits. But rural spending has ticked up slightly in China mainly because of incentives in the government's stimulus package, including a lower value added tax in the countryside and programs to allow rural residents to buy new appliances at reduced prices. The government wants to create a domestic market for its products to reduce reliance on exports and create a sustainable pattern for future growth. Many of the programs are in the pilot stage. Here in Hebei province, some farmers said they began paying into the medical insurance fund only this year. Although government assistance is popular, there is some wariness about whether it will last and whether the benefits will be distributed fairly. Besides, the culture of relying on self and family is deeply ingrained. "I'm still healthy," said Li, sturdy despite his years. "I still need to farm and sell food to make a living. . . . My family treats me well -- what else do I need?" Li's daughter-in-law, Zhang Yuxia, 52, agreed. "Right now, we try to do more work and save more money," she said. "In the future, I think we have to rely on our kids. In China, you cannot predict the government very well. The future is uncertain. It's more reliable if we depend on ourselves." Their village, Houliang, is in Luanping county, rated one of China's poorest. It is just 93 miles, but a world away, from the skyscrapers and shopping malls of Beijing. Many of the young men from this area go to work on the construction sites in China's big cities. Houliang and villages like it are filled with women, the elderly and small children. Wen, the premier, visited this county in 2000 and 2005 and again in January, returning each time to the same village, Pianqiao. During the National People's Congress in March, Wen suggested that journalists visit the area, saying, "You'll learn that the development of Beijing and Shanghai cannot represent the whole China." Su Hongxi, 69, met Wen on each of his visits to Pianqiao, the first coming when Su was the village's Communist Party chief. Su said he appreciates the reforms, including the new pension money he began collecting this year. But, he said, "right now, the money is not enough. I hope the government can increase the pension a little bit. . . . The changes have happened on the surface. There's been no real change in life." 'A long way to go'
265 Economists and other experts said establishing a social safety net will become essential for China down the line because of a rapidly aging population, the existence of fewer children to support their parents due to the "one child" family planning policy and the migration of younger Chinese to the cities. "The family protection function is going to be weakened," said Tang, the researcher at the China Academy of Social Sciences. "For the old in the countryside, they can no longer depend on the family support." Still, experts said it will be a long time before China's social system approaches the level that is needed. "For years, the government was absent in taking care of the weak groups," said Han Keqing, an assistant professor at Renmin University. "The increasing investment in the rural social security system demonstrates that the government realized the farmers should not be ignored." But he added, "There is still a long way to go." Researcher Zhang Jie in Beijing contributed to this report. Keith B. Richburg China hopes social safety net will push its citizens to consume more, save less July 14,
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Government gets a jump on preparing for regulatory overhaul By Brady Dennis Washington Post Staff Writer Wednesday, July 14, 2010; A15 Administration officials and federal regulators quietly began laying the groundwork to implement the far-reaching measures in the 2,300-page regulatory overhaul legislation weeks ago, even though the bill has not yet cleared Congress. The Senate moved to hold a vote on Thursday, and the bill, with support from three Republicans, now seems all but certain to become law. The House already approved the package, meaning that within days the focus will shift to the mountain of work needed to transform thousands of pages of legislative text into regulatory reality. "It's like taking the elephants over the Alps -- it's on that order of magnitude in terms of the task in front of all the regulators," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a Washington research firm. Even disregarding the ongoing debate about whether the bill will rein in the recklessness and regulatory failures that led to the financial crisis, she said, "the immutable fact is that a lot has got to change." Consumer protection One central example is the creation of a Consumer Financial Protection Bureau within the Federal Reserve, which the bill states must be up and running within a year. The new regulator, which would have autonomy to write and enforce rules aimed at protecting borrowers from lending abuses, will have to hire a sea of federal employees and gather hundreds of millions in funding from the Fed's coffers. Administration officials have held preliminary discussions over whom the president could appoint to the powerful post to lead the agency. The new director would be "authorized to employ attorneys, compliance examiners, compliance supervision analysts, economists, statisticians, and other employees as may be deemed necessary to conduct the business of the bureau." Separate offices must be created to deal with issues affecting women, minorities, military families and senior citizens. The bill also calls for an Office of Financial Education "to educate and empower consumers to make better informed financial decisions." Even small decisions will consume time -- from the endless details of office furniture to setting up phone and computer systems. The flurry of activity over the consumer bureau represents just a hint of the bustle to come. The bill orders officials to dissolve the Office of Thrift Supervision and merge its responsibilities into the Office of the Comptroller of the Currency -- both agencies with sizable workforces. It mandates the government to set up new oversight of the vast financial derivatives market, and it calls for a new council of top regulators to monitor risks to the financial system. In addition, it requires regulators to bring on staff who can help to wind down failing financial firms. These officials will also have to conduct dozens
267 of new studies, from possible curbs on short sales of stock to how much cash reserves large nonbank financial companies should hold. Securities and Exchange Commission spokesman John Nester said agency officials "have already begun preparing for the many rulemakings, studies and other responsibilities that would be required by the law." At the OTS and OCC, "we have a working group of senior managers from both agencies that have begun to discuss the merger," said OCC spokesman Robert Garsson.
"We've been doing internal planning to prepare for the passage of the legislation," said SheilaH
C. Bair,H chairman of the Federal Deposit Insurance Corp., who plans to put in place the capability for the agency to wind down the AIGs and Lehman Brothers of the world next time around, if necessary. "As soon as the bill becomes law," she said, "we will be moving to hire additional staff with expertise in investment banking, broker dealers and the insurance business, because a lot of the affiliated activity in these larger financial organizations involves that." In addition, the bill will require some of the largest, most interconnected financial firms to create "living wills" that essentially detail how they would be liquidated in the event of a crisis without crashing the financial system. FDIC officials already have been contemplating the guidelines for what kind of information those wills should include. "That will be ongoing," Bair said. "There will have to be real-time monitoring and updating of the living wills; that will be another important function that will keep our staff busy." Implementing rules Some of the same people who helped shape the legislation over the past year are in line to oversee its implementation. At Treasury, Deputy Secretary NealH Wolin H and MichaelH Barr,H an assistant secretary, are expected to spearhead many of those efforts.
Even though work to implement new rules has already begun, PresidentH Obama H on Tuesday urged the Senate to act quickly. "It will end an era of irresponsibility that led to the loss of 8 million jobs and trillions of dollars of wealth," Obama said. "This reform is good for families; it's good for businesses; it's good for the entire economy."
At least three Senate Republicans have pledged their support for the bill, giving MajorityH
Leader Harry M. Reid H (D-Nev.) confidence that he has the 60 votes needed to overcome a filibusterH H and prompting him to push for a final vote Thursday morning. "We're going to make sure big bankers can never again gamble away our future," Reid said. "We're going to make sure that there's not a next time."
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268 07/13/2010 01:08 PM
The267B 'Mannschaft' at The World Cup
Ambassadors391B of a New Germany An essay by Alexander Osang In South Africa, the German national team surprised the world by playing unusually attractive football. With their flair, selfless team spirit and different ethnic backgrounds, they were ambassadors of a new Germany. Two weeks ago, shortly before midnight in Durban, where Germany would later lose to Spain, I encountered two white men and a black woman in a hotel elevator. The two men were wearing England jerseys, and the woman was scantily clad. It had been a long day of football, and the Englishmen had apparently started drinking beer early on. That day, I had watched the Netherlands wrestle down Slovakia at the magnificent stadium in Durban, and I later saw Brazil defeat Chile in the fan park on the beach. I was ready for bed. The trio in the elevator couldn't decide whether to get off or stay on. Finally, one of the men jumped out and pulled the woman with him, while the second man and I continued riding the elevator upward. He was teetering precariously and fell on his backpack between the third and fourth floors. "Where are you from?" he asked from his position on the floor. "Germany," I replied. "Sorry, I know it was a goal." "Oh, to hell with the goal," the man said. "Your guys were better. Faster. We brought along a bunch of slow, lazy stars. Terry, Lampard. They're not that enthusiastic anymore. Your guys were really good. I don't know how you did it. But it was really very good." "Thanks," I said, as I got off on my floor. "Muller, Osssil, bloody hell, damn good guys," the man said as the doors closed. He was still sitting on his backpack, smiling. I didn't have the impression that he knew where he was supposed to go from there, but he didn't seem unhappy. A disoriented, drunk Englishman who had found a moment of solace in new German football. It wasn't exactly something you would have expected. And Germany hadn't even beaten Argentina 4:0 yet. I have lost count of the hotel employees, fans sitting next to me in stadiums, TV commentators and taxi drivers who have congratulated me on German football in those last weeks in South Africa, struggling with hard-to-pronounce names like Bastian Schweinsteiger and Miroslav Klose, and smiling ecstatically and admiringly. At times, I felt like I had become a new, lighter human being. Two months earlier, in a different football era, Michael Becker, Michael Ballack's manager, told me how many German players are supposedly gay. We were sitting in a restaurant above the Mercedes dealership in Luxembourg, where Becker lives. The advantage of coming to this particular restaurant, Becker said, is that you can have your car washed while you eat. He seemed to be in a good mood, and he had every reason to be. The food was good, the sun was shining, and we had come to the restaurant in his Mercedes convertible, with the top down, driving through quiet streets. Ballack, his most important client, had just found his way back into the first choice line-up at Chelsea FC, he had slipped into Pierce Brosnan's role in a L'Oréal commercial, his smiling face was plastered all over German train stations, and in the American magazine Vanity Fair's World Cup issue, Ballack was chosen as the German player to be photographed in his underwear -- in Germany's national colors -- next to the likes of Cristiano Ronaldo, Kaká, Drogba and Eto'o. Ballack was Germany's undisputed captain. He
269 was also the only star we had out there in the world. Nevertheless, Becker seemed to think that it was all too good to be true. He talked a lot about people who were envious of his client, because they were supposedly mediocre, ugly, untalented, bureaucratic, provincial, unmanly or gay. He told me some unbelievable stories, which I wrote down on my pad of paper. Becker didn't seem to mind, perhaps because he assumed that they would never make it into print anyway, or that they were already common knowledge. A few days later, on the sidelines of a farewell match for footballer Bernd Schneider at Bayer Leverkusen, Becker told a group of agents and journalists in the Bayer clubhouse that there was a former player on the national team who was about to go public with the names of "the gay combo." I expected my fellow journalists to be all ears, but they seemed relatively blasé about Becker's remark. It seemed that every sports journalist was already familiar with the alleged homosexual conspiracy swirling around German coach Joachim Löw's team. The rumors accompanied the team to South Africa. They are apparently part of the package. A New Lightness After lunch, Becker showed me his office, his house and his garden, where he has been trying for some time, albeit unsuccessfully, to build a frog pond. He told me, beaming, how Elton John had sung the German national anthem at Ballack's wedding. When I asked him whether he thought that a player whose nomination to the team had come as something of a surprise was gay, Becker said: "He's half-gay." When he said that, I realized that all of this was somehow synonymous with something Becker could no longer understand. It was something that was light, non-ideological, dance-like, beautiful, joyful, and easily confusing for someone whose life had revolved around pecking orders and hierarchies until then. Ballack is the last star Becker is still managing, and he clings to him the way some people cling to time. And even though he didn't even play in the World Cup, or perhaps precisely because he wasn't there, Ballack's story is emblematic of what happened to the German team in the last four weeks. Ballack has become a transitional figure. This isn't just the fault of his manager, Becker, but also of the old grumblers in German football, the likes of Paul Breitner and Günter Netzer and Udo Lattek, who were constantly demanding that Ballack show leadership. At first, Ballack thought that playing well was good enough, and he did play well. He led the German team through two World Cups and European Championships, he scored important goals, he sacrificed himself and he became the face of German football around the world. But at some point, probably when he had lost some of his strength and influence, the messages coming from the old men got through to him, and he began acting out his leadership role. He shouted and threw fits on the field, and he argued with team manager Oliver Bierhoff and fellow player Lukas Podolski. He continued to fight and score important goals, but at times he came across as an old bull reminding younger players that things weren't that bad in the old days. This became the most apparent when he injured himself. Now he was a captain without a team, and he tried to behave accordingly. With a plaster cast on his foot, he traveled to the team's training camp in Sicily, because he felt that it was expected of him, as Capitano. But at the training camp they were already discussing his replacement. From Sicily, Ballack went to Mallorca to appear on the popular game show "Wetten, dass…?" ("Wanna Bet") with TV show host Thomas Gottschalk and entertainer Dieter Bohlen. He seemed lost in his sky-blue jacket and with his foot in a cast, a symbol of something, but of what? No one was quite sure. A few days later, the German national team routed Australia in a World Cup qualifying match, and fans got a sense of what was to come when they saw Thomas Müller in the thick of it,
270 wearing Ballack's jersey number and scoring a goal. At a press conference after the match, someone asked him why he had picked the number 13, of all numbers. "It happened to be available," Müller said, and laughed. Then he said that he was completely aware of the tradition he had become part of, and that it was naturally a great honor for him. But he was referring to Gerd Müller, the legendary striker of the 1960s and 1970s, not Michael Ballack. He had never seen Gerd Müller play live, he said, but he thought he was pretty good. Müller is 20. Only two weeks later, in the match against England, the new number 13 scored twice and was voted player of the match. By that point, it seemed clear that the team wasH doing just fine without Ballack. H The Birth of New German Football The match against England seemed like the birth of a new German football. Australia didn't really count, and then the German team fought its way through two tough matches against Serbia and Ghana, but then came England, an encounter always burdened with a history of blood, sweat and excitement, and Germany seemed like a fresh wind. The Germans were lucky that Lampard's goal didn't count, but they weren't interested in luck. They were relentless, attacking and scoring goals until, in the end no one, with the exception of England's sour-faced manager Fabio Capello, was talking about the goal that didn't happen, but about the Germans, who didn't seem German at all anymore. There was something soothing and liberating about watching this team play, and it was even more soothing and liberating to see the expressions of joy on the players' faces. They embraced each other when Klose, who had been out of form all season at Bayern Munich, finally scored a goal again in the first World Cup match, and the team hugged him as if he had just recovered from a long, serious illness. Klose later said that Podolski wouldn't let him go -- and that it was a nice feeling. They all seemed like boys having a fantastic time on a school outing. Löw thanked the players he substituted, and they thanked him, an act that was not a gesture but an expression of need. Everyone trusted everyone else. The most German of feelings that this team triggered was romanticism. In odd, touching moments, the team's management seemed intent on proving that it was still very German. National coach Joachim Löw explained stiffly how proud the players whose families came from faraway countries were to wear the German eagle on their chests. He seemed to be reading a prepared statement, just as Philipp Lahm had read FIFA's message against racism. Löw kept talking about "automatic" moves " and "hard work," and that the apparent ease with which the German team was playing didn't exactly drop into one's lap. Team manager Oliver Bierhoff explained that the way in which the players celebrated their performance also had something to do with the fact that each player was happy to be part of this German team. No one, he said, was just out to score goals for himself. Instead, they behaved as a collective and were aware that they were embodying their nation here. Fairness, openness and precision, Bierhoff said, these are some of the things Germany represents. He also said that the players, unlike players in the past, folded their things together neatly after training sessions and didn't simply throw them on the floor for the kit manager to untangle afterwards. Of course, he added, still hopelessly entangled in German virtues, it wasn't something that had been instilled in them through military discipline. And when team captain Lahm tried to think of a typically German way to characterize his team's quick passing, he came up with "goal-oriented." Of course, traditional German football was also in evidence. Former player and coach Thomas Berthold sat in a South African television studio, his hair parted with military precision, and warned of the German defense's lack of experience. In the team headquarters, the general secretary of the German Football Federation (DFB), Wolfgang Niersbach, told me that he
271 became suspicious when the team doctors told him how low-maintenance the German team was. Low-maintenance was all very well and good, he added, but players need elbows, too. And after the match against England, former player Lothar Matthäus told me, without being asked, how he would have defeated the Germans if he had been England's coach. The voices of traditional German football were there, but they were mostly drowned out in all the excitement. Miracle Match Against Argentina After the match against Argentina, even Löw was at a loss for words to describe what he had just seen. He seemed as if he had just witnessed a miracle. He was no longer using words like hard work and training, and instead raved about the team's amazing world-class performance, about how it deserved to win the World Cup and about Schweinsteiger, who had played outstandingly. When the chancellor, who had danced and clapped in the stands, went into the locker room to congratulate the players, she was as light-hearted as the rest of us. The fun- loving South African president, Jacob Zuma, looked as if he were afraid she would jump into his lap at any moment. "Antschela," Löw said in his trademark Swabian accent, smiling with a faraway look in his eyes, everyone is happy to see you, "Antschela." There was nothing smarmy and certainly nothing political about his words. It was more like the Queen Mum attending the match -- a mascot. Ballack also attended the Argentina match, but the comments about him sounded more distant. Of course they were happy that Michael was watching the match and cheering them on, Schweinsteiger said, but they just didn't have much time for him, he added, given that they were in the middle of a tournament. Ballack sat in the stands next to Bierhoff, like some VIP guest of the DFB top brass. He cheered whenever the German team scored a goal, but once, between Germany's third and fourth goal, a stadium camera zoomed in on his face, and he looked very serious. He left two days later. There was some medical explanation, but everyone realized how difficult it must have been for him to watch his overjoyed teammates without truly being part of it all. Even Kevin-Prince Boateng, who was once treated as a public enemy after he tackled Ballack, ruining the captain's chances of playing in the World Cup, was now a World Cup hero. The only thing Ballack had to look forward to was playing at Leverkusen next season. By this point, none of the players who had been photographed in their underwear in Vanity Fair was still in the tournament. The four teams remaining in the World Cup were the ones that, in addition to Ghana, had played most obviously as teams. The Uruguayans didn't play as if they came from South America, the Spaniards played like Barcelona, the Netherlands played like Germany and Germany played like the Netherlands. The South African newspapers referred to the "German machine" that defeated England and then Argentina. But it didn't sound disparaging. The German machine was no longer a steam engine or a bulldozer, but more like a sewing machine or one of those devices that uniformly spits out tennis balls at high speeds. At the height of the German team's self-confident ease, Schweinsteiger, who had been named "Man of the Match" in the match against Argentina, said that he and his teammates hoped to play Spain next. They were no longer interested in excuses, or in just muddling through. Now they wanted to defeat the favorite. When goalkeeper Manuel Neuer was asked whether he wanted to switch to Manchester United, he said: "Nah, I have a contract with Schalke." By this point, there was no longer any good reason to leave the Bundesliga. Germany had a future. A short time later, Philipp Lahm told us that he didn't want to give up the captain's armband after the World Cup. He liked being captain, he said, and he liked having the responsibility. In that moment, it sounded self-evident, not presumptuous. But a single match can change everything.
272 Defeated by Their Own Ideals
The Germans stood their ground for a long time, but in the end theH Spanish sewing machine simply rattled along more perfectly. H It was reassuring to see how the expression on Löw's face reflected both his disappointment over the German defeat and his admiration for the Spaniards' game. It is, after all, what he wants. He was defeated by his own ideals. His team still behaved like a team after the match. The veterans Schweinsteiger, Podolski, Klose and Lahm faced the press while the despondent newcomers behind them skulked silently to the bus. The new German men, Neuer, Özil, Khedira, Kroos and Boateng, looked like schoolboys. Only Thomas Müller, who had been suspended before the game against Spain, stood still for a moment. How do you feel, someone asked. "Like shit," Müller replied. Shortly after midnight, I was standing with a few colleagues in a guesthouse in Durban, where we were spending the night. We could see the stadium off in the distance, and behind it the Indian Ocean. The other journalists speculated on what the next day's story would be. We talked about Khedira, who was no match for the Spaniards, about Friedrich, who lost the ball too often, about Lahm, whose passes never got where they were supposed to go, and about Özil, who lacked the confidence to shoot at key moments. Before long, Ballack was on everyone's mind once again. Someone said that the Germans also need a player who's capable of kicking somebody once in a while. I could just imagine what was going through the heads of Thomas Berthold, Lother Matthäus, General Secretary Niersbach and Michael Becker at that moment. At the German press conference the next day, there was a lot of talk, once again, about hard work and not as much about the ease with which the Germans had played. The journalists were mostly interested in their return flight options and in the question of whether Lahm, with his comments about being the captain, hadn't gotten ahead of himself after all. The name that was mentioned most was that of Michael Ballack. A fellow journalist said openly that it was a good thing that Lahm showed strength, but that it wasn't such a good idea to show it before the game against Spain. It seemed as if Lahm had sat down on Stalin's chair in the Politburo, a chair that was supposed to remain vacant after the dictator's death. When he gave news conferences, Lahm looked more like a school class spokesman than a German captain. For a moment, everything that had been so romantic about the German team had evaporated. The beauty, the ease, the dance-like quality suddenly belonged to the Spaniards. It isn't easy to be a new German man, but it certainly plays well in the rest of the world. Translated from the German by Christopher Sultan
URL:510B
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273 http://www.project-H syndicate.org/commentary/eichengreen19/Spanish
Mentirillas268B y disparates fiscales
Barry392BH Eichengreen 2010-07-13
BERKELEY – En todo el mundo, el debate sobre la consolidación fiscal tiene el sonido distintivo de dos voces que se superponen entre sí. Una de las voces es la de aquellos que insisten en que los gobiernos deben tomar medidas ahora mismo, a cualquier costo, para controlar los déficits presupuestarios. Llevar las finanzas públicas a una situación sostenible, arguyen, es esencial para tranquilizar a los mercados financieros. Si se realizan esfuerzos concertados para equilibrar los presupuestos, se fomentará la confianza. Y si se restablece la confianza, el consumo y la inversión aumentarán. Desde este punto de vista, reducir los déficits será una medida expansionaria. Como prueba de que esto no se trata simplemente de una posibilidad hipotética, los defensores de la consolidación fiscal señalan casos como el de Dinamarca a principios de los años 1980, Irlanda a fines de los años 1980 y Finlandia en los años 1990. Del otro lado están los que insisten en que sigue siendo necesario un mayor gasto público para respaldar la demanda. El gasto privado es aún débil, mucho más donde un alto desempleo persistente ha llevado a los consumidores, preocupados por sus perspectivas futuras, a guardar sus billeteras en el bolsillo. Es más, objetan los críticos, la evidencia en respaldo de las consolidaciones fiscales expansionarias es errónea. En cada caso en que la consolidación supuestamente fue expansionaría, la economía creció por algún tercer factor. Dinamarca creció, a pesar de los recortes fiscales, porque las tasas de interés, en un principio de dos dígitos, cayeron. Irlanda y Finlandia crecieron, a pesar de los recortes fiscales, porque el tipo de cambio cayó marcadamente, alentando las exportaciones. La economía mundial hoy, desesperada como está por la demanda, no puede recurrir a ninguno de los dos mecanismos. Las tasas de interés en muchos países ya son prácticamente de cero. Y todos los países no pueden depreciar sus tipos de cambio al mismo tiempo.
274 ¿Quién tiene razón entonces? Consideremos la siguiente imagen: consumidores e inversores como pasajeros en un auto precipitándose directamente hacia una pared de ladrillos. En este caso, el conductor que pone el pie en el freno les dará a los pasajeros mayor confianza. Aquí, los pasajeros factibles son las empresas del sur de Europa. Ellas entienden que las posiciones fiscales de sus países no son sustentables. Saben que el impago de la deuda sería perjudicial. Al ver la economía precipitarse hacia una pared de ladrillos, contienen la respiración colectiva, mientas que la evidencia de que el gobierno habla en serio cuando pone el pie en el freno puede inducirlas a exhalar. En este caso, es probable que la consolidación fiscal afecte su gasto de inversión de manera positiva. Esto no implica que Grecia, Portugal y España se vayan a expandir de manera robusta como lo hicieron Dinamarca, Irlanda y Finlandia en los años 1980 y 1990. No pueden bajar el tipo de cambio para favorecer las exportaciones. Pero pueden reducir las tasas de interés si eliminan el riesgo percibido de un impago soberano. Los bancos podrán pedirse dinero prestado mutuamente por menos, y así podrán prestarles a las firmas por menos. Esto sugiere que la inversión puede responder mejor de lo que temen los pesimistas. Ahora bien, lo que podría funcionar en el sur de Europa no tiene posibilidades de funcionar en otras partes. En otras economías del G-20, entre ellas Estados Unidos, Alemania, China y Japón, el auto sigue circulando a velocidad crucero por un camino despejado. La velocidad fiscal puede ser considerable –es decir, los déficits pueden ser grandes-, pero no existe ninguna evidencia de una pared de ladrillos por delante. Las tasas de interés sobre la deuda gubernamental siguen estando bajas. Si los pasajeros empezaran a intranquilizarse, éstas aumentarían. En este momento, no están intranquilos. En estos países, no existe por lo tanto ninguna razón para pensar que la consolidación fiscal tendría un marcado efecto positivo en la confianza. Esa posibilidad podría plantearse en algún momento del futuro, cuando la proverbial pared de ladrillos apareciera a la vista. Pero todavía no se la vislumbra en el horizonte, lo que significa que no habría ninguna respuesta positiva del gasto privado para amortiguar los recortes del gasto público. En consecuencia, los recortes presupuestarios serían marcadamente contradictorios. Finalmente, existen los casos fronterizos, como Gran Bretaña. El ministro de Economía y Hacienda, George Osborne, insiste en que la trayectoria fiscal de su país es peligrosamente insostenible, y ha propuesto recortes draconianos. Otros están marcadamente en desacuerdo y observan el nivel persistentemente bajo de las tasas de interés, y el hecho de que incluso bajo el programa del gobierno anterior ya se calculaba que los costos de endeudamiento netos caerían en aproximadamente dos tercios entre 2010-11 y 2014-15. Es casi como si los gobiernos como el de Gran Bretaña estuvieran intentando manipular al sector privado y hacerle creer que las condiciones severas necesarias para una consolidación fiscal expansionaria ya se cumplieron. Es como si intentaran aterrorizar al sector privado, de manera que cuando caiga realmente el hacha fiscal, consumidores e inversores se sientan tan aliviados de que el desastre se haya evitado que decidan aumentar el gasto. Si fuera así, los líderes están jugando un juego peligroso que depende de fomentar un mayor gasto futuro alentando a los consumidores y a los inversores ahora, al mismo tiempo que se deprime el gasto real justo cuando se lo necesita con más urgencia. O tal vez los políticos no creen en nada de todo esto y simplemente intentan recortar el gasto por motivos ideológicos, sin pensar en las consecuencias económicas. ¿Pero quién sería tan cínico de creer eso?
http://www.project-syndicate.org/H commentary/eichengreen19/Spanish H
275 Eye on the Market, July 13, 2010 Topics: The 5 best things about the Flash Crash All eyes are on European bank stress tests, which will be released on July 23. After their release, our European head strategist Cesar Perez and I will take a look at the results. For European banks, it could serve as an important inflection point; for U.S. banks, the test results marked the bottom. But in the U.S., the tests incorporated loss assumptions that were even more severe than losses realized during the worst stretch of the 1930’s Depression, and also came at a time when the global recovery in production was just getting underway. Given the size of the European system, reliance on wholesale funding, slower trend growth and higher levels of corporate and household debt, stress tests will have to be credible to prompt money market and bond funds to start providing capital again. Our focus will be on the rigor of loss and GDP growth assumptions; recently announced decisions to expand the tests to more banks should be seen as a “given”.
The 5 best things about the Flash Crash
On May 6 2010, major U.S. market indices dropped by over 9%, with a 7% decline within one 15-minute span, temporarily evaporating $1 trillion in market capitalization, before recovering. The SEC has not yet determined what caused this event. In their examinations, the SEC is dealing with a world that has changed a lot from the traditional floor-based outcry
276 model; the percentage of total volumes executed by floor brokers and specialists fell from 52% in 1999 to 7.5% as of 2007. That’s why the Flash Crash discussion includes a focus on high-frequency trading. Market research estimates that HFT has grown in the U.S. to 70% of all trades (50%-60% of shares traded). In Japan, HFT is roughly 30% of all trading, and in Europe, 40%. The broad category of HFT includes funds that employ algorithms to arbitrage away market variances (e.g., between exchange traded funds and their component stocks), a benign and helpful function for markets. Other HFTs track the order flow of other participants to both influence and benefit from it, which engenders a lot more debate. There’s a postmodern temptation to define all forms of innovation as progress, but there are big differences between the two. One example: while some forms of genetic engineering are possible, they may also be very undesirable. The downside to some innovation only becomes apparent over time (overuse of antibiotics which may lead to the survival of more virulent strains of bacteria; species transplantation that cause disastrous side-effects for local populations). Some derivatives activity (e.g., CDO-cubed) ended up being innovations with strongly negative aftershocks. You do not have to be a Luddite to raise questions about undesired consequences of innovation, particularly when financial services are involved. The debate is not about reversing innovation in electronic trading, but making adjustments along the way. Why do we care about all of this? As fiduciaries for several hundred billion dollars in client assets, we are very focused on issues that either raise or detract from market confidence, stability, volatility and perceptions of fairness. With that background, here are 5 positive developments that have either resulted, or may result, from the May 6 Flash Crash. [1] Stock-specific circuit breakers. The U.S. has been slow to install circuit breakers on major exchanges, relying instead on “clearly erroneous trade rules” that cancel trades after the fact. In Asia and Europe, circuit-breakers have been around for a while. In Asia, trading is restricted outside of pre-specified daily bands of 5%, 10% and 15% (different by market). In Europe (e.g., Deutsche Bourse), trading is halted for 5 minutes after a 3%-10% move, and then reopened. In the wake of the Flash Crash, 10% circuit breakers are now applied to a few stocks as part of a pilot program (they have already been triggered on Citigroup and the Washington Post Company). If we are going to exist in a world with automated robots doing the lion’s share of daily trading, circuit breakers may be needed to prevent unintended and unmanageable meltdowns. Another topic under discussion by the SEC: prevent HFTs from having “unfiltered, naked access” to the exchanges by requiring them to live by the same pre-trade risk management controls that clearing members do. Why? As noted by the Chicago Fed, “high-frequency trading has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment”. [2] More balance to the HFT discussion. HFT supporters claim they are providers of liquidity to the market, and that HFT makes U.S. markets more efficient than ever. Suggestions to the contrary have been deemed “utterly laughable” by firms defending them (see Rosenblatt in sources). However, the Flash Crash highlights the uncertainties around these assertions. While volumes have tripled in the last few years, there’s a big difference between volume and liquidity (the ability to transact without moving the price). In an industry barometer survey conducted by the Tabb Group in May of this year, barely half the participants (a) had a high degree of confidence in the US equity market structure; 73% did not believe the market structure is “orderly”. One of the survey recommendations: HFTs should be required to register as broker-dealers.
277 To be sure, there were weaknesses in the old specialist system as well (b). But specialists were required to maintain a fair and orderly market, and post quotes that were part of the National Best Bid and Offer system; their reputations mattered. HFTs have no such requirements (no minimum shares or minimum quote times); one proposal would require quotes to be valid for at least one second. The SEC has broadened the trader reporting system in order to analyze HFT activity more closely. [3] Proposals requiring HFTs to act more like the floor specialists they’re replacing. With the advent of HFTs, cancelled orders have soared. Today’s ratio of 30 cancelled orders for each one executed means that 97% are cancelled. To curb abusive practices, some market participants recommend applying a fee to HFTs for an excessive number of cancelled orders. The increase in cancelled orders is one reason we do not agree that increased order depth on S&P 500 stocks at the NBBO is a clear indication of greater liquidity, as some market research alleges. Quotes pulled within a nano-second of being posted, and which are part of an algorithmic order detection exercise, don’t seem like liquidity in the traditional sense. Ameritrade’s representative on the recent SEC Roundtable referred to this as “opportunistic liquidity”.
[4] More discussion around HFT “co-location”. Some HFTs co-locate computer servers inside stock exchanges to minimize the milliseconds (or nanoseconds) required to scan existing orders, and have algorithms act on this information. Co-location services are offered by many exchanges, including NYSE Euronext, Eurex, ICE and the Chicago Mercantile Exchange. As trading execution and IPO listing fees declined, exchanges have tried to make up the difference by selling access to market data. Some exchanges have products which give clients a faster look at quotes, in exchange for a fee. As a result, some HFTs end up with access to information sooner than institutional or retail investors who rely on more standard venues (such as SIP Quotes). The search for co-location benefits has existed forever (in polite company, “order anticipation strategies”). Broker-dealers in past decades argued that being closer to floor traders on the CBOT was an advantage to their clients. But historical parallels can lose their meaning when the instruments of battle change: one HFT computer can reportedly decode more than 5 million messages per second. The Flash Crash has increased the debate around whether co- location confers advantages to HFTs, and whether there should be obligations and responsibilities that accompany them. [5] Asset managers learn that “cheapest <> best”. After the NYSE moved to decimalization in 2001, bid-offer spreads fell almost in half on S&P 500 stocks (less so for the Russell 2000 stocks, where HFTs are less active). Schwab retail commissions fell from $35 in 2003 to less than $10 in 2009. This trend is confirmed by broader research from the American
278 Association of Individual Investors. So if the prism of success is bid-offer costs and commissions on individual trades, the battle has been won. But is that the right prism to define what makes an optimal marketplace? Part of the HFT industry tracks the order flow of larger investors who leave electronic footprints (c). Using algorithms which include spraying the tape with thousands of quotes, the intentions of large investors is ferreted out. This can result in higher trading costs for such investors, and by extension, their clients, who include 401k investors, and pensioners participating in state and corporate plans. Quantitative Services Group computes analyses of HFT impacts on execution costs. They estimate that HFT tracking algorithms can drive execution costs up 1.5 to 3 times, even when institutional investors parcel trades into smaller orders to avoid detection. One last point on the Flash Crash. At a June SEC Roundtable dealing with the crash and market structure, the CEO of Vanguard proposed “depth of book” protection. In plain English: customer orders should get the benefit of the best bids and offers at multiples prices across exchanges, rather than just the single best quote on one exchange. With the average trade size having fallen by 70% in the last few years, only protecting the single best bid/offer has become less meaningful. A “depth of book” rule might prompt traders to post more limit orders and reduce volatility, a view shared by the Tabb Group survey respondents.
Conclusions Over the last decade, trading automation coincided with substantial improvements for equity investors. Information is available more readily, and transactions costs have come down on individual trades. High frequency trading is here to stay, and parts of the industry contribute to greater efficiencies. But the HFT industry may have gotten ahead of anyone’s ability to understand and monitor its capabilities and consequences. The combination of a singular quest for lower execution costs and advanced technology may have resulted in a more fragmented marketplace in which liquidity is temporal, and in less incentive to display limit orders or contribute capital to market-making. The Flash Crash provides a basis for regulators and market participants to consider these consequences in more detail than they have so far, and make adjustments. As shown below, confidence in the market has been dented by the latest events, and there’s work to be done to restore it. In its request to improve market structure and sort these issues out, the SEC had this to say: “Where the interests of long-term investors and short-term professional traders diverge, the Commission repeatedly has emphasized that its duty is to uphold the interests of long-term investors”. On that, we agree 100%.
279 Michael Cembalest, Chief Investment Officer, J.P. Morgan Private Banking Notes (a) The TABB survey included buy side investors, broker-dealers, execution venues, liquidity providers, advisory firms, consultants and technology providers. Topics included HFT, co-location, trade-at and depth-of-book rules, stub quotes and large trader reporting rules. (b) The lowest common denominator argument that specialists didn’t do a great job during the 1987 crash simply means that the proposed registration, pre-trade, naked access and minimum quote controls on HFTs are even more important for the marketplace. (c) The proliferation of so-called “dark pools” such as LiquidNet and Pipeline reflect a desire by institutional investors to avoid detection by HFT algorithms. This may lead to greater market fragmentation. Sources • “Unintended consequences of market regulation”, Tabb Group comments to the SEC, December 8, 2009 • “Controlling risk in a lightning-speed trading environment”, Federal Reserve Bank of Chicago, March 2010 • “An in-depth look at high-frequency trading”, Rosenblatt Securities, September 2009. • “Equity Trading in the 21st Century”, James Angel [Georgetown], Lawrence Harris [USC] and Chester S. Spatt [Carnegie Mellon University]. USC Marshall School of Business, May 2010. • “Beware of the VWAP Trap”, Quantitative Services Group, November 2009. • “Statement of Kevin Cronin”, Global Head of Equity Trading at Invesco, to the Securities and Exchange Commission, Market Structure Roundtable, June 2, 2010 • “Does Algorithmic Trading Improve Liquidity?”, Terence Hendershott (UC Berkeley), Charles Jones (Columbia Business School) and Albert Menkveld (VU University, Amsterdam), Journal of Finance, date forthcoming. • Themis Trading response to SEC on S7-02-10, Concept Release on Equity Market Structure, April 2010. • “An analysis of trades by high frequency participants on the London Stock Exchange”, Elvis Jarnecic and Mark Snape, School of Business and Economics, University of Sydney, June 2010 • “Statement of George Sauter”, Managing Director and Chief Investment Officer, The Vanguard Group, SEC June 2, 2010 Market Structure Roundtable • “A wake-up call for America”, Grant Thornton Capital Markets Series, November 2009. This paper describes the “depression in capital markets listings” in the US. They see the IPO listing decline as a consequence of the pendulum swinging too far in favor of lowering execution costs, and against providing the revenues to support IPO activity. Domestic listings on all U.S. exchanges declined by 43% from 1996 to 2008. • “TABB Group Says Confidence Level in US Equity Market Structure is Highly Polarized Across the Marketplace since the May 6 Market Crash”; press release following May survey • “The Shrinking New York Stock Exchange Floor and the Hybrid Market”, Terrence Hendershott [Berkeley] and Pamela C. Moulton {Fordham], October, 2007 SEC Securities and Exchange Commission; CDO Collateralized debt obligation; HFT High frequency trading; NBBO National Best Bid and Best Offer; CBOT Chicago Board of Trade; SIP Securities Information Processor; IPO Initial Public Offering The material contained herein is intended as a general market commentary. Opinions expressed herein are those of Michael Cembalest and may differ from those of other J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may differ from that contained in J.P. Morgan research reports.
280
Eurointelligence269B Daily Morning Newsbriefing
ECB’s482BH bond purchase programme has effectively ended
13.07.2010 Last week ECB bought sovereign bonds worth only €1bn; Analysts expect a rebound in bond yields once the programme ends officially; At the Ecofin today, Germany will insist on a EU sovereign insolvency law; ECOFIN is to adopt a “European semester”, allowing European institutions an early peak at national budgets; Finance ministers are also expected to explain today how banks will recapitalise themselves if stress tests reveal they are vulnerable; Nicolas Sarkozy battles to get political initiative back after allegations of illegal campaign financing; Edward Hugh looks at the current state of world growth and finds the pace is slowing; Calculated Risk calculates five-year default probabilities of bonds showing that Greece and Portugal risks are very high; Nouriel Roubini and Ian Bremner have a list of what the Europeans need to do (and won’t) to avoid double dip recession; Satajit Das, meanwhile, does the maths on the EFSF, and finds it does not add up.
13.07.2010
ECB’s39B bond purchase programme has effectively ended
So all this talk about the downward trend in bond purchases was merely to prepare the pubic for the drastic fall in bond purchases in the previous week, during which the ECB bought bonds worth only €1bn – the exact amount will be released today. Here is the table of bond
281 purchases, to indicate the extent of the decline: 11 May 16.3 18 May 10.4 25 May 8.8 1 June 4.9 8 June 6.7 15 June 4.0 22 June 4.2 29 June 3.7 7 July ~1.0
FT Deutschland says pressures from banks to sell their holdings has eased somewhat, but some analyst were expecting a rebound in bond yields once the programme ends officially. In the last few days several ECB officials spoke about phasing out the bond purchase programme, while the IMF warned the ECB was not doing enough. In a separate article, the paper also quoted several market observers as saying the southern European bond markets were not yet in a position to survive on their own. Germany reiterates its insistence on an EU sovereign insolvency law Angel Merkel’s spokesman said yesterday that Germany would continue to press for a eurozone-wide insolvency law, as one of the lessons from this crisis. Wolfgang Schauble said the issue remains firmly on the agenda of Herman van Rompuy’s task force, but, as
FrankfurterH Allgemeine reports,H there is no support for the setup of a “Berlin Club”, akin to the Paris Club, as all these changes would almost certainly require a change in the European Treaties, for which there is no appetite. There is now agreement on the introduction of “a European semester” – Brussels-speak for allowing the European institutions an early peak at national budgets, without prejudice to the prerogatives of national parliaments. There is still no final agreement on the EFSF, as this is still blocked by the Slovakians. But the fund will go ahead one way or the other.
You can read more about this crazy Berlin Club proposal in DerH Spiegel H – hat tip NakedH
Capitalism,H which correctly calls it a trial balloon for domestic consumption. Also on the expected from the ECOFIN meeting today is to explain how banks will recapitalise themselves if stress tests reveal they are vulnerable to losses related to the sovereign debt crisis, writesH the FT.H This is the last full meeting before the results of the stress tests are published on July 23. Analysts say they expect up to 20 banks to require billions of euros in fresh capital as a result of the tests.Commissioner Olli Rehn suggested earlier to tap the €440bn financial stability facility fund, which is not yet running. Sarkozy fights to get away from corruption allegations In his most presidential manner Nicolas Sarkozy was rejecting allegations of corruptions and promote his policy agenda and style during a 1-hour interview at prime time on French television. Sarkozy rejected to compromise on his pension reform proposal and dismissed media reports that he accepted improper campaign contributions. He defended his Labour minister Eric Woerth, who was in the middle of the scandal, but said that he should give up the post of treasurer of his UMP party to focus on pensions. Sarkozy promised a cross-party commission to draw up rules to eliminate potential conflicts of interest for ministers or
282 parliamentarians. No cabinet reshuffling. See FTH H, LesH Echos H or LaH Tribune H for more. Edward Hugh on global growth
EdwardH Hugh,H in AFOM, has written a very useful analysis on the state of global growth at the moment, to disentangle the mixed signals we are getting from the US where growth is slowing, and Germany, where manufacturing growth is accelerating. He looks at Germany, the US, China, India, Brazil, and Japan, and find that there is indeed some evidence of a global slowdown – global manufacturing was down in June for the second month in a row – but this slowdown is probably going to stop short of a double-dip recession. Calculating the five-year default probabilities of bonds It is not straightforward to calculate default probabilities from bond prices (we have use a lazy rule-of-thumb formula of the square root of the yield spread, which is justified thus: if you think a bond has a 10% probability of a 10% loss, then you will be compensated for the expected risk by a premium of 10% times 10% equals 1% = 100 basis points. Conversely, by drawing the square root from hundred, you arrive at the 10%/10% combination, which is logically only one of an infinite possibilities). There are significantly more sophisticated ways of doing this, discussed in a series of article in CalculatedH Risks.H One of these methods implies the following sovereign default probabilities.
Nouriel Roubini and Ian Bremner on global growth
Writing in the FT, NourielH Roubini and Ian Bremner H give a bleak outlook: The eurozone needs fiscal austerity, but it also needs a level of growth best provided by an
283 easing of monetary policy from the European Central Bank. Early debt-restructuring of insolvent members should also be on the agenda. Germany should postpone its fiscal consolidation for a couple of years to boost disposable income and consumption. Outside Europe, Japan must accelerate economic reforms. These steps will take time. Even if all are undertaken properly, global growth will recover only slowly. But if they are not undertaken at all, the risk of a global double dip, and a new financial crisis, will grow sharply. And over here in Europe we know all too well those steps will not be undertaken at all. The ECB is already in tightening mode. Satyajit Das on the EFSF
This in our view is one of the best articles ever written on the ESFF. SatyajitH Das H writes in the FT that this vehicle is nothing but a re-incarnation of the worst excesses of the credit crisis, where debt was shuffled from one corner into another, becoming less transparent in the process. He goes through the maths of the EFSF, and finds that even with the overcollateralization of 20% the vehicle is still risky. This is his conclusion: “The reality is that a problem of too much debt is being solved with even more debt. Deeply troubled members of the eurozone cannot bail out each other as the significant levels of existing debt limit the ability to borrow additional amounts and finance any bail-out. The EFSF is primarily a debt shuffling exercise which may be self defeating and unworkable. The resort to discredited financial engineering highlights the inability to learn from history and the paucity of ideas and willingness to deal with the real issues.”
http://www.eurointelligence.com/index.php?idH =581&tx_ttnews[tt_news]=2852&tx_ttnews[ba ckPid]=901&cHash=b4748dd409# H
284 MARKETS
Debt270B shuffling will be a self-defeating exercise By Satyajit Das Published: July 12 2010 16:10 | Last updated: July 12 2010 16:10 George Bernard Shaw observed that “Hegel was right when he said that we learn from history that man can never learn anything from history”. Emerging details of the European Financial Stability Facility (EFSF) bear testament to this. The structure echoes the ill-fated collateralised debt obligations (CDOs) and structured investment vehicles (SIVs). The head of the EFSF also had a brief stint at Moore Capital, a macro-hedge fund, entirely consistent with the fact the new body will be placing a historical macro-economic bet.
51BH H Investors seek clarity on euro rescue fund - Jul-01
512BH H IMF plans mega bail-out for next crisis - Jul-11
513BH H Analysis: ECB: A bolder banker - Jul-07
514BH H Eurozone rescue fund aims for top rating - Jul-05 In order to raise money to lend to finance member countries as needed, the EFSF will seek the highest possible credit rating – triple A. But the EFSF’s structure raises significant doubts about its creditworthiness and funding arrangements. In turn, this creates uncertainty about its support for financially challenged eurozone members with significant implications for markets. The €440bn ($520bn) rescue package establishes a special purpose vehicle, backed by individual guarantees provided by all 19 member countries. Significantly, the guarantees are not joint and several, reflecting the political necessity, especially for Germany, of avoiding joint liability. The risk that an individual guarantor fails to supply its share of funds is covered by a surplus “cushion”, requiring countries to guarantee an extra 20 per cent above their ECB contributions. An unspecified cash reserve will provide additional support. Given the well-publicised financial problems of some eurozone members, the effectiveness of the 20 per cent cushion is crucial. The arrangement is similar to the over-collateralisation used in CDOs to protect investors in higher quality triple A rated senior securities. Investors in subordinated securities, ranking below the senior investors, absorb the first losses up to a specified point (the attachment point). Losses are considered statistically unlikely to reach this attachment point, allowing the senior securities to be rated triple A. The same logic is to be utilised in rating EFSF bonds. If 16.7 per cent of guarantors (20 per cent divided by 120 per cent) are unable to fund the EFSF, lenders to the structure will be exposed to losses. Coincidentally, Greece, Portugal, Spain and Ireland happened to represent around this proportion of the guaranteed amount. If a larger eurozone member, such as Italy, also encountered financial problems, then the viability of the EFSF would be in serious jeopardy.
285 There are difficulties in determining the adequacy of the 20 per cent cushion. There is the potential risk that if one peripheral eurozone member has a problem then others will have similar problems. The structure faces a high risk of rating migration (a fall in security ratings). If the cushion is reduced by problems of one eurozone member, the EFSF securities may be downgraded. Any such ratings downgrade would result in mark-to-market losses to investors. Unfortunately, the global financial crisis illustrated that modelling techniques for rating such structures are imperfect. Rapid changes in market conditions, increases in default risks or changes in default correlations can result in losses to investors in triple A rated structured securities, ostensibly protected from this eventuality. Given the precarious position of some guarantors and their negative ratings outlook, at a minimum, the risk of ratings volatility is significant. This means that investors may be cautious about investing in EFSF bonds and, at a minimum, may seek a significant yield premium. The ability of the EFSF to raise funds at the assumed low cost is not assured. Major economies have over the last decades transferred debt from companies to consumers and finally onto public balance sheets. A huge amount of securities and risk now is held by central banks and governments, which are not designed for such long-term ownership of these assets. There are now no more balance sheets that can be leveraged to support the current levels of debt. The effect of the EFSF is that stronger countries’ balance sheets are being contaminated by the bail-out. Like sharing dirty needles, the risk of infection for all has drastically increased. The reality is that a problem of too much debt is being solved with even more debt. Deeply troubled members of the eurozone cannot bail out each other as the significant levels of existing debt limit the ability to borrow additional amounts and finance any bail-out. The EFSF is primarily a debt shuffling exercise which may be self defeating and unworkable. The resort to discredited financial engineering highlights the inability to learn from history and the paucity of ideas and willingness to deal with the real issues.
http://www.ft.com/cms/s/0/487622bH 6-8dc2-11df-b5e2-00144feab49a.html H
286 COMMENT
Sagging271B global growth requires us to act By Ian Bremmer and Nouriel Roubini Published: July 12 2010 23:18 | Last updated: July 12 2010 23:18 It looks as if the global economy is heading for a serious slowdown this year. Emergency austerity programmes in some countries will put a drag on growth. Inventory adjustments will run their course. The effects of tax policies that steal demand from the future – such as the US “cash for clunkers” scheme, tax credits for home buyers or cash for green appliances – will fizzle out. Labour market conditions will remain weak. The slow and painful deleveraging of balance sheets and income-challenged households, financial institutions and governments will continue. The result is governments and consumers that spent too much and now need to deleverage – in the US, Britain, Spain, Greece and elsewhere – will spend, consume and import less. But those governments and consumers that saved too much – in China, emerging Asia, Germany and Japan – are not spending more. In a world of excess supply, the recovery of global aggregate demand will be weak, pushing global growth much lower.
51BH H Wall St reform proposal wins key support - Jul-13 516BH H In depth: Obama and Wall St - Jun-25 517BH H Global Insight: US financial reform - Jul-12 518BH H US private banks left out in reform - Jul-11 519BH H FT Trading Room: News from the exchanges - Jun-16 520BH H Holdout senator says she will vote for reform - Jul-02 The most realistic scenario for global growth is painful, even if we avoid a double dip. In the US, 1.5 per cent growth in the second half of this year and into 2011 will feel like a recession, given a probable further rise in unemployment, larger budget deficits, a further fall in home prices, larger losses by banks on mortgages and loans, and the risk that a protectionistH surge H will further damage relations with China. In the eurozone, growth will be closer to zero by the end of this year, as fiscal austerity and stock market corrections, along with rises in sovereign, corporate and interbank liquidity spreads, take their toll. Increases in volatility and sovereign debt risk will also undermine business and consumer confidence in ways that move beyond Europe. Those hoping that China can keep the global economy afloat are likely to be disappointed. The world’s leading growth engine in recent years is slowingH ,H from 11 per cent-plus towards a 7 per cent rate by year’s end. That will damage China’s exporters, while spelling bad news for export-growth in the rest of Asia, which increasingly relies on Chinese imports too. Politically, this second global slowdown could not have come at a more difficult time. In the US, Democrats and Republicans will soon retreat to their corners to prepare for November’s mid-term elections. Meanwhile, President Barack Obama must again persuade America’s taxpayers that a new surge in government spending is needed to protect a fragile recovery – and at a moment when voters are telling pollsters that America’s debt is as great a threat as terrorism.
287 So the president must also tell voters that the longer-term solution to America’s economic insecurity involves both austerity and sacrifice. But abroad he faces an even larger problem. Mr Obama has limited leverage with the few remaining moderate Republicans, but the recent
GroupH of 20H summit in Toronto showed him even less able to persuade European governments to shrug off fiscal worries. These countries seem unlikely to shift from their view that events of the past year in Greece, Spain and elsewhere – and fears of further crises to come – demand that the continent must learn to live within its means. Nor should we expect much from the next G20 meeting in Seoul in November. A common fear of global meltdown provided some degree of unity at previous meetings. Yet, there is no longer international consensus on where tomorrow’s true dangers lie. Differing assumptions within the group over the proper role of government in a domestic economy make agreement on the details involving anything of substance very difficult. Mr Obama’s critics often deride him as a man whose talents are limited to his fine speeches. Yet even if that were true, words matter. Plans to boost government spending in the near term, and to embrace austerity in the longer term, will only become more difficult if the president fails to explain the need for them. For their part, America’s Republicans need to accept that the path to a global recovery begins at home, with extended unemployment insurance and help for state and local governments. Countries that save too much must also do their part for global demand. In particular, the
Chinese leadership should recognise that failure to allow a more substantive revaluationH of its currency H will have serious consequences at home. It makes little sense to try to boost China’s local exporters while undermining the longer-term health of their best customers. Beijing must also move much more quickly to boost China’s domestic consumption. The eurozone needs fiscal austerity, but it also needs a level of growth best provided by an easing of monetary policy from the European Central Bank. Early debt-restructuring of insolvent members should also be on the agenda. Germany should postpone its fiscal consolidation for a couple of years to boost disposable income and consumption. Outside Europe, Japan must accelerate economic reforms. These steps will take time. Even if all are undertaken properly, global growth will recover only slowly. But if they are not undertaken at all, the risk of a global double dip, and a new financial crisis, will grow sharply. Policymakers cannot keep kicking the can down the road for much longer. Ian Bremmer is the president of Eurasia Group and author of The End of the Free Market. Nouriel Roubini is professor of economics at the Stern School at New York University, chairman of Roubini Global Economics and co-author of Crisis Economics Ian Bremmer and Nouriel Roubini Sagging Global Growth Requires Us to Act July 12 2010 23:18 http://www.ft.com/cms/s/0/eaf81fbH e-8de3-11df-9153-00144feab49a.html H
288 7/12/2010 11:40 AM Creating Order in the Euro Zone
Merkel's57B Rules for Bankruptcy By Christian Reiermann Fearing a lasting burden on taxpayers, the German government is preparing a set of insolvency rules for countries in the euro zone. It would require private investors to bear some of the financial burden and force the affected countries to give up some sovereignty. The plan is guaranteed to meet with resistance. As a physicist and an avowed admirer of the Swabian housewife, German Chancellor Angela Merkel, leader of the center-right Christian Democrats (CDU), is seeking to establish binding rules in the midst of the chaos of financial and monetary crises. Her desire for order was reinforced recently when the prospect of Greece collapsing under a mountain of debt triggered turmoil in the European Monetary Union.
The first national bankruptcy on European soil in decades was only prevented because the remaining countries in the euro zone came to the aid of their faltering fellow member with billions in loans and loan guarantees. The chancellor, determined not to allow the Greek
289 debacle to be repeated elsewhere, proposed the establishment of a procedure to ensure "orderly national bankruptcies." The German chancellor hoped that the plan would create "an important incentive for the euro-zone members to keep their budgets under control." Finance Minister Wolfgang Schäuble, in complete agreement with Merkel, said: "We have to think about how, in an extreme situation, member states could become insolvent in an orderly fashion without threatening the euro zone as a whole." Averting Future Problems The two politicians have taken on a formidable task. They sense that the future of the euro is anything but certain, despite the recently approved €750 billion ($945 billion) European rescue package. In approving the emergency measure, all of those involved, including Merkel, French President Nicolas Sarkozy, European Commission President José Manuel Barroso and Greek Prime Minister Georgios Papandreou, are merely buying time, which they must utilize to work off deficits. This is especially true when it comes to Greece, which will have to restructure its budget by the time all of the bailout packages expire in 2013, but even more so for the euro zone as a whole. To avert future problems, the Germans have asked their experts to assemble a package of reforms that could stabilize the construct of the European Monetary Union in important ways - - if, that is, the partner countries play along. And even then, it cannot be ruled out that some countries could go bankrupt in the future. The effort is necessary, because important safety measures to protect the common currency are not working. The Stability and Growth Pact, which was intended to nip excessive government borrowing in the bud, proved to be largely worthless. Some of the monetary union's ironclad principles were ignored, including a rule that prohibits member states from coming to the aid of others in financial difficulties. It was only with political tricks of questionable legitimacy that the euro-zone countries managed to ward off the crisis in the short term, but by no means has it been overcome. German taxpayers, in particular, could face enormous burdens if the current measures fail. Under the provisions of the bailout package, Germany has pledged up to €170 billion. With her plans for orderly national bankruptcies, Merkel intends to eliminate these vulnerabilities within the monetary union. She hopes to install a procedure under which a bankrupt country could be restructured in the future. She also wants to prevent the rescue program from becoming a permanent fixture in the future and, as a result, a chronic threat to the German federal budget. Sharing the Burden Despite the urgency of the problem, the German government must take a cautious approach. The chancellor is worried that her deliberations could be seen as a vote of no confidence in the European bailout package, which is why she is treating the plans with such secrecy. Less than a dozen experts from various parts of the government are even familiar with the matter. Her goal is to structure the plans as a further development of, rather than an alternative to the bailout package. Work on the project has already made a lot of progress. A concept based on preliminary work carried out by the Finance and Justice Ministries is already being circulated at the Chancellery. If the plans are implemented, banks and investors will not be the only ones bearing the burden when countries in the euro zone encounter financial difficulties. The debt-ridden countries themselves will also have to make substantial sacrifices, and their governments will cede some of their power. The experts propose a two-step procedure. In describing the goals of this
290 approach, Schäuble says: "Whenever a company files for bankruptcy, the creditors must relinquish a portion of their claims. The same should apply in cases of national bankruptcy." The reformers expect the plan to have a deterrent effect, both for lenders and borrowers. If banks and private investors must anticipate that they may not recoup all of their investment, they will be more cautious about lending money to certain countries. Those countries, in turn, will be forced to preserve their credit ratings if they hope to continue borrowing. The goal of the German government experts developing the plan is to straighten out a situation gone haywire in the midst of enthusiasm over the bailout program. "The private sector should be involved in the procedure, so that taxpayers are not the only ones bearing the financial burdens," the plan reads. "The bondholder receives a risk premium through the coupon, so it should also have to bear this risk." Aggravating the Crisis? But is this feasible? In a situation in which a euro-zone country can no longer service its debts, the government experts propose a "tailored combination of maturity extension and a suitable reduction of the face value or interest rate" of the bonds in question. In other words, creditors receive less money than they are entitled to, and they have to wait longer for it, a process experts refer to as a "haircut." The debtor country derives most of the benefit. Its financial burden declines, so that the government no longer has to incur new debts to pay off the old ones. This reduces the burden on government budgets, because the country can only borrow new funds by offering its lenders a higher risk premium. Because it blasts new holes into the government budget, this crisis surcharge can also aggravate the crisis. But the creditors should also receive an incentive to accommodate a debtor nation. In return for waiving their claims, they are guaranteed a residual value of the bond, which would be no more than half its face value. The benefit to them is that they do not have to write off the entire bond. The debtor nation must pay a guarantee fee, which means that it also carries a portion of the burden. Because less than half of debts are usually forgiven in a haircut procedure, the bankrupt countries are left with an "original country risk." This residual amount functions as a signal, because the country's own bonds are still being traded. If this credit rating declines interest rates rise, and if it rises interest rates decline. In other words, investors, governments and bailout organizations are consistently aware of the market's assessment of the situation. Berlin Club as 'International Guarantor' A newly established Berlin Club would serve as the "international guarantor." The German government experts see this organization as an "apolitical and legally independent entity." The plans build on existing institutions involved in international debt settlement. While the Paris Club regulates debt restructuring among nations, the London Club specializes in liabilities between banks and countries. The German government hopes to bridge a gap with its proposal. The Berlin Club would concentrate on government bonds and the associated derivative securities. The members of the club could be recruited from within the G-20 group of industrial and emerging nations. Another possibility would be to establish the club within the framework of the euro zone. The International Monetary Fund (IMF) would be involved in the debt refinancing from the outset. The German experts see the IMF playing a key role. If representatives of the
291 Washington-based organization determine that debt forgiveness and restructuring have failed, then the second phase of the procedure kicks in. It amounts to a complete refinancing. According to the concept, "this will require restrictions on sovereign discretionary powers." In other words, the government of the affected country would no longer be able to fully dispose of its own treasury. Institutionalized Disempowerment It would be replaced with "an individual or group of individuals familiar with the regional characteristics of the debtor nation," which would safeguard the financial interests of the bankrupt country. The Berlin Club would have the authority to appoint these individuals. The concept toughens the stance, particularly toward creditors, but also toward the debt-ridden country. If it is implemented, it will amount to an institutionalized disempowerment of a debtor nation's government by the IMF and the new Berlin Club, at least in its final stage. This prospect alone could have a disciplining effect on overspending governments. But the concepts would also represent an imposition on international donors. Until now, conventional bailout programs like the one devised for Greece have been based primarily on the notion that a cash-strapped government receives public funds from other countries, while private donors are not asked to waive their claims. To put it simply, taxpayers in countries with reasonably healthy government finances, particularly Germany, have taken the place of banks and private investors that have extricated themselves from ailing economies. This would no longer be the case in the future. This is also the way the EU's and IMF's €750 billion rescue package works. The bailout funds provide the euro zone with planning security until 2013, but it is by no means certain that the crisis will have been resolved by then. Experts predict that by that time Greece will be burdened by a debt ratio of 150 percent of its gross domestic product. The country will have an enormous need for fresh loans, but the difficulties it faces in getting those loans will probably be just as great. This suggests that the country could quite possibly stumble from one bailout program to the next.
Resistance Guaranteed It is also completely unclear as to if, when and to what extent the new concept could even be implemented. Regardless of whether the government introduces its plans at the G-20 level or within the task force headed by European Council President Herman Van Rompuy, resistance is guaranteed. Countries immediately or potentially threatened by insolvency, like Greece, Portugal and Spain, will be up in arms against the proposals from Berlin. Why should they agree to rules that would make it easier for the remaining euro countries to deny them aid in an emergency? But the German government is determined not to be the paymaster for Europe's debt transgressors in the long term. Officials at the Chancellery and Finance Ministry fear that otherwise the German public's support for the euro and the EU would be undermined. In developing their scenarios, the government experts assume that other potential donor countries share their concerns. The governments of France, Finland and the Netherlands are likely to be just as interested in private creditors and debtor nations bearing a portion of the burden.
292 No Way Around Emergency Planning The concept by no means sells itself. If the project were organized under the auspices of the EU, it would face a high hurdle: The European treaties would have to be amended to establish the Berlin Club, which would require the consent of each individual member. This is not a process governments are keen to repeat after the experiences of the Lisbon Treaty. Nevertheless, there is no way around pushing ahead with emergency planning, because the situation could come to a head more quickly than anticipated. The aid for Greece is subject to the Papandreou government fulfilling the EU and IMF requirements. The Greek prime minister is full of good intentions, but his measures have been relatively ineffective so far. Although the government is raising taxes and even introducing new taxes, revenues have fallen short of expectations. Strikes, like the one that was staged last Thursday, are constantly paralyzing public life and the economy. In other words, it is quite possible that Greece will not fulfill the conditions and thus will receive no aid from the European fund. This could lead to a consequence that European leaders have been trying to prevent at all costs: a total national bankruptcy. And, if the reform package has not been implemented by then, it could end up being anything but an orderly process. Translated from the German by Christopher Sultan
URL: http://www.spiegel.de/iH nternational/europe/0,1518,705959,00.html H RELATED SPIEGEL ONLINE LINKS:
CrisisH 2.0?: Banks Skeptical Despite Signs of Economic Recovery (07/09/2010) H http://www.spiegel.de/internatiH onal/business/0,1518,705590,00.html H
EuropeH and the Euro: 'The Crisis of Confidence Has Yet to Be Overcome' (07/06/2010) H http://www.spiegel.de/internatiH onal/europe/0,1518,704767,00.html H
TheH Four Horsemen of the Acropolis: An Old Battlefront Returns in War on Euro (06/30/2010) H http://www.spiegel.de/internatiH onal/germany/0,1518,703613,00.html H
WillH Germany's Tab Grow?: Berlin Fears Euro Rescue Could Get More Expensive (06/28/2010) H http://www.spiegel.de/internatiH onal/europe/0,1518,703266,00.html H
ResurrectionH of the Euro: European Austerity the First Step to Recovery (05/27/2010) H http://www.spiegel.de/internatiH onal/business/0,1518,697030,00.html H
'WeH Only Have One Shot': How the Euro Rescue Package Came Together (05/17/2010) H http://www.spiegel.de/internatiH onal/europe/0,1518,695110,00.html H
SPIEGELH 360: The Euro Crisis H http://www.spiegel.de/internatiH onal/europe/0,1518,k-7612,00.html
naked27BU capitalism
Monday,394B July 12, 2010
Germany’s483BH Eurobailout Template: A Stealth
Takeover? H Der Spiegel (hat tip reader Richard Smith) presents a detailed sketch of German thinking, specifically that of chancellor Angela Merkel and finance minister Wolfgang Schäuble, regarding howH countries who fail an initial round of restructuring within the eurozone would be treated.H This piece is very much worth reading, but the German proposal has all the hallmarks of being a trial balloon for domestic consumption. The idea that Germany or the creditor nations within the ECB can impose a regime that interferes with national sovereignty of EU member nations and violates current eurozone treaty arrangements is more than a bit of a stretch. And the restrictions on
293 sovereignity would be considerable; democratically elected governments, even if they had nothing to do with the policies that led to fiscal deficits, would be stripped of their control over their own taxing and spending: A newly established Berlin Club would serve as the “international guarantor.” The German government experts see this organization as an “apolitical and legally independent entity.” The plans build on existing institutions involved in international debt settlement. While the Paris Club regulates debt restructuring among nations, the London Club specializes in liabilities between banks and countries. The German government hopes to bridge a gap with its proposal. The Berlin Club would concentrate on government bonds and the associated derivative securities. The members of the club could be recruited from within the G-20 group of industrial and emerging nations. Another possibility would be to establish the club within the framework of the euro zone. The International Monetary Fund (IMF) would be involved in the debt refinancing from the outset. The German experts see the IMF playing a key role. If representatives of the Washington-based organization determine that debt forgiveness and restructuring have failed, then the second phase of the procedure kicks in. It amounts to a complete refinancing. According to the concept, “this will require restrictions on sovereign discretionary powers.” In other words, the government of the affected country would no longer be able to fully dispose of its own treasury. It would be replaced with “an individual or group of individuals familiar with the regional characteristics of the debtor nation,” which would safeguard the financial interests of the bankrupt country. The Berlin Club would have the authority to appoint these individuals. The concept toughens the stance, particularly toward creditors, but also toward the debt-ridden country. If it is implemented, it will amount to an institutionalized disempowerment of a debtor nation’s government by the IMF and the new Berlin Club, at least in its final stage. Yves here. Um, we had a revolution over taxation without representation in the US. What happens if the locals don’t like this takeover and start, say general strikes or sabotaging infrastructure? Will NATO tanks roll next? Or that pre the takeover, the member state calls this action out as what it is, a violation of EU governing arrangements, and threatens to exit the EU (which is also not permitted under the current treaty)? In all seriousness, while this round of German saber-rattling might be treated with more dignity than it deserves, the ECB is acting as a stealth Treasury, and if it continues, such draconian measures will not be necessary. As Marshall Auerback pointed out via e-mail: ….. if the ECB continues to step into the secondary market and cap yields, then it does take away the solvency risk short term. Did you notice that the ECB bought 8 billion euros of Irish bonds over the last several weeks? It addresses the insolvency issue and facilitates the euro countries’ ability to secure funding from the bond markets again. So you get a once-off rally in euro risk assets as the perceived insolvency risk is mitigated, and then we get Japan all over the world, as they do just enough (probably) to ensure that this whole thing doesn’t go over the cliff. He also points out that the comparison to a controlled corporate bankruptcy is highly questionable. If this remedy were imposed on Greece, it compromises the debt of all other eurozone nations that are under scrutiny. Marshall notes:
294 These governments at the very least would face lower credit ratings and much higher borrowing costs, making their defaults that much more likely. Since investors know this, there might also be bank runs Yves here. And again, this problem is ultimately circular, since the party that is nominally at risk is the sovereign state, but the party holding the debt is the one at holding the bag, which in the case of Club Med borrowers, is French and German banks (and note the German plan requires creditors to take a hit, yet has no mechanism for bailing out impaired banks). In other words, in classic Blazing Saddles fashion, even if this proposal were anything more than posturing to appease German voters, it looks like a nuclear option that is ultimately directed at the party making the threat.
http://www.nakedcapitalism.com/2010/07/germanys-eH urobailout-template-a-stealth-takeover.html H
• StrategicH Defaulters as the New Welfare Queens H - 07/13/2010 - Yves Smith
• QuelleH Surprise! Financial Regulatory Reforms Being Diluted H - 07/13/2010 - Yves Smith
• Moody’sH Cuts Portugal’s Sovereign Debt Rating Two Notches to A1 H - 07/13/2010 - Yves Smith
Tuesday,395B July 13, 2010
Moody’s48BH Cuts Portugal’s Sovereign Debt Rating Two Notches to
A1 H
The reporting so far is thin, just notices of the announcement at BloombergH H and the HWall Street
Journal H that Moody’s cut the rating on Portugal’s sovereign debt from Aa2 to A1. The Bloomberg headline notes that Moody’s put the outlook as stable, while the Journal pointed out that the agency expected “Portuguese government’s financial strength will continue to weaken over the medium term.” Predictably, the euro weakened a bit, but at least so far, the reaction appears subdued. Stock indices are still in positive territory. However, this change will likely increase scrutiny of Eurobank stress test assumptions and results, with those findings due to be released July 23.
295 07/12/2010 04:23 PM
Europe's273B Financial Health Check
Concern396B of Stress Test Failures on the Rise The planned stress tests of European banks could be tougher than first thought. According to a German media report, up to 15 percent of the European banks to be examined may fail -- even though the criteria for the tests have been watered down. The pan-European stress tests for banks won't be as easy to pass as previously thought, and 10 to 15 percent of banks assessed may fail them, German business daily Handelsblatt reported on Monday, citing an unnamed management board member of a large German bank. More than 10 banks in Europe, including one or two in Germany, may fail the tests, the board member said. The results of the stress tests are scheduled to be published on July 23 to help reassure financial markets that Europe's banking system is strong enough to weather the euroH debt crisis H and the austerity programs launched to overcome it. The executive told Handelsblatt that the tests needed to be credible in order to boost market confidence. The newspaper also cited unnamed financial sources as saying the tests were "not a show," and that they would simulate real challenges that banks might face. Analysts said one or two of Germany's Landesbanken, publicly-owned regional banks, might be found lacking. The European tests will be conducted by national banking supervisors and will cover 91 banks. Markets have been increasingly concerned that some banks might be unable to cope with a sharp slowdown in economic growth resulting from the current wave of government spending cuts around Europe. The tests model the impact on banks of possible economic scenarios. The Committee of European Banking Supervisors (CEBS) said on Wednesday it would test the banks to see how they would hold up if the economy deteriorated and the banks had to write off some of their sovereign debt holdings. The 91 financial institutions to be tested represent 65 percent of Europe's banking sector. "Passing" would suggest a bank could withstand the stress scenario, while "failing" would imply it needs more capital to preserve core ratios in the scenario. Are the Tests Too Soft? The CEBS has not published its full methodology but the details of the methodology released so far have been criticized by analysts and finance experts who say the committee is not testing worst-case scenarios. The Handelsblatt report came as a surprise after SPIEGEL learned that banks reacted with relief when they were told the details of the planned tests by their respective supervisory authorities last week. According to SPIEGEL, the 14 German banks being tested have little to fear because the criteria for the tests were watered down in hectic negotiations between the European Central Bank, the European Commission and European banking watchdogs. In the strictest of three stress scenarios, the impact on banks of an economic slump together with a simultaneous crash in European government bonds is simulated, according to SPIEGEL. Some Details of Tests Have Leaked out
296 Banks are told to factor in a 20 percent slump in the value of Greek government bonds, as well as drops of 11 percent for Portuguese bonds, 8.6 percent for Irish bonds, 6.7 percent for Spanish bonds, 4.9 percent for Italian and 2.3 percent for German bonds. But the banks only need to calculate the impact of such losses if they keep the bonds in their short-term trading books, not if they hold them as long-term investments. Europe agreed to bank stress tests after US President Barack Obama urged fellow G20 leaders to follow Washington's lead and do more to address lingering uncertainty over the balance sheets of their banks. US regulators had published bank stress tests last year and the move had been credited with calming market fears. Euro zone finance ministers meeting in Brussels on Monday and Tuesday are expected to discuss the policy response countries will take if the tests show problems, an EU source told Reuters last week. European Central Bank President Jean-Claude Trichet on Friday reiterated the crisis was not over and banks should remain open to accepting help. In a research note, Credit Suisse said German Landesbanken may have to raise up to €37 billion as a result of the stress tests. Spanish savings banks, which so far have partaken of €11.2 billion from the country's restructuring fund, would also need another €12 billion in a scenario where the economy weakened sharply and discounts were required on sovereign debt, the note said. cro/With reporting by SPIEGEL Staff
URL:
• http://www.spiegel.de/intH ernational/business/0,1518,706076,00.html H
RELATED521B SPIEGEL ONLINE LINKS:
• CrisisH 2.0?: Banks Skeptical Despite Signs of Economic Recovery (07/09/2010) H
http://www.spiegel.de/intH ernational/business/0,1518,705590,00.html H
• ExportH Optimism, Financial Fear: Bank Balance Sheets Could Torpedo Recovery
(07/05/2010) H
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(06/28/2010) H
http://www.spiegel.de/interH national/europe/0,1518,703266,00.html
297 07/12/2010 03:25 PM
Auto274B Industry Grumbles
German397B Car Makers Fear US Trade Sanctions The German automobile industry is recovering rapidly from the economic downturn. But new challenges may await. Politicians in Washington may be considering a levy on cars imported from Germany. The news in June was heartening. The German automobile industry, hit hard by the global economic downturn, was experiencing a rapid comeback, according to a report three weeks ago. Sales in the US were particularly strong. Now, though, some are concerned that US trade sanctions might bring the party to a premature end. Sources within the German government and in the automobile industry have told SPIEGEL that Washington may be considering raising tariffs on German cars imported into the US. The alleged plan is apparently born out of frustration in the US that Berlin ultimately declined to provide support to General Motors subsidiary Opel despite requests to do so from Washington. Furthermore, while German car makers have been able to increase sales in the US, GM and Ford have not found much recent success in Europe. Feeling the Pain Many might argue that such a discrepancy may have more to do with European tastes in cars, but US politicians are concerned it has more to do with EU trade policy. In conversation with German auto industry leaders, political leaders from Washington pointed to the fact that Europe charges a 10 percent tariff on cars imported from the US. Automobiles heading into the US from Europe, however, are only taxed with a 2.5 percent levy. Reading between the lines, German auto industry leaders are now concerned that Washington intends to increase that levy in the near future. Any such tax would not prove particularly harmful to Mercedes or BMW, as both companies produce most cars meant for the US market in the US. Volkswagen, however, which is only now building its first factory in the US, could feel the pain. German Economics Minister Rainer Brüderle recently ruled out German government aid for Opel, leading to GM withdrawing all requests for aid from European public finances in its attempt to restructure the Germany-based carmaker. Germany had originally sought to midwife a sale of Opel to a Canadian auto-parts manufacturer, but GM changed its mind about going through with the sale at the last minute. Many in Berlin were less than impressed by the GM about face. cgh/SPIEGEL
URL:52B
• http://www.spiegel.de/intH ernational/business/0,1518,706043,00.html H
298 http://fistfulofeuros.net/275BH
Is276B There Global Economic Slowdown In The Works? by Edward Hugh July 12, 2010
According to Ralph Atkins writingH in the Financial Times last week,H “the pace of Germany’s recovery is helping dispel fears of a “double dip” recession across the continent as a result of the crisis over public finances in southern European countries”. Coincidentally, however, on the very same day, Alan Beattie writing from Washington informed us that the IMF feel “the risk of a slowdown in the global economic recovery has risen sharply”. This left me asking myself which is it: is the global recovery a question of up up and away, or are we at the start of a renewed slowdown (whether or not you wish to term this a “double-dip”)? So I thought I would take a look through some of the most recent data (both hard and soft) to see if I could make any sense of the situation. Well one place we could look for some sort of indication would be in the latest batch of PMI survey results. David Hensley, Director of Global Economics Coordination at JPMorgan, put it like this: “Signs are that growth of global GDP may have reached an near term peak in Q2 2010. June PMI data indicate that growth of business activity and new orders are starting to wane. Some cooling in the manufacturing boom was expected as the inventory cycle matures. What is more concerning is that the service sector also may be losing momentum.” Most importantly it is, as we shall see, new order growth that is waning, and that does look rather ominous, with even Ralph Atkins admitting that Germany is no exception here, since German industrial orders fell by a seasonally-adjusted 0.5 per cent in May compared with April according to the latest data from the economy ministry. Nor should this surprise us, since given that the German economy is export dependent, economic growth in Germany is a dependent variable (and not a leading indicator), since the German economy expands in the wake of expansion elsewhere, and falls back as the wave loses power. And if you don’t get this, just take a look at the evolution in German retail sales (below): a country with this lack of dynamism in domestic sales is never going to lead the global growth charge.
Manufacturing In The Van
299 In fact it is obvious that something somewhere is slowing, since the rate of growth of the entire global manufacturing sector fell back again in June, for the second month running, with the reading recording the weakest performance so far this year, although since it is still showing 55 it is clear that growth in the sector remains solid and indeed it is still above the longer run series average. So the worry here is not about what is actually happening now, but about what gets to happen next, about the future, and we might expect to happen in the second half of the year. In fact manufacturing production rose for the thirteenth consecutive month in June and the Global Manufacturing Output Index averaged 59.1 across the whole second quarter, making for the strongest performance since Q2 2004. But current output is just one of the components of the PMI, and if we look at some of the other components the future however seems decidedly less optimistic, and especially in the new orders indicator where growth (and especially in new export orders) fall back sharply to hit the lowest level in six-months, with the rates of increase slowing in the majority of the national manufacturing sectors covered by the survey.
Thus the phenomenon seems far more general than local, and national PMI New Orders indices fell in the US (eight-month low), the Eurozone (weakest expansion in the year-to-date), Asia (one-year low) and the UK (seven-month low), although in each case the indicator continued to register expansion. When we come to national performance, it is perhaps the Chinese reading which has generated most comment. At 50.4, down from 52.7 in the previous month, the headline China Manufacturing PMI showed only a marginal improvement in Chinese manufacturing sector operating conditions over May. What’s more, it was the third month that the reading has fallen (see chart below). In fact seasonally adjusted manufacturing output actually fell in China during June (as I said, the PMI is a composite, and output is but one of the components), bringing to an end a fourteen-month stretch of continuous expansion. Although it was only marginal, the contraction contrasts strikingly with the near-record growth levels registered at the start of the year. And for the first time in fifteen months, the level of new business taken by Chinese manufacturing firms fell in June. The rate of decline in new work was only fractional, but marked a distinct turnaround from strong growth seen throughout Q1 2010. Those respondents that reported a drop in new orders widely commented that this reflected softer market demand. New orders placed by foreign clients also fell in June, with the pace of decline the fastest since March 2009. Survey respondents widely mentioned that reduced new export business reflected lacklustre global demand, and really you would think that this was something Chinese manufacturers would know about.
300
And it isn’t only manufacturing which is showing the strain, growth in the services sector (which remained fairly strong at 55.6) also weakened to what was a 15 month low. And although new business received by service providers continued to rise in June, the rate of growth lost further ground on the strong expansion seen at the start of second quarter. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC had little doubt what the culprit was: “The slowdown in services activities reflects the effect of property market tightening measures. This, combined with the moderating manufacturing production, implies the economy is cooling off sequentially”, he said. Of course, none of this means China is spinning off towards recession, or anything like it. But it does mean the Chinese economy is unlikely now to become the source of global demand many expected, a fact which is reflected in the large goods trade surplus recorded in June (see below). Really the argument about the property boom doesn’t need to be so much about whether China has had a bubble or not. The key point is that the earlier dynamic in the property sector wasn’t sustainable, and the domestic market in China will note the consequences. As will those who have been benefiting from the imports surge into China (see Brazil below).
Brazil’s Economy Slowing Sharply Less commented on is the perhaps more surprising fact that growth also seems to be slowing in Brazil, as should be evident from looking at the Composite PMI reading. (The Composite is a synthesis of the separate services and manufacturing ones). This fell back to 51.6 in June, from 52.5 in May, and reflected a weakening of activity in both sectors. While expansion in the services sector was only marginal (50.9) manufacturing continued to show modest expansion with the reading (52.7) up slightly from May’s eight-month low of 52.4. Again we
301 aren’t necessarily talking about recession threat here, but we are also hardly seeing the kind of momentum we would need to see in terms of Brazil making a notable contribution to sustaining global demand.
India’s Economy Heating Up? In India, by way of contrast, growth continues to be impressive, and the International Monetary Fund just revised their 2010 economic growth forecast for the country to 9.4 percent from April’s 8.8 percent estimate. And India’s manufacturing industry continues to roar ahead, following the twenty-seven month peak of 59.0 seen in May, the seasonally adjusted PMI maintained the strong expansionary tone in June, despite slipping back slightly to 57.3. This was the fifteenth successive month of continuous expansion. Services put in an even stronger performance, and the headline Business Activity Index for the service sector hit a two-year high of 64.0. As a result the India Composite Output Index - at 62.8 - suggested the sharpest rise in activity for almost two years.Indeed, if you look at the chart below, it tells its own story.
India’s problem is not then growth. India’s problem has a different name: inflation. Just to show us that nothing in this world is ever completely perfect wholesale prices in India are now climbing at double digit rates. Indeed Central bank Governor Duvvuri Subbarao recently
302 increased benchmark interest rates for the third time this year after they rose by an annual 10.16 percent in May.
Food price inflation is an even more serious problem, and the cost of feeding yourself went up by 12.63 percent in the week ended June 26, following a 12.92 percent increase the previous week (year on year figures in both cases). So India is likely to slow somewhat too, or at least a brake will be applied, and this is somewhat unfortunate, since India runs a trade deficit, which means that at this critical time it is a net provider of demand to the global economy.
There are, of course, other net providers of demand to the global economy, like the US.
Or Spain.
303
Or the UK.
But the problem is that these economies are all heavily indebted, and consumers need to deleverage, not take on more debt. So they need trade surpluses, not deficits. Running these unsustainable deficits was how we got here in the first place. Exporting Their Way Into Trouble? Then there are the current account and trade surplus economies, like Japan and Germany. Japan’s Sevices Activity Index fell from 47.5 to a four-month low of 47.1 in June, suggesting a continuing contraction in the Japanese service sector. Nonetheless the Manufacturing PMI continued to show robust growth, even if it did fall back slightly /for the first time in five months), from 54.7 to 53.9. The New Export Orders index also fell slightly (by 0.6 points), but again remained at a high level at 56.9.
304 As a result of the stronger decline in services the headline Composite Output Index fell to 49.8, below the neutral level of 50.0 for the first time in four months. While the fall-off in new export orders in the June PMI is hardly alarming, the drop in May core machinery orders (i.e., private-sector orders excluding shipbuilding and electric power company orders) that was reported by the Industry Ministry is slightly more preoccupying, since they slid by 9.1% from April, well under consensus expectations for a 3.2% drop. (All percentage comparisons are MoM unless otherwise specified.) These results are also consistent with the previously announced 10.2% drop in capital goods exports for the month. While it would be premature to make any rapid judgment (May was in fact the first month in which machinery orders and capital goods shipments both fell back) they do suggest we may be seeing a faster than anticipated peaking in machinery and equipment investment worldwide.
Japan Industry Ministry Turning to Germany, the recent export performance is certainly impressive. As is the fact that 30 billion euros out of the total of 77 billion exported in May went outside the EU.
The rebound in German industrial activity is also impressive, so it is perhaps not hard to understand why Ralph Atkins felt able to be so positive.
305
And even though the manufacturing PMI has fallen back slightly from the earlier very high levels, at 58.4 it is still showing very strong growth. But even in Germany the storm clouds may be gathering. As I have noted, German growth is ALL about exports, since domestic demand is more of a drag than a stimulus, but even in this case the June PMI data showed that new order growth slowed for the third month running and was at its weakest level since December 2009. New export order growth also eased markedly and was the slowest for five months. Now, you might say, that should not surprise us since they were growing very rapidly, but you can’t take these movements in isolation: we are talking about exports here, so it is important to think about what is happening in the other economies.
Water, Water Everywhere Lastly I would just mention the state of play with the Baltic Dry Index, since this has now registered 31 days of continuous decline, making for what BloombergH describes as H its longest losing streak since the 34 session run to Aug. 15, 2001. Of course, not everyone likes this index, since it measures shipping freight charges, and asH Capital Economic’s Julian Jessop points out,H there are many factors (like shipping supply) that can affect it, and not just end demand. But as Bloomberg would doubtless be quick to point out, the drop does correlate with the movement of commodity prices in China. The price of hot-rolled steel, for example, has fallen 17 percent since it hit its 2010 high of 4,698 yuan on April 15. So while movements in the index should not be taken as strong evidence for anything, they should hardly be ignored as additional background information. Something similar could be said about the work being done by the Economic Cycle Research Institute (ECRI) and their U.S. Long Leading Index. This has been pointing to growing economic weakness for months now, and it fell again this week with the growth component slipping to -8.3% from -7.6% at the end of June. Of course, there are plenty of other people out
306 there who would disagree with them, but ECRIs record does seem to have been pretty good during the current crisis.
Baltic Dry Index At the end of the day, it would seem to me, it all depends whether you are one of what
HWolfgang Münchau terms the “optimists” or one of the “pessimists”.H The pessimists believe that a strong global recovery is unlikely given the persistence of financial stress, and the deleveraging of the private and public sectors across the industrialised world. The optimists divide into two groups. There are those who have difficulties counting to zero, who cannot add up the global private, public, and foreign balances, which must equal zero by definition. And then there are the rational optimists, whose expectations of resurgence in private sector demand must surely rest on the assumption of a return to even greater global imbalances than before the crisis, to which the eurozone will this time contribute actively. But this is surely not a sustainable position. The pessimists would argue that global demand growth will not be sufficiently strong to support a self-sustained recovery in the eurozone. Even the rational optimists, who believe that this is possible, would probably conclude that these imbalances are not sustainable, and may trigger another financial crisis down the road. And if that is what you expect, you are not really an optimist. What we know is that some of our societies are deeply over-leveraged, and that de-leveraging them means running trade surpluses, not deficits (see the indebtedness chart for the US economy below). What we also know is that it is deeply unrealistic to imagine that a burst of new consumer credit will restore growth to economies with such deep structural distortions, and the data seem to be confirming that this rebirth in new credit growth just isn’t going to happen (at least not in the short term). According to the most recent ECB data, while the annual rate of Eurozone credit growth for general government stood at 9.8% in May, growth of credit extended to the private sector was at a meager 0.1%. The annual rate of change of loans to companies was -
307 2.1% in May (yes minus, it fell) while the annual rate of change of consumer credit stood at - 0.4%. So if it wasn’t for the respective governments, I don’t think it is too hard to see that domestic demand would be in contraction mode.
Indebtedness chart for the US
And the situation is broadly similar in the US, where the Federal Reserve announced last week that consumer borrowing in the dropped by $9.1 billion in May, following a revised $14.9 billion slump in April. In fact there have only been two months since the end of 2008 when borrowing has increased. So, when Jean-Claude Trichet says that all the global gloom over the Eurozone’s prospects is being overdone, since the data they are looking at over on Kaiserstrasse is “not confirming this pessimism”, and adds that a double dip into recession “is not at all what we are observing” someone might just like to ask him which data it is he is looking at. MaybeU we won’t see a complete double dip, but a serious slowdown in growth does seem to be in the works, and contractions will be once more registered in more of Europe’s economies than M Trichet seems to be currently contemplating. Edward Hugh Is There Global Economic Slowdown In The Works? July 12, 2010 http://fistfulofeurosH .net/afoe/economics-and-demography/is-there-global-economic-slowdown- in-the-works/ H
308
Commodity27B Shipping Slumps for Longest in Almost Nine Years on China Steel By Alaric Nightingale - Jul 9, 2010
The BalticH Dry Index,H a measure of commodity shipping costs, fell for the longest period in almost nine years as declining Chinese steel prices erode the nation’s iron ore demand. The index of freight rates on international trade routes fell 38 points, or 2 percent, to 1,902 points today, according to the London-based Baltic Exchange. Today’s drop was the 31st straight decline. That’s the longest since the 34 sessions to Aug. 15, 2001, according to Baltic Exchange prices. Charter rates for all types of ships tracked by the exchange fell. “We don’t see anything in the next two to three weeks that’s going to turn the market around,” Guy Campbell, head of dry bulk at Clarkson Plc, the world’s largest shipbroker, said by phone. “Everything is centered on China. We are still watching China in terms of where the steel price is going.”
The price ofH hot-rolled steel H in China has declined 17 percent to 3,909 yuan ($577) a metric ton since rising to a 2010 high of 4,698 yuan on April 15, according to prices from Antaike Information Development. Some of the nation’s mills are shuttering blast furnaces for maintenance and others are relying on existing stockpiles instead of imports, MichaelH Gaylard,H strategic director at Freight Investor Services Ltd., said by phone from Shanghai today. Iron ore creates the single-biggest source of demand for dry-bulk shipping, according to data from Clarkson’sH research unit.H Trade in the steelmaking ingredient will total 996 million tons this year. Coal is second-largest at 865 million tons of seaborne trade. Grains are 315 million tons. ‘Difficult Picture’ “It’s a very difficult picture as far as miners are concerned trying to put together sales” of the raw material, Gaylard said. The present slump in shipping costs “is going to continue for July at least,” he said. Charter rates may start to recover starting in September once Chinese mills have worked through iron ore stockpiles and need to accelerate purchases again, Clarkson’s Campbell said.
Rental rates fell 2 percent to $15,679 a day for panamaxH H vessels, the largest to navigate the
Panama Canal, according to the exchange. They declined 3 percent, to $17,643, for capesizesH ,H so called because they have to travel around South Africa’s Cape of Good Hope or South America’s Cape Horn to deliver consignments.
To contact the reporter on this story: AlaricH Nightingale H in London at
Alaric Nightingale Commodity Shipping Slumps for Longest in Almost Nine Years on
China Steel Jul 9, 2010 http://www.bloomberg.com/news/print/2010-07-09/commodity-H shipping-costs-slump-as-chinese-hot-rolled-steel-prices-decline.html H
309 OpinionH H
July 11, 2010
The278B Feckless Fed
By574B PAUL KRUGMAN Back in 2002, a professor turned Federal Reserve official by the name of Ben Bernanke gave a widely quoted speech titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” Like other economists, myself included, Mr. Bernanke was deeply disturbed by Japan’s stubborn, seemingly incurable deflation, which in turn was “associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems.” This sort of thing wasn’t supposed to happen to an advanced nation with sophisticated policy makers. Could something similar happen to the United States? Not to worry, said Mr. Bernanke: the Fed had the tools required to head off an American version of the Japan syndrome, and it would use them if necessary. Today, Mr. Bernanke is the Fed’s chairman — and his 2002 speech reads like famous last words. We aren’t literally suffering deflation (yet). But inflation is far below the Fed’s preferred rate of 1.7 to 2 percent, and trending steadily lower; it’s a good bet that by some measures we’ll be seeing deflation by sometime next year. Meanwhile, we already have painfully slow growth, very high joblessness, and intractable financial problems. And what is the Fed’s response? It’s debating — with ponderous slowness — whether maybe, possibly, it should consider trying to do something about the situation, one of these days. The Fed’s fecklessness is, to be sure, not unique. It has been astonishing and infuriating, as the economic crisis has unfolded, to watch America’s political class defining normalcy down. As recently as two years ago, anyone predicting the current state of affairs (not only is unemployment disastrously high, but most forecasts say that it will stay very high for years) would have been dismissed as a crazy alarmist. Now that the nightmare has become reality, however — and yes, it is a nightmare for millions of Americans — Washington seems to feel absolutely no sense of urgency. Are hopes being destroyed, small businesses being driven into bankruptcy, lives being blighted? Never mind, let’s talk about the evils of budget deficits. Still, one might have hoped that the Fed would be different. For one thing, the Fed, unlike the Obama administration, retains considerable freedom of action. It doesn’t need 60 votes in the Senate; the outer limits of its policies aren’t determined by the views of senators from Nebraska and Maine. Beyond that, the Fed was supposed to be intellectually prepared for this situation. Mr. Bernanke has thought long and hard about how to avoid a Japanese-style economic trap, and the Fed’s researchers have been obsessed for years with the same question. But here we are, visibly sliding toward deflation — and the Fed is standing pat. What should it be doing? Conventional monetary policy, in which the Fed drives down short- term interest rates by buying short-term U.S. government debt, has reached its limit: those short-term rates are already near zero, and can’t go significantly lower. (Investors won’t buy bonds that yield negative interest, since they can always hoard cash instead.) But the message of Mr. Bernanke’s 2002 speech was that there are other things the Fed can do. It can buy longer-term government debt. It can buy private-sector debt. It can try to move expectations by announcing that it will keep short-term rates low for a long time. It can raise
310 its long-run inflation target, to help convince the private sector that borrowing is a good idea and hoarding cash a mistake. Nobody knows how well any one of these actions would work. The point, however, is that there are things the Fed could and should be doing, but isn’t. Why not? After all, Fed officials, like most observers, have a fairly grim view of the economy’s prospects. Not grim enough, in my view: Fed presidents, who make forecasts every time the committee that sets interest rates meets, aren’t taking the trend toward deflation sufficiently seriously. Nonetheless, even their projections show high unemployment and below-target inflation persisting at least through late 2012. So why not try to do something about it? The closest thing I’ve seen to an explanation is a recent speech by Kevin Warsh of the Fed’s Board of Governors, in which he declared that doing what Mr. Bernanke recommended back in 2002 risked undermining the Fed’s “institutional credibility.” But how, exactly, does it serve the Fed’s credibility when it fails to confront high unemployment, while consistently missing its own inflation targets? How credible is the Bank of Japan after presiding over 15 years of deflation? Whatever is going on, the Fed needs to rethink its priorities, fast. Mr. Bernanke’s “it” isn’t a hypothetical possibility, it’s on the verge of happening. And the Fed should be doing all it can to stop it.
http://www.nytimes.com/2010/07/12/opiniH on/12krugman.html?_r=1&th&emc=th H
July 11, 2010, 5:42 pm
The398B Revenge of Felipe II Nobody expects the Spanish football team! I was, in fact, rooting for Spain. If tomorrow’s column is a bit incoherent, blame the vuvuzelas. Add: I think we need to modify the legend — it’s not the flying Dutchman, it’s the fouling Dutchman.
http://krugman.blogs.nytimes.com/2H 010/07/11/the-revenge-of-felipe-ii/ H July 11, 2010, 6:25 pm
What39B Have We Learned? Sometimes it’s useful to step back slightly from the current fray and ask what we’ve really learned about macroeconomics over, say, the past year and a half. Here’s how I see it: in early 2009 there was a broad divide between two policy factions. One, of which I was part, declared that we were in a liquidity trap, which meant that some of the usual rules no longer applied: the expansion of the Fed’s balance sheet wouldn’t be inflationary — in fact the danger was a slide toward deflation; the government’s borrowing would not lead to a spike in interest rates.
311 The other side declared that we were in imminentH danger of runaway inflation,H and that federal borrowing would lead to H very high interest rates.H What actually happened? (The dip and rise in the interest rate represents the rise and fall of oh-god-we’re-all-gonna-die fears). Now, the guys who got it all wrong are winning the political argument, in large part because the Obama administration went for half-measures, and is now being punished for a weak economy — which people like me predicted would happen. But never forget that as far as the facts go, the Keynesians won this hands down.
http://krugman.blogs.nytimes.com/2H 010/07/11/what-have-we-learned/ H
312 July 11, 2010, 11:25 am
Trending40B Toward Deflation Inflation has been falling, but how close are we to deflation? I found myself wondering that after observing JohnH Makin’s combusting coiffure,H his prediction that we might see deflation this year. Here’s the thing: the usual way inflation is measured is by looking at the change from a year earlier. But if inflation is trending lower, that’s a lagging indicator — if prices have been falling for the past few months, but were rising before that, inflation over the past year will still be positive. On the other hand, monthly data are noisy. So what to do? Well, a crude approach would be simply to fit a trend line through those noisy monthly numbers. Here’s what happens when you do this for the Cleveland Fed’s median consumer price inflation number. On the vertical axis is the monthly inflation at an annual rate, on the horizontal axis months with Jan. 2008=0: Cleveland Fed Yes, I know, the axes aren’t labeled. Read the text! Now, there’s a common objection to the Cleveland data, which is that the median tends to be measured by the price of owner-occupied housing, which is imputed rather than directly measured. So for a check I’ve done the same exercise with the personal consumption expenditure deflator for market-based prices, excluding food and energy — Well, whaddya know — a Fed official emails to say that despite what the BEA footnote says, this index still includes owner-occupied housing. Weird. But it doesn’t do very much damage to my main point …: Bureau of Economic Analysis What I take from this is that deflation isn’t some distant possibility — it’s already here by some measures, not far off by others. And of course there isn’t some magic boundary effect when you cross zero; falling inflation is raising real interest rates and making debt problems worse as we speak.
So “it”H is happening here.H Domo arigato, Bernanke-san.
http://krugman.blogs.nytimes.com/2H 010/07/11/trending-toward-deflation/ H July 9, 2010, 8:48 pm
John401B Makin’s Hair Is On Fire
He’s politically conservative, and is based at a right-wing think tank. But his warning about the loomingH danger of deflation H reads just like something I or Jan Hatzius (Goldman’s chief economist — never mind the Blankfein stuff, the econ group is very good, and very pessimistic) might have written. Except Makin is even more gloomy, warning that we might enter deflation this year. Scary stuff. And all too plausible.
http://krugman.blogs.nytimes.com/2010/H 07/09/john-makins-hair-is-on-fire/ H
313 AEI OUTLOOK SERIES The Rising Threat of Deflation
By JohnH H. Makin H | AEIH Online H (July 2010)
July 2010 As we enter the second half of 2010--the "postcrisis" year--while markets have been obsessed with Europe's debt crisis, they have failed to notice potentially more ominous developments. The United States and Europe are heading toward--and Japan already suffers from-- deflation, a classic prolonger of crises that boosts the real burden of debt and crushes profit margins.
U.S. year-over-year core inflation has dropped to 0.9 percent--its lowest level in forty-four years. The six-month annualized core consumer price index inflation level has dropped even closer to zero, at 0.4 percent. Europe's year-over-year core inflation rate has fallen to 0.8 percent--the lowest level ever reported in the series that began in 1991. Heavily indebted Spain's year-over-year core inflation rate is down to 0.1 percent. Ireland's deflation rate is 2.7 percent. As commodity prices slip, inflation will become deflation globally in short order. Meanwhile in Japan, while analysts were touting Japan's first-quarter real growth rate of 5 percent, few bothered to notice that over the past year Japan's gross domestic product (GDP) deflator had fallen 2.8 percent, reflecting an accelerating pace of deflation in a country where the price level has been falling every year since 2004. As of May, Japan's year-over-year core deflation rate stood at 1.6 percent. The Paradox of Crisis and Deflationary Pressure The financial crisis of 2008 prompted aggressive monetary and fiscal easing by most governments. In the United States, the Federal Reserve cut its overnight lending rate to zero and tripled the size of its balance sheet during the year beginning in January 2009, during which time Congress and President Barack Obama enacted a substantial fiscal stimulus package. By later this year, persistent excess capacity will probably create actual deflation in the United States and Europe. Many market participants and policymakers have warned that such aggressive easing will lead to inflation. Contrary to those expectations, as noted above, core inflation has steadily moved lower in the United States and Europe and is approaching outright deflation, which Japan is already experiencing. By later this year, persistent excess capacity will probably create actual deflation in the United States and Europe. Moreover, the recent appreciation of the dollar, especially against the euro, exacerbates the U.S. deflation threat. Fears of higher inflation are a persistent phenomenon at central banks after accommodative steps have been taken to cushion the negative impact on the real economy following a financial shock. During the Great Depression, the Federal Reserve allowed the money stock to fall rapidly because, among other concerns, Fed leaders feared inflation. The disastrous consequences, a serious exacerbation of the economic contraction already underway following the aftermath of a bursting bubble, are fully articulated in Milton Friedman and Anna Schwartz's Monetary History of the United States, 1867-1960 (Princeton University Press, 1963).
314 More recently, the Bank of Japan, slow to ease after the real estate bubble burst in 1990, has pre- sided over two decades of disinflation that has become outright deflation. Japan's nominal GDP, as of the first quarter of this year, at ¥480 trillion has dropped by an extraordinary 7 percent over the past two years because of a combination of outright deflation and low-to-negative growth. Perhaps even more dismaying, in 2010, Japan's nominal GDP is equal to its 1993 GDP. It is encouraging to know that, after its May 20 meeting, the Bank of Japan's policy statement expressed the need to be more accommodative in light of resumed signs of financial distress centered in Europe. Perhaps the Fed's next policy statement after its June midyear policy review by the Federal Open Market Committee will emphasize further the need to remain accommodative for "an extended period." Why Crises Are Deflationary Financial crises are deflationary because they create a rise in the demand for cash that depresses aggregate demand at a time when substantial excess capacity exists. The excess capacity is created during the run-up to the crisis, where underpricing of risk cuts the cost of capital and leads to substantial increases in the capital stock. A number of reasons drive the rise in the demand for cash. First, a crisis causes a sharp rise in uncertainty--Keynes's precautionary motive. In an extreme crisis, one that entails bank runs, the demand surges for currency at the expense of bank deposits and, in turn, reduces the money multiplier, the ratio of the money supply to the bank reserves supplied by the central bank to commerical banks. That places more pressure on the central bank to accommodate the sharply rising demand for outright cash by printing money. Failure by the Fed to recognize the deflationary impact of a sharp rise in the demand for cash in 1932 resulted in its allowing a collapse in the money multiplier to sharply contract the money supply--cash and deposits--which, in turn, severely intensified the collapse of economic activity that was already underway. The Fed aggressively addressed a similar problem in 2008 when it sharply boosted the monetary base (currency and bank reserves) by enough to avoid a sharp drop in the money supply. Despite the rapid rise in the monetary base, the M2 money supply (cash and bank deposits) has stagnated over the past year. This is because the money multiplier has dropped as households--still cautious-- have elected to hold more cash relative to bank deposits while banks--still reluctant to expand credit--have held higher reserves. In fact, banks have virtually ceased to function as financial intermediaries since 2008, preferring to use the zero cost of money provided by the Fed to finance purchases of Treasury securities instead of supplying loans to households and small businesses. After a financial crisis, banks become much more risk averse, as is manifest in their willingness to lend only to the government instead of to households and businesses. That development is deflationary because it means that a sharp boost in the monetary base engineered by the Fed does not translate into faster monetary growth at a time when the precautionary demand for money has been boosted by elevated uncertainty. The recent appreciation of the dollar, especially against the euro, exacerbates the U.S. deflation threat. The increased demand for money that results from higher desired precautionary balances and stingy monetary creation by the banks is deflationary, just as an excess supply of money is inflationary. The fear that a sharp rise in the size of the Fed's balance sheet--the reflection of a sharp boost in the monetary base--is inflationary is misplaced for two reasons. First, such fear does not recognize that the money multiplier has dropped so rapidly that the money supply--a key determinant of inflation--has stagnated. Additionally, it overlooks the increase in the precautionary demand for money that adds to the deflationary excess demand for money. There is a bigger risk that deflation will intensify sharply because once the price level actually starts to fall, the demand for money will be further enhanced. A deflationary spiral--a self- reinforcing, accelerating drop in the price level--can result. This is because a falling price level means that cash "earns interest" since it enhances the purchasing power of otherwise sterile cash
315 assets that pay zero interest, just as interest on a bond adds to its value in terms of its ability to be used to buy goods and services. That is why deflation drives down nominal (market) interest rates just as inflation drives them up. The "real" return on cash rises as inflation falls, thereby further boosting the excess demand for money and, in turn, exacerbating deflationary pressure. The fact that deflationary real returns on cash are not taxed further exacerbates deflationary pressure by enhancing the demand for cash. The "Zero Bound" Looms The Fed's dreaded "zero bound problem," whereby interest rates even at zero percent are still not low enough to stimulate demand, results from the rising real return on idle cash that subtracts from demand growth as deflation accelerates. Once the Fed has cut interest rates to zero, as it has done on short-term loans, any rise in deflation boosts the real return on cash that, in turn, exacerbates deflation. The Fed is, and has been, forced to print money by purchasing Treasury securities and mortgage-backed securities in order to satisfy the deflationary rise in money demand. Beyond a crisis-induced rise in the precautionary demand for cash, and the related tendency for bank disintermediation, postcrisis deflation pressures can be enhanced by an excess supply of goods and services beyond that caused by the rising demand for cash. This is because the run-up in asset prices that creates a bubble in the first place lowers the cost of capital while the bubble is inflating. Firms find it easier to borrow as prices of risky stocks and bonds rise, so they add to productive capacity. Households, encouraged by cheap credit, buy more cars and houses, thereby increasing the stock of durable sources of a stream of housing and transportation services. Once the bubble bursts, wealth is destroyed and workers are laid off--both causes of a sharp drop in demand for goods and services, whose supply is increased by the sharp increase in investment during the rise of the financial bubble. Excess capacity adds to the deflationary pressure induced by a sharp rise in the demand for money and the disintermediation that accompanies a financial crisis and its aftermath. The Cusp of Global Deflation? Europe's sovereign debt crisis has been exacerbated by the European Central Bank's (ECB) stringent policies that imply either drastic wage and price deflation in southern Europe or a breakup of the European Monetary Union. The upshot, so far, of this crisis is a sharp weakening of the euro against the dollar. The 18 percent depreciation of the euro since last November amounts to an export of deflation from Europe to the United States, not to mention China, the rest of Asia, and emerging markets. The transmission of that deflationary impulse has helped to spread the negative impact on markets emanating from the European crisis. Japan's nominal GDP is equal to its 1993 GDP. More recently, an ominous drop in commodity prices and commodity-sensitive currencies, such as the Australian dollar, has accompanied signs that the pace of expansion in China may be slowing rapidly, in part because of stern measures aimed at deflating China's property bubble. The price of copper--a widely followed bellwether for global demand--has dropped 20 percent since April. A combination of weakening currencies in commodity-rich nations and lower commodity prices, coupled with a move toward deflation in the G3 economies, is a troubling sign that a series of rolling financial crises may lie before us. That outcome would seriously exacerbate the balance sheet problems of commercial banks worldwide that hold substantial quantities of debt that is less likely to be repaid in an environment of global deflation. There are exceptions. The price of gold, a classic inflation hedge, is up by 8 percent since April. Gold is a hedge for those who fear that the aftermath of the financial crisis may include inflation. But simultaneously, the price of a thirty-year U.S. government bond is up about 10 percent on the year, with virtually all of that price increase having come in May as the deflationary euro crisis has unwound. Most of the rise in the thirty-year-bond price is tied to a drop in inflation expectations.
316 Policymakers Ignoring Deflation Risks Perhaps it is time for central banks, the ECB especially, to take note. Financial crises are usually deflationary. Pretending otherwise because of a policy of low interest rates and sharp increases in the monetary base undertaken after financial bubbles have burst constitutes a necessary, although not sufficient, condition for a global depression. This would be especially true if China's response to the crisis was to create more excess capacity while refusing to allow its currency to appreciate. A persistent failure to respond to the dangers of further deflation, such as the premature removal of accommodative monetary policy apparently favored at the ECB or a sharp fiscal contraction favored by the European Monetary Union, would sharply elevate the risk of global deflation and depression. At this point in the postbubble transition to deflation, fiscal rectitude and monetary stringency are a dangerous policy combination, as appealing as they may be to the virtuous instincts of policymakers faced with a surfeit of sovereign debt. The result of Europe's embrace of fiscal rectitude will be--paradoxically in the eyes of some--to export deflation to the United States, Asia, and the emerging markets. Additionally, Japan's new government's proposal to double the consumption tax as a way to promote growth has been appropriately chastised by the opposition Your Party leader Yoshimi Watanabe, who retorted: "Boosting the economy with a tax hike? That is an obscene stretch." Japan is threatening to repeat its disastrous experience of 1997, when a consumption tax hike threw the economy back into a sharp slowdown followed by intensified deflation. The G20's shift toward rapid, global fiscal consolidation--a halving of deficits by 2013--threatens a public sector, Keynesian "paradox of thrift" whereby because all governments are simultaneously tightening fiscal policy, growth is cut so much that revenues collapse and budget deficits actually rise. The underlying hope or expectation that easier money, a weaker currency, and higher exports can somehow compensate for the negative impact on growth from rapid, global fiscal consolidation cannot be realized everywhere at once. The combination of tighter fiscal policy, easy money, and a weaker currency, which can work for a small open economy, cannot work for the global economy. The link between volatile financial conditions and the real economy has been powerfully underscored by the events since mid-2007. Growth has suffered and subsequently recovered given powerful monetary and fiscal stimulus. And yet, the damaged financial sector, unable to supply credit; a jump in the precautionary demand for cash; and a persistent overhang of global production capacity have combined to leave deflation pressure intact. The G20's newfound embrace of fiscal stringency only adds to the extant deflation pressure. No wonder no country wants a strong currency any- more, as attested to by Europe's easy acceptance of a weaker euro. The acute phase of the financial crisis is over, but the chronic trend toward deflation that has followed it is not. John H. Makin ([email protected]) is a visiting scholar at AEI.
ClickH here to view this Outlook as an Adobe Acrobat PDF.
http://www.aei.org/outlook/100971H H
317 OpinionH H
July 11, 2010
The279B Class War We Need
By57B ROSS DOUTHAT The rich are different from you and me. They know how to game the system. That’s one interpretation, at least, of last week’s news that Americans with million-dollar mortgages are defaultingH at almost twice the rate H of the typical homeowner. It suggests an infuriating scenario in which the average American slaves away to keep Wells Fargo or Bank of America off his back, while fat cats and high fliers cut their losses and sail off to the next investment opportunity. That isn’t exactly what’s happening, most likely. Just because you have a million-dollar mortgage doesn’t make you a millionaire, and a lot of the fat-cat defaulters probably aren’t that fat anymore. Chances are they’re more like Teresa and Joe Giudice from “The Real
Housewives of New Jersey,” tacky reality-TV climbers who recently filedH for bankruptcy H after their decadent lifestyle turned out to be a debt-enabled fantasy. Still, watching the Giudices sashay through their onyx-encrusted mansion, and knowing that thousands of similarly profligate homeowners are simply walking away from their debts, it’s easy to succumb to a little class-warrior fantasizing. (Pitchforks, tar, feathers ... that sort of thing.) The trick is to channel those impulses in a constructive direction. The left-wing instinct, when faced with high-rolling irresponsibility, is usually to call for tax increases on the rich. But the problem, here and elsewhere, isn’t exactly that we tax high rollers’ incomes too lightly. It’s that we subsidize their irresponsibility too heavily — underwriting their bad bets and bailing out their follies. The class warfare we need is a conservative class warfare, which would force the million-dollar defaulters to pay their own way from here on out. Consider the spread that the Giudices currently occupy (pending potential foreclosure proceedings, of course). The first million of its reported $1.7 million price tag is presumably covered by the federal mortgage-interest tax deduction. Intended to boost middle-class homebuyers, this deduction has gradually turned into a huge tax break for the affluent, with most of the benefits flowing to homeowners with cash income over $100,000. In much of the country, it’s a McMansion subsidy, whose costs to the federal Treasury are covered by the tax dollars of Americans who either rent or own more modest homes. This policy is typical of the way the federal government does business. In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and have-mores. We subsidize drug companies, oil companies, agribusinesses disguised as “family farms” and “clean energy” firms that aren’t energy-efficient at all. We give tax breaks to immenselyH profitable corporations H that don’t need the money and boondogglesH H that wouldn’t exist without government favoritism. And we do more of it every day. Take Barack Obama’s initiative to double U.S. exports in the next five years. As The Washington Examiner’s Tim Carney points out, it involves the purest sort of corporate welfare: We’re lending money to foreign governments or companies so
318 that they’ll buy from Boeing and Pfizer and Archer Daniels Midland. That’s good news for those companies’ stockholders and C.E.O.’s. But the money to pay for it ultimately comes out of middle-class pocketbooks. This isn’t just a corporate welfare problem. The same pattern is at work in our entitlement system, which is lurching toward bankruptcy in part because of how much Medicare and Social
Security pay to H seniors who could get along without assistance.H Instead of a safety net that protects the elderly from poverty, we have a system in which the American taxpayer is effectively underwriting cruises and tee times.
All of this ought to be grist for a kind of “small-governmentH egalitarianism,”H in the economist Edward Glaeser’s useful phrase, that seeks to shrink government by attacking Washington’s wasteful spending on the well-connected. And sometimes conservative politicians make moves in this direction. President George W. Bush’s TaxH Reform Commission proposed H sharply reducing the mortgage-interest deduction. House Minority Leader John Boehner, to his great credit, recently floated the possibility of means-testingH Social Security.H Many Republican senators have been staunch critics of corporate welfare. In the age of Barack Obama, many rank-and-file conservatives have been more upset about redistribution of a different sort — the kind that takes money from the prosperous and “spreads the wealth” (as Obama put it, in his famous confrontation with Joe the Plumber) down the income ladder. This kind of spending can be problematic. But conservatives need to recognize that the most pernicious sort of redistribution isn’t from the successful to the poor. It’s from savers to speculators, from outsiders to insiders, and from the industrious middle class to the reckless, unproductive rich.
http://www.nytimes.com/2010/07/12/opiH nion/12douthat.html?th&emc=th H
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Eurointelligence280B Daily Morning Newsbriefing
Stark485BH hints at an end to ECB’s sovereign bond purchases
12.07.2010 ECB board member says if situation continued to improve, there would be no need to continue the controversial programme; he says the eurozone’s economic recovery has not been fully appreciated; Germany and France press ahead with financial transactions tax; a mindboggling €1.65 trillion of bank debt is due in 2011 and 2012; bond market investors have been getting a tad more optimistic about the European debt crisis, as credit market indices improved; European banks are likely to tap the bond markets ahead of the stress tests; strong majority of Europeans support deficit cutting; Lex says the Spanish reform of the cajas is too little, too late; Silvio Berlusconi, meanwhile, had a bruising meeting with Italy’s regions over the extent of the spending cuts in the 2011 budget.
12.07.2010
Stark402B hints at an end to ECB’s sovereign bond purchases
The ECB signals that government bond purchases could end, the FTH reports.H Jürgen Stark said on Friday the declining scale of the ECB’s purchases since then showed how the market environment was better, “If the situation improves further, then there is no need to continue”. His comments put the ECB at odds with the IMF, which urged the ECB to continue bond purchases. Mid May the ECB had bought €16.5bn, and had fallen down to €4bn last week. Mr Stark added that the strength of the eurozone’s recovery had not yet been fully appreciated. “The IMF has not caught up with the reality in Europe,” he said. Germany and France set transaction tax on Ecofin agenda Germany and France are pressing ahead with their proposal for an EU wide tax on financial
transactions, reportsH the FT,H to be discussed at the Ecofin meeting this week. The initiative comes three weeks after they failed to get a global agreement about a transaction tax at the G20 meeting. The fate of the tax depends mainly on the UK, which is opposed to such a transaction cost tax and prefers an IMF style levy based on bank balance sheet and could also be interested in a tax on extra profits and remuneration. Despite the uncertainty, Germany has already budgeted €6bn revenues from the tax in its four-year budget plan.
320 €1.65 trillion of eurozone bank debt to come due
The HWall Street Journal blog H pins up a mind boggling figure: €1.65 trillion, this is the eurozone bank debt coming due in 2010 and 2011. It is far more than among banks in the US, the UK or elsewhere. As risk premia are rising, the question is, how much do the banks need to rollover and what does the rising debt service mean for their balance sheet. Is the bond market crisis over?
BloombergH H has a story that the tensions in the bond markets are slowly subsiding, as bond investors have regained confidence in European banking sectors. Various credit default swap indices have fallen last week, including the Markit iTraxx Financial, which was down 25bp, the biggest decline in two months. Bloomberg also said that the stress tests are also a factor that have given a positive impact on investor confidence. European banks are looking to tap the bond markets in the coming weeks in an attempt to secure financing ahead of the results of the stress tests, writes the FT. Last week was the busiest for bank issuance in the region since mid-April, according to data from Dealogic, with €18.4bn of bonds sold – up nearly fourfold on the previous week’s €4.8bn. Europeans in support of deficit cutting A strong majority of people in the European Union’s five largest countries (UK, Germany, France, Italy and Spain) are in support of deficit cuts and think that governments were
wrong to run up large scale deficits in response to the 2008 crisis, according to a pollH from
the FT.H Asked where spending cuts should occur, all countries except the UK listed aid to developing countries and defence at the top followed by cuts in the welfare system, the UK listed unemployment services first. There was no support for cutting expenditure on police services, healthcare and education. Who wants to buy stakes in Spanish Cajas?
FTH lex column H is pessimistic about the Spanish government’s reform for its saving banks, the cajas, arguing that is too little too late. The reform “will allow cajas to sell up to half of their equity to private investors, so enabling them to absorb losses. So far, unable to issue equity or generate profits fast enough, 38 of the 45 cajas have had to deal with losses through mergers; a couple have turned to Spain’s bank bail-out fund. But who will buy the voting securities, and will existing shareholders – a coterie of regional and municipal governments – let them?” Italian regions contest spending cuts Italian regional governors are outraged after what they said was a completely unhelpful meeting with Prime Minister Silvio Berlusconi, accusing the PM of starving the regions of
funds, and ending the country’s federalist system, accordingH to the Wall Street Journal.H Berlusconi and Economy Minister Giulio Tremonti have called for €25bn in budget savings over the next two years. Around half the savings come from cuts in transfers to Italy's 20 regions, which manage the public health-care system and distribute resources to municipalities for public transportation services and other needs. The government is ready to review some of the measures but insists that the spending targets should remain unchanged.
http://www.eurointelligence.com/index.php?id=581&tx_403BH ttnews[tt_news]=2851&tx_ttnews[backPid]=901&cHash
=e77d9eabad# H
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Support281B for European spending cuts strong By Tony Barber in Brussels Published: July 11 2010 13:30 | Last updated: July 11 2010 16:04 European governments have solid public support, at least for now, for the spending cuts they are making in an effort to boost economic recovery, according to the latest Financial Times/Harris opinion poll. The survey also indicates that a majority of people in the European Union’s five largest countries disagree with the decision of governments to let their budget deficits rise in order to combat the financial crisis that erupted in 2008.
The poll’s results point to a fiscal conservatism among the European public that contrasts with the eagerness with which mostH governments ran up high deficits H to protect jobs and living standards as the crisis unfolded. Moreover, the results suggest that the austerity measures now being introduced across Europe need not be politically fatal for governments as long as they give convincing explanations for their actions. However, the full impact of the austerity measures has yet to be felt in most countries. The poll may to some extent reflect public awareness of the debt crisis that came close to overwhelming the eurozone in May. The emergency resulted in a €110bn rescue plan for
Greece and aH promise of up to €750bn in funds H for any other euro area countries that find themselves in refinancing trouble Asked if public spending cuts were necessary to help long-term economic recovery, 84 per cent of French people, 71 per cent of Spaniards, 69 per cent of Britons, 67 per cent of Germans and 61 per cent of Italians answered Yes. In the US, 73 per cent of Americans agreed.
523BH H France and Germany push for transaction tax - Jul-09
524BH H ECB set for rethink on bond purchases - Jul-09
322 Only 38 per cent of Italians, 33 per cent of Germans, 31 per cent of Britons, 29 per cent of Spaniards and 16 per cent of French people thought that public spending cuts would harm the economic recovery. Some 27 per cent of Americans agreed. Asked if they preferred public spending cuts or tax rises as a way to reduce budget deficits and national debts, strong majorities in the five EU countries as well as the US were in favour of spending cuts. Similarly conservative views on public expenditure emerged when people were asked if EU governments were right to engage in large-scale deficit-spending after the 2008 crisis. In all five EU countries, a majority – ranging from 68 per cent in France and Italy to 54 per cent in the UK – said the governments were wrong to have done so. According to the survey, large majorities in every country agree with the proposition that the high budget deficits and subsequent spending cuts call for a re-examination of Europe’s generous welfare state. The survey makes clear, however, that Europeans and Americans would like to see the pain spread around. Asked which policy area should bear the brunt of the cuts, a majority in the US and every European country except the UK put aid to developing countries and defence in the first two places, although not always in that order. In the UK, respondents put development aid first, unemployment benefits second and defence third. In all five EU countries and the US, there was next to no support for cutting expenditure on police services, healthcare and education. The FT/Harris poll was conducted online by Harris Interactive among 6,164 adults aged 16 to 64 in France, Germany, Spain, the UK and the US, and adults between 18 and 64 in Italy, between June 22 and July 1. http://www.ft.com/cms/s/0/8f9e61c40BH 0-8ce2-11df-bad7-00144feab49a.html H
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July 10, 2010, 5:00 AM ET
Number28B of the Week: Euro Zone Debt Is Coming Due N the Week $1.65 Trillion $1.65 trillion: Euro zone bank debt coming due in 2010 and 2011. Throughout the recession and recovery, many European banks have sought to sweep their problems under the carpet in the hopes that they could solve them in a better and more profitable future. Now, though, they’re running out of time. As investors fret about European banks’ exposures to Greece and other financially troubled countries, those banks’ borrowing costs are rising sharply. That wouldn’t be a problem if they didn’t need to borrow, but as it happens they need to borrow quite a lot: This year and next, some $1.7 trillion in euro-area bank debt will come due, far more than among banks in the U.S., the U.K. or elsewhere.
If banks are forced to renew those borrowings at high interest rates, the resulting debt-service costs will make it still more difficult for them to earn their way out of their troubles. If they choose not to refinance, they’ll have to sell assets and cut back on lending — anathema to European economies still struggling to recover. Given the stakes involved, it’s surprising that European bank regulators aren’t being more forthcoming with details of the stress tests aimed at restoring confidence in the region’s banking system. So far, investors are being left in the dark as to what many of the key assumptions in the tests’ various scenarios will be — including how much debt holders will lose if Greece, Spain and other countries default on their government bonds. For the sake of the banks and the broader economy, a little more openness would be a good idea.
405B http://blogs.wsj.com/economics/2010/07/H 10/number-of-the-week-euro-zone-debt-is- coming-due/tab/print/ H
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Bank283B Swaps Show Reduced Stress-Test Fears as Bonds Rally: Credit Markets By Abigail Moses - Jul 12, 2010 Bond investors are gaining confidence in the ability of banks to ride out Europe’s government deficit crisis, driving the difference in the cost of insuring financial and corporate debt from default to near the lowest in three months.
TheH Markit iTraxx Financial Index H of credit-default swaps on 25 banks and insurers from
BancoH Santander SA H in Spain to Germany’s Deutsche Bank AG fell more than 25 basis points last week, the most in two months. The bank swaps index pared that decline today, though it’s still just 16 basis points wider than the Markit iTraxx Europe Index of corporates, down from a record 55 basis points on June 4. Investors are buying bank bonds at the fastest pace in six months on speculation the examination by the Committee of European Banking Supervisors will confirm lenders can withstand a shrinking economy and a drop in the value of government bonds. Europe’s budget deficit crisis triggered concern banks would suffer crippling losses from sovereign debt holdings.
“There was a fear the financial system would collapse,” said PhilipH Gisdakis,H a Munich-based strategist at UniCredit SpA. “There’s a high probability the stress tests will show the core of the financial system is healthy and sound in the sense it can weather the storm.” A weekly survey of money managers by Jersey City, New Jersey-based Ried Thunberg ICAP, a unit of ICAP Plc, the world’s largest inter-dealer broker, found that 95 percent of the 22 respondents controlling $1.39 trillion said most major European banks will receive favorable test ratings. Bond Sales Rebound Financial firms in Europe sold the most bonds last week since the start of January, raising 11.4 billion euros ($14.4 billion), or 93 percent more than this year’s weekly average of 5.9 billion euros, according to data compiled by Bloomberg. Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt fell to the lowest in almost seven weeks, while emerging-market bonds rallied the most in two months. Spreads shrank 5 basis points last week to an average of 192 basis points, or 1.92 percentage points, the narrowest since May 24, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The gap reached a low this year of 142 on April 21 before expanding to as much as 201 on June 11. Yields fell to 3.97 percent, from 3.98 percent on July 2. ‘Positive Outlook’ “Overall sentiment feels like it has shifted, giving investors a more positive outlook,” Payden
& Rygel, a Los Angeles-based investment firm overseeing $50 billion led by JoanH Payden,H said in a report to clients.
325 Credit-default swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies climbed 6.5 basis points to 536.4 as of 11:10 a.m. in London, according to Markit Group Ltd. The index is a benchmark for the cost of protecting bonds against default and an increase signals a deterioration in investor perceptions of credit quality. Default swaps tied to the government bonds of Greece, where Europe’s debt crisis began, rose 13 basis points to 854, while Spain climbed 8 basis points to 218, according to CMA.
The cost of insuring BPH Plc’sH debt fell for a ninth day on reports that Exxon Mobil Corp. may bid for the U.K. oil company and that it’s selling assets in Alaska. Credit-swaps on the company dropped 35.5 basis points to 335.5 today, the lowest since June 8, CMA prices show. Most Traded BP’s bonds were the most traded by dealers on July 9 on optimism the London-based company will stem the flow of oil as soon as this month from the worst spill in U.S. history, Bloomberg data show. Anadarko Petroleum Corp. had the most active junk bonds. High-yield, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Sales of corporate bonds rose to $49 billion last week from $20.8 billion in the previous period as UBS AG, Switzerland’s largest bank, sold 1.75 billion euros of five-year notes and Frankfurt-based Kreditanstalt fuer Wiederaufbau issued $5 billion of debt due in 2013, Bloomberg data show.
CreditH Agricole SA,H France’s largest bank by branches, is selling five-year bonds in euros today, according to two people with knowledge of the deal. KBC Bank NV, a unit of Belgium’s biggest bank by market value, is issuing three-year floating- rate notes through its KBC IFIMA NV unit, a banker involved in the transaction said. Leveraged Loans
The S&P/LSTAH US Leveraged Loan 100 Index H rose 0.05 cent to 87.93 cents on the dollar last week, after reaching 87.82 cents on July 7, the lowest since Jan. 4. Loans returned as much as 5.82 percent this year through April 26, before dropping to 1.47 percent by July 9, according to the index, which tracks the 100 largest dollar-denominated first-lien leveraged loans. In emerging markets, the extra yield investors demand to own bonds instead of government debt fell 24 basis points to 311 basis points last week, the biggest drop since shrinking 33 basis points in the period ended May 14, according to index data from JPMorgan Chase & Co. The spread has ranged from as low as 229 on April 15 to as high as 359 on May 25. Rising confidence in Europe’s banks can also be seen in their so-called Tier 1 bonds, which are used by lenders to bolster capital ratios. The securities have gained 1.52 percent this month, compared with a loss of 0.07 percent for a global index of the debt maintained by Bank of America Merrill Lynch and 0.02 percent for corporate bonds in the region. ‘Pessimistic’ “There is a tendency from the outside to be excessively pessimistic,” European Central Bank
President Jean-ClaudeH Trichet H said at a news conference in Frankfurt after the ECB left its benchmark interest rate at a record low of 1 percent on July 8. “The figures don’t confirm this pessimism.”
326 Europe’s economy is showing “encouraging” signs, Trichet said, with exports and industrial production rising and employment stabilizing. The stress tests will cover 65 percent of the area’s banking industry and include 14 German lenders, six from Greece and four from the U.K., the European bank committee said July 7. The results will be disclosed July 23. Yields on financial company bonds in euros have climbed 60 basis points relative to benchmark rates since April 30 to 250 basis points, according to Bank of America Merrill Lynch’s EMU Financial Corporate Index. The spread on euro corporate securities widened 47 basis points in the same period. Bank Swaps Financial credit-default swaps approached an all-time high in Europe last month amid concern that Greece, Portugal and Spain may be forced to restructure debt to ease budget deficits that are more than three times the European Union limit. Greek attempts to cut the budget deficit are “positive,” indicating that 2010 targets may be met and reducing the medium- term risk of default or an imminent debt restructuring, Citigroup Inc. analysts wrote in a July 9 report. European government measures to curb government spending and boost taxes are also taking the pressure off banks.
“There is renewed faith in the banks,” SukiH Mann,H a credit strategist at Societe Generale SA in London, wrote in a note to investors. “If the results of the impending earnings season prove strong, financials will continue to outperform corporates soundly.”
To contact the reporter on this story: AbigailH Moses H in London at [email protected] H
406B http://www.bloomberg.com/news/2010-07-11/bank-H swaps-show-reduced-stress-test-fears-as- bonds-rally-credit-markets.html H
327 328 Ante el debate del estado de la nación
Del284B fin de la recesión al acoso de los mercados financieros
La486B política económica ha virado en redondo ante la crisis MIGUEL JIMÉNEZ - Madrid - 11/07/2010 "Yo, señor Rajoy, he dicho que no hay que hacer una reforma laboral". La frase corresponde al debate sobre el estado de la nación del año pasado y fue pronunciada por Zapatero, que puso mucho énfasis en "dejarlo muy claro delante de todos los ciudadanos". "Yo, señor Rajoy, he dicho que no hay que hacer una reforma laboral". La frase corresponde al debate sobre el estado de la nación del año pasado y fue pronunciada por Zapatero, que puso mucho énfasis en "dejarlo muy claro delante de todos los ciudadanos". En aquel momento, el Gobierno aún vivía en la ensoñación de que no serían necesarias reformas de calado en la economía española para salir de una crisis que por entonces atravesaba su momento más agudo. Del mismo modo que el Gobierno se equivocó al diagnosticar la llegada de la crisis, también erró con respecto a la salida. "España saldrá de la recesión como el resto de los países europeos", decía en septiembre pasado Zapatero, cuando en realidad las grandes economías europeas ya habían vuelto a crecer. El Gobierno empezó a hacer parte de los deberes del ajuste fiscal en los Presupuestos, con una subida del IVA y del IRPF que fue pésimamente comunicada. Y lanzó el proceso de reforma de las pensiones y del mercado de trabajo al arrancar 2010, pero sin excesiva convicción. Ni siquiera cuando la crisis fiscal griega se agravó e hizo necesario el rescate europeo, el Gobierno español era consciente de la amenaza que se cernía sobre España. Es verdad que se abría paso la tesis de que sanear las cuentas públicas era vital para impulsar la recuperación, pero en pleno rescate griego el Gobierno aún creía que bastaría con aplicar el plan previsto y que ni había margen -ni eran convenientes- ajustes adicionales. En cuanto a reformas, el pactito de Zurbano y la ley de la economía sostenible hacían que el Ejecutivo se diese por satisfecho. España no se vio reflejada en el espejo griego hasta que se lo pusieron delante de la cara a Zapatero sus colegas europeos y los mercados financieros (esos conspiradores). Todavía el 5 de mayo, tras su reunión con Rajoy, el mensaje del presidente era: "Reducción del déficit, sí. Drástica, no". Dos días después, la prima de riesgo española alcanzaba el que hasta ese momento era su máximo de la era euro. Había pasado en cuestión de semanas de 66 a 165 puntos básicos. Los mercados se cerraban para España y el euro parecía en peligro. La crisis se agravaba, curiosamente, cuando se acababa de conocer que España había dejado atrás la recesión (eso sí, con una tasa de paro del 20%). El Gobierno se vio al borde del abismo y todo el discurso anterior saltó por los aires. Llegaron el recorte de sueldo de los funcionarios, la congelación de las pensiones y las demás medidas de ajuste. En contra de lo que dijo el año pasado, Zapatero llega al debate de este año con una reforma laboral aprobada por decreto y también con una reestructuración de las cajas (real y normativa). El próximo paso es la reforma de las pensiones. http://www.elpais.com/articulo/espana/fin/rH ecesion/acoso/mercados/financieros/elpepunac/201 00711elpepinac_15/Tes
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"Alemania juega un papel destructivo"
Paul487B Krugman ve posible que Grecia deba abandonar el euro y dañe a España - El Nobel prevé un largo periodo de bajo crecimiento mundial sin creación de empleo ALICIA GONZÁLEZ - Madrid - 11/07/2010 Cuando Paul Krugman (Nueva York, 1953) recibió en Oviedo el Premio Príncipe de Asturias, en octubre de 2004, ya advirtió que Estados Unidos estaba viviendo en los años veinte del siglo pasado, esos años que acabaron de bruces en la Gran Depresión y que ahora planean cual espada de Damocles sobre la economía global. Cuando Paul Krugman (Nueva York, 1953) recibió en Oviedo el Premio Príncipe de Asturias, en octubre de 2004, ya advirtió que Estados Unidos estaba viviendo en los años veinte del siglo pasado, esos años que acabaron de bruces en la Gran Depresión y que ahora planean cual espada de Damocles sobre la economía global. Si el premio Nobel de Economía de 2008 mantiene la misma capacidad de predicción, no cabe esperar buenos tiempos para la eurozona. "No me sorprendería ver a uno o dos países forzados a salir del euro". Y pone nombres. "Creo que hay una posibilidad plausible de que Grecia se vea obligada a salir [del euro] y ese contagio provocaría serios problemas en todos los demás, especialmente en Portugal, y luego posiblemente España e Irlanda se verían atrapadas" en ese lío. Pese a todo, "no veo que Europa se colapse", admitió, "y estaría realmente sorprendido si Francia, Alemania o los países del Benelux no se aferrasen a la moneda única en el futuro más inmediato". El alcance de los problemas europeos preocupa más allá de las fronteras del euro y centró, sin dudas, la conversación que Krugman mantuvo esta semana con periodistas de varios medios de comunicación de todo el mundo, aquellos con derechos para publicar sus tribunas de opinión. Sin embargo, no fue el tema que discutió con mayor ardor. El premio Nobel y profesor de Princeton mantiene en las últimas semanas un duro enfrentamiento intelectual y dialéctico contra quienes defienden que ha llegado la hora de imponer la austeridad a las cuentas públicas después de los estímulos masivos que se han aprobado estos años para combatir la recesión. Ese era, en esencia, el mensaje que trasladó el G-20 en su última reunión en Toronto, aunque con distintas velocidades según los países, y Krugman no oculta su frustración. "Fue algo escandaloso, dado que el estado de la economía mundial se encuentra muy lejos de haberse recuperado". Y la receta, en su opinión, no es otra que más estímulos. Sin embargo, él mismo reconoce que no es lo mismo que la nueva ronda de gasto público que él defiende -keynesianista hasta el final- los lleve adelante una gran economía como Estados Unidos o Europa en su conjunto, a que lo hagan economías de menor tamaño como Letonia, Irlanda o incluso España. "La austeridad española tendría muchas más posibilidades de funcionar si Alemania no siguiera también una política de austeridad. Y todas las políticas tendrían más efectividad si el BCE adoptara con firmeza políticas expansionistas". Pero dado el juicio de los mercados, Krugman admite que "claramente España no está en una posición de llevar a cabo una política expansiva en solitario, pero eso podría funcionar si otros lo hicieran". Krugman demuestra seguir muy de cerca la actualidad económica del país y salpica su charla -menos fluida de lo que él quisiera ante los efectos de un imprevisible catarro veraniego- de multitud de ejemplos sobre la situación de la economía española. Menos comprensivo se muestra con la situación de Alemania que, en su opinión, "está adoptando una posición que no solo no es buena para Alemania sino que es realmente mala
330 para Europa". Es más, "Alemania está jugando un papel realmente destructivo. Está empujándose a sí misma y al resto de Europa por la vía de la autodestrucción", sentencia. Todo porque "parte del problema de la zona euro es que hay muchas vías de contagio, de forma que la austeridad de un país llevan a la depresión a los demás países" y "la austeridad puede parecer bien para un país porque reduce su deuda, pero no tiene en cuenta el coste que impone a sus vecinos con una política restrictiva". Tampoco tiene un juicio benévolo para la autoridad monetaria europea. De hecho, compara las apelaciones a la necesidad de ajuste fiscal del presidente del Banco Central Europeo (BCE), Jean-Claude Trichet, con las que hizo el presidente estadounidense Herbert Hoover en 1932, que no hicieron otra cosa que agravar la recesión, "y eso es bastante deprimente". "Hay una vieja broma que dice que el euro es un complot de los italianos para tener por fin banqueros centrales alemanes y algo de eso hay", bromea. En el fondo, el problema de la eurozona, asegura, "no es solo una crisis de deuda" y el mejor ejemplo, en su opinión, es España, "que tenía un presupuesto equilibrado y una deuda a la baja respecto al PIB hasta que la crisis financiera le golpeó". Se trata de los problemas que conlleva una unión monetaria "que, en cierta forma, nunca cumplía los criterios para compartir una moneda única". "Los problemas que nos aseguraron que no serían tan severos han resultado ser más severos de lo que incluso los más pesimistas imaginaron nunca", apunta. ¿Qué hacer, pues, para que funcione? Paul Krugman defiende una mayor integración fiscal, aunque reconoce que algunos planteamientos "no formarán parte de la agenda ni en los próximos 10 años ni en las generaciones venideras". "La situación sería menos severa si, por ejemplo, las pensiones españolas estuvieran cubiertas por una especie de seguridad social [a nivel federal], como en Estados Unidos". Un objetivo que él mismo admite como irreal, aunque sí defiende avances en esa dirección. A ello habría que añadir una política económica más expansiva y una mayor permisividad con la inflación por parte del BCE. "Una eurozona con una tasa de inflación del 3% o del 4% tendría mucho más fácil hacer los ajustes que con una tasa del 1% o del 2%" y es precisamente, en su opinión, la falta de integración de la zona euro lo que da mayores argumentos para que el BCE fije el objetivo de precios por encima del de la Reserva Federal de EE UU, actualmente en el 2%. Lo que no aparece, al menos en sus previsiones hoy por hoy, es que, con austeridad o sin ella, la economía mundial vuelva a entrar en recesión. "Es difícil ver cómo va a acabar este periodo de débil demanda a nivel mundial; puede llevar un tiempo antes de que termine", admite. "Una vuelta a la recesión propiamente dicha no lo veo, pero un entorno de desaceleración del crecimiento que impida que se cree empleo probablemente sí, y eso es lo que me asusta". Si algo ha puesto también en evidencia esta crisis, afirma Krugman, es que la posibilidad de que el euro fuera la moneda de reserva mundial alternativa al dólar se ha desvanecido de facto. "El mercado de bonos europeo es profundo y amplio en tanto en cuanto los bonos denominados en euros sean considerados iguales. Una vez que estás en una situación en la que el mercado establece marcadas diferencias entre los bonos franceses, los alemanes y ni qué decir de los bonos españoles y los griegos ya no hablamos de un mercado único sino de mercados nacionales individuales que ni de lejos tienen la magnitud del mercado estadounidense, lo que significa que el papel especial del dólar como moneda de reserva se ha ampliado", advierte.
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Europa285B muestra las tripas de su banca para calmar al mercado
España,48B promotora de la publicación de las pruebas de resistencia, "desnuda" al 90% de sus bancos y cajas - Algunos expertos dudan de los criterios seguidos A. MISSÉ Í. DE BARRÓN - Bruselas / Madrid - 11/07/2010 Finalmente y tras muchas dudas, el Comité de Supervisores Bancarios Europeos (CEBS) decidió el pasado miércoles la publicación de las pruebas de resistencia de 91 entidades financieras, el 65% del sistema de la Unión. Las pruebas o stress tests son un ejercicio teórico que mide la capacidad de bancos y cajas para afrontar un deterioro económico. Finalmente y tras muchas dudas, el Comité de Supervisores Bancarios Europeos (CEBS) decidió el pasado miércoles la publicación de las pruebas de resistencia de 91 entidades financieras, el 65% del sistema de la Unión. Las pruebas o stress tests son un ejercicio teórico que mide la capacidad de bancos y cajas para afrontar un deterioro económico con las secuelas de aumento del desempleo, impago de créditos y devaluación de activos como la deuda soberana. En este caso se ha tomado como escenario que el PIB de la UE cayese el 3% con relación a las previsiones de la Comisión. Los stress tests han sido realizados por los supervisores nacionales y el CEBS y la colaboración del Banco Central Europeo (BCE) y la Comisión Europea. El propósito es demostrar a los mercados que, después de los recursos públicos empleados y las reestructuraciones, el sistema financiero europeo está saneado. La publicación de los resultados prevista para el 23 de julio irá acompañada de los planes de recapitalización en los supuestos en que sea necesario. Los resultados serán, sin embargo, muy dispares y dependerán en buena medida de la amplitud y profundización de los exámenes realizados por las respectivas autoridades nacionales. La iniciativa de publicar de los resultados de cada entidad fue adoptada por España en la víspera del Consejo Europeo del 17 de junio. Durante la cumbre, el presidente del Gobierno, José Luis Rodríguez Zapatero, formalizó la propuesta, que fue aceptada por todos a pesar de las reticencias manifestadas hasta entonces por la canciller alemana Ángela Merkel. Antes solo se pensaba examinar las 26 mayores entidades y no estaba clara la publicación de resultados individuales. España ha optado por la máxima transparencia y es el país que va a examinar prácticamente todo su sistema, 27 entidades o grupos: todas las cajas tras el proceso de reestructuración y los bancos grandes y medianos. "El Banco de España estaba harto de las continuas sospechas sobre la solvencia de sus entidades, que estaban costando dinero al país al tener que afrontar una refinanciación más cara de la deuda", señala una fuente comunitaria. España examinará el 100% de las cajas de ahorros y la mayoría de bancos, incluida la Banca March, con activos de 12.658 millones. El subgobernador del Banco de España, Javier de Aríztegui, ha recordado que en 2009 el CESB realizó pruebas de resistencia a las 25 mayores entidades pero no publicó los resultados. A su juicio, "este esfuerzo de comunicación mostrará la solvencia del sistema bancario español". Para el presidente del BCE, Jean Claude Trichet, "es bueno que los mercados financieros vean los resultados de los exámenes. Contribuirá a restablecer la confianza". Las
332 pruebas se realizarán después de que la UE haya movilizado más 4,1 billones de recursos públicos (entre garantías y recapitalizaciones) para salvar a sus bancos. Aun así, hay ciertas dudas sobre los criterios con que se realizarán los stress tests. Por ejemplo, algunos analistas consideran que el deterioro del 17% previsto para la deuda griega es insuficiente. Para España, las dudas planean sobre los riesgos sobre el sector inmobiliario. También aquí el Banco de España ha optado por la máxima transparencia. Reconoce que la exposición del sistema financiero español era de 445.000 millones a finales de 2009 (el 12% del sistema), pero señala que hay que tener en cuenta las garantías. Para José María Roldán, director general de Regulación, "el conjunto de entidades podrían deshacerse de su cartera problemática de promoción y construcción percibiendo el 65% del valor en libros de las garantías trabadas, sin que se registrase ninguna pérdida en la cuenta de resultados". Solo el tiempo revelará si los resultados son tan sólidos. Iñigo Vega, de Iberian Equities, comenta que el supervisor no hubiera sometido a estas pruebas a todo el sistema "si no supiera que van a salir bien". Vega destaca que solo Alemania y España han tenido que examinar a un gran número de bancos, "lo que demuestra que la concentración del sector es mucho menor que en otros países". El presidente del Eurogrupo, Jean Claude Juncker, recordó se habían realizado con "criterios muy serios y profesionales sin márgenes para la complacencia".
91489B bancos sometidos a los test de resistencia - Austria. Erste Group Bank AG; Raiffeisen Zentralbank Oesterrreich AG (RZB). - Bélgica. KBC Group; Dexia. - Chipre. Marfin Popular Bank Public, Bank of Cyprus Public. - Dinamarca. Danske Bank, Jyske Bank, Sydbank. - Finlandia. Op-pohjola Group. - France. BNP Paribas; Credit Agricole, BPCE; Société Generale. - Alemania. Deutsche Bank AG; Commerzbank AG; Hypo Real Estate Holding AG; Landesbank Baden-Wurttemberg; Bayerische landesbank; DZ Bank AG DT. Zentral- Genossenschaftsbank; Norddeutsche Landesbank; Deutsche Postbank; Westlb AG; HSN Nordbank; Landesbank Hessen-Thüringen; Landesbank Berlin; Dekabank Deutsche Girozentrale; WGZ Bank Geno. Zentralbk. - Grecia. National Bank of Greece; EFG Eurobank Ergasias; Alpha Bank; Piraeus Bank Group; Agricultural Bank of Greece; TT Hellenic Postbank. - Hungría. OTP Bank Nyrt; FHB Jelzalogbank Nyilvanosan Mukodo RT. - Irlanda. Bank of Ireland; Allied Irish Banks. - Italia. Unicredit; Intesa Sanpaolo; Monte dei Paschi di Siena; Banco Popolare; Unione di Banche Italiane scpa (Ubi Banca). - Luxemburgo. Banque et Caisse d'Epargne de l'Etat; Banque Raiffeisen. - Malta. Bank of Valletta (BOV). - Holanda. ING Bank; Rabobank Group; ABN / Fortis Bank Nederland; SNS Bank. - Polonia. Powszechna kasa oszcz.dno.ci bank polski s.a. (pko bank polski). - Portugal. Caixa Geral de Depositos; Banco Comercial Portugues (BCP o Millennium BCP); Espirito Santo Financial Group; Banco BPI. - Eslovenia. Nova Ljubljanska Banka.
333 - España. Banco Santander; BBVA; Júpiter (Caja Madrid, Bancaja, Caixa Laietana; Caja Canarias; Caja Ávila, Caja Segovia, Caja de La Rioja); La Caixa; CAM; Banco Popular; Banco Sabadell; Diada (Caixa Catalunya, Tarragona, Manresa); Breogan (Caixa Galicia y Caixanova); Mare Nostrum (Caja Murcia, Caixa Penedès, Sa Nostra, Caja Granada); Bankinter; Espiga (Caja Duero y Caja España); Banca Cívica; Ibercaja; Unicaja; Banco Pastor; Cajasol; BBK, Kutxa; Unnim (Caixa Sabadell, Terrassa y Manlleu); CAI; Cajasur (intervenida); Banca March; Banco Guipuzcoano; Caja Vital; Caja Ontinyent: Caixa Pollensa. - Suecia. Nordea Bank; Skandinaviska Enskilda Banken; Svenska Handelsbanken; Swedbank. - Reino Unido. Royal Bank of Scotland (RBS); HSBC; Barclays; Lloyds Banking Group.
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ENTREVISTA:409B ENTREVISTA MIGUEL BOYER Ex ministro de Economía y Hacienda del PSOE
"Muchos286B inmigrantes y algunos españoles tendrán que buscar empleo en otro país" • "Nos hemos endeudado por encima de nuestras posibilidades y de nuestras necesidades" • "Alemania ha hecho un gran negocio con un euro más débil que el viejo marco alemán" • "Zapatero y Salgado me escuchan. Cambiamos impresiones y les mando hojas sueltas" • "Soy partidario de menos funcionarios; pero mejor pagados, para no dañar la función pública" MIGUEL ÁNGEL NOCEDA 11/07/2010 Miguel Boyer Salvador (nacido en 1939 en San Juan de Luz, Francia, durante el exilio de sus padres) se ha ganado un hueco en la historia de España. Es un hombre reflexivo con fuerte carisma, cuyas opiniones suelen tenerse muy en cuenta, no exentas a veces de cierta polémica. Fue diputado del PSOE y ministro de Economía y Hacienda con Felipe González; se dio de baja por controversias sobre la incorporación al euro. Asesoró a José María Aznar y se incorporó a la Fundación FAES; también se dio de baja por ser contrario a la invasión de Irak. Ahora Zapatero le "escucha", aunque en su cabeza no cabe volver a la actividad política. En su tiempo se puso el embrión del contrato temporal y se inició una primera reforma de las pensiones que granjeó un vendaval entre PSOE y UGT. Defiende la reforma laboral y el alargamiento de la edad de jubilación, insta a profundizar en las reformas estructurales que precisamente impulsó con el denominado decreto Boyer de liberalización de horarios comerciales y actualización de alquileres. Cuando dejó de ser ministro en 1985, tras exigir sin éxito una vicepresidencia económica, pasó a presidir el Banco Exterior. Posteriormente, presidió CLH (la antigua Campsa) y trabajó para FCC. Ahora colabora en el grupo Hispania de José Ramón Carabantes y es consejero de Reyal Urbis y Red Eléctrica. Pregunta. Quiera o no, su opinión se tiene muy en cuenta en este país, ¿cómo se lo toma? Respuesta. Creo que los acontecimientos de la época de la transición del franquismo a la democracia siguen muy vivos y que se nos recuerda a los que tuvimos algún papel en ella y, en particular, a los ministros del primer Gobierno socialista. Por otra parte, la actual crisis me ha inducido a escribir y dar conferencias, por si puede ser útil mi experiencia, y eso me ha hecho reaparecer, modestamente. P. Y desde esa modestia, ¿qué dice sobre la salida de la crisis? R. Estados Unidos está ya en un ritmo de crecimiento del PIB del 2,5%, casi normal, y los principales países europeos en torno a un 1%, que indica el comienzo de la recuperación. Pero no se ha salido todavía de la crisis en cuanto al empleo y continuarán las altas tasas de paro, aunque hay signos alentadores recientes. En cuanto a España, tiene unos trimestres de retraso por el desplome casi total del sector inmobiliario y, también, muy fuerte en el resto de la construcción. Como son actividades intensivas en mano de obra, su caída ha generado una masa tremenda de parados, solo comparable a la de Irlanda, el otro país que había invertido excesivamente en aquellas: un 15% del PIB, frente al 9% de promedio en la eurozona. P. ¿Es más dramática esta crisis que las anteriores?
335 R. Depende de en qué aspectos se enfoque la atención. Si consideramos el PIB, en las crisis del petróleo, casi no llegó a caer, mientras que el año pasado hubo un descenso del -3,6% en España (por cierto, el segundo menos malo después del de Francia). Pero en empleo, durante las crisis del petróleo (1974-1985), cayó 11 años consecutivos y en conjunto un 18%; mucho más que en la recesión actual. Además, se hundió una gran parte de la industria (acero, construcción naval, electrodomésticos, química...) y un buen número de entidades financieras. La inversión tuvo tasas negativas durante nueve años. Así es que ambas crisis son tremendas, aunque creo que las de los setenta y ochenta fueron más largas y penosas. P. ¿Cree que España ha vivido por encima de sus posibilidades? R. Yo no emplearía esa expresión. Si vivir por encima de nuestras posibilidades es consumir con exceso, digo que no. Las familias han gastado en consumo, en el periodo de auge 2003- 2007, una proporción del PIB semejante a la de la eurozona (57%) y bastante menor a la de Estados Unidos (70%). Y hemos ahorrado un 22% del PIB -como la eurozona- y mucho más que el 12% de Estados Unidos. Donde sí cometimos un exceso fenomenal fue en la inversión: un 29% del PIB, año tras año, cuando en la Unión Monetaria fue un 21% y en Estados Unidos del 18%. La mitad fue a bienes de equipo y similares, y la otra mitad a la construcción. En esta se cometieron excesos perdonables en infraestructuras, pero completamente desmesurados a cuenta del ladrillo; pasamos de iniciar 300.000 viviendas en 1995 a 760.000 en 2006, y de emplear 1.100.000 trabajadores a 2.750.000 en 2008, para construir un número gigantesco de casas, cuya mitad no se podía vender, arrastrados por la burbuja especulativa. De modo que sí hemos invertido -no consumido- endeudándonos por encima de nuestras posibilidades y, lo que es aún peor, mucho más allá de nuestras necesidades. Hemos invertido demasiado y mal. A ello contribuyeron bancos y cajas de ahorros, dando crédito fácil y apalancamientos enormes, y las agencias de calificación -ahora tan rigurosas en apariencia- sobrevalorando las garantías para obtener créditos. Es una lección que no debemos olvidar. P. Estamos en plenas tensiones financieras, ¿está cumpliendo bien el BCE? R. A principios de año todos los países nos preparábamos para retirar paulatinamente los estímulos al crecimiento de la demanda y del empleo. Pero han irrumpido temores justificados e injustificados, tras el caso de Grecia, y los mercados financieros restringen los préstamos a los países de tamaño pequeño, medio e, incluso, del tamaño de España -cuya economía es solo un 20% menor que la italiana y la francesa-, además con unas primas de riesgo notablemente elevadas. En este punto de la crisis es absolutamente necesario mantener un flujo de crédito y de liquidez que permita funcionar el sistema productivo y desarrollar un proceso de desendeudamiento pausado del Estado y de las empresas. Ese es el papel del Banco Central Europeo que, tras unas presiones erróneas del Bundesbank alemán, está ya inyectando la liquidez suficiente. P. ¿Ve lógicos los ataques a España y los rumores sobre un rescate financiero? R. Son bulos interesados. Descarto un rescate. España está iniciando ya un proceso de ajuste, del cual hay signos bastante claros: se está desacelerando el crecimiento del gasto público y creciendo de manera notable los ingresos, de modo que el déficit de los primeros cinco meses del año es de un 6% inferior al del año pasado. P. Viene a decir que la reacción de los mercados es irracional. R. No, digo que es muy exagerada. Hay una sobrerreacción negativa, que es típica de las inversiones financieras en situaciones de incertidumbre o de crisis; pero hay también maniobras bajistas, interesadas en subir las primas de riesgo, propalando seudoanálisis excesivamente pesimistas.
336 P. Usted tuvo reticencias respecto al euro, ¿las sigue teniendo respecto a la incorporación de España a la eurozona? R. Yo fui uno de los expertos independientes que junto a los 12 presidentes de los bancos centrales formamos el comité Delors que diseñó la Unión Monetaria y el euro. Era y soy muy consciente de las fortísimas restricciones que suponen una moneda única y un tipo de interés único. Y, además, temía que España no estuviera preparada -por su tendencia a una inflación mayor que las de Alemania y Francia- a integrarse en 1999. Me acordaba del gracioso, y alarmante, dicho de Paul Samuelson, dirigido a los países que iban a entrar en la UEM: "Van a meterse ustedes en la cama con un gorila, que es Alemania. Que tengan ustedes suerte". Desde luego ese país ha resultado bastante gorila. Ha hecho un gran negocio con un euro más débil que el viejo marco alemán: en 2008, sus exportaciones llegaron al 47% del PIB, mientras, las de Francia, Italia y España no pasaban del 26%. Pero cuando Alemania y Francia, más sus satélites del Benelux y Austria, decidieron formar la Unión Monetaria, me pareció inevitable que Italia y España se sumaran, ya que quedarse fuera tenía más riesgos políticos y económicos. P. Usted trabajó para González, después se le acercó Aznar, ¿le ha pedido consejo Zapatero? R. Durante cinco años de Gobierno de Zapatero no había tenido relación con él, aunque nos conocimos en una conferencia en la Academia de la Historia, creo que en 2002. A final del año pasado, escribí unos artículos en EL PAÍS, que interesaron al presidente y a Elena Salgado [vicepresidenta y ministra de Economía], a la que conozco desde mucho antes y por la que tengo gran estima profesional y personal. Desde entonces hemos hablado, esporádicamente Zapatero y yo, y con mayor frecuencia Salgado y yo. Cambiamos impresiones y les mando hojas sueltas por si les sirven para algo. Haría lo mismo con otro Gobierno en coyuntura semejante, y que tuviera interés por mis opiniones. P. O sea, que le consultan. R. Más bien, me escuchan, creo que con interés. Será por condescendencia con un veterano, ya que tienen un excelente equipo en el Ministerio de Economía. P. ¿La situación es tan grave como para hablar de un Gobierno de coalición? R. No lo creo, salvo que todos los grupos de la oposición se concertaran para rechazar las propuestas de ley del Gobierno. Pero eso parece improbable, cuando se trata de leyes muy importantes para superar la crisis, y el sentido común cívico de los partidos les recomendará no bloquear la acción del Gobierno. Lo que corresponde en esta situación es que las oposiciones presenten sus propuestas y lleguen a acuerdos con el Gobierno. Los Pactos de la Moncloa, por ejemplo, no dieron lugar a un Gobierno de coalición, sino a una serie de acuerdos sobre asuntos muy importantes, entre el Gobierno y la oposición. El PSOE, que estaba en la oposición, no reclamó ministros, y se volcó para apoyar los acuerdos. A mí me mandaron a defender los pactos en la cuenca minera asturiana: no fue fácil ni agradable. P. ¿Hace falta profundizar en reformas estructurales? R. Ciertamente, hace falta en la liberalización de sectores de servicios y su adaptación a las directrices europeas. Por otra parte, hay que frenar la contratación de funcionarios, en el Gobierno central y en los autonómicos, e incluso dar marcha atrás. El peso en el PIB de la remuneración de los asalariados públicos es el 12% en España, mientras que en Alemania -país federal y descentralizado- es del 7,5%. Soy partidario de menos funcionarios en todos los niveles del Estado; pero mejor pagados para evitar la degradación de la función pública. Siguiendo con los problemas estructurales, existe una situación complicada en el sector de la energía, en el que se ha cometido un error promoviendo la técnica fotovoltaica antes de
337 lograrse una situación competitiva, como ha ocurrido en la eólica. Por otra parte, aunque somos grandes defensores de la lucha contra el cambio climático, seguimos usando carbón, que es lo más nefasto en cuanto a emisiones de CO2. P. No dice nada de la reforma educativa. R. Su efecto es más a medio y largo plazo, aunque hay que empezarla cuanto antes. La mejora más inmediata de la formación profesional vendrá a través de la reforma laboral, mediante la formación de los trabajadores en la empresa. Eso debe mejorar notablemente la productividad. Desde luego, la educación necesita impulsos y reformas porque, contrariamente a los otros países europeos continentales, tenemos un porcentaje insuficiente de jóvenes que terminan la enseñanza secundaria, que es la formación más básica y necesaria. P. ¿Qué opina de la reforma laboral? R. El decreto ley del 16 de junio es un avance muy positivo en el camino de fomentar la contratación indefinida, especialmente para los jóvenes, que podrán tener una estabilidad que les permita formarse en las empresas. Se enfoca en el contrato llamado de fomento de la contratación indefinida, ampliando mucho el colectivo que puede beneficiarse de él, aunque se mantiene todavía una casuística innecesaria (parados de tres meses, mujeres entre 30 y 45 años, trabajadores con anteriores contratos temporales, etcétera). ¿Por qué no extenderlo a todos los trabajadores a los que se les ofrezca y que quieran aceptarlo? P. ¿Usted que dice? R. El contrato tiene una indemnización de 33 días de salario por año y 8 días son subvencionados por el Fondo de Garantía Salarial. Se ha dicho erróneamente que "se subsidia el despido", como si los empresarios fueran obsesos deseando despedir a sus empleados. Los empresarios deberían hacer el uso máximo de este instrumento ampliado, por mor de mejorar la formación de los empleados estables y la productividad. A ello contribuyen los retoques del contrato temporal, introduciendo el rigor en precisar qué obra o servicio y en qué tiempo se va a desarrollar para evitar los abusos. P. ¿A qué se refiere? R. La situación actual y la lógica económica impiden un solo contrato indefinido. Hay 15 millones de trabajadores con contratos indefinidos con indemnización de 45 días cuyos derechos adquiridos no pueden suprimirse jurídica ni éticamente. Y tampoco se puede prescindir del contrato temporal -esencial en la construcción y en el turismo-, ni de los contratos por tiempo determinado, etcétera. Pero si es efectivo el rigor sobre los contratos temporales, lo lógico es que los empresarios usen al máximo el contrato de fomento. Poco se ha avanzado, en cambio, en precisar cuándo un despido colectivo es procedente, ni se ha facilitado el descuelgue de empresas que no puedan llegar a los mínimos salariales que fijan los convenios colectivos de ámbito superior (de rama, etcétera). Por tanto, no se flexibiliza la negociación salarial haciéndola más próxima a las necesidades de las empresas. P. ¿Dónde van a encontrar empleo todas las personas que se han quedado en el paro por el desplome del ladrillo? R. Ese es para mí el problema más difícil de la economía española. Está claro que una parte importante de los inmigrantes que han venido a España encontraron trabajo en la construcción y que una parte muy considerable de ellos no van a volver a encontrarlo en dicho sector. Muchos de los que vinieron y, quizá, algunos españoles van a tener que buscar empleo en los otros países europeos. La esperanza es que haya un desarrollo muy importante de los servicios, que es el sector que va a crear empleo más dinámicamente.
338 P. ¿Y de la reforma de las pensiones? R. Se ha trasladado razonablemente al Pacto de Toledo. El alargamiento de la vida laboral es inevitable tanto por razones de sostenibilidad económica como por razones humanas. Ahora que la vida alcanza una media de 85 años o más, ¿es soportable estar mano sobre mano 20 años salvo en el caso de trabajos muy duros? P. ¿Hay motivos para una huelga general? R. En absoluto. El ajuste es inexorable y, si no se hace, la situación empeoraría. Es comprensible humanamente, pero es inútil política y económicamente. P. ¿Se ve con Felipe González? R. Con cierta frecuencia, solemos cenar. Hemos sido muy amigos desde los años sesenta del siglo pasado. A pesar de algún desencuentro de antaño, que lamento, tengo una gran admiración y un gran afecto por él, que ha sido un dirigente político extraordinario. Poder charlar de los avatares de la política y de la economía españolas, con él y con viejos amigos como Carlos Solchaga, Fernández Ordóñez y Guillermo de la Dehesa es un placer inacabable y rejuvenecedor. Me produce mucha satisfacción sentir que nos apreciamos unos y otros, y recordar las cosas que pudimos hacer para contribuir a vivir en democracia. Y soy también afortunado por tener un contrapeso a la deriva política en mis amigos de la historia, de la filosofía, de la ciencia, Jesús Mosterín, Manuel Sánchez Ron y Cayetano López. P. ¿Qué le parece el Estatuto catalán? R. Que estábamos más contentos con el Estatuto de Sau [aprobado en 1979 y vigente hasta 2006].
http://www.elpais.com/articulo/reportajes/MuH chos/inmigrantes/algunos/espanoles/tendran/bus car/empleo/pais/elpepueco/20100711elpdmgrep_3/Tes
339 410B REPORTAJE: Primer plano
Latinoamérica287B sortea la crisis
La490B región evita errores del pasado y afronta ahora el reto de aprender a gestionar la abundancia • El crecimiento ya no depende solo de EE UU; China juega un papel decisivo • A diferencia de los años 90, el modelo de crecimiento genera empleo • Chile y Singapur son los únicos países sin deuda pública neta • Los precios de las materias primas, vitales en la región, no se han colapsado • El desafío es dirigir los fondos que llegan a actividades productivas • La banca está saneada pero el crédito apenas es el 30% del PIB • Brasil, Chile y Perú ya han subido los tipos para evitar inflación futura • Los balances de empresas españolas mejoran por las filiales de la región ALEJANDRO REBOSSIO 11/07/2010 "Antes, cuando iba a Latinoamérica, iba preparado para lo peor. Ahora, vengo preparado para lo peor cuando vengo a España", contaba el pasado lunes el director general de la división América del Banco Santander, Francisco Luzón, que vive la mitad del año de un lado del Atlántico y la otra mitad, del otro. En el noveno encuentro anual del grupo sobre Latinoamérica, que se celebra en la Universidad Internacional Menéndez Pelayo (UIMP), en Santander, Luzón se refería al contraste entre un subcontinente que está recuperándose en forma de V después de la crisis mundial, gracias sobre todo a la demanda de China, y una Europa que teme caer en una nueva recesión por el efecto de los ajustes fiscales que la mayoría de sus países ha aplicado para reducir su deuda. Un día después de que dos millones de argentinos celebraran, el pasado 25 de mayo, el bicentenario de la revolución independentista de su país, el secretario general iberoamericano, Enrique Iglesias, comentaba en Buenos Aires ante empresarios españoles su asombro por el espíritu festivo que había allí y lo comparó con el de Europa, donde reside en la actualidad. "En Europa hay un ánimo demasiado deprimido, que contrasta con el que hay en América Latina". Los indicadores sociales latinoamericanos siguen siendo mucho peores que los europeos, pero las coyunturas económicas de una y otra región contrastan. Y lo hacen en parte porque el crecimiento de Latinoamérica depende no solo de EE UU, que se recupera con rapidez pero con dudas, sino cada vez más de China, que no ha dejado de crecer a ritmo acelerado durante la crisis. Latinoamérica depende cada vez menos de Europa. A diferencia de otras crisis mundiales, que dejaban a Latinoamérica postrada, esta vez el golpe no fue tan duro como otras veces y la recuperación está siendo más vertiginosa. Por supuesto que si la Gran Recesión, la mayor contracción mundial después de la Gran Depresión, termina marcando una doble caída, Latinoamérica no saldrá indemne, pero de momento la región se recupera con fuerza. "Los que mejor están aprovechando la salida de la crisis entre los emergentes son los países asiáticos y los latinoamericanos", opina Dante Sica, de la consultora abeceb.com. "El ciclo económico mundial ahora se explica más por la demanda de los emergentes, sobre todo de Asia", añade Sica. Los emergentes ya representan el 44% de la economía mundial, frente a un tercio en los años ochenta, y Brasil es una de las nuevas potencias, destacó el director de análisis de la división América del Santander, José Juan Ruiz. Latinoamérica está bien situada
340 para responder a las necesidades de alimentos y minerales que tiene Asia para expandir su economía y sus clases medias. En especial, Suramérica resulta el proveedor ideal para Oriente. En cambio, México, América Central y el Caribe siguen dependiendo más de EE UU y por eso su recuperación es un poco más lenta. De todos modos, la volatilidad financiera mundial por la crisis europea perjudica el acceso al financiamiento de Gobiernos y empresas latinoamericanas, alerta Sica. "Hay un mundo financiero más hostil". El PIB latinoamericano, después de caer el 1,9% en 2009, crecerá el 5,2% este año, según la media pronosticada por cuatro bancos: Santander, Morgan Stanley, JP Morgan y Goldman Sachs. A la cabeza de las principales economías de la región estará Brasil, con 7,6%; seguido por Perú, con 6%, y Argentina, con 5,4%. Chile, pese al terrible terremoto de febrero pasado, se expandirá el 4,7% y México, el 4,5%. Colombia crecerá 3,6% y la excepción entre las grandes economías será Venezuela, que seguirá contrayéndose, esta vez un 2,6%. De momento, no solo crece la economía latinoamericana sino también los puestos de trabajo, a diferencia de lo que sucedió en los años noventa. "Este modelo de crecimiento genera empleo, que crece al 2,8% anual", dice Ruiz con entusiasmo. "Hay menos paro que hace 12 meses. Esto no se ve en otras regiones". El paro latinoamericano se había elevado durante 2009 del 7,3% al 8,1%. En el mismo seminario, Enrique Iglesias destacó que en la última década se redujo la desigualdad social en el subcontinente más inequitativo del mundo y recordó que este es un objetivo difícil de cumplir para la política económica. La creación de empleo y los planes de asistencia a los más pobres en Brasil, México, Chile o recientemente en Argentina han ayudado a crear sociedades menos desiguales. No obstante, aún el 20% más pobre de la población latinoamericana recibe solo el 3% de los ingresos, y el 20% más rico, el 57%, según alertó el rector de la Universidad Nacional Autónoma de México (UNAM), José Narro. Uno de los motivos de la acelerada salida latinoamericana de la crisis mundial radica en que durante la bonanza de las materias primas previa a la debacle, entre 2002 y 2008, los Gobiernos del subcontinente se comportaron de forma prudente en el gasto público, sobre todo Brasil y Chile, según Daniel Artana, de la Fundación de Investigaciones Económicas Latinoamericanas. Habían acumulado reservas en sus bancos centrales (cuentan con medio billón de dólares en total) y fondos anticíclicos en sus arcas públicas. Esto permitió a los países latinoamericanos hacer políticas contracíclicas efectivas quizás por primera vez en su historia, destaca un reciente informe de la consultora Ecolatina, que fundó el ex ministro de Economía argentino Roberto Lavagna. "Por primera vez el ciclo de altos precios de las materias primas no se ha desaprovechado en Latinoamérica", opinó Luzón. También la flexibilidad de los tipos de cambio, en contraposición con la rigidez de los años noventa, permitió sobrellevar mejor la crisis mediante depreciación de las monedas, según Iglesias. Pero ¿por qué esta vez es diferente? En el pasado, cualquier crisis en EE UU provocaba un desastre al sur del río Bravo porque se cortaba el financiamiento externo. Esta vez, los inversores siguieron prestando a unos Gobiernos que apenas incurrieron en déficits fiscales para estimular la reactivación. Argentina fue una excepción porque los mercados no creen en ella desde que, en 2007, comenzó a subestimar la inflación, índice por el que se actualizan los bonos en pesos. Algunos países europeos presentan déficits fiscales de más del 10% del PIB, pero la media latinoamericana llegará al 2,4% este año, según bancos internacionales. Argentina, sin acceso a los mercados de deuda pese a que acaba de completar el canje del 92% del pasivo que dejó de pagar en 2001, solo tendrá un 0,8% de números rojos. No puede permitirse más. México, el 2,5%; Brasil, el 3,1%, y Venezuela, el 3,3%.
341 Chile y Singapur son los únicos dos países del mundo sin deuda pública neta, según destacó el ex presidente del Banco Central de Chile, Vittorio Corbo, en Santander. La deuda bruta chilena es del 12% del PIB, mientras que en México, 32%; Argentina, 50%, y Brasil, 51%, menos de la mitad que Grecia o Italia. Claro que los países desarrollados pueden darse el lujo de tener mayores déficits y deudas que los emergentes porque los mercados confían más en ellos a la hora de prestarles. Otra de las razones que explica la recuperación latinoamericana consiste en que, a diferencia de ciclos anteriores, esta vez los precios de las materias primas no cayeron durante la Gran Recesión por debajo de la media histórica y, de hecho, ya han empezado a subir, aunque aún por debajo de los máximos alcanzados antes del colapso del banco Lehman Brothers, en septiembre de 2008. Prácticamente, 6 de cada 10 dólares que recibe Latinoamérica por sus exportaciones provienen de los envíos de materias primas, ya sea el petróleo de México y Venezuela, el cobre de Chile y Perú o los granos de Argentina y Brasil. "Hay un boom de las materias primas que sigue porque China e India demandan, pese a la situación de Europa", describe Artana. La bonanza de las exportaciones de materias primas le permite a Latinoamérica tener un déficit por cuenta corriente de solo el 0,7% del PIB, según pronostican algunos bancos para este año. Brasil es quizás el que más debe preocuparse porque sus números rojos serán del 2,9%, frente al 1% de México y los superávits de Argentina (1,6%), Chile (0,4%) y Venezuela (7%). El déficit brasileño puede empeorar por una demanda europea en retroceso y un consumo doméstico en alza, advirtió el encargado del Fondo Monetario Internacional (FMI) para Brasil y ex secretario de Estado de Economía español, David Vegara, en las jornadas en la UIMP. Un factor que contribuye a la recuperación es el desarrollado comercio intrarregional. Por ejemplo, el hecho de que a Brasil le vaya bien le permite a Argentina aumentar sus exportaciones, sobre todo de coches. Pero no solo se ha recuperado el intercambio dentro de la región sino también con el resto del mundo. Tras una recesión, que provocó fuertes caídas del PIB en México, Chile y Argentina, la recuperación también es algo normal, aclara Artana. Sin embargo, los impactos de la crisis "se están absorbiendo rápidamente", en particular en Brasil, según Ruiz. "Sin doble recesión mundial, Latinoamérica habrá superado las consecuencias de la recesión al comenzar 2011", vaticina Ruiz. En un mundo de tipos de interés bajos para estimular el crecimiento, "los inversores no saben dónde poner el dinero y Latinoamérica ofrece oportunidades", destaca Artana. Sin embargo, la inversión en Latinoamérica sigue siendo baja para hacer sostenibles tasas de crecimiento como las de China, de más del 9% anual. "En China, la inversión es del 35% del PIB, mientras en Brasil no alcanza al 20%", apunta Artana. Aunque insuficiente, la inversión externa llega a países como Brasil, Colombia, Chile o Perú, "que no solo aprovechan el ciclo externo sino que tienen políticas consistentes", señala Sica. "En cambio, países como Argentina, que viene de la crisis de 2001, no las tiene. Sorteó la crisis, pero tiene trabajo interno por hacer". Cuando un país se pone de moda, llegan capitales y eso puede generar riesgos de burbuja y apreciación excesiva de la moneda. Por eso, Vegara sugirió a Brasil controles a los flujos financieros y prudencia en las políticas macroeconómicas. Y de ahí que Ruiz dijera que no será el sector público el que se endeude en Latinoamérica sino el privado y advirtió que los reguladores deberán evitar repetir errores como los de Europa e impedir desbordes en el apalancamiento del crédito.
342 "Las economías con grado de inversión (Chile, Brasil, Perú) no solo han conseguido fondos a tipos bajos (desde marzo de 2009) sino que además se beneficiaron de la entrada de capitales externos", señala el informe de Ecolatina. Pero alerta: "El desafío de estos países es direccionar los fondos a actividades productivas que permitan apuntalar el empleo y la competitividad". La inversión extranjera directa regional, que cayó un 42% en 2009, se recuperará este año entre un 40% y un 50%, según el presidente de la Confederación de la Producción y del Comercio de Chile, el bodeguero Rafael Guilisasti, en Santander. Además, destacó el crecimiento de las inversiones de las multilatinas, las empresas autóctonas que se expanden por la región comprando a otras locales, a filiales de multinacionales europeas o estadounidenses, y que no se centran solo en las materias primas (como las empresas chinas) sino también en la industria y los servicios. Otra ventaja de Latinoamérica es que ha afrontado la última crisis con un sistema financiero sin activos tóxicos (sí los tenían algunas empresas brasileñas y mexicanas) ni burbujas inmobiliarias. Luzón elogió la fortaleza del sistema financiero latinoamericano, que se ha depurado después de décadas de crisis, pero también reconoció su pequeñez: el crédito supone solo un 30% del PIB regional, la peor media del mundo. Algunos analistas se preguntarán de qué sirve una banca segura pero que preste poco. El fuerte crecimiento de ciertas economías ha llevado a que sus Gobiernos se preocuparan por un sobrecalentamiento que derivara en mayor inflación. Los bancos centrales de Brasil, Chile y Perú han elevado sus tipos de interés para ajustar la política monetaria laxa que habían aplicado para estimular la economía durante la crisis. El Gobierno de Luiz Inácio Lula da Silva ha anunciado un ajuste fiscal de 3.100 millones de euros. Pero tampoco es tiempo de austeridad en Brasil justo cuando Lula está comprometido con la candidatura presidencial de Dilma Rousseff en las elecciones de octubre próximo. La inflación de Brasil alcanzará el 5,9%, según la media pronosticada por Santander, Goldman Sachs, JP Morgan y Morgan Stanley. En México será del 5,1%, por encima del 3,8% de Chile y Colombia y del 2,2% de Perú. "En general hay baja inflación en la región en comparación con décadas anteriores", destaca Sica. Las excepciones son Argentina, que superará el 20%, según consultoras de ese país, y Venezuela, que trepará al 40,8%, según los bancos internacionales. "El problema de Latinoamérica será cómo gestionar la abundancia", pronosticó el uruguayo Ernesto Talvi, del Centro de Estudios de la Realidad Económica y Social. "En el pasado, la plata (dinero) dulce terminó en crisis. Será un desafío para nuestros días porque la llegada de plata dulce será fuerte concentradora de la riqueza, lo que creará legítimas reclamaciones de redistribución del ingreso". Los balances de las empresas españolas mejoran en la actualidad por las filiales latinoamericanas, destacó Iglesias. "Tenemos una posición racionalmente optimista acerca de Latinoamérica", se entusiasmó Luzón. "Si la economía española tuviera conciencia de la potencialidad latinoamericana, sería un enorme vector de crecimiento", añadió el consejero del Santander. Empresarios latinoamericanos también se mostraron optimistas en el seminario. "En contraste con el resto del mundo, somos bastante optimistas con Latinoamérica", se confesó el chileno Guilisasti. Pero el subcontinente no es un mundo feliz. Algunos economistas latinoamericanos advierten que su economía es tan disfuncional que ha permitido el auge del narcotráfico y el crimen organizado. "Es una lacra que nos preocupa", reconoció Luzón. "Desestructura al Estado".
343 El 21% de los jóvenes de 15 a 24 años no trabaja ni estudia, recordó Narro. La pobreza se ha reducido y muchos latinoamericanos se adentraron en la clase media entre 2003 y 2008, pero todavía un tercio de los habitantes de la región es pobre, añadió el rector de la UNAM. "En las etapas de bajada (de la economía) crece mucho la pobreza y la desigualdad, y en las altas, no se recuperan tanto. Cada crisis (coyuntural) acentúa la pobreza (estructural)".
http://www.elpais.com/articulo/primer/plano/H Latinoamerica/sortea/crisis/elpepueconeg/201007
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41B
El28B excedente de las mutuas se invertirá en deuda pública EL PAÍS - Madrid - 10/07/2010 La Seguridad Social podrá invertir el excedente que genera la gestión de las mutuas de accidentes de trabajo en deuda soberana. En concreto, la Tesorería del instituto público podrá destinar el 90% de los 3.800 millones de euros que constituyen el Fondo de Prevención y Rehabilitación -nombre oficial de estos recursos- a comprar bonos del Estado, según acordó ayer el Consejo de Ministros desarrollando una previsión de los Presupuestos de 2010. El objetivo de la decisión es aumentar la rentabilidad de este dinero, depositado hasta ahora en el Banco de España. Por eso precisamente, la Seguridad Social no informa de las subastas de bonos a las que prevé acudir. No obstante, sí que apuntan que lo lógico es que se compre deuda española, siguiendo el camino del Fondo de Reserva de la Seguridad Social (poco más de 60.000 millones) que tiene gran parte de sus inversiones -más del 75%- en bonos españoles.
http://www.elpais.com/articulo/economia/excedH ente/mutuas/invertira/deuda/publica/elpepueco
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344 412B La reforma del sistema financiero
El289B Gobierno abre la puerta a la privatización total de las cajas
Las491B entidades podrán emitir cuotas con derecho a voto, ceder el negocio a un banco filial con mayoría o convertirse en una fundación y quedarse en minoría ÍÑIGO DE BARRÓN - Madrid - 10/07/2010 Las cajas de ahorros afrontan su mayor cambio en 170 años. La crisis financiera ha golpeado al capital de las entidades, el punto débil de las cajas de ahorros. Con la naturaleza jurídica actual es difícil aumentar su solvencia y eso limita su capacidad para conceder créditos. Además, han dado un triste espectáculo con enormes resistencias políticas para fusionarse. Las cajas de ahorros afrontan su mayor cambio en 170 años. La crisis financiera ha golpeado al capital de las entidades, el punto débil de las cajas de ahorros. Con la naturaleza jurídica actual es difícil aumentar su solvencia y eso limita su capacidad para conceder créditos. Además, han dado un triste espectáculo con enormes resistencias políticas para fusionarse. Su futuro era muy negro. El Gobierno les ofrece el salvavidas, es decir, el capital, pero a cambio tendrán que someterse a la disciplina de los mercados financieros, con cuotas participativas cotizadas en Bolsa; echar a los políticos en tres años, aunque seguirán nombrando representantes y, las que quieran, podrán dejar de ser cajas para convertirse en bancos. Cada una escribirá su futuro. El Consejo de Ministros aprobó ayer el real decreto ley de reforma de la Ley de Órganos Rectores de Cajas de Ahorros (LORCA) para "fortalecer el sistema financiero español", según explicó la vicepresidenta segunda y ministra de Economía, Elena Salgado, tras el Consejo de Ministros. El Gobierno publicará la reforma en el BOE la semana próxima y ya será oficial, aunque se votará el 20 de julio en el Congreso. La reforma permitirá que las cajas puedan emitir cuotas participativas, similares a las acciones, con o sin derechos políticos. En ambos casos no podrán superar el 50% del patrimonio de las cajas. Para Elena Salgado, la emisión de estas cuotas, con las que las cajas podrán conseguir capital, las hará "más atractivas" para los mercados. La reforma establece cuatro modelos para las cajas. Son los famosos "trajes a medida" de los que habló Isidro Fainé, presidente de la Confederación de Cajas de Ahorros (CECA) y de La Caixa. En el primero podrán mantener su condición de caja, con el nuevo régimen de cuotas y adaptando sus estatutos a las normas de gobierno corporativo. En el segundo podrán integrarse en un Sistema Institucional de Protección (SIP), conocido como fusión fría. El tercero, mantener la condición de caja cediendo todo su negocio financiero a un banco, pero manteniendo el 50% de las acciones de la filial. La obra social y la cartera industrial permanecerán en la caja. El cuarto es "sobrepasar la línea roja", según algunos ejecutivos del sector: las cajas podrán dejar de serlo y transformarse en una fundación cediendo su negocio a un banco en el que tenga una participación inferior al 50%. Por otro lado, las cajas que se integren en una fusión fría tendrán una entidad central, que será un banco, y que estará participada al menos en un 50% por las cajas. Si venden más del 50% en Bolsa, también pierden la condición de caja y deberán transformarse en fundaciones. En estos dos últimos casos no se respeta una petición del sector, que era "preservar el modelo actual de cajas". Un asunto espinoso que ha disparado las críticas en los sindicatos y en la izquierda. Algunos ven detrás la mano de Miguel Ángel Fernández Ordóñez, gobernador del
345 Banco de España. También apuntan a Rodrigo Rato, presidente de Caja Madrid, y a José Luis Olivas, de Bancaja, como impulsores de este cambio. Olivas comentó hace unas semanas en Santander las bondades del modelo italiano de transformación de las cajas. En Italia empezó siendo voluntario vender una parte del negocio a los bancos y terminó siendo obligatorio. Hoy no hay cajas de ahorros en ese país. Sin embargo, la reforma del Gobierno es voluntaria y, además, para tomar cualquier decisión en el cambio de modelo, como indicó Salgado, tendrá que contar con el visto bueno de dos tercios del Consejo y de la asamblea. En cuanto a la despolitización del sector, Salgado anunció dos medidas: que todos los cargos políticos electos y altos cargos (con la excepción de los representantes sindicales) deben abandonar los consejos de administración y las asambleas a medida que se vayan renovando, en un máximo de tres años. Según algunos cálculos, entre el 25% y el 35% de los cargos son políticos de Diputaciones, Gobiernos regionales y Ayuntamientos. A partir de ahora, los Parlamentos autonómicos nombrarán a sus representantes en las cajas, por lo que mantendrán la influencia política. No obstante, se reduce su influencia máxima desde el 50% actual hasta el 40% de los derechos de voto en los consejos. Salgado negó que la reforma llegara tarde: "cada cosa a su tiempo. Cuando cambien los mercados, las cajas estarán más fuertes, podrán captar capital y dar créditos". Ese es el reto.
El492B nuevo marco normativo de las cajas - Se facilita el acceso de las cajas de ahorros al capital privado, mediante la emisión de cuotas participativas con derechos políticos, es decir, con derecho a voto en los órganos de decisión. Las cuotas cotizarán en Bolsa y estarán remuneradas mediante dividendos, igual que las acciones. El límite de emisión es del 50% del patrimonio de la caja. Tendrán la consideración de capital de máxima calidad a efectos de medir la solvencia de la entidad. Las cuotas participativas ya existen en la actualidad, pero no tienen derechos políticos y tienen limitaciones, por ejemplo, que un solo partícipe no puede tener más del 5% del capital de la caja, restricción que ahora desaparece. - Las cajas avanzan en su profesionalización pero aún mantienen los lazos políticos. La reforma da tres años para que los cargos electos (parlamentarios nacionales o regionales, concejales, altos cargos de la Administración, etcétera) salgan de los órganos de gestión de las cajas. No obstante, serán los Parlamentos regionales (no los Gobiernos) los que nombren sus sustitutos. Habrá, por otra parte, mayorías reforzadas de 2/3 para aprobar cambios en la naturaleza jurídica. Deberán publicar un informe anual de gobierno corporativo con los sueldos individualizados del Consejo. - Cambia el modelo de cajas hasta el punto de permitir su disolución en un banco. Podrán elegir entre mantenerse como ahora emitiendo cuotas participativas; integrarse en un Sistema Institucional de Protección (SIP); ceder el negocio financiero a un banco manteniendo la obra social y la cartera industrial; o perder la condición de caja para transformarse en una fundación con la obra social, al controlar menos del 50% de las acciones del banco filial.
http://www.elpais.com/articulo/economia/Gobierno/H abre/puerta/privatizacion/total/cajas/elpep ueco/20100710elpepieco_1/Tes H
346 413B
China290B no manipula su divisa
La493B Administración Obama ha evitado designar al gigante asiático como un país que modifica su moneda, el yuan SANDRO POZZI - Nueva York - 09/07/2010 China vuelve a evitarlo. Con casi tres meses de retraso, el Tesoro de EE UU ha publicado su esperado informeH anual sobre divisas H . El Capitolio, con las elecciones legislativas de noviembre llamando a la puerta, presionó al equipo de Timothy Geithner para que no se diera tregua a Pekín. Sin embargo, la Administración de Barack Obama optó por hacer otro guiño y evitó designar a China como un país que manipula su moneda, el yuan. Es el último desenlace de una larga e intensa saga, que cobró fuerza cuando con los primeros balbuceos serios de la crisis financiera los chinos decidieron fijar la paridad del renminbi (nombre oficial de la moneda china que fuera se conoce como yuan) a la del dólar. Si Washington hubiera colocado el cartel a Pekín, hubiera sido la llave maestra que necesitaban los legisladores para activar desde el Congreso de EE UU medidas punitivas contra los productos importados desde China. Geithner, sin embargo, optó por seguir una estrategia más enfocada hacia a los gestos, consciente de que la revalorización del yuan iba en interés tanto de la economía china como la global, y no solo de EE UU. El primer fruto de esta política de mano tendida -con dos viajes a
Pekín la pasada primavera- lo tuvo hace tres semanas, cuando elH banco central chino anunció que empezaba a flexibilizar el tipo de cambio H , de forma gradual. El retraso del informe del Tesoro permitió de esta manera a Timothy Geithner abrir un margen temporal para que Pekín pudiera demostrar sin tanta presión que está dispuesto a avanzar en esa dirección. Y ese gesto chino evitó, a la vez, que el contencioso asunto del yuan centrara las discusiones de la reunión de los líderes de las economías desarrolladas y emergentes del G20, celebrada hace dos semanas en Toronto (Canadá). Un informe para contentarlos a todos El documento del Tesoro califica el anuncio de la autoridad monetaria china como un "cambio significativo" en la política seguida desde el verano de 2008. Pero Geithner es consciente del debate que esta cuestión genera en EE UU. De hecho, el informe se publica durante el receso por la celebración del Día de la Independencia. E incluye algún pasaje para no crear recelos entre los congresistas, especialmente los demócratas. Washington sigue pensando que el yuan está por debajo del valor que le correspondería atendiendo a la fortaleza de su economía y de su superávit exterior. Por eso Geithner cree que lo importante en esta nueva fase es ver "lo rápido y lo lejos que llega la apreciación del renminbi". En este sentido, garantiza que seguirá muy de cerca la evolución de la moneda china. Y recurre a una excusa para apoyar su decisión de no catalogar a China como país manipulador. El informe dice que "necesita tiempo para valorar hasta qué punto los cambios" permitirán que sea el mercado el que determine el tipo de cambio adecuado "para corregir esa devaluación". El problema, a la vista de la volatilidad del euro, es que el yuan puede caer antes de apreciarse.
347 Hasta ese momento, la apreciación del yuan fue del 1%. La Administración de George Bush logró una corrección del 21% entre julio de 2005 hasta finales de 2008. De ahí se desplomó. Pekín argumentó que la crisis financiera y económica afectaban a su sector exportador, por la caída de la demanda por la recesión. Washington, por su parte, denuncia que esta devaluación artificial pone en desventaja para su industria doméstica. Lo que está ahora por ver es cómo responde el sector exportador estadounidense y los sindicatos a la decisión del Tesoro, ya que urgieron a Barack Obama que fuera duro. El demócrata prometió durante la campaña que le llevó a la Casa Blanca que lo sería. "Un paso atrás", dicen desde la AllianceH for American Manufacturing H . Y cómo los congresistas se hacen eco de esta protesta, que reverbera aún más con una tasa de paro del 9,5%.
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348
¿Por291B qué China no revaloriza el yuan?
La49B política monetaria del gigante asiático le ha enfrentado en los peores momentos de la crisis financiera con EE UU y Occidente SANDRO POZZI | Nueva York 19/06/2010 Los detalles, en el mundo del dinero, son siempre vitales, porque ahí es donde se esconde el diablo. Pero a falta de que China especifique cuál es suH plan para empezar a flexibilizar el yuan,H este primer paso del banco central chino es relevante por varios motivos, tanto para Estados Unidos como para Europa. - La intervención de China sobre su divisa le permite mantenerla artificialmente baja frente a las monedas rivales, lo que da una ventaja competitiva de sus productos en el mercado internacional. Es decir, un destornillador fabricado por una empresa china es más barato que uno "made in USA". - El Economic Policy Institute calcula que el yuan vale en este momento un 40% menos de lo que debería, atendiendo al ritmo de expansión de su economía y de su balanza exterior. Esto permite a China ayudar a compensar lo que sus compañías pierden por la caída de la demanda global, por la crisis. - El sindicado AFL-CIO, citando un estudio del Peterson Institute for International Economics, denuncia que la devaluación del yuan "costó hasta tres millones de empleos en EE UU". La apreciación del yuan hasta la paridad con el dólar, opinan algunos economistas, ayudará a crear un millón de empleos, porque hará las exportaciones estadounidenses más competitivas. - Es año electoral, y el tambor del proteccionismo suena fuerte en el Capitolio. La presión para que la Administración de Barack Obama reaccione y actúe para preserva el empleo en EE UU se hizo patente a comienzos de mes, cuando el secretario del Tesoro, Timithy Geithner, compareció ante el Congreso. - El Tesoro debía haber presentado el pasado 15 de abril su informe sobre política de cambio, pero lo retrasó sin fecha para dar margen al diálogo. Los legisladores en el Congreso le pedían que calificara a China como "manipulador", porque con su política pone a la industria exportadora doméstica en desventaja. - China es de los pocos puntos donde demócratas y republicanos están unidos. El pasado 15 de marzo, 130 congresistas enviaron una carta a Geithner pidiendo que se impongan medidas arancelarias selectivas si Pekín no revalúa su divisa. El senador demócrata Charles Schumer y el republicano Lindsey Graham introdujeron una Ley para ejercer más presión. - EE UU tiene un punto de vulnerabilidad. En este momento no puede minar los esfuerzos para que China colabore en cuestiones económicas en el marco del G20. Pero sobretodo, China es su principal banquero. La deuda nacional bruta estadounidense asciende a 13 billones de dólares (entorno al 90% del PIB). De esta cantidad, unos 8 billones es deuda neta y la mitad está en manos extranjeras. Los chinos tienen entorno a un billón.
http://www.elpais.com/articulo/economia/ChinH a/revaloriza/yuan/elpepueco/20100619elpepuec o_2/Tes H
349 41B JOSEP RAMONEDA El día siguiente a la sentencia
La29B hora de la política JOSEP RAMONEDA 11/07/2010 La manifestación de reafirmación catalanista y contra la sentencia del Estatuto reunió a un número ingente de ciudadanos en el centro de Barcelona, con ganas de decir de forma tranquila que Cataluña existe como nación política. Con este exitoso acontecimiento terminó la fase de los rituales. Y empieza la hora de la verdad política. La indignación serena que los ciudadanos expresaron en la calle es un sentimiento que surge cuando la gente se siente atropellada y que está en el origen de los grandes cambios sociales. La tarea del día después es darle traducción política. Si la sentencia del Constitucional marca el cierre del Estado autonómico, como es opinión extendida en Cataluña, ¿cómo traducir la respuesta ciudadana en políticas adecuadas para la nueva etapa que esta manifestación abre? Esta es la tarea que tienen por delante los partidos políticos y que debe guiar su comportamiento en la inminente campaña electoral catalana. Si los partidos, por una vez, fueran capaces de hacer una campaña electoral más política que propagandística, de las urnas podrían salir las alianzas adecuadas para poner en marcha la agenda compartida que la situación requiere. Hay quien piensa que habría sido mejor que la sentencia no llegara en vigilias electorales. No estoy de acuerdo. Es precisamente la gran oportunidad de cambiar las inercias. De constituir mayorías o alianzas mayoritarias fuertes capaces de tomar la iniciativa. A Cataluña le ha llegado la hora de afrontar el futuro por sí misma. Se han oído voces en Cataluña y fuera de Cataluña que dicen que las manifestaciones son gestos inútiles, expresiones de impotencia. No es verdad. La manifestación del 11 de septiembre del 77 está en la mente de todos todavía y sin ella la Transición probablemente habría sido distinta. Las movilizaciones contra la guerra de Irak cambiaron el curso de la política española. Y la manifestación de este 10 de julio puede tener un papel determinante en el futuro inmediato de Cataluña. No vale la demagogia de que el lunes la vida volverá a la rutina de siempre y los catalanes se irán de vacaciones como cada año. Naturalmente, nadie ha llamado a la insurrección. Se trata simplemente de comprometer a los partidos políticos a encontrar la hoja de ruta adecuada para que, con decisión, y sin rodeos innecesarios, Cataluña pueda alcanzar el autogobierno que se le niega. Lo que requiere mucha política, mucho pacto entre los partidos catalanes para la acumulación de fuerzas, mucha confrontación ideológica, en el sentido más noble de la palabra, hasta la configuración de las mayorías necesarias para emprender cambios de envergadura. Se nota en algunos medios de comunicación conservadores cierto desdén, en el sentido de que una vez agotado el tiempo del ruido todo volverá a su cauce y se demostrará una vez más que los catalanes ladran mucho pero muerden poco. Corresponde a los partidos catalanes demostrar que las cosas han cambiado, pero corresponde también a las élites locales, especialmente a las económicas, siempre tan lampedusianas, no frustrar las expectativas generadas. No vale manifestarse de tarde y decir en las cenas de la noche que ahora lo que hay que hacer es evitar que esta dinámica de cambio vaya demasiado lejos. Había más de un rostro y más de una institución en la calle que respondían a este perfil. En el intento de minimizar la manifestación de ayer, que parece ser la consigna de la derecha, algunos medios de comunicación han empezado utilizar La Roja como arma para el ataque. Espero que a la vista de la masiva manifestación de ayer no pierdan el tiempo contabilizando los ciudadanos que mañana salgan a celebrar el Mundial, si España lo consigue. Deben
350 sentirse muy inseguros en la defensa de la nación española cuando tienen que convertir al fútbol en bandera para la reconstrucción nacional. Realmente, están ya en el último recurso. El Gobierno español y el PP, ahora en el papel de manso cordero olvidadizo de haber provocado esta fractura institucional, esperan que, con el retorno de CiU al poder o con una coalición CiU-PSC, las cosas vuelvan a su sitio natural. El problema es que lo que antes resultaba natural ahora ya no lo es. Porque Cataluña ha cambiado mucho y la presencia masiva de las nuevas generaciones en la manifestación lo testifica. Y porque cuando a uno se le cierran las puertas no le queda más salida que buscar su propio camino. Esto es lo que expresaban los catalanes en la calle. Algunos dirán que se habría podido llegar a esta conclusión mucho antes. Pero para que un país se mueva sin desgarros internos ni fracturas dolorosas es necesario que una amplia mayoría de la sociedad tome conciencia de la necesidad de cambio. Los manifestantes dieron testimonio de esta mayoría.
http://www.elpais.com/articulo/espana/H hora/politica/elpepiesp/20100711elpepinac_8/Tes H
415B JOSEP RAMONEDA OPINIÓN
Días293B de fútbol JOSEP RAMONEDA 11/07/2010 Para los que tenemos cierta alergia a las retóricas nacionalistas y a las exaltaciones patrióticas, los días de éxitos deportivos son a la vez una pesadez y una gratificación. La pesadez de tener que aguantar este "nosotros" insoportable que se repite en los medios de comunicación y en la calle, y el griterío que despliegan los voceros nacionales. Los ruidos de acompañamiento de un éxito de la selección española o de un triunfo del Barça, en tanto que representante de Cataluña, se parecen como dos gotas de agua. Las únicas diferencias son de matices idiosincrásicos: más expansivos y descarados los voceros españoles; más graves y trascendentales, los catalanes. La gratificación de verificar el carácter regresivo del discurso patriótico, exaltaciones melancólicas de una homogeneidad perdida. Afirmación desesperada de un sustrato arcaico que ya solo se reconoce en el deporte. El discurso del nosotros es particularmente patético: por lo que tiene de excluyente y por lo que tiene de verbalización de la impotencia. Todos los españoles con la selección, todos esperando la victoria, vamos a ganar. Se trata de hacer impensable que alguien no comparta este deseo. Es decir, no solo se excluye a los miles de ciudadanos que prefieren que gane otro, sino que ni siquiera se les concede el derecho a voz: la negación de la unanimidad carece de significado. La virtud del fútbol -como penúltimo depositario del patriotismo- es que el discurso es tan directo, tan brutal, que hace emerger el fundamento enormemente simplista de la retórica nacionalista: somos los mejores. Pero al mismo tiempo, y ahí está buena parte de su éxito, es la voz de la impotencia social, en lo colectivo y en lo individual. En lo colectivo porque la sobreactuación patriótica es señal de duda: feliz casualidad que los éxitos del Mundial hayan coincidido con un auto del Constitucional que repite y reitera la indisoluble unidad de la nación española. Algunas dudas debe haber sobre su solidez cuando hay que reafirmarla con tanta insistencia. En lo individual, porque este nosotros permanente de los locutores deportivos: estamos jugando de maravilla, el partido es nuestro, hemos metido un gol, es una transferencia para que los ciudadanos puedan vivir como éxito propio lo que es un mérito exclusivo de los jugadores que están en el campo. Es curioso que una sociedad tan dada a la exaltación de los triunfadores haga del mérito de los futbolistas un éxito conseguido gracias al compromiso de todos.
351 A este discurso socializador del éxito, este año se ha incorporado un nuevo elemento: la conversión de los jugadores en amigos y familiares de todos: son como tu hijo, podríamos verle en las comidas familiares, es el vecino de al lado. En un momento de crisis manifiesta de instituciones como la familia y de una economía de la productividad y el consumo que aísla a los ciudadanos y rompe vínculos comunitarios, el fútbol es la penúltima entelequia. Personajes extraordinariamente bien pagados y especialmente dotados para ser competitivos trazan un espacio comunitario virtual, como una nube que va y viene por encima de la cruda realidad del dinero y de la quimera del éxito, del que ellos mismos son exponentes. Durante algún tiempo los intelectuales miraron con desdén el fútbol: otro opio del pueblo. Ahora se ha puesto de moda lo contrario: exaltar las virtudes estéticas y cívicas del fútbol, y construir la correspondiente poética. Siempre he sido aficionado al fútbol. Estoy convencido de que el fútbol ejerce una función social importante. El estadio es un vomitorio social por el que se evacuan y subliman grandes dosis de violencia presentes en la sociedad. A través del fútbol se resuelven simbólicamente batallas entre países, aunque la victoria futbolística ayuda más a la resignación que al fortalecimiento para envites posteriores. Barack Obama le pidió a Joseph Blatter, el presidente de la FIFA, ideas y ayuda para desarrollar el fútbol en Estados Unidos -tierra que se le resiste empecinadamente- porque pensaba que podía ser un acicate de promoción social para los jóvenes afroamericanos. Hay muchas razones a favor del fútbol con su guión de dramatismo e incertidumbre que atrapa a los aficionados. Pero no por ello hay que negar la realidad de un tinglado que de juego solo tiene las apariencias: mueve un montón de dinero e intereses y está gestionado por unos señores empeñados en no hacer nada para que los árbitros no se equivoquen. Por algo será. Resulta enternecedor oír a los líderes políticos que los españoles, con lo mal que lo están pasando, merecen la alegría de un Mundial. Más claro, el agua.
http://www.elpais.com/articulo/opinion/H Dias/futbol/elpepusocdgm/20100711elpdmgpan_4/Tes H
416B AGUSTÍ FANCELLI El día siguiente a la sentencia
33294B años después AGUSTÍ FANCELLI 11/07/2010 Por la radio los jóvenes locutores comparaban una y otra vez la manifestación de ayer a la de 1977, la del supuesto millón de almas que reclamaban libertad, amnistía y Estatuto de Autonomía por el paseo de Gràcia. Los locutores añadían que ellos no tenían memoria de aquella referencia, pues por entonces eran muy niños o no habían nacido. Yo miraba y salvo en el mogollón festivo genérico no sabía encontrar otros paralelismos. Veamos. En 1977 Decathlon no existía. La gente iba con camisas entalladas, pantalones largos acampanados, zurrones de piel girada y alpargatas, cuando no con unos incomodísimos zuecos de madera que hicieron furor por la época. El manifestante de hoy se inclina por el pantalón corto hasta la rodilla con profusión de bolsillos, camiseta de algodón ancha, gorra de visera, mochila confortable y sandalias anatómicas. Contrariamente a sus contestatarios antecesores, conoce los riesgos de una insolación excesiva, por lo que lleva consigo un botellín para "hidratarse" convenientemente (antes se le llamaba "beber"). Otro aspecto que ha cambiado radicalmente de entonces a ahora es el acarreo de las crías. Los hombros paternos y maternos que servían de atalaya han sido sustituidos por una variada gama de mochilas portabebés con sofisticados sistemas antisolares y antiviento. No está claro que haya variado mucho el interés de los niños en asistir a este tipo de actos, pero sus padres
352 insisten, convencidos de que un día podrán explicarles que ellos también tomaron parte en aquella giornata particolare. En lo tocante a la prosodia de los lemas, hay que constatar que para el ritmo binario no pasan los años. "Llibertat! Amnistia! Estatut d'Autonòmia!", tenía la gracia del pareado y el respeto de los acentos naturales. En cambio, el de "In/inde/independència!", el más coreado de largo ayer, obliga a una parada ortopédica sobre la "i", si bien hay que reconocerle élan guerrero a esa consigna fragmentada que estalla en plenitud solo al tercer intento. ¿Y la música? Bueno, aunque dicen que históricamente fuimos un pueblo versado en el canto coral, siendo sinceros, ni durante la Transición ni ahora podemos decir que descollamos en esta actividad de manera espontánea. Pero hay que reconocer que hemos mejorado algo. Ayer, sin ir más lejos, se escucharon unos Segadors cantados en todas y cada una de sus estrofas. En 1977 apenas si se llegaba a balbucear la primera. El hit era la gallina revolucionaria de la canción de Llach, de la que por supuesto solo se conseguía entonar el estribillo. Acabáramos. En algo sí se parecen las dos manis separadas por 33 años: el carácter histórico de ambas. La primera buscaba eso que más tarde se conoció como el "encaje" de Cataluña en un Estado de las Autonomías todavía por inventar. La de ayer parecía marcar el fin de esa vía con un grito compacto a favor de la independencia. Gentileza debida a un tediosísimo proceso de elaboración del nuevo Estatut, a un insensato recurso de inconstitucionalidad y a una sentencia que ha acabado de acercar la cerilla al bidón de gasolina. Quién iba a decir que esos 33 años acabarían así.
http://www.elpais.com/articulo/espana/33/H anos/despues/elpepiesp/20100711elpepinac_5/Tes H
417B TRIBUNA: JOSÉ ANTONIO MONTILLA
Un295B Estatuto constitucional JOSÉ ANTONIO MONTILLA 11/07/2010 Una vez conocida la sentencia del Tribunal Constitucional que resuelve el recurso planteado por más de 50 diputados del PP contra el Estatuto de Cataluña podemos considerar que el intérprete supremo de la Constitución ha convalidado no solo el Estatuto de Cataluña sino un modelo de Estatutos a los que podemos denominar "de segunda generación", que abren una nueva etapa en la evolución del Estado autonómico. Pese a los exabruptos oídos en los últimos años frente al Estatuto de Cataluña, la sentencia confirma que sus aportaciones son conformes a la Constitución. Esto es importante no solo para Cataluña sino también para Andalucía, con un Estatuto muy similar, e incluso, en mayor o menor medida, para Aragón, Castilla y León, Baleares o Valencia. Una vez publicada la sentencia podemos suponer que las restantes CC AA reformarán sus Estatutos conforme a este modelo. Por ello, esta sentencia era capital para el desarrollo del Estado autonómico y, a mi juicio, en las peores circunstancias, sobre las que no procede incidir ahora, el Tribunal Constitucional ha emitido una sentencia muy razonable. Desde una perspectiva formal, se agradece el estilo sintético que por una vez utiliza el Tribunal, haciendo de la necesidad virtud, en la línea de los tribunales constitucionales de otros países. Va directamente a los problemas, sin circunloquios, y cita solo las sentencias realmente importantes respecto a cada asunto. Pero, desde una perspectiva más de fondo, lo trascendente es que intenta aportar sosiego desde el razonamiento lógico a aspectos que se han presentado ante la opinión pública en términos muy crispados. Por ello, incluso aún discrepando en algún caso de la argumentación, resulta destacable la voluntad de desmontar las polémicas que se han impulsado por quienes han querido convertir el Estatuto en un campo de batalla.
353 La sentencia presenta como elemental que estamos ante un Estatuto con su fundamento en la Constitución, nada de reforma encubierta de la Constitución u otras elucubraciones preventivas que nos han repetido hasta la saciedad. En ese sentido, rechaza radicalmente los intentos de los recurrentes por darle a los términos pueblo de Cataluña, ciudadano de Cataluña o incluso derechos históricos una interpretación conflictiva. Con naturalidad, los encaja en el marco constitucional. Igual ocurre con el manido debate sobre el concepto de "nación". El Tribunal lo resuelve recordando su doctrina sobre el valor de los preámbulos y la definición de Cataluña como una nacionalidad, que contiene el propio Estatuto tanto en el artículo 1 como en el 8. Es un debate impostado, innecesario, en cuanto el propio Estatuto expresa con nitidez la definición de Cataluña como nacionalidad y el encaje de los símbolos nacionales. Esa voluntad de desactivar los conflictos lo advertimos también en otros aspectos polémicos. Así, en los derechos lingüísticos concilia el derecho de opción lingüística con la constitucionalidad de las medidas de promoción de la lengua propia y la normalización lingüística, aceptada desde la STC 337/1994. La sentencia va recorriendo los preceptos recurridos, en definitiva la mayor parte del Estatuto, confirmando su constitucionalidad salvo en aspectos muy puntuales, e incluso criticando los planteamientos genéricos o imprecisos de los recurrentes. Ciertamente, no comparto las declaraciones de inconstitucionalidad, pero eso no opta para reconocer que son pocas y con escaso alcance. En la mayoría de los supuestos deriva de lo que, según el Tribunal, no puede contenerse en el Estatuto sino en una ley orgánica, como en el caso de los Consejos de Justicia, por lo que bastaría con modificar la correspondiente ley orgánica. En puridad, las declaraciones de inconstitucionalidad con contenido afectan a la "preferencia" en el uso del catalán, el carácter vinculante de los dictámenes del Consejo de Garantías Estatutarias, la exclusión del Defensor del Pueblo en la supervisión de la Administración autonómica o la competencia normativa autonómica para aprobar tributos locales. Puede sostenerse que ni siquiera esto debería haberse eliminado de un Estatuto aprobado en referéndum por el cuerpo electoral o, incluso, que no se ha respetado suficientemente el principio de deferencia al legislador democrático. No obstante, me parece evidente que la "poda" es muy limitada. Por ello, la valoración de la sentencia es positiva, especialmente si pensamos en sus efectos para el desarrollo del Estado autonómico. En primer lugar, porque delimita de forma adecuada la posición constitucional del Estatuto. En sentido positivo, configurándolo como norma institucional básica de la Comunidad Autónoma con una función materialmente constitucional y, en sentido negativo, impidiéndole la definición de categorías constitucionales. En segundo lugar, porque no se había hecho hasta ahora en España una apelación tan clara y precisa a la importancia de la colaboración y la participación en el Estado autonómico. Finalmente, porque al aceptar la técnica del desglose de facultades competenciales que propone el Estatuto favorece la delimitación de los espacios respectivos del Estado y las CC AA, así como la asunción de sus responsabilidades. Por ello, procede huir de debates estériles para configurar en el marco de los nuevos Estatutos, y con el referente de esta sentencia, un Estado autonómico sustentado en los principios de lealtad institucional y cohesión territorial.
http://www.elpais.com/articulo/opinion/EstaH tuto/constitucional/elpepuopi/20100711elpepiopi_
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354 418B EDITORIAL
Soberanismo296B en la calle
La495B multitudinaria manifestación de Barcelona deja el Estatuto en segundo plano 11/07/2010 La manifestación que ayer recorrió el paseo de Gracia en Barcelona no puede ser ignorada y, menos aún, menospreciada como una momentánea expresión de descontento tras la que las aguas volverán al cauce por sí solas, impulsadas por acontecimientos deportivos o la inminencia de las vacaciones. Pero tampoco el mensaje de la jornada será fácil de gestionar para los partidos que la convocaron, sobre todo los dos que han representado hasta ahora una alternativa de Gobierno en Cataluña, PSC y CiU. Entre otras razones porque interpretar la manifestación de ayer como un respaldo masivo de los ciudadanos catalanes al Estatuto no encaja ni con la baja participación en el referéndum de convalidación ni mucho menos con el tono y las consignas de la manifestación. Y que no lo fue lo demuestra que los líderes e instituciones que se sumaron a la iniciativa de Òmnium Cultural en respuesta a la restrictiva sentencia del Tribunal Constitucional se encontraron inmersos en un acto multitudinario a cuyo éxito contribuyeron de manera decisiva y que, sin embargo, quienes lo capitalizaron fueron los partidarios de la independencia. El presidente Montilla fue increpado en diversas ocasiones, lo mismo que el cortejo de líderes políticos presentes en la marcha, como Duran i Lleida. Era lo que algunos temían y fue exactamente lo que sucedió. Solo las próximas elecciones podrán determinar en qué punto se encuentran las principales fuerzas políticas catalanas. También si la manifestación de ayer supone la constatación de un desplazamiento general de la política catalana hacia el soberanismo o, por el contrario, se trata de un espejismo que, una vez desvanecido, ofrecerá, sin embargo, el inquietante panorama de un gravísimo problema institucional, del que nadie está libre de responsabilidades. Frente a este problema, no basta con decir que las instituciones catalanas deben acatar la sentencia, algo que, de puro obvio, resulta insultante. El problema es que, debido al oportunismo que se ha adueñado de la vida política española, la sentencia ha invalidado en el Estatuto de Cataluña preceptos que están vigentes en otros textos autonómicos, incluida su definición como nación. Por más que la gestación del Estatuto haya sido un ejemplo de torpeza e irresponsabilidad, el peor desenlace consistiría en que, para desactivar un supuesto privilegio, se perpetre una discriminación. En este punto, los ciudadanos de Cataluña no deberían quedar solos en su protesta, en nombre de la equidad sobre el que se construyó el modelo autonómico y que, sea cual sea el grado de deterioro al que se ha conducido, sigue vigente. Con la nueva Generalitat, PP y PSOE no podrán reproducir el espectáculo ofrecido el mismo día en que una multitud de catalanes salía a la calle sin arriesgar un agravamiento de la crisis institucional y, por tanto, carece de sentido que se limiten a seguir cruzando acusaciones cuando lo urgente es rehacer un consenso desde el que reparar el destrozo provocado entre todos.
http://www.elpais.com/articulo/opinion/SH oberanismo/calle/elpepuopi/20100711elpepiopi_2/Te s H
355 419B
EDITORIAL420B
Amenaza297B otra quiebra
La496B insolvencia de Mediapro gravita sobre la financiación del endeudado fútbol español 11/07/2010 El mismo día en que la selección española de fútbol amagaba con dar un disgusto a la afición y debutaba con mal pie en el Mundial de Sudáfrica, luego felizmente rectificado, la compañía Mediaproducción, filial de Mediapro, y a su vez esta filial 100% de Imagina, donde se reúnen todos los propietarios de la cadena Sexta de televisión, el financiero Abelló y la agencia de publicidad WPP, solicitaba la suspensión de pagos ante los tribunales. La cuestión carecería de importancia, si Mediapro no fuera la sociedad que ha contraído multimillonarios compromisos con los clubes de fútbol, a despecho de los contratos firmados por ella con Audio Visual Sport y en una actitud que le llevó a ser condenada a indemnizar con más de 100 millones de euros a esta última empresa y a poner a disposición de la misma los derechos de los clubes. La insolvencia de Mediaproducción, consecuencia de su aventurada política empresarial, amenaza a la financiación del fútbol español en un momento en el que las deudas de este difícilmente pueden ser aliviadas, como ha sido costumbre, mediante la utilización del erario público, salvo que alguien pretenda que es más importante la política del pan y toros que el mantenimiento del ya maltrecho Estado de bienestar. No se puede decir que la opinión pública, los responsables oficiales -tanto los del Gobierno central como los de las autonomías- y el mercado en general no estuvieran avisados al respecto. Pero hasta ahora solo las instancias judiciales han servido para poner orden en estas guerras mediáticas en las que se han ventilado -y al parecer evaporado- grandes cantidades de dinero y que se han beneficiado de la habitual pasión de los poderes políticos por contar con medios de comunicación serviles. En cualquier caso no hay mal que por bien no venga y las dificultades económicas por las que atraviesan las empresas de Jaume Roures y sus socios pueden ser ocasión para que el Gobierno siga la estela judicial y se decida a poner, él también, orden en la competición y en el mercado audiovisual español después de tanto desorden como el propio Ejecutivo ha propiciado en los últimos años. Lo que le faltaba a La Moncloa es que a la quiebra de tantas empresas se le añada ahora la del fútbol. Seguro que hay maneras de evitarlo, pero la temporada próxima está a la vuelta de la esquina y queda muy poco tiempo para hacerlo.
http://www.elpais.com/articulo/opinion/AmH enaza/quiebra/elpepuopi/20100711elpepiopi_3/TesH
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World economic recovery driven by global imbalances By Neil Irwin Washington Post Staff Writer Friday, July 9, 2010; A01 The catastrophic economic downturn that began two years ago was supposed to shake up the global economy, ending an era in which Americans consumed too much and saved and exported too little. But the recovery is being driven by a return to the very global imbalances that were a major cause of the crisis. Americans' savings rates have fallen over the past year, imports are rising faster than exports, and countries around the world are again turning to Americans to be the consumers of last resort. "Despite all the good words and good intentions, I'm afraid we're going back to the same conditions that led us into this mess to begin with," said C. Fred Bergsten, director of the Peterson Institute for International Economics. That's partly because countries around the world view those old ways, while dangerous over the long term, as the quickest option to power out of the deep economic decline. For China, Japan and Germany, that means exporting vast volumes of goods, saving too much and spending too little; for the United States, and to varying degrees Britain and other European nations, it is the reverse. These trends are deeply ingrained in countries' policies and individual decisions by their citizens, such as the lack of a social safety net in China that causes people to save more and the mortgage-interest deductions in the United States that encourage people to take on more debt. World leaders have pledged to guide the global economy away from those imbalances. Just this week, President Obama renewed his call for a doubling of U.S. exports. But that has been made more difficult given that the value of the dollar has risen 7.5 percent against other major currencies this year, making American exports more expensive. Meanwhile, leaders in Germany and Japan have turned their focus to reducing budget deficits, but the rest of the world would benefit if those countries spent more aggressively, increasing their consumption. The United States has been like a customer who outspends his paycheck by receiving store credit. The store -- in this case, China, which buys vast quantities of U.S. Treasury bonds -- essentially funnels its profit back to the customer in the form of more credit. Everybody is better off for a while; the customer gets more stuff, and the store does more business. But that relationship can't go on forever. Eventually, the customer owes more money than he can pay, and the whole arrangement collapses. In the years before the financial crisis, it was that risk -- of a collapse in the value of the dollar and of U.S. government securities -- that kept many economists up at night. Many had concluded that the crisis would shock the system into a fundamental change.
357 "The growth model that has been in place over the past 10 years -- where excess savers around the world, namely in Asia, allow us to live beyond our means, namely by buying products from those places -- that model is broken, and it's not coming back," Tim Adams, a Treasury Department official in the George W. Bush administration, said in congressional testimony in early 2009. For a time that prediction seemed to be coming true, as the gap between spending and income narrowed. The U.S. savings rate, which was less than 2 percent of disposable income before the crisis, spiked to 6.4 percent in May 2009, as Americans chose to hoard cash rather than spend it, largely out of fear. But in the year since, spending has risen faster than incomes, and the savings rate has edged back down to 4 percent. At first glance, Americans seem to be cutting back on their debts. Total household debt has fallen 2.7 percent, or $374 billion, since peaking in the second quarter of 2008. But, as the Wall Street Journal recently noted, U.S. banks and lenders have written off almost exactly the same amount of loans as unrecoverable. That means, on balance, that Americans are not paying down what they owe in any meaningful way. The broadest measure of the gap between savings and consumption, known as the current account deficit, was about 5 percent of total economic output before the crisis in 2007. It shrank to 2.9 percent last year as U.S. consumers cut back and saved more. But based on current trends, the International Monetary Fund now expects that measure to climb back to 3.3 percent this year and to 3.6 percent in 2013. China's current account surplus, by contrast, fell from 11 percent in 2007 to 5.8 percent last year. But as the Chinese return to their high-saving ways, this surplus of income over spending is forecast to rise to 8 percent in 2015. In the United States, policies to deal with the economic crisis have contributed to the trend: deficit spending on government stimulus programs, incentives to buy automobiles and various subsidies for borrowing money to buy a house. China, meanwhile, is continuing to encourage its exports by keeping its currency cheap, though Beijing said last month that it could allow a gradual adjustment of the value. This problem of global imbalances was high on the agenda when leaders from the world's 20 largest economies met late last month in Toronto. But their joint statement dealt with the issue only in vague terms, promising to seek "strong, sustainable and balanced growth." There was no specific agreement on how governments would do this. The recent financial tremors in Europe could aggravate the imbalances further. Some European countries have responded to the debt crisis by slashing government spending and reducing consumption. Germany, the continent's largest economy, was already producing more than it consumed, and its move toward austerity could reduce demand for American products just as the United States is pushing to expand exports. World leaders trying to grapple with these issues face a clash between what is best for the world economy in the long run and the immediate interests of their respective countries. The risk: that the seeds of the next crisis are already in the ground. "These imbalances weren't accidental," said Robert Shapiro, chairman of the economic advisory firm Sonecon and head of the globalization initiative at think tank NDN. "They solved large political and economic problems for a lot of countries and were the result of successful political arrangements. That's why they're so hard to untangle." Neil Irwin World economic recovery driven by global imbalances July 9, 2010; A01 http://www.washingtonpost.com/wp-dyn/conteH nt/article/2010/07/08/AR2010070806177_pf.html H
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Brasil58B se olvida de la crisis
Los497B ingresos y el empleo superan los niveles de septiembre de 2008. -El país creó un millón de puestos formales el año pasado FRANCHO BARÓN | Río de Janeiro 09/07/2010 Las elecciones presidenciales brasileñas se celebrarán el próximo 3 de octubre y, si se puede hacer una lectura en clave electoral de estos datos, no habría que divagar mucho para concluir que juegan a favor de la candidata del Partido de los Trabajadores (PT) y protegida de Lula, Dilma Rousseff. ¿La razón? Ella misma lo explicó en una entrevista concedida recientemente a este periódico: "El éxito de Lula también es el mío". El presidente brasileño, Luiz Inácio Lula da Silva, no necesita hacer grandes malabarismos para que la realidad confirme sus pronósticos. Para sus críticos, se trata de suerte. Para los defensores de su gestión, no es más que el afinado olfato que Lula ha ido perfeccionando a lo largo de décadas fajándose en las trincheras de la política. Independientemente de cuál sea el caso, o de si es una combinación de ambos, ayer un nuevo paquete de indicadores económicos vinieron a confirmar lo que Lula, ante la mirada escéptica de muchos, vaticinó hace un año y medio: que Brasil no estaba atravesado ninguna crisis y que simplemente estaba capeando una "marejadilla" financiera que no dejaría grandes secuelas. Según los datos divulgados por la Confederación Nacional de Industria (CNI), los ingresos y el empleo en el sector industrial brasileño superaron por primera vez en mayo de este año los niveles previos a septiembre de 2008, cuando se sitúa el inicio de la crisis. Tanto el Fondo Monetario Internacional (FMI) como los mercados han revisado al alza sus previsiones de crecimiento para este año, y ahora pronostican un aumento del producto interior bruto (PIB) superior al 7% en 2010. La demanda de crédito, principalmente en los estratos más bajos de renta, también ha aumentado un 16,6% en el último año, algo que confirma las dos caras de una misma moneda: por un lado, el recalentamiento de la economía brasileña y, por otro, las mejoras en el sistema de créditos al consumo. Lo que en otro contexto podría parecer contradictorio, en este país se torna un engranaje perfectamente engrasado. Lula, que se encontraba ayer de visita oficial en Zambia, no tardó en reaccionar a las noticias: "Cuando teníamos crisis en Zambia o en Brasil, aparecía rápidamente el FMI o el Banco Mundial para enseñarnos lo que teníamos que hacer y para opinar sobre nuestra políticas. Ahora que la crisis la viven los países ricos, el FMI guarda un silencio profundo y el Banco Mundial se ha quedado mudo. O sea, no saben dar respuesta a la crisis de la misma manera que creían saberlo con los países pobres". La andanada pega una vez más en la línea de flotación de ambas instituciones, que Brasil pretende adaptar a un nuevo orden planetario en el que las potencias emergentes englobadas en el grupo BRIC (Brasil, Rusia, India y China) tengan un mayor protagonismo. El CNI informó ayer de que los ingresos de la industria crecieron el pasado mayo un 2,1% respecto al mes anterior. El dato supera en un 2,3% los ingresos contabilizados en septiembre de 2008. Durante los cinco primeros meses de 2010, la facturación del sector industrial, uno de los motores de la economía brasileña, aumentó un 12,5%. El empleo en este sector también ha registrado un aumento considerable: un 0,4% en mayo respecto a abril y un acumulado del 3,6% en los cinco primeros meses del año. En 2009, Brasil generó casi un millón de nuevos empleos formales.
359 Las últimas proyecciones económicas del FMI para Brasil apuntan a un crecimiento del 7,1% en 2010, más de un punto y medio por encima de las previsiones divulgadas el pasado mes de abril (5,5%). La institución financiera también pronostica un aumento del 4,2% del PIB en 2011. Los datos del FMI no difieren mucho de los análisis de mercado divulgados por el Banco Central de Brasil (crecimiento del 7,2% en 2010 y del 4,5% en 2011). El vertiginoso aumento de la demanda de créditos al consumo (del 16,6% en el primer semestre del año, en relación al mismo periodo de 2009) confirma que Brasil está afrontando una de sus cuentas pendientes: reducir unos altísimos tipos de interés que frenan el acceso de los consumidores al crédito.
FRANCHO BARÓN | Río de Janeiro 09/07/2010 Brasil se olvida de la crisis
http://www.elpais.com/articulo/internacional/BH rasil/olvida/crisis/elpepuint/20100709elpepuint
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360 OpinionH H
July 8, 2010
Pity298B the Poor C.E.O.’s
By576B PAULH KRUGMAN Job creation has been disappointing, but first-quarter corporate profits were up 44 percent from a year earlier. Consumers are nervous, but the Dow, which was below 8,000 on the day President Obama was inaugurated, is now over 10,000. In a rational universe, American business would be very happy with Mr. Obama. But no. All the buzz lately is that the Obama administration is “antibusiness.” And there are widespread claims that fears about taxes, regulation and budget deficits are holding down business spending and blocking economic recovery. How much truth is there to these claims? None. Business spending is indeed low, but no lower than one would have expected given widespread overcapacity and weak consumer spending. Business leaders are feeling unloved, but giving them a group hug won’t cure what ails the economy. Ask the Obama-is-scaring-business crowd for some actual evidence supporting their claim, and they’ll tell you that business spending on plant and equipment is at its lowest level, as a share of G.D.P., in 40 years. What they don’t mention is the fact that business investment always falls sharply when the economy is depressed. After all, why should businesses expand their production capacity when they’re not selling enough to use the capacity they already have? And in case you haven’t noticed, we still have a deeply depressed economy. Historically, there has been a close relationship between the level of business investment and the “output gap,” theH difference between the economy’s actual output and its long-run trend H — which means that there’s nothing surprising about low investment now, given the fact that the output gap is hugely negative. If anything, it’s surprising how well business investment has been holding up. Alternatively, we can look directly at measures of unused business capacity. Capacity utilization in industry is up over the past year, but still far below historical norms. Vacancy rates at industrial and retail properties are at historic highs. Again, given that businesses have plenty of idle structures and machines, why should they be building or buying even more? So where’s the evidence that an antibusiness climate is depressing spending? The answer, supposedly, is that this is what you hear when you talk to entrepreneurs. But don’t believe it. Yes, when you talk to business people they complain about taxes, regulations and the deficit; they always do. But the Obama’s-socialist-policies-are-wrecking-the-economy chorus isn’t coming from businesses; it’s coming from business lobbyists, which isn’t at all the same thing.
ReadH the report on the U.S. Chamber of Commerce H in the latest Washington Monthly: peddling scare stories about what Democrats are up to is a large part of what organizations like the chamber do for a living. Or read through the latest survey of small business trends by the National Federation for Independent Business, an advocacy group. The commentary at the front of the report is largely a diatribe against government — “Washington is applying leeches and performing blood- letting as a cure” — and you might naïvely imagine that this diatribe reflects what the surveyed
361 businesses said. But while a few businesses declared that the political climate was deterring expansion, they were vastly outnumbered by those citing a poor economy. The charts at the back of the report, showing trends in business perceptions of their “most important problem,” are even more revealing. It turns out that business is less concerned about taxes and regulation than during the 1990s, an era of booming investment. Concerns about poor sales, on the other hand, have surged. The weak economy, not fear about government actions, is what’s holding investment down. So why are we hearing so much about the alleged harm being inflicted by an antibusiness climate? For the most part it’s the same old, same old: lobbyists trying to bully Washington into cutting taxes and dismantling regulations, while extracting bigger fees from their clients along the way. Beyond that, business leaders are, as I said, feeling unloved: the financial crisis, health insurance scandals, and the catastrophe in the Gulf of Mexico have taken a toll on their reputation. Somehow, however, rather than blaming their peers for bad behavior, C.E.O.’s blame Mr. Obama for “demonizing” business — by which they apparently mean speaking frankly about the culpability of the guilty parties. Well, C.E.O.’s are people, too — but soothing their hurt feelings isn’t a priority right now, and it has nothing at all to do with promoting economic recovery. If we want stronger business spending, we need to give businesses a reason to spend. And to do that, the government needs to start doing more, not less, to promote overall economic recovery.
PAULH KRUGMAN H Pity the Poor C.E.O.’s July 8, 2010 http://www.nytimes.com/2010/07/09/opinion/09kH rugman.html?_r=1&partner=rssnyt&emc=rss H
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Eurointelligence29B Daily Morning Newsbriefing
The498BH EU has once again lost credibility with the financial markets – this time over the stress tests
09.07.2010 Market reaction decidedly negative on stress tests, as whitewash is expected; particular criticism over decision to use stress scenario for government bonds that are more optimistic than current market rates; all banks, but two, are expected to pass the tests with flying colours; FT Alphaville: When is a stress test not a stress test? FT Editorial: EU should revise those tests; Robert Peston makes the point that bond discounts are irrelevant if banks to do not book mark-to-market; IMF criticises ECB’s lacklustre bond purchase policies; Trichet says all eurozone-world cup final is evidence that one should not underestimate Europe ; Berlusconi faces strike action, and a backlash from the regions, over budget cuts; US consumer credit has declined sharply; in Brussels, meanwhile, an Italian MEP thinks the EU is insufficiently focused on UFOs. 09.07.2010
The421B EU has once again lost credibility with the financial markets – this time over the stress tests
The European media reaction to the announced stress tests is devastating. FT Deutschland is leading the paper with the story and a comment according to which the stress tests are a whitewash, not intended to solve the problem, but as a pure PR exercise.
363 If that was the intention it is sure backfiring. The reactions by market analysts is that the so- called tests do not constitute extreme scenarios, especially on European sovereign bonds, but rather very accommodating conditions, which the banks are almost certain to fulfil. Commerzbank is quoted as saying that if everybody ends up surprised at how well the banks have passed the tests, there is a real danger that this would backfire. The stress tests assume a worst-case scenario for Greece that the bonds are traded at a discount of 17%, when they already discounted at 25%. As for Greece, this means that the worst case scenario is completely unrealistic. The paper also reports of analysis by Deutsche Bank according to which only two of the 91 banks to be tested are likely to fail the broad tier 1 test 6% threshold. Allied Irish Bank and the National Bank of Greece. FT Alphaville’s headline says it all: When is a stress test not a stress test?
And the FT’sH editorial H is already highly critical of the process, also making a deeper point about the process of economic governance – that the EU’s authorities continue to rely on the idea that everything would be well if the markets fully trusted them. Robert Peston on the stress tests
RobertH Peston H of the BBC has made an interesting observation about the stress tests. Apart from the fact that all UK banks will pass those soft tests with flying colours, there is also an accounting problem related to the impact on a haircut of Greek debt. If a bank doesn't use mark-to-market valuations for of their government bond holdings, then this would be an irrelevant test no matter what discount is applied. So they should not be stress a meaningless – and too small anyway – discount, but a genuine haircut. IMF criticises ECB over bond purchases The globes are coming off in the global economic debate. The IMF has criticised the ECB for failing to signal sufficiently to investors that it would support the European bond markets. Yesterday, Jean Claude Trichet defended the ECB’s stance by saying that the ECB’s decision to reduce its weekly bond purchases – see yesterday’s daily morning briefing for a table – looked like a trend. While the ECB is not yet committed to end the programme, his comments were clearly seen as a signal that the ECB’s bond support programme was very limited in nature. More complacency from Trichet The FT jumps on the “pessimism overdone” claim from Trichet during his press conference yesterday. He said that international investors were far too pessimistic in their assessment of the economic prospects of the eurozone, which according to the latest indicators looked a lot more solid than published opinion would suggest. Notably Mr Trichet mentioned the upcoming all-European world cup final as a sign that one should not underestimate the Europeans. Berlusconi faces regions anger and vast strike actions over budget cuts Silvio Berlusconi is in trouble. The €25bn budget cuts of his finance minister Giulio Tremonti is outraging the regions and provokes vast strike actions from transport workers to diplomats never seen before, writes LaH Repubblica. H Berlusconi calls it an “act of courage” to hold a confidence votes in both houses, he needs to get dissenters in line, who have stalled the €25bn budget cuts by tabling more than 1200 amendments. Both Berlusconi and Tremonti will meet
364 today with the regions and municipalities. TheH editorial H of La Republicca asks whether Berlusconi is up for the task to face unpopularity and mediate between the regions and his finance minister. This is unusual terrain for him and means that he has to do some real politics. Berlusconi’s ratings are currently down to 41% approval rate, though he insists that it is 65%. US consumer credit declines sharply Not directly a eurozone story, but of relevance to our economic debate. As we are again relying on the US consumer to bail out the world economy, we should take a look at the latest stats on US consumer credit – the driver behind US consumption. It was down 4.5% yoy, with revolving credit down at 10.5%, according to CalculatedH Risk.H This is the long term time series. No bailout here.
The real issue
We just leave you with this headline from the Wall Street Journal’s Burssels blog. MarioH
Borghezio,H a far-right Italian member of the European Parliament, says the EU is not sufficiently focused on studying UFOs.
http://www.eurointelligence.com/index.php?idH =581&tx_ttnews[tt_news]=2850&tx_ttnews[bac kPid]=901&cHash=87eb1bede9 H
365 MARKETS
42B School is out, but does the final bell toll for London?
By Gillian Tett Published: July 8 2010 18:36 | Last updated: July 8 2010 18:36 On Thursday in London, a clutch of private schools beloved by bankers and hedge fund players broke up for the summer holidays. Some parents were probably wondering if the final farewells could soon follow. During the past three years, there has been endless debate about whether financiers would leave London as a result of the bank turmoil and the ensuing regulatory clampdown.
52BH H The great and the good aim to ‘humanise globalisation’ - Jun-20 526BH H The Short View - Jun-17 527BH H Opinion: Time for Asia to rewrite rules of capitalism - Jun-16 528BH H French politicians cling to de Gaulle legacy - Jun-16 529BH H Republicans vote against moving financial regulation bill - Apr-26 530BH H US Treasury chief hardens stance - Apr-18 But, until quite recently, there has been little evidence of any real stampede. Most bankers and hedge fund players have tended to assume banking activity would rebound. Most also thought any future regulatory clampdown would be relatively restrained; or, at least, not draconian enough to justify the upheaval of moving away from London, and away from all those prised schools. But judging from debates that I have recently participated in with financiers and regulators, a mood shift is now under way. For some financial players, the costs of operating in London are finally starting to outweigh those “lifestyle” issues. And while it is hard to track this shift of sentiment with any precision (expect from noting that some high-profile hedge fund players such as Mike Platt have left London for Geneva), there is a good chance this sense of malaise will only grow. Tax is part of the story. Last year’s one-off banker bonus tax in the UK offered one irritation. The recent rise of the top income tax rate to 50 per cent was another, more important, flash point. And the bitter fight about a rise in capital gains tax last month simply fuelled the sense of grievance – notwithstanding the fact that these rates have “only” been raised to 28 per cent, less than the 40 or 50 per cent that was feared. However, it should be stressed that the malaise is not just about tax. After all, tax rates in New York, say, are not that much lower than those in London. What is really prompting some financiers to rethink their UK attachment is a more subtle set of doubts about the British government’s commitment to championing the cause of finance within the European Union as a whole, and maintaining the type of pro-market values that Americans, say, tend to take for granted. The essential issue at stake might be dubbed – somewhat irreverently – the “widget-cheese- finance” debate. Until a year or so ago, it was widely presumed among key global financial
366 players that the British government was operating with an unspoken deal inside the EU. Under this, Germany and France let London operate as Europe’s dominant financial centre, run with pro-market rules; the quid pro quo was that countries such as Germany or France were allowed to keep supporting (if not protecting) their industry and agriculture. Thus, the French kept control of their cheese, the Germans produced impressive widgets – and hedge funds, private equity bodies and investment bankers kept dancing in London, ring-fenced from any anti- market rhetoric emanating from Paris or Frankfurt. Or so the argument went. But these days, financiers’ faith in this “widget-cheese-finance” pact is crumbling. It is now increasingly clear that Paris is determined to grab more eurozone financial business from London, and less willing to accept the idea that London is “naturally” pre-eminent forever. German politicians seem less willing to tolerate the vagaries of Anglo-Saxon financiers too. Meanwhile, the UK government itself seems increasingly ambivalent about whether it wants to fight aggressively for London’s role as Europe’s dominant financial centre; and, more importantly, maintain a climate that is explicitly friendly to banks and hedge funds. After all, these days there are not many British politicians eager to defend financiers – even (or especially) in the national interest. The bureaucrats at the Financial Services Authority are also often too distracted or demoralised to fight. It is little wonder that hedge funds and bankers complain Britain is not thumping the tables hard enough in Brussels about issues that really worry the financial community, such as the latest EU hedge fund directive. Nor is there much trust that London will fend off this week’s bonus rules from the EU parliament. “We just don’t think you have the stomach for a fight,” a senior hedge fund player recently told a harassed- looking British diplomat. This could yet change; some City grandees hope that George Osborne, UK chancellor, will start fighting back against the hedge funds directive this autumn. There are still plenty of financiers in London who want to give the new government the benefit of the doubt, not least because the regulatory environment of other financial centres looks uncertain too. But if this sense of doubt continues, London’s attractiveness will almost certainly ebb, particularly given so much business is already shifting east. When those posh London schools re-open this autumn, most of those hedge funds kids will still be there. In five years’ time, their like may not.
http://www.ft.com/cms/s/0/cd0fab92-8ab5-11df-8e17-00144feab49a.htmlH H
367 UK
423B Late OBR changes shrank job loss figure By Chris Giles, Economics Editor Published: July 8 2010 23:38 | Last updated: July 8 2010 23:52
The OfficeH for Budget Responsibility Hmade last-minute changes to its Budget forecasts that had the effect of reducing theH impact of the emergency Budget on public sector job losses,H the government has acknowledged. In a move that will raise further questions about its independence and relevance, the new office revised its assumptions by trimming its official forecasts for public sector job losses by about 175,000 by 2014-15.
531BH H OBR struggles to gain respect - Jul-08 532BH H Scramble for new OBR boss - Jul-07 53BH H In depth: UK government spending - Jul-08 534BH H Sir Alan Budd to leave fiscal watchdog - Jul-06 53BH H Warning over financial rules ‘made on hoof’ - Jul-05 536BH H Q&A: The Office for Budget Responsibility - Jun-13 The OBR’s published estimates show that 490,000 public-sector jobs would be lost by 2014- 15, with a total of 600,000 by the following year. Had it not tweaked the forecast, that would rise to nearly 775,000. One of the revisions related to employer pension contributions. The OBR pre-empted the results of the Pensions Commission by assuming public-sector employers would lower their future pension contributions, enabling the forecast to show fewer job losses for a given paybill. The OBR also assumed promotions for public servants would slow, again reducing the assumed number of job losses for a given paybill – although the government has not told public employees this is its plan. Making these important forecasting revisions in the week before the emergency Budget, the OBR was able last week to say that while 460,000 public-sector jobs were planned to go under the policies of the Labour government by 2014-15, there would be only 490,000 job cuts under the new government in spite of bigger spending cuts. David Cameron seized on these figures last week in parliament, saying the OBR figures showed fewer public-sector job losses in 2011-12 and 2012-13 than Labour had planned. “What the figures show is that under Labour’s plans, next year there would be 70,000 fewer public sector jobs and, the year after that, there would be 150,000 fewer public sector jobs,” he said. But the OBR accepts that the prime minister’s claim was based on comparing policies not yet announced by government and was the equivalent of comparing apples with oranges.
The OBR was created in the first week of theH coalition government toH stop accusations that official forecasts were massaged to favour the government. OBR officials refused to comment on Thursday, nor release estimates of the true effect of the Budget spending cuts on public sector employment without the tweaks. But government insiders said the Financial Times’s estimate of 175,000 job cuts was close to the real number.
368 The OBR’s revelations came after Financial Times enquiries. Its published figures implied that each £1bn of real departmental spending cuts planned by Labour would result in 20,000 job losses by 2014-15, but each additional £1bn cut in the emergency Budget cost 2,000 jobs. An OBR statement late on Thursday night said: “The OBR’s best estimate of the aggregate impact of public spending reductions on public sector jobs was set out in our Budget forecast published last week. This estimated that the level of public sector employment would fall by 490,000 by 2014-15. As stated alongside that forecast, changes from the pre-Budget forecast reflected changes to modelling assumptions and Government policy.”
http://www.ft.com/cms/s/0/c3e077ca-8adf-11df-bead-00144feab49a.htmlH H
Trichet30B plays down eurozone gloom By Ralph Atkins in Frankfurt Published: July 8 2010 20:46 | Last updated: July 8 2010 20:46 The world should not write off the eurozone, the European Central Bank president said on
Thursday, as aH surge in German exports highlightedH Europe’s economic resilience. Moving to shore up financial-market confidence in the 16-nation bloc, Jean-Claude Trichet said that globalH gloom over its prospects was overdone.H Economic data “are not confirming this pessimism”. A double dip into recession “is not at all what we are observing”, he added.
537BH H IMF warns of contagion threat to US - Jul-08 538BH H ECB keeps interest rates on hold at 1% - Jul-08 539BH H Bank of England holds course - Jul-08 540BH H Analysis: ECB: A bolder banker - Jul-07 541BH H German exports jump on Chinese demand - Jul-08 542BH H Greek unions strike ahead of pension vote - Jul-08 His comments underlined ECB confidence that emergency measures to stabilise Europe’s 11- year-old monetary union are taking effect. Mr Trichet even cited this weekend’s all-EuropeanH football World Cup final betweenH the Netherlands and Spain as a reason “one should not underestimate Europe”. Emergency bond purchases by the ECB were already on a declining trend amid improving market sentiment, Mr Trichet noted, in a possible hint that the programme might soon end. Launched in May at the height of the eurozone debt crisis, the programme is controversial in Germany, where Axel Weber, Bundesbank president, has warned that it risks igniting inflation. ECBH bond purchases lastH week totalled just €4bn, down from €16.5bn in its first week of operation.
Mr Trichet was also cheered by European Union plansH to publish bank “stress tests” this month,H which the ECB believes will further strengthen investor confidence. Economists have complained over the lack of detail about the test scenarios, which the ECB helped compile, warning that they might not be rigorous enough. Eurozone growth has been boosted by exceptional second-quarter growth in Germany, which saw exports rise 9.2 per cent and industrial production by 2.6 per cent in May compared with April.
369 In spite of his upbeat tone, however, Mr Trichet said the ECB would not revise its forecasts showing eurozone gross domestic product rising just 1 per cent this year. Last week, the ECB withdrew €442bn in 12-month loans it granted to banks a year ago. Some were rolled over into shorter-term ECB loans but about €250bn in liquidity was removed from the financial system – pushing up market interest rates and, in effect, tightening monetary policy. Mr Trichet made clear the ECB was not yet trying to steer market-borrowing costs back towards itsH main policy rate,H which the ECB left unchanged at 1 per cent. Eurozone market rates rose sharply yesterday, with average overnight borrowing costs up from 0.554 per cent to 0.591 per cent. Additional reporting by David Oakley in London
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US
42B IMF warns of contagion threat to US ByAlan Beattie and James Politi in Washington Published: July 8 2010 14:28 | Last updated: July 8 2010 18:16 The US economy has rebounded faster than expected but faces the threat of contagion from sovereign debt problems in Europe, the International Monetary Fund has warned.
In an advanceH summaryH of its annual health check of the US economy, the IMF said: “While still modest by historical standards, the recovery has proved stronger than we had earlier expected, owing much to the authorities’ strong and effective macroeconomic response.”
543BH H In depth: US downturn - Mar-18 54BH H IMF warns on global recovery - Jul-08 54BH H US jobs data hint at flagging recovery - Jul-02 546BH H Video: Market reaction to the US jobs report - Jul-02 547BH H Services report fuels US recovery fears - Jul-06 548BH H Fears mount over slowing global demand - Jul-01 The release of the report on Thursday was accompanied by a piece of good news about the US economy, which contrasts with a run of disappointing data. The number of Americans filing for jobless claims last week fell more than expected, offering some measure of comfort that the recovery in the labour market is advancing, albeit slowly. But the IMF warned that, along with risks of renewed weakness in the US housing market, international events of recent months had introduced risks to the recovery. “Sovereign strains in Europe have become an increasing concern, potentially impacting the United States through financial markets and, in a tail risk scenario, trade links,” the fund said. “Tail risk” usually refers to an extreme scenario that may be more probable than standard assessments predict. The fund also said that, since it was less optimistic than the US administration about the capacity of the US economy, fiscal policy should be tightened more than the White House was currently planning. The US Treasury noted that the report’s release, which is at the discretion of the country being analysed, “is consistent with the United States’ longstanding, strong support for enhanced
370 transparency of the IMF”. For the first time this year’s report also includes an assessment of the stability of the financial sector, the summary of which was broadly complimentary to recent US financial regulatory reform. The labour department on Thursday said initial jobless claims fell by 21,000 to 454,000 in the week ending July 3. Economists were expecting claims to drop to 460,000. The strength of the labour market recovery has been called into question recently as payroll data showed sluggish private sector job creation for two consecutive months in May and June. Meanwhile, the unemployment rate is still at 9.5 per cent, unusually high for the US. Weekly jobless claims – at stubbornly high levels in recent months – are a useful, if volatile, real-time indicator of the pace of job cuts by US employers. The less volatile four-week moving average was reduced from 467,250 to 466,000, also an encouraging sign. While the improvement in weekly jobless claims may be transitory, it comes in the wake of a string of bad news on the US recovery.
http://www.ft.com/cms/s/0/ffH 9731a8-8a91-11df-bd2e-00144feab49a.html H
371 The49BH Prudent Investor
Europe's50BH 91 Potentially Bad Banks H
Thursday,425B July 08, 2010
After weeks of intra-Eurozone haggling the CommitteeH of European Banking
Supervisors H (CEBSH )H has finally published the list of 91 banks currently undergoing stress tests whose results are eagerly awaited for July 23. The 91 banks (list below) represent 65% of Europe's banking business, in itself an indication that domino theories, where one failure will lead to others, may develop into a harsh reality, keeping Europe's extensiveH cross-border business H in mind. Such scenarios do not appear to be part of the stress tests which display a silk glove, business- as-usual approach. The CEBS lifted the curtain only an inch wide, sayingH ,H On aggregate, the adverse scenario assumes a 3 percentage point deviation of GDP for the EU compared to the European Commission’s (EC) forecasts over the two- year time horizon. The sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010.
The ECH spring forecast H talks of 0.9% GDP growth in 2010 and 1.5% in 2011. (Find countryH data here.)H
This may still be too positive as most recent growth data for H1 2010 show. EurostatH reported on Wednesday H that, Euro area (EA16) and EU27 GDP both increased by 0.2% during the first quarter of 2010, compared with the previous quarter, according to second estimates... In comparison with the same quarter of the previous year, seasonally adjusted GDP rose in the first quarter of 2010 by 0.6% in the euro area and by 0.5% in the EU27, after -2.1% and -2.3% respectively in the previous quarter. So we conclude that the adverse scenarios will nevertheless not reserve for more than a 2% economic contraction, a still very optimistic assumption given the underperformance of Europe in the first half of 2010. According to the CEBS, The exercise is being conducted on a bank-by-bank basis using commonly agreed macro-economic scenarios (baseline and adverse) for 2010 and 2011, developed in close cooperation with the ECB and the European Commission. These peanuts of information raise more questions than they answer. Recalling the ECB's stance of moderate inflation expectations and therefore low interest rates it is exactly the yield scenario that is the tipping point of all stress tests.
ReutersH H came up with more details regarding haircuts and valuations, citing banking sources:
372 Two German banking sources said a markdown of 16 to 17 percent off the market price would be applied to Greek debt. Greece's 10-year bonds are trading at about 75 percent of their par value at present. No markdown would be applied to German sovereign bonds, the sources said, and a 0.7 percent markdown would be applied to French sovereign bonds, one of the sources said. Government bonds of Portugal, Spain, Italy and Ireland would see more significant markdowns, the sources said. Wire service Bloomberg reported that a 3 percent loss would be applied to Spanish bonds. Thursday's ECB meeting will probably confirm this low rate outlook one more time as anemic growth leaves the money printers in Frankfurt no other choice. The ECB can be expected to hold rates at current levels until higher inflation figures will force it to tighten symbolically. It may be entirely different in the real world, that is those non-bank lenders without access to
1% loans from the ECB. Recent recordH CDS prices for European government debt andH unpublished hiccups in interbank lending may become the breaking point for many of Europe's banks. Before you scroll to the list of banks included in the stress test, some observations. Banks have long resisted to be named and also resisted that the results will be published on July 23. Spain leads the list with 27 banks taking part, showing the results of the property boomH H turn bustH .H Germany's list of contenders includes state-owned banks. If this is a genuine stress test it can be expected that not only one but maybe a third or more of all banks will be confronted with the gloomy side of things. In 2008 the ECB had criticizedH that banks' own stress tests were too lax.H This one has yet to pass the litmus test.
And here's "theH list".H Austria • Erste Group • Raiffeisen Zentralbank (RZB) Belgium • KBC Group • Dexia Cyprus • Marfin Popular Bank • Bank of Cyprus Denmark • Danske Bank • Jyske Bank • Sydbank Finland • Oh-Pohjola Group France • BNP Paribas • Credit Agricole • BPCE • Societe Generale Germany • Deutsche Bank • Commerzbank • Hypo Real Estate Holding
373 • Landesbank Baden-Württemberg • Bayerische Landesbank • DZ Bank • Norddeutsche Landesbank • Deutsche Postbank • West LB • HSH Nordbank • Landesbank Hessen-Thüringen • Landesbank Berlin • Dekabank Deutsche Girozentrale • WGZ Bank Greece • National Bank of Greece • EFG Eurobank Ergasias • Alpha Bank • Piraeus Bank Group • Agricultural Bank of Greece • TT Hellenic Postbank Hungary • OTP Bank • Jelzalogbank Nyilvanosam Muködo Ireland • Bank of Ireland • Allied Irish Banks Italy • Unicredit • Intesa Sanpaolo • Monte dei Paschi di Siena • Banca Popolare • UBI Banca Luxembourg • Banque et Caisse d'Epargne de l'Etat • Banque Raiffeisen Malta • Bank of Valletta Netherlands • ABN/Fortis • ING Bank • Rabo Bank • SNS Bank • Poland • PKO Bank Polski • Portugal • Caixa Geral de Depositos • Espirito Santo Financial Group • Banco BPI Slovenia • Nova Ljubljanska Bank Spain • Banco Santander • Banco Bilbao Vizcaya Argentaria (BBVA) • Jupiter (holds 8 cajas) • Caixa (2 cajas) • CAM (4 cajas) • Banco Popular Espanol • Banco de Sabadell • Diada (3 cajas)
374 • Breogan (3 cajas) • Mare Nostrum (4 cajas) • Bankinter • Espiga • Banca Civica • Caja de Ahorros y M.P. de Cordoba • Caja de Ahorros y M.P. de Zaragoza, Aragon y Rioja • Antequera y Jaen (Unicaja) • Banco Pastor • Caja Sol (2 cajas) • Bilbao Bizkaia Kutxa, Aurrezki Kutxa Eta Bahitetxea • Unnim (3 cajas) • Caja de Ahorros y M.P. de Gipuzkoa y San Sebastian • CAI (3 cajas) • Caja de Ahorros y M.P. de Cordoba • Banca March • Banco Guipuzcoano • Caja de Ahorros de Vitoria y Alava • Caja de Ahorros y M.P. de Ontinyent • Colonya Sweden • Nordea Bank • SEB • Svenska Handelsbanken • Swedbank UK • RBS • HSBC • Barclays • Lloyds Banking
http://prudentinvestor.blH ogspot.com/2010/07/europes-91-potentially-bad-banks.html H
375
Jobs59B now, deficits . . . soon! By Matt Miller Thursday, July 8, 2010; I got into policy journalism in the late 1980s and government in the early 1990s because of my worries about debt and deficits. I was a warrior for "generational equity" back when I was still (sigh) a member of the younger generation. And I'm as fearful as the next fiscal scold of long- term damage from the gap between federal spending and revenue, not to mention the trillions in unfunded liabilities in public employee pensions at the state and local level. I come before you, in other words, a deficit hawk to the core. But it is the height of economic folly -- and socially dangerous, in my view -- to elevate deficit reduction as a goal today over boosting jobs and growth. Especially when there are ways to goose the economy while at the same time legislating changes that move us toward fiscal sanity once we're past this stagnation. What would a radically centrist "Jobs Now, Deficits Soon" package look like? Start with the tax side, where we should accelerate the kind of sensible tax reform that's overdue. That means cutting payroll and corporate taxes now -- and offsetting this with phased-in tax hikes on dirty energy and consumption, to take effect only once jobs and growth are back on track. Why this swap? Cutting (and ideally eliminating) payroll taxes is the surest way to lower the cost of employment and boost hiring. And while the link between corporate taxes and jobs is more dubious, we should cut these levies for at least three reasons: (1) they're uncompetitively high compared with the rest of the world; (2) they're paid by employees or shareholders (so they're not a "freebie" paid by evil corporations, as some on the left seem to think); and (3) announcing a combined payroll and corporate tax cut would send a huge signal to the spooked business community that Washington "gets it" when it comes to growth. Meanwhile, higher taxes on dirty energy would help our environmental goals; and a value- added tax, or something like it, is, as every other advanced nation has recognized, a sounder way to fund government than job-killing taxes on payrolls and corporations. But tax cuts are hardly enough. We need spending initiatives as well. For starters, we need to extend unemployment benefits -- in a job market this tough, the argument that these benefits promote idleness isn't persuasive. We also need to help states avoid the layoffs and cutbacks that will further dampen consumption. But not without strings to encourage future prudence;
DavidH Brooks's idea H that fiscal relief be conditioned on states enacting longer-term public pension reform is a smart model. Larry Katz of Harvard says we need to boost credit to small businesses; can't Ben Bernanke cook something up from the list of creative ideas he never got to at the height of the meltdown? My colleague Michael Ettlinger at the Center for American Progress touts a government-assured market for green energy devices such as solar panels and wind turbines, to get those production lines running. Toss in some progressive trims to Social Security and Medicare benefits beginning a few years out. And wrap it all up (asH I've argued elsewhere)H with a new law requiring a supermajority
376 vote in Congress to run deficits higher than 3 percent of GDP whenever unemployment is below 6 percent. Along with the new taxes and entitlement trims, this will convince bond markets we're serious and underscore that we're only running outsized deficits to fight today's output and jobs gaps. I'm not saying this eclectic package is the only path to nirvana. But it shows it is possible to take ambitious steps that could appeal to Democrats and Republicans alike. The fact that nothing like this will happen, therefore, is both depressing and instructive. Republicans are content to glide toward November slamming Democrats without offering answers of their own. Democrats who now know the first stimulus was too puny feel they'll be clobbered for trying more in the Tea Party era. And me? In an odd way this deficit hawk feels like he's channeling Jack Kemp, whose blithe indifference to deficits earned my scorn 20 years ago. Back then, real interest rates were high and could thus come down after Bill Clinton's deficit-busting plan was unveiled; also, there was no debt hangover like we face now, poised to suppress consumer demand for years. In today's very different circumstances, Kemp's logic finally seems unanswerable. "Fix the economy and it's easier to fix the budget," he scribbled to me in 1992, after I'd written him saying he just didn't get it. Keynes, yes; but we also all need to be Kempians now.
Matt Miller, a senior fellow at the CenterH for American Progress H and co-host of public radio's
"Left,H Right & Center,"H writes a weekly column for washingtonpost.com. He can be reached at [email protected] .H
http://www.washingtonpost.com/wp-H dyn/content/article/2010/07/07/AR2010070702492_pf.html H
377 OpinionH H
July 5, 2010
A301B Little Economic Realism
By57B DAVIDH BROOKS Let’s say you’re the leader of the free world. The economy is stuck in the doldrums. Naturally, you want to do something. Many economists say we need another stimulus bill. They debate about whether the stimulus should take the form of tax cuts or spending increases, but the ones in your party are committed to spending increases. They trot out a plausible theory with computer models to go with it. If the federal government borrows X amount of dollars and pumps it into the economy, that would produce Y amount of growth and Z amount of jobs. In a $14 trillion economy, you’d probably have to borrow hundreds of billions more to have any noticeable effect, but at least you’d be doing something to help the jobless. These Demand Side theorists are giving you a plan of action. But you’re not a theorist. You’re a practical executive, and you have some concerns. These Demand Siders have very high I.Q.’s, but they seem to be strangers to doubt and modesty. They have total faith in their models. But all schools of economic thought have taken their lumps over the past few years. Are you really willing to risk national insolvency on the basis of a model? Moreover, the Demand Siders write as if everybody who disagrees with them is immoral or a moron. But, in fact, many prize-festooned economists do not support another stimulus. Most European leaders and central bankers think it’s time to begin reducing debt, not increasing it — as do many economistsH at the international economic institutions.H Are you sure your theorists are right and theirs are wrong? The Demand Siders don’t have a good explanation for the past two years. There is no way to know for sure how well the last stimulus worked because we don’t know what would have happened without it. But it is certainly true that the fiscal spigots have been wide open. The U.S. and most other countries have run up huge, historic deficits. And while this has helped save public-sector jobs, we certainly haven’t seen much private-sector job growth. It could be that government spending is a weak lever to counter economic cycles. Maybe monetary policy is the only strong tool we have. The theorists have high I.Q.’s but don’t seem to know much psychology. Lord Keynes, though a lesser mathematician, wrote that the state of confidence “is a matter to which practical men pay the closest and most anxious attention.” These days, debt-fueled government spending doesn’t increase confidence. It destroys it. Only 6 percent of Americans believe the last stimulus created jobs, according to a New York Times/CBS News survey. Consumers are recovering from a debt-fueled bubble and have a moral aversion to more debt. You can’t read models, but you do talk to entrepreneurs in Racine and Yakima. Higher deficits will make them more insecure and more risk-averse, not less. They’re afraid of a fiscal crisis. They’re afraid of future tax increases. They don’t believe government-stimulated growth is real
378 and lasting. Maybe they are wrong to feel this way, but they do. And they are the ones who invest and hire, not the theorists. The Demand Siders are brilliant, but they write as if changing fiscal policy were as easy as adjusting the knob on your stove. In fact, it’s very hard to get money out the door and impossible to do it quickly. It’s hard to find worthwhile programs to pour money into. Once programs exist, it’s nearly impossible to kill them. Spending now creates debt forever and ever. Moreover, public spending seems to have odd knock-off effects. Professors Lauren Cohen, Joshua Coval and Christopher Malloy of Harvard surveyed 42 years of government spending increases in certain Congressional districts. TheyH foundH that federal spending increases dampened corporate hiring and investment in those districts. You wish somebody could explain that one to you before you pass on more debt burdens to your grandchildren. So you have your doubts, but you are practical. You want to do something. Too much debt could lead to national catastrophe. Too much austerity could lead to stagnation. Well, there’s a few short-term things you can do. First, extend unemployment insurance; that’s a foolish place to begin budget-balancing. Second, you need to mitigate the pain caused by the state governments that are slashing spending. You need a program modeled on Race to the Top. You will provide federal money now to states that pass responsible long-term budget plans that will reduce spending and pension commitments. That would save public-sector jobs and ease contractionary pressures without throwing the country into a fiscal-debt spiral. But the overall message is: Don’t be arrogant. This year, don’t engage in reckless new borrowing or reckless new cutting. Focus on the fundamentals. Cut programs that don’t enhance productivity. Spend more on those that do. You don’t have the ability to play the economy like a fiddle. You do have the ability to lay some foundations for long-term growth and stability.
http://www.nytimes.com/2010/07/06/opiniH on/06brooks.html?_r=1&th&emc=th H
379 ECONOMYH H JULY 8, 2010, 12:47 P.M. ET Trichet Calls for 'Appropriate' Action on Stress Tests
By NINAH KOEPPEN FRANKFURT—Banks and regulators must take "appropriate action" to strengthen banks' resilience to shocks and safeguard the health of Europe's financial system, European Central Bank President Jean-Claude Trichet said Thursday.
The ECB left its key rate unchanged, but all eyes remained fixed on Trichet's press briefing, where the central bank president is expected to soothe concerns over bank liquidity. Dave Kansas, David Weidner and Bob Davis discuss. Also, Ianthe Jeanne Dugan discusses the pain that impacted many hospitals after their derivative bets went bad. "We welcome the decision announced by the European Council to publish, with the consent of the banks involved, the individual results of the stress-test exercise for banks in the European Union carried out by the Committee of European Banking Supervisors in cooperation with the ECB," Mr. Trichet said. "Appropriate action will have to be taken where needed," he added at a news conference after the ECB's decision to keep its benchmark rate unchanged. The CEBS late Wednesday named the 91 banks that it will test for resilience against further market and credit risks, and laid out the key features included in the tests. Europe's banking superviser will carry out the stress tests in cooperation with the ECB. Mr. Trichet declined on Thursday to add any detail to what CEBS published about the stress tests, but encouraged market participants to wait until the results were published on July 23 before judging them too harshly. "Transparency has its virtue," he said, adding that they expect the tests to be "confidence building." Ralph Orlowski/Reuters ECB President Jean-Claude Trichet told reporters in Frankfurt Thursday that he expected the stress tests on European banks to be "confidence-building."
Sound balance sheets and transparent business models are key to strengthening banks' resilience to shocks, the central-bank president said.
380 "The challenge remains for banks to expand the availability of credit to the nonfinancial sector when demand picks up," Mr. Trichet cautioned. "Where necessary, to address this challenge, banks should retain earnings, turn to the market to strengthen further their capital bases or take full advantage of government support measures for recapitalization." Mounting worries about the sustainability of public finances and the health of the Europe's financial system have prompted banks to park piles of cash at the ECB instead of lending it to their peers, pushing up market interest rates. But Mr. Trichet said the latest increase in the Euro Overnight Index Average Rate "is not signaling monetary-policy intentions." He said the ECB's special liquidity support for banks in the region "isU appropriate," but added that the central bank won't hesitate to adjust its credit-support measures, if deemed appropriate.U The ECB will later this month release the details of a new collateral framework for next year, which will make central-bank funds more expensive for banks offering low-rated securities against central-bank loans. The move represents the ECB's next step in its cautious exit strategy from ultra-loose monetary policy and will provide an additional incentive for banks to clean up their balance sheets. The gradual nature of the exit strategy contrasts with the ECB's original plan to return to the more stringent collateral framework in place before the escalation of the global financial crisis in late 2008. Mr. Trichet said Thursday the euro zone's economic recovery is likely to be uneven in an environment of "high uncertainty." The ECB president's remarks come amid growing fears that the region's slow-motion economic upturn is losing steam. The International Monetary Fund earlier Thursday warned that downside risks to the global recovery "have risen sharply amid renewed financial turbulence," alluding mainly to European governments' debt problems. Mr. Trichet said "the last IMF projections are in line with what we are saying," as he cautioned that "the process of balance-sheet adjustment in various sectors and weak labor-market prospects" could damp future economic activity. The ECB Governing Council left its euro-zone benchmark interest rate unchanged at 1%, a record low. Mr. Trichet called the current rate level "appropriate," pointing to a muted euro- zone inflation outlook. That indicates that interest rates in the 16-nation euro bloc will remain on hold over the near term. Most economists in a Dow Jones Newswires poll don't expect the ECB to raise rates over the next 12 months. Also Thursday, the Bank of England's Monetary Policy Committee left its key interest rate unchanged at an all-time low to help cushion the economy against the impact of deep cuts in government spending. The decision was broadly expected, with many economists predicting the MPC would leave its key rate at 0.5% and maintain its stock of bond purchases, made through its quantitative easing policy, at £200 billion ($303 billion). —Roman Kessler and Natasha Brereton contributed to this article.
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381
Federal Reserve weighs steps to offset slowdown in economic recovery By Neil Irwin Washington Post Staff Writer Thursday, July 8, 2010; A11 Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth.
With CongressH tied in political knots H over whether to take further action to boost the economy, Fed leaders are weighing modest steps that could offer more support for economic activity at a time when their target for short-term interest rates is already near zero. They are still resistant to calls to pull out their big guns -- massive infusions of cash, such as those undertaken during the depths of the financial crisis -- but would reconsider if conditions worsen. Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent. But weak economicH reports,H the debtH crisis in Europe H and falteringH financial markets H have led them to conclude that the risks of the recovery losing steam have increased. After months of focusing on how to exit from extreme efforts to support the economy, they are looking at tools that might strengthen growth. "If the economic situation changes, policy should react," James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview Wednesday. "You shouldn't sit on your hands. . . . I think there's plenty more we could do if we had to." One pro-growth strategy would be to strengthen language in Fed policy statements that the central bank's interest rate target is likely to remain "exceptionally low" for an "extended period." The policymakers could change that wording to effectively commit to keeping rates near zero for even longer than investors now expect, perhaps adding specifics about which economic conditions would lead them to raise rates. Such a move would be opposed by many members of the Fed policymaking committee who are wary of the "extended period" language, arguing that it limits their flexibility. Another possibility would be to cut the interest rate paid to banks for extra money they keep on reserve at the Fed from 0.25 percent to zero. That would give banks slightly more incentive to lend money to customers rather than park it at the Fed, although it also could cause technical problems in the functioning of certain credit markets. A third modest possibility would be to buy enough new mortgage securities to replace those on the Fed balance sheet that are paid off as people take advantage of low interest rates to refinance. Role of mortgage rates None of those steps amounts to the kind of massive unconventional effort to drive down mortgage rates and prop up growth that the Fed took in late 2008 and early 2009, when the economy was in a deep dive. Then, the Fed began buying Treasury bonds, mortgage securities and other long-term assets -- more than $1.7 trillion worth by the time the purchases concluded in March.
382 Some economists have encouraged the Fed to launch a new asset-purchase program, saying that with theH unemployment rate at 9.5 percent H and little apparent risk of inflation, the Fed should use every tool at its disposal to get the economy back on track. Fed leaders view such a strategy as likely to have only a small impact on the economy and as carrying a risk of slowing growth. One of the key ways the earlier securities purchases stimulated the economy was by driving down mortgage rates, which in turn propped up the housing market. But with mortgage rates near all-time lows, it is not clear that actions to lower rates another, say, quarter percentage point would result in much additional home sales or refinancing activity. Moreover, the Fed's purchases of mortgage securities have reduced the role of private buyers in that market, and some leaders at the central bank fear that further intervention could delay the resumption of normal market functioning. "The Fed probably believes that unconventional policy does not have much traction as market functioning gets better," said Vincent Reinhart, a resident fellow at the American Enterprise Institute and a former Fed official. Asset-purchase plan Another risk is that global investors could lose faith that the Fed will be able or willing to pull money out of the economy in time to prevent inflation. That would lead the investors to demand higher interest rates on long-term loans, which could reverse the rate-lowering effects of the Fed's asset purchases. When the Fed was buying $300 billion in Treasurys in mid-2009, part of its try-everything approach to dealing with the crisis, rates on 10-year bonds temporarily spiked amid concerns that the Fed was "monetizing the debt," or printing money to fund budget deficits. With deficit concerns having deepened in the past year, such fears could be even more pronounced now. All that said, Fed officials do not rule out launching a major new asset-purchase program. Rather, they say they would consider one only if their basic forecast -- of continued steady expansion in the economy -- proves to be wrong. A key factor that would build support for new asset purchases would be a rise in the risk of deflation, or a dangerous cycle of falling prices -- which has become more of a concern as the world economy slows. Fed officials express confidence that they have tools to address the economy further if conditions worsen. "I think we do have a variety of tools available, and we shouldn't rule any tool out," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview. "If we're uncomfortable with how long it's going to take us to reach either element of our dual mandate [of maximum employment and stable prices], we'll have to make some adjustments to policy."
http://www.washingtonpost.com/wp-H dyn/content/article/2010/07/07/AR2010070705100_pf.html H
383 Paul Krugman July 8, 2010, 12:49 pm
How426B Much Can The Fed Help? (Wonkish)
OK, there are signs that the Fed is nervingH itself up H to do something more to support the economy. The question is, how much are the kinds of actions likely to be on the table likely to matter? Normally, the Fed’s power comes from its ability to move short-term interest rates. Now short rates on government debt are basically zero. Long rates, and rates on private debt, aren’t. But can the Fed do anything to change them? Start with long rates on government debt. The simplest model of long-term rates is that they reflect expected short-term rates — that is, the interest rate on a 10-year bond is equal to the rate of return investors believe they would get if they put the same amount of money into 3- month Treasuries and kept rolling it over for the next 10 years. If that model were precisely correct, Fed purchases of long-term debt would have no effect at all on long-term rates — those rates would continue to reflect expected short rates, end of story. In reality, things are presumably not quite that simple: buying a long-term bond exposes you to some risk of losing money if rates rise, so there’s presumably imperfect substitution between short and long. So the Fed can move long rates by buying long-term bonds — basically, it’s reducing the supply of these bonds to the public by buying them up, which would lead to a higher price/lower interest rate. But how strong would this effect be? Even if the Fed bought a couple of trillion dollars’ worth, probably not all that large. I’m not saying don’t do it, but don’t expect miracles. If the Fed is willing to buy private debt, this offers another margin for impact: since private debt carries risks, this makes it an imperfect substitute for public debt, and the Fed can once again reduce the supply to the public and drive up the price. Again, however, it’s not clear how strong the effect would be. Way back when, Goldman Sachs guesstimated that it would take an expansion of the Fed’s balance sheet to $10 trillion to accomplish as much as the reduction in short rates the Fed would have undertaken already if it weren’t up against the zero lower bound. That still sounds plausible. Is the Fed ready to act on that scale? Probably not. What would really be effective would be a credible commitment to a higher inflation target, which would reduce real interest rates. But that’s not on the menu, at least not yet. So, it’s good to see the Fed getting worried; but don’t get too excited.
http://krugman.blogs.nytimes.com/2010/07/08/H how-much-can-the-fed-help-wonkish/ H July 7, 2010, 1:40 pm
Self-defeating427B Austerity The WSJ’s economics blog has an interesting piece about how failing to extend unemployment benefits may actually end up increasingH the deficit H in the longer run, by pushing marginal older workers into disability. But this is actually a much broader point. There’sU a quite good case
384 to be made that austerity in the face of a depressed economy is, literally, a false economy
— that it actually makes long-run budget problems worse. U People like me have been hesitant to make this argument loudly, for fear of being cast as the left equivalent of Arthur Laffer — but the heck with it, I’m going to lay it out. So here’s the outline. Suppose you slash spending equal to 1 percent of GDP. That looks like a budget saving, right? But if you do it in the face of an economy up against the zero bound, so that the Fed can’t offset the demand effects with lower rates, it’s going to shrink the economy. Let me use a multiplier of 1.4; you can adjust the numbers as you wish. Now, a weaker economy means less revenue. Assume that every dollar up or down in GDP means $0.25 in revenue, which is conservative. Then the fiscal austerity reduces revenue by 0.35 percent of GDP; the true saving is only 0.65 percent. Now, the government has to borrow those funds; let’s say the real interest rate is 3 percent (it’s actually much lower now). Then the long run impact of the austerity on the fiscal position is to reduce real interest payments by 0.0195 percent of GDP. But wait: what if there are long-run negative effects of a deeper slump on the economy? The WSJ piece showed one example: workers driven permanently out of the labor force. There’s also the negative effect of a depressed economy onH business investment.H There’s the waste of talent because young people have their lifetime careers derailed. And so on. And here’s the thing: if the economy is weaker in the long run, this means less revenue, which offsets any savings from the initial austerity. How big do these negative effects have to be to turn austerity into a net negative for the budget? Not very big. In my example, the real interest payments saved by a 1 percent of GDP austerity move are less than .02 percent of GDP; if the marginal tax effect of GDP is 0.25, that means that a reduction of future GDP by .08 percent is enough to swamp the alleged fiscal benefits. It’s not at all hard to imagine that happening. In short, there’s a very good case to be made that austerity now isn’t just a bad idea because of its impact on the economy and the unemployed; it may well fail even at the task of helping the budget balance. It’s important to realize that I’m not saying that government spending always pays for itself, and that saving money is always counterproductive. These kinds of effects are specific to a liquidity trap situation. But that’s the situation we’re in.
http://krugman.blogs.nytimes.com/2H 010/07/07/self-defeating-austerity/ H
385 What501BH might the Fed do? H by CalculatedRisk on 7/08/2010 04:02:00 PM
Neil Irwin at the WaPo discusses some possible future actions at the Fed: FederalH Reserve weighs steps to offset
slowdown in economic recovery H Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth. Irwin mentions a few possibilities, such as the Fed expanding the "extended period" language in the FOMC statement to describe an even longer period, or buying more agency MBS (mortgage backed securities).
Professor Krugman weighs in with some analysis: HowH Much Can The Fed Help? H
I think it might be useful to revisit Bernanke's 2002 speech for hints of the roadmap: Deflation:H Making Sure
"It" Doesn't Happen Here H This entire speech is worth rereading. Bernanke suggests several policies (many have been used), but this might be a clue to the next possible action: One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities. There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields.
... if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. In the 2002 speech, Bernanke mentioned the possibility of a "specified period" for holding short rates low, as opposed to the "extended period" language (Irwin suggested this in the WaPo article). However Bernanke clearly prefers targeting longer term maturities. So if the Fed decides to take action, the FOMC might announce "explicit ceilings for yields on longer-maturity Treasury debt" - just like they do with the Fed funds rate at each FOMC meeting. Although the Fed purchased longer term Treasury securities during the crisis, the FOMC didn't announce an explicit interest-rate ceiling. Below is a table of recent yields. There isn't much the Fed can do at 6 months or 1 year, but the Fed could announce lower targets for the 3 year and the 5 year and flatten the yield curve.
Treasury constant maturities
1-month 0.07%
3-month 0.17%
6-month 0.22%
1-year 0.30%
2-year 0.62%
3-year 1.03%
5-year 1.83%
7-year 2.49%
10-year 3.05%
20-year 3.82%
30-year 4.01%
http://www.calculatedriskblog.comH /2010/07/what-might-fed-do.html H
386 TheMoneyIllusion428BU A slightly off-center perspective on monetary problems.
Bio429B My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.
http://www.bentley.edu/academics-H research/faculty_research/faculty_database/faculty_detail.cfm?id=2804 H
1. OK, if you’re so smart what should we do? It is not about being smart, it’s about setting specific goals and promising to do whatever one can to meet those goals. I’d like to see the Fed set an explicit target path for nominal GDP. But at this point even a price level or inflation target would be better than nothing. Do “level targeting,” which means you commit to a specified path for NGDP or prices, and commit to make up for any deviations from the target path. Thus if you target NGDP to grow at 5% a year, and it grows 4% one year, you shoot for 6% the next. Let market expectations guide Fed policy. Ideally this would involve the sort of NGDP futures targeting regime that I have proposed in this blog. Right now they could focus on the yield spread between inflation-indexed and conventional bonds. The spread is currently than 1/2% on two year bonds, which means inflation expectations are far too low for a vigorous recovery. It should be closer to 2%. The Fed should stop paying interest on excess reserves, and if necessary should put a small interest penalty on excess reserves. This would encourage banks to stop sitting on all the money that has been injected into the system. If they did these things it would be easy to get inflation expectations up to 2%. But if I am wrong, they should do aggressive quantitative easing (QE), something they have not yet done (despite misleading news reports to the contrary.) They should buy Treasury bills and notes, with Treasury bonds and agency debt available as a backup. 2. How can I say money was tight in late 2008? Because markets expected NGDP growth to fall far short of the Fed’s implicit target.
387 3. But weren’t interest rates cut to very low levels? Interest rates are a very misleading indicator of monetary policy. Both in the early 1930s and late 2008, falling rates disguised a tight money policy. The rates were actually falling for two reasons. Expectation of recession led to less borrowing and thus lower real interest rates. And inflation expectations also fell sharply. 4. But didn’t the monetary base increase sharply? Yes, but this is also misleading for two reasons. During periods of deflation and near-zero rates, there is a much higher demand for non-interest bearing cash and bank reserves. In addition, last October 6th the Fed began paying interest on reserves, which caused banks to hoard bank reserves. 5. Wouldn’t charging a penalty rate on excess reserves cause all sorts of problems? Not if done correctly. It need not hurt bank profits if it was combined with a positive interest rate on required reserves. The penalty can also be applied to vault cash, which is a part of bank reserves. 6. But what if banks cannot find good credit-worthy borrowers? Then they can use the excess reserves to buy Treasury bonds. This will put the cash into circulation, and boost aggregate demand through the “excess cash balance mechanism.” 7. Isn’t the real problem . . . ? No, the real problem right now is not a “real” problem. The real problem is a nominal problem. When the growth rate of nominal GDP falls sharply there is always a severe recession. We have a severe nominal shock, a problem which has been understood by economists at least as far back as Hume. At the time, it always looks like the “real problem” was some symptom of the monetary shock, such as financial panic. Thus in the 1930s people thought the collapsing financial system caused the Great Depression, only later did we discover it was too little money. 8. How can the solution for this mess be the same thing that got us into this mess in the first place? The solution is stable NGDP growth at about 5% a year, which is not what got us into this mess. It would be slightly more accurate to say that it is what kept us out of this mess between 1982 and 2007. We got into this mess when we stopped providing enough money for modest growth in NGDP. 9. Won’t your policies lead to high inflation in the long run? No, but not doing my policies might. Countries that follow conservative “hard money” policies during deflation (the US in the early 1930s, Argentina 1998-02) end up seeing the government taken over by left-wingers. And if massive deficits are incurred because of a long recession, that makes higher inflation more likely in the future. Monetary stimulus reduces the need for fiscal stimulus, and thus reduces the risk that debts will be monetized in the future. 10. Aren’t market forecasts unreliable? Yes and no. Markets are often wrong, but are still about the best forecasts we have. In this case other private forecasters, as well as the Fed itself, are also forecasting low NGDP growth. So whatever forecast we use, it still shows the need for further stimulus. 11. Isn’t monetary stimulus ineffective in a liquidity trap.
388 No. Temporary monetary injections are never very effective. Monetary injections expected to be permanent are always effective–even in a liquidity trap (according to well-known Keynesian Paul Krugman.) What we need is an explicit NGDP or inflation trajectory, including a promise to make up for any short term undershoots. This will increase the credibility of monetary policy. 12. Don’t we need both monetary and fiscal stimulus? No. Monetary stimulus can make NGDP grow as fast as you like, as we saw in Zimbabwe. Once the Fed has set monetary policy at the level expected to produce on target growth, then there is no role for fiscal stimulus, it can only make things worse. 13. Isn’t there a risk of overshooting with monetary stimulus, due to the “long and variable lags.” No. There are no long and variable lags in monetary stimulus. Money does have a lagged effect on sticky wages and prices. But wage growth is determined by inflation expectations. Thus as long as the Fed targets 12 month forward NGDP or inflation; we don’t need to be worried about damaging inflation. A temporary blip in inflation may occur from oil prices now and then, but it won’t feed into core inflation, and hence wages. 14. Isn’t the CPI a bad measure of inflation, because it ignores house prices and stock prices? Stocks prices should not be included. House prices should be, and actual inflation was higher than the official rate in 2004-06, but not very much higher. This is one reason I prefer NGDP targeting, it does include new house prices. 15. How can I defend the EMH, when so many studies show people are irrational and markets are inefficient? Market anomaly studies are products of data mining. At some level this is known by economists, but the problem is far worse than even most economists realize. These tests are not reliable. People are often irrational, but it’s not clear that irrationality has much impact on sophisticated financial and commodity markets. The anti-EMH position has yet to come up with useful public policy advice, or useful investment advice. 16. Wasn’t the housing bubble obviously just a big house of cards? And wasn’t that obvious to any thinking person at the time? Apparently it wasn’t obvious to the big Wall Street banks who lost billions, and in some cases failed entirely. Nor to the many highly sophisticated investors who invested in those banks, or more directly in mortgage-backed securities. I agree that in retrospect this collapse seems like it should have been obvious, but the reality is it was not. Obama’s proposal for a minimum 5% “skin in the game” rule would not have prevented this crisis, as lots of the villains did have skin in the game, and lost billions. 17. Aren’t business cycles caused by a misallocation of capital? No. Misallocation of capital does occur, and it can have real effects. But even a major misallocation of resources such as the housing boom of 2003-06 does not cause a big enough misallocation to create a recession. That’s why the initial downturn in housing was handled well, with only a minor bump in unemployment between mid-2006 and mid-2008. The big jump in unemployment more recently was caused by a sharp fall in NGDP, i.e. tight money. By the way, there was no major misallocation of capital before the Great Depression. In that case the problem was 100% tight money after September 1929. 18. Have you seen Garrison’s Powerpoint slides?
389 Yes, several times. Using his terminology, we now face a secondary depression. BTW, please don’t ask me to read such and such a book on Austrian economics. The comment section is where you get to show me how useful ABCT really is, by making thought- provoking comments on the post. Until I finish my other projects, I won’t have much time to read anything. 19. Isn’t the only solution to get rid of central banking? And then what? A gold standard does not stabilize the price level, as the real value of gold fluctuates like any other commodity. We had depressions under the gold standard. I think central banking is inevitable, but we do need to reform the system so that central bankers no longer try to out-guess the market. Monetary policy should be implemented by the market, using a futures targeting system. The market is best able to stabilize the price level, or NGDP. 20. Aren’t you just a monetary crank trying to solve all the world’s problems by printing money? Yes, but like a broken clock the monetary cranks are right twice a century; 1933, and today. The other 98 years I am a Chicago-trained, libertarian, inflation-hawk. Twice a century I put on my Irving Fisher super-hero suit, and emerge from my deep underground bunker. 21. What books should I read? I think someone interested in money should start with the classics. Irving Fisher’s “The Purchasing Power of Money” or “The Money Illusion.” Or Fisher’s 1925 article on the Phillips Curve, which was republished as “I Discovered the Phillips Curve.” The other classic writer is Milton Friedman. He wrote a number of books and articles. And also ”The Monetary History of the US” with Anna Schwartz. Hawtrey and Cassel are also good. Keynes’s “Tract on Monetary Reform” is his best monetary book. For textbooks, I use Mishkin’s “The Economics of Money, Banking and the Financial System.” For living authors, you are better off with articles, not books. Robert Hall, Bennett McCallum and Robert Hetzel are excellent. (The exception is David Laidler, who has some good monetary economics books.) Look for articles that are more survey-oriented, less technical. James Hamilton and John Taylor also have some good stuff, and both are bloggers. Bloggers like Nick Rowe, Bill Woolsey, David Beckworth, Ambrosini, and Josh Hendrickson have interests that partly overlap with my own. Krugman is the best blogger on the left. Tim Duy and Free Exchange seem more centrist to me, and are worth reading. All the George Mason bloggers are very interesting, although not all do monetary stuff. Arnold Kling probably does the most, and has views that lean slightly in an Austrian direction. Bob Murphy blogs in more the hard core Austrian tradition. I don’t know enough about Austrian economics to recommend readings, but Mises and Hayek are classics, and today Selgin, White, Garrison, Horwitz are some of the best in that tradition. Earl Thompson has very interesting ideas, some of which are summarized in David Glasner’s book “Free Banking and Monetary Reform.” I’m sure I have forgotten many names, and will add some later. Sorry, but I don’t have time to respond to FAQs here. These are primarily for new visitors who don’t know where I am coming from, and want information to help them better understand a blog post. There will be plenty of opportunities for visitors to raise these issues in new posts. They pop up over and over again.
http://www.themoneyillusion.com/?page_id=3447H H
390
Jobless aid stalls in Senate; home buyers get more time By Lori Montgomery Thursday, July 1, 2010; A11 The Senate failed once again late Wednesday to advance a plan to restore jobless benefits for people out of work more than six months, leaving millions of unemployed workers in limbo until after the July 4 recess. The measure fell one vote shy of the 60 needed to end a Republican filibuster. Sen. George V. Voinovich (R-Ohio) said he was prepared to provide that vote, but that Democrats had rejected his request to pay for at least half of the $34 billion measure with unspent funds from last year's stimulus package. "Democrats are more interested in having this issue to demagogue for political gamesmanship than they are in simply passing the benefits extension," Voinovich, who is retiring, said in a statement. "I came to the table with a fair compromise and the ball is in their court." Democrats countered that the 9.7 percent jobless rate constitutes a continuing emergency that, under congressional budget rules, has traditionally been addressed through deficit spending. "For those who question whether this is an emergency situation, they should talk to the Nevadans who I hear from every day who rely on this assistance to put food on the table and pay the bills while they look for work," Senate Majority Leader Harry M. Reid (D-Nev.) said at a news conference with Labor Secretary Hilda L. Solis. That argument won over at least two Republicans: Sens. Olympia J. Snowe and Susan Collins of Maine voted for the stripped-down measure, which would have restored jobless benefits that expired June 2 and extended the deadline for home buyers to claim a tax credit aimed at reviving the housing market until Sept. 30. After the overall bill failed, the Senate passed a separate measure that sent the tax credit to President Obama for his signature.
AtH Snowe's urging,H Democrats had jettisoned numerous other provisions from the jobless bill, including $16 billion for cash-strapped state governments, $1 billion for summer jobs and $32 billion in special-interest tax breaks that expired earlier this year. But other Republicans -- as well as Sen. Ben Nelson (D-Neb.) -- continued to insist that at least a portion of the jobless benefits be paid for, arguing that the nation can no longer afford to add to record budget deficits. When it became clear that the vote would fail, Reid switched sides for strategic reasons, making the final vote 58 to 38. House leaders were planning to take up the jobless bill Thursday and said they expect it to pass. But its failure in the Senate ensures that more than 2 million people will have their checks cut off before Congress returns to Washington after a week-long break. The Labor Department estimates that more than 1.2 million people already have been affected. States typically provide unemployment benefits for up to 26 weeks. Congress triggered emergency benefits in 2008 and expanded them in last year's stimulus package. On June 2, the federal programs was providing more than 5 million people with up to 99 weeks of assistance.
http://www.washingtonpost.com/wp-H dyn/content/article/2010/06/30/AR2010063005483_pf.html H
391
Eurointelligence302B Daily Morning Newsbriefing
The502BH stress tests are finalised
08.07.2010 91 banks are to participate, accounting for some 65% of banking assets in the eurozone; There are 19 Spanish and 14 German banks included: Among the risk scenarios is a 3% haircut on Spanish bonds and a 17% haircut on Greek bonds; Germany’s banking regulator considers legal trick to force publication of stress tests; IMF revises growth forecast for Spain downwards to 0.6% less than half of government forecast; ECB reduces purchasing bonds steadily; Analysts wonder whether the ECB is to tolerate rising interbank interest rates; Irish finance minister says losses of the bad bank have to be covered by bank levy not the taxpayers; Nicolas Sarkozy and his pension reform project in trouble over party donation affair; new collective wage agreement in Greece could limit wage increases to EU average inflation rate; the Baltic Dry Index, meanwhile, seems not to be a good leading index for world production after all.
08.07.2010
The430B stress tests are finalised
So there are the final data about the stress tests. They will include 91 banks in the eurozone, accounting for some 65% of all banking assets. There will be three scenarios, the ECB’s forecast growth scenario, an economic downturn, and higher risk surcharges for government
bonds. Among those there are 19 Spanish banks, and 14 German, accordingH to El Pais.H The
test results will be published on July 23. BloombergH H writes that the stress tests would include a 3 per cent haircut on Spanish, and a 17% haircut on Greek debt. This is less what investors expect, at least according to recovery swaps, which are trading at rates that imply investors
392 would get back about 40% in a Greek default or debt restructuring. Germany’s banking regulator considers a legal trick to force publication Under the German banking laws, the banks are not required to publish the stress test information, and several are still reluctant to do so. Germany’s banking regulator Bafin is considering using stock exchange laws to force publication, which applies to any bank that has its shares or preference shares listed on an exchange. Under those rules, the banks are required to forward any information that has a bearing on the stock price. FT Deutschland, which has the story, quotes legal experts as saying that it this is a legal grey area. IMF revises Spanish growth forecasts downwards
ElH Pais H has the story that the IMF forecasts a 2011 growth rate of only 0.6%, down from a forecast of 0.9% in April, and less than half of the forecast of the Spanish government, of 1.3%. El Pais says Spain comes out worst of the major industrial nations, in the IMF’s latest forecast. For the world economy the Fund has raised its forecast from 4.3% to 4.6%, mostly as a result of higher growth in emerging markets. But the IMF has also warned about higher risks to the recovery. ECB reduces purchases of bonds The FTD has a useful table of the gradual fall in ECB’s bond purchases. During the last week of June, they were down to €3.9bn. We reproduce the results: 11 May 16.3 18 May 10.4 25 May 8.8 1 June 4.9 8 June 6.7 15 June 4.0 22 June 4.2 29 June 3.7 Will the ECB tolerate rising market rates? Interbank interest rates have been rising after the 1y ECB loan expired and lower lower-than- expected take-up of shorter-term ECB loans reduced excess liquidity in the system. The
question now is whether the ECB will tolerate higher market rates at this time. HBloombergH writes that while this as a positive sign that banks are less dependent on its funds, it could also stress Greek, Irish, Spanish and Portuguese banks, which are more dependent. There is likely to be no decision before the results of the stress test, to see its effects on funding costs. The end of a German dream Well , we are of course talking about stable property price. FT Deutschland has an interesting comment this morning by Siegfried Jaschinski, who predict that the long-term period of stability of house prices Germans have enjoyed might come to a close, as German housing finance is going through some seminal changes. It is now customary to finance houses through 10 year loans, backed by covered bonds, but the changes in market conditions, and the demise of the Landesbanken will force Germany, just like everybody else onto the shorter end of the interest rate spectrum. And that means that German property prices are likely to become more volatile.
393 Who is paying for Irish bad bank losses? The Irish finance minister Brian Lenihan claims the taxpayer won't be hit with a bill for the National Asset Management Agency (NAMA), despite the projections for the bad bank
worsening dramatically, the IrishH Independent H reports. After previously estimating a profit of €4.8bn, NAMA may now lose up to €800m. Lenihan said that even if NAMA is to make losses, it would be covered by the banks not the taxpayers. Political scandal threatens pension reform project in France Nicolas Sarkozy and his social minister Eric Woerth are embroiled in a party donations scandal, which risks t derail their pension reform project and weakens Sarkozy politically.
The police have found evidence (LaH Tribune/LeH Monde) that France’s richest woman, Liliane Bettancourt, made an illegal cash donation to Mr Sarkozy’s presidential campaign in 2007 directly to Eric Woerth then the treasurer of the UMP party. The story is getting even more complicated, as Woerth’s wife was then financial adviser to Bettancourt and tapes now
revealed that Bettancourt had apparently undeclared Swiss bank accounts, holding €78m (FTH
story).H FTH editorial H calls for resignation of Eric Woerth. How this story developed into a state
affair is described by LesH Echos.H Critical week for collective wage agreement in Greece It is a critical week for wage negotiations in Greece, as the GSEE, the umbrella organisation for trade unions, is getting closer to a compromise for its new national general collective
agreement despite strike actions announced for today. According to KathimeriniH ,H they have found a way to integrate the 13th and 14th month salary into the base salary by calling it Christmas gift, Easter and holiday pay. An interesting element of this agreement is that wage increases are not to exceed average inflation in the European Union (why not the eurozone as the relevant currency domain?), around 1%. The Baltic Dry Index, not a indicator after all? The Baltic Dry Index, a measure of shipping costs for dry bulk goods, suffered its 29th consecutive daily decline, to record its longest losing streak in more than six years, according
to Bloomberg. We often referred to this BDI measure in the past but now HFT AlphavilleH argues that it is not really a useful indicator. It looks like this string is caused less by falling demand but more by rising supply of ships. The article also notes that BDI‘s track record as leading indicator for world productivity trends has been poor in the sense that it was more coincident rather than leading trends.
http://www.eurointelligence.com/index.php?iH d=581&tx_ttnews[tt_news]=2848&tx_ttnews[ba ckPid]=901&cHash=549cc19900# H
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España acapara un tercio de los bancos analizados por la UE
Salgado503B y Fainé avanzan en la reforma de la ley de cajas ÍÑIGO DE BARRÓN - Madrid - 08/07/2010 Ya es oficial. España será el país que más entidades someta a las pruebas de resistencia (stress test en terminología anglosajona). La lista oficial se compone de 91 entidades de las que 27 serán españolas, casi un tercio. Ocho son bancos y las 19 cajas. Ya es oficial. España será el país que más entidades someta a las pruebas de resistencia (stress test en terminología anglosajona). La lista oficial se compone de 91 entidades de las que 27 serán españolas, casi un tercio. Ocho son bancos y las 19 cajas. El siguiente que más aporta es Alemania, con 14 entidades, de los cuales cinco son landesbank (bancos propiedad de los Estados regionales). España quiere demostrar a los mercados que se equivocan cuando dudan de la solvencia de las entidades. Por eso ha decidido poner bajo la lupa del comité de supervisores bancarios europeos (CEBS, por sus siglas en inglés) a prácticamente todo el sistema financiero. En las 27 entidades están todas las agrupaciones de cajas (SIP) y las que han quedado por libre, incluidas Ontinyent y Pollensa. El CEBS ya ha bautizado a la unión de Caja Madrid y Bancaja con la denominación de Júpiter. A la de Caixa Catalunya la llama Diada, a las gallegas Breogan, a la de Murcia Mare Nostrum y a la de Caja Duero y España, Espiga. Entre los bancos están los dos grandes, Santander (el que mejor ha quedado en la última prueba de resistencia) y el BBVA, junto con el Popular, Sabadell, Bankinter y Pastor. El CEBS explica que el alcance de las pruebas se ha ampliado respecto a la previsión inicial para incluir no solo a los principales bancos europeos transfronterizos, sino también algunas de las entidades nacionales de crédito "claves" en Europa. El Comité de Supervisores publicará los resultados de las pruebas el 23 de julio. Sobre las pruebas comentó que se verá el efecto en la solvencia de las entidades de un crecimiento del PIB europeo tres puntos por debajo del previsto por la Comisión Europea durante dos años. Según Bloomberg, también se verá el efecto de una depreciación del 3% del valor de la deuda soberana española y del 17% de la griega. Esto dañará a los bancos franceses y alemanes, los que más bonos griegos han comprado. También se analizará el efecto de una subida de la inflación y del paro. Por otro lado, Elena Salgado, vicepresidenta y ministra de Economía, mantuvo ayer una reunión con Isidro Fainé, presidente de La Caixa y de la Confederación Española de Cajas de Ahorros (CECA) para concretar aspectos de la reforma de la ley de cajas. A la vez, la comisión ejecutiva de la CECA mantuvo otra reunión con José Manuel Campa, secretario de Estado de Economía, y el subgobernador, Javier Aríztegui. El Gobierno quiere acelerar la aprobación de la reforma de las cajas y busca el máximo consenso político, aunque la clave la tendrá el PP. No se espera un desmarque del PP porque tanto Fainé como Rodrigo Rato, han hablado con Mariano Rajoy y confían en su apoyo. El Gobierno prepara un real decreto ley que se podría aprobar en el Congreso la tercera semana de julio.
http://www.elpais.com/articulo/H economia/Espana/acapara/tercio/bancos/analizados/UE/elpepie co/20100708elpepieco_6/Tes/ H
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Europe presents main threat to global recovery, IMF says By Howard Schneider Washington Post Staff Writer Thursday, July 8, 2010; A11 Europe's weakened economy is now the central threat to global recovery, as its countries struggle with heavy debt, banks face a reckoning over their lack of capital and growth is slowing, the International Monetary Fund said Wednesday in its first assessment of the world economy since a crisis over government borrowing in Greece. While the agency estimated that growth in the United States and emerging Asian and Latin American countries remains on track, it scaled back projections for Europe and outlined a series of issues there that could -- unless controlled -- spark problems rivaling those that caused the 2008 collapse of Lehman Bros. "Downside risks have risen sharply" in recent months, the IMF said. "The ultimate effect could be substantially lower global demand." In updating its World Economic Outlook, the IMF slightly raised its overall forecast for global growth, to 4.6 percent for the year, compared with 4.2 percent in its April report. The improvement was based on a stronger than expected performance in the first months of the year, particularly in Asia. The IMF said it also expected the United States to grow slightly faster than earlier predicted -- about 3.3 percent this year and 2.9 percent next year, less than forecast by the U.S. Federal Reserve. But the outlook for Europe was reduced, as the combined impact of government spending cuts, continued concern over national debt and uncertainty about the banking sector undermines an economy already lagging behind the rest of the world. The IMF projected that the 16 countries that share the euro as a currency will grow just 1 percent this year and 1.3 percent in 2011. The report and an accompanying analysis of world economic stability emphasized how a problem that was considered limited in scope when it surfaced in Greece last fall eventually expanded to other European countries and is now one of the main issues facing the global economy. Governments across Europe are cutting spending and overhauling social programs in an effort to curb record levels of debt, and the Obama administration is studying similar U.S. measures. Although no other country has reached the crisis point hit by Greece -- where borrowing costs skyrocketed until a joint European Union-IMF bailout provided emergency funding -- the IMF noted that European countries and the United States will be competing this year to refinance some $4 trillion in government bonds maturing in the second half of the year. With the United States and nations such as Germany considered classic havens, there has been pressure felt in Britain, and in weaker euro-zone economies such as Portugal and Spain, to make a convincing effort to control deficits to keep the favor of bond investors and analysts. While Europe, in conjunction with the IMF, established a fund to guarantee the repayment of euro-zone government debt, the IMF noted that thecalming effect of that program is "wearing off." The interest rates paid by countries such as Spain and Italy -- and even some, such as
396 Belgium, considered at the heart of "core Europe" -- have been rising again in comparison to those paid by Germany, the continent's top economic performer. "On the heels of Greece's fiscal troubles, investors are now re-pricing these risks across the region," the IMF said. In addition, European and other economic analysts are awaiting the result of financial stress tests that will give a sense of how European banks fared during the recent financial crisis and recession, whether they could withstand another downturn, and how much capital they might need to raise to be considered healthy. Stress tests in the United States helped restore confidence in the banking system. But IMF and other analysts say that European banks have been slow to write off bad loans and raise new capital and, until now, have been protected by national governments from a full accounting of their problems. The issues of government debt and the health of the banks are related: European banks own tens of billions of dollars in Greek, Spanish and other government bonds, and the stress tests will assess how those holdings affect each company's overall financial health. The European banking system is plagued by a "legacy of unfinished cleansing," the IMF said, which has left "pockets of vulnerability, overcapacity, and poor profitability." Banks have become hesitant to lend to each other -- much as happened during the U.S. financial crisis -- and are relying on an ultimately unhealthy mix of short-term loans from the European Central Bank to ensure they have enough cash. "Recent global stability gains are threatened by a confluence of sovereign and banking risks in the euro area that, without continued and concerted attention, could spill over," the agency said. Howard Schneider Europe presents main threat to global recovery, IMF says July 8, 2010; A11 http://www.washingtonpost.com/wp-H dyn/content/article/2010/07/07/AR2010070705786.html H
Germans30B Deaf to U.S. `Nonsense' as Exports Power Growth By Alan Crawford and Tony Czuczka - Jul 8, 2010 Hamburg, the port city that sends 1 million tons of goods to foreign markets each week, has a reply to those who say Germany’s economy is too reliant on exports. “Nonsense,” said Frank Horch, the city’s Chamber of Commerce president, in a June 24 interview in the offices of the 345-year-old tradeH group.H “You cannot say Germany has to stop exports, it makes no sense. Germany was born out of this.” Hamburg, Germany’s largest port and a crossroads in European trade since at least the 13th century, is the city with the most to lose from U.S.-led calls on Chancellor AngelaH Merkel H to reduce the trade surplus in Europe’s biggest economy.
As figures released today showed global demand for German goods surgingH ,H Merkel is torn between fostering the export boom and honoring a Group of 20 pledge to bolster domestic growth and rely less on foreign trade. Her Cabinet’s backing yesterday of a $100 billion
397 domestic savings program suggests she’s ignoring calls by President BarackH Obama H to tackle what some say are German imbalances. “Germany is very skilled at exporting, and it’s neither possible nor desirable for it to meet U.S. and European calls to curb exports,” said FredrikH Erixon,H director of the EuropeanH Centre for
International Political Economy H in Brussels. “It’s politically convenient for some leaders and people to keep raising export surpluses, even if they know Germany can’t and won’t do anything about them.” Hanseatic League
The message resonates in HamburgH H, located on the RiverH Elbe H between the Baltic and North seas. Germany’s second-biggest city after Berlin traces its trading credentials back to the medieval HanseaticH League,H a network of merchants’ guilds from London to Novgorod that dominated northern European trade for 200 years. Hamburg, with a population of 1.8 million, is the richest of Germany’s 16 states, with a per capita gross domestic product of 48,229 euros ($60,700) last year, almost double Berlin’s and the European Union average, governmentH statistics show.H The city also has the country’s biggest red-light district, the Reeperbahn, a boulevard stretching from the port that includes bars where the Beatles played some of their first gigs.
Where merchants once dealt in amber, fish and timber, port operators such as HamburgerH
Hafen und Logistik AG H and Eurogate handled about 40 percent of Germany’s 808 billion-euro exportH trade H of goods in 2009, including machinery from Munich-based Siemens AG and chemicals from BASF SE of Ludwigshafen. Port Traffic Hamburg handled about 642,000 containers in March, the latest complete statistics available, or more than 20,000 per day. In 2009, Hamburg handled 7 million containers, known as TEU or twenty-foot equivalent units, the port’sH website H shows. That compares with just over 5 million TEUs in the PortH of Long Beach,H California.
Port traffic is picking up, said AxelH Gedaschko,H Hamburg’s state minister for economy and labor, in a July 5 interview. There has been a turnaround since March from a 28 percent slump last year, with container volume up 16 percent in May from a year earlier, he said. China, which overtook Germany as the world’s biggest exporter last year, sends more goods through Hamburg than anywhere else in Europe. An estimated 2.5 million containers will pass through the port traveling to and from China this year, up from 2.27 million TEU in 2009, according to the Hamburg Port Authority. That compares with 566,000 TEU with second-placed Singapore, followed by Russia and Sweden, which with 264,000 TEU was Hamburg’s highest-ranked trading partner in the European Union. Chinese Consulate
ChinaH Cosco Holdings Co.,H China’s largest container line, has its European headquarters in Hamburg, one of more than 400 Chinese companies with offices in the city. China has a consulH general H in Hamburg, reflecting the city’s growing links with the world’s most populous nation.
“Some question our successful export model,” Economy Minister RainerH Bruederle H said July 1 in a speech to parliament in Berlin. “They say: raise wages drastically, do more to stimulate the economy. That way risks turning Germany’s economic policy into that of Greece, and we refuse to do it.”
398 Germany came under pressure to do just that last month with calls by Obama and Treasury
Secretary TimothyH F. Geithner H to boost domestic spending. The G-20 Toronto’s summit communiqueH H required countries to “reduce reliance on external demand and focus more on domestic sources of growth.” Exports Surge The euro’s 12 percent drop against the dollar this year is helping German exporters cement their advantage. ExportsH jumpedH more than twice as much as economists forecast in May, rising 9.2 percent from April, when they fell 6.3 percent, the Federal Statistics Office in Wiesbaden said today. Imports meanwhile surged 14.8 percent. Plant and machinery orders soared 61 percent in May from a year earlier, the VDMA machine makers’ association said July 1. In Hamburg, the influence of centuries of seaborne trade is evident in street names such as
San-Francisco-Strasse and Shanghai Allee. The downtown HErnst Brendler H store has offered “Marine and Tropical Supplies since 1879.”
Jens Meier, who runs the HamburgH Port Authority H from a 19th century redbrick warehouse once used to store coffee and tea, said he’s overseeing as much as 1 billion euros of investment over the next four years to create the “port of the future.” He plans to curb noise and light pollution, make the site more accessible to tourists, and boost efficiency via technology. ‘Port of Future’ “The simple things like carrying bags may not be the future, and the dirty, dusty, noisy business maybe also isn’t the business for this port,” Meier said. “There’s still a huge nucleus of engineers and people producing innovation here.” Horch at the trade chambers, who is also managing director of Hamburg-based shipyard
BlohmH & Voss AG,H which built Russian billionaire RomanH AbramovichH’s superyacht Eclipse, sees Hamburg’s advantage in turning its “Hanseatic view and Hanseatic behavior” to today’s globalized world. “Hamburg is not a residents’ town like Berlin or Munich, Hamburg is a trading town,” Horch said, surrounded by oil portraits of his predecessors and a tapestry presented to mark the trade chambers’ 300th anniversary in 1965. “We build up industry, we build up know how, we bring ideas.”
To contact the reporters on this story: AlanH Crawford H in Berlin at [email protected] ;H
TonyH Czuczka H in Berlin at [email protected] .H Alan Crawford and Tony Czuczka Germans Deaf to U.S. `Nonsense' as Exports Power Growth Jul 8, 2010 http://www.bloomberg.com/news/2010-07-07/haH mburg-deaf-to-u-s-nonsense-as-german- recovery-reliant-on-port-exports.html
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ft.comH /H alphavilleH H All times are London time
431B Don’t panic, the Baltic dry is a rubbish indicator!
Posted by IzabellaH Kaminska H on Jul 07 16:54. The Baltic Dry Index (BDI) — a measure of shipping costs for dry bulk goods — suffered its 29th consecutive daily decline on Wednesday, to record its longest losing streak in more than six years, according to Bloomberg. It’s news that David Rosenberg at Gluskin Sheff, amongst others, managed to get pretty excited about on Wednesday. He, for example, thought it’s the sort of story that should have made the front pages by now: The problem for the commodity complex in general is that the Baltic Dry Index, a usually reliable leading indicator, has plummeted by half since the end of May, is down now for 29 consecutive sessions and is at its lowest level in more than a year.
Not to mention the fact that this is on nobody’s radar screen (pageH 21 news in the FT)!H And while many economists still view the index as an extremely useful barometer of global productivity trends — it appears there are some growing concerns about its usefulness today versus its usefulness say two years ago. And it’s all down to shipping supply. Julian Jessop, chief economist at Capital Economics makes the case as follows: The BDI is a composite measure of the cost of hiring a ship to transport dry bulk commodities such as grains, coal and metal ores. It is therefore understandable that the near-50% fall in the index since late May is attracting plenty of attention. However, there are two reasons to be wary of making big calls on commodities (or anything else) on the basis of the BDI. For a start, fluctuations in the index could be driven by changes in the supply of shipping as well as in the underlying demand for commodities transported by sea. For example, a fall in the BDI could reflect an increase in the number of ships available to carry dry commodities (either new-builds or conversions from other uses, such as oil tankers). Similarly, the BDI might be distorted by temporary port closures, changes in the cost of fuel and insurance, and many other factors. On the supply side, Jessop notes that there was a surge in orders for new cargo ships in 2007 and 2008. And since it takes about two to three years to build a ship that supply should be making its way to market right about now. Hence, says the economist: It is therefore at least conceivable that the BDI could fall further this year even if commodity prices rebound, provided the corresponding increase in demand for shipping is more than offset by an increase in supply. But it doesn’t stop there. While the idea of a shipping index being a leading indicator might make logical sense, the BDI’s actual track record is pretty poor, says Jessop. For instance, the best that can be said about the index is probably that it tends to move up and down at the same time as global commodity prices — hardly insightful. He adds:
400 But as these prices are also directly observable, and given that almost all commodities now have well-developed futures markets, the BDI is not much use as an additional forecasting tool. Indeed, it has often sent misleading signals, particularly for industrial metals such as copper. (See Chart 1.) The correlation with agricultural commodities has been more reliable (reflecting their greater importance in the dry bulk shipping market), but again the BDI is no more than a coincident indicator. And here’s the proof:
http://ftalphaville.ft.com/bH log/2010/07/07/280641/dont-panic-the-baltic-dry-is-a-rubbish- indicator/ H
401
Eurointelligence304B Daily Morning Newsbriefing
EU504BH Parliament picks fight with Germany and the UK over EU financial supervision
07.07.2010 Final vote postponed as EP makes a series of amendments to strengthen EU-level financial supervision; specifically wants all large cross-border banks supervised at EU-level; commercial banks have sold gold reserves to BIS in signs of significant money market troubles; Martin Wolf says the global recovery strategy rests to a large extent on the risky assumption that the private sector will miraculous start spending – while the opposite is happening now; Rob Parenteau and Yves Smith also argue that the private sector to invest more, and recommend a series of policy measures to induce private-sector investment; Wolfgang Münchau, meanwhile, warns Germany’s Left not to underestimate Angela Merkel, and to devise a strategic, rather than tactical plan to unseat her in 2013.
07.07.2010
EU432B Parliament picks fight with Germany and the UK over EU financial supervision
Guy Verhoftstadt got it just right when he said that the member states have learned nothing from the financial crisis. They continue to trust their national financial supervisiors, even though they have failed during the crisis. The European Parliament is due today to vote a serious of amendments, and postponed its final vote on the supervisory reforms until September. FT Deutschland writes that the parliament wants the large cross-border banks to be subject to EU-wide, rather than national regulation, and for the EU to have much wider powers during financial crises. There are also a dispute about whether the various supervisors should all move to Frankfurt – an idea supported by the Parliament.
402 More signs of money market trouble
TheH FT has a report H that European banks are using gold holding to raise cash with the Bank for International Settlements, as a further sign of an acute crisis in the money markets. The BIS reported purchase of 346 swap operations involving gold, according to its latest annual report, while there was no mentioning of such operations in previous years. The total amounts raised, about $13bn, are not high, but a sign of desperation. Global rebalancing: how it works and why it is so dangerous This is an important discussion. And we would like to go into some detail here. If you do the maths on global rebalancing – of the private, public, and foreign sectors of the economy – you arrive at some disturbing effects of the current retrenchment, both in the public and the private sector in the advanced world.
MartinH WolfH, in the FT, starts with the OECD’s estimate of a 7% of GDP private sector surplus – around $3000bn, two thirds of that from the US and the eurozone – which implies as massive private retrenchment. The IIF puts the surplus the current account surplus of the advanced economies, including China, at $300bn – which is less than before the crisis, but still high. There are no net flows of capital into the emerging markets (where positive net flows from our private or compensated for by offsetting flows from public sector). So this leaves a massive flow of funds from our private sector to the public sector. And here is the important bit: “What then of the future? Suppose there is no significant change in policy in emerging economies. Then if a fiscal contraction in advanced countries is not to cause a slowdown, even a second recession, it must be accompanied by an upsurge in private spending.” He concludes that the world would be in serious trouble if that was not the case.
RobH Parenteau and Yves Smith,H writing in the New York Times, also have a powerful comment on the corporate savings glut. They say the normal pattern is for households to save, and for companies to invest. They say the corporate savings glut is caused by the obsession with quarterly earnings, which has led to underinvestment by US corporate. But if households and companies are savings, you either need more government dissaving, i.e. a larget budget deficit, or a larger trade surplus. But what if the government saves as well? That would through the economy in recession, cause a fall in wages and prices, and improve the current account – which would be fine in normal times, but not when the private sector needs to deleverage. They conclude: “Rather than blindly marching to Austeria, we need to set fiscal policy to the task of incentivizing the reinvestment of corporate profits in business operations rather than games at the casino.” To that effect, they propose a tax on retained earnings that are not reinvested, a financial turnover tax, and a new stimulus programme. Münchau on the political complacency of the German left In his FT Deutschland column, Wolfgang Münchau warns the SPD against complacency if it believes that the Merkel government is about to evaporate. He says Merkel and the FDP have every reason to continue to the bitter end of their coalition in 2013. He also doubts that last week’s presidential elections, during which Merkel’s candidate was only elected in the third
403 round, has much of a positive effect. What matters for the outcome in 2013 are the newspaper headlines in 2010, but the policies adopted in 2010, and those of the SPD hardly stand up to scrutiny either.
http://www.eurointelligence.com/index.php?idH =581&tx_ttnews[tt_news]=2847&tx_ttnews[ba ckPid]=901&cHash=99bcbde279# H
COLUMNISTS
43B Demand shortfall casts doubt on early austerity By Martin Wolf Published: July 6 2010 20:24 | Last updated: July 6 2010 20:24
Fiscal default is nigh, insist the doomsayers: repent and retrench before it is too late. Yet I have a question: do we believe that markets are unable to price anything right, even the public debt of the world’s largest advanced countries, the best understood and most liquid assets in the world? I suggest not. Markets are saying something important.
549BH H Short View: Keep money flowing - Jul-06 50BH H Germany basks in ‘fairytale’ summer optimism - Jul-06 51BH H Martin Wolf: Central banks should keep printing - Jun-22 52BH H Martin Wolf’s Exchange - Jul-06 53BH H MPC faces crunch meeting on rates - Jul-06 54BH H Australia holds rates as wage pressure builds - Jul-06 On Monday, the yield on 10-year government bonds was 1.1 per cent in Japan, 2.6 per cent in Germany, 3 per cent in the US and 3.3 per cent in the UK (see chart). Based on yields on index-linked securities, real interest rates on borrowing by these governments are very low (1.2 per cent, or less, in the US, Germany and UK). Investors are saying that they view the risk of depression and deflation as greater than that of default and inflation. Why should it be so easy to fund such huge fiscal deficits even after central banks have stopped their buying of government bonds? In response, here is a calculation that can be derived from the figures for fiscal and current account balances in the latest Economic
Outlook from the OrganisationH for Economic Co-operation and Development:H the private sector – households and corporations – of advanced countries is forecast to run an excess of income over spending this year of 7 per cent of gross domestic product. In round
404 numbers, this is $3,000bn. In the US and eurozone, the implied private surplus is about $1,000bn, in each case. In Japan, it is about $500bn. In the UK, it is $200bn. Focus on the $3,000bn: this is the amount by which the private sectors of the advanced countries are forecast to increase their net claims on governments and foreigners in 2010. That means massive private retrenchment, with corporations particularly frugal at the moment. Where could this money go? A possibility might be emerging countries. One might imagine, for example, that advanced countries eliminated their fiscal deficits but maintained these private surpluses. That would mean an aggregate current account surplus of $3,000bn, (or 7 per cent of GDP). The OECD region would become a mega-Germany. Rich countries would be pouring capital into poorer ones.
In practice, however, this is not going to happen. Far from running a current account deficit of $3,000bn, emerging countries are forecast to run a surplus: the latest from the Washington- based Institute for International Finance is for an aggregate surplus of about $300bn, two- thirds of which will be generated by China. This is smaller than two years before. But it still means that the emerging world will be a net provider of capital to advanced countries, not the other way around. That is not all. According to the IIF, the net flow of private funds from advanced countries to emerging countries will be close to $700bn this year. But that will be almost entirely offset by an official outflow, in the form of foreign currency reserves, of close to $600bn. These huge official interventions prevent the emergence of large net capital inflows into emerging countries. Instead, the private sectors of the advanced countries accumulate net claims on the private sectors of emerging countries, while the governments of
405 emerging countries accumulate offsetting claims on the governments of advanced countries (see charts). The bottom line is clear: there exists, at present, a gigantic net flow of funds into the liabilities of the governments of advanced countries. Of course, some countries can still get into difficulties. But it is quite wrong to argue that the difficulties of a GreeceH H or a SpainH H entail difficulties ahead for the US, or even the UK. The opposite is far more likely: flight from risk entails flight into something less risky. What is the least perilous asset for the investment of gigantic private financial surpluses? The only answer is the public debt of the big advanced countries. These flows of funds consist only of identities. So what are the causal factors? Maybe, the collapse in private spending in the wake of the financial crisis was caused by terror of the fiscal deficits to come. Maybe, the moon is made of green cheese, too. There is also next to no sign of crowding out in capital markets. The plausible hypothesis, then, is that the fiscal deficits were a response to the collapsing desire to spend of the crisis-hit private sector. Fiscal policy could have been tighter. But the result would have been a depression. What then of the future? Suppose there is no significant change in policy in emerging economies. Then if a fiscal contraction in advanced countries is not to cause a slowdown, even a second recession, it must be accompanied by an upsurge in private spending. The argument must be that improved confidence in the long-run sustainability of public finances would lead to greater private consumption and investment spending now, even if there is no significant effects on interest rates or the exchange rate. I am highly sceptical of this argument (see H “Why it is right for central banks to keep printing”,H Financial Times, June 22, 2010). But grant that this is true. Then the best policy is to slow the long-term growth in spending on age-related programmes. This comes out clearly from the discussion of long- term fiscal trends in the excellent new annual report from the BankH for International
Settlements.H The arguments for a dramatic short-term fiscal contraction, however, are weak. Yes, we are enjoying a recovery. But economies are still far below peak levels of activity and also below almost any plausible estimate of the long-term trend (see chart). This is particularly true in the US, where unemployment rates have shot up by far more than in other advanced countries. Unless the US has suddenly become continental European, why should equilibrium unemployment have jumped by as much as that? My conclusion, then, is that the advanced countries remain highly short of demand. In this environment, rapid cuts in fiscal support make sense if, and only if, monetary policy can be effective on its own and expanding the interest-elastic parts of the economy is the best way to climb out of the hole. There is reason to doubt both ideas.
At the summit of the GroupH of 20 countries inH Canada, leaders pledged to “halve fiscal deficits by 2013 and stabilise or reduce government debt-to-GDP ratios by 2016”. It would make far better sense for governments to focus their efforts on altering the long-term trajectory of spending. They may hope that retrenchment now will spur on private spending. But what is their plan if it turns out that it does not?
http://www.ft.com/cms/s/0/f8b5bd90-892f-11df-8ecd-00144feab49a.htmlH H
406 07/05/2010 12:54 PM
Export560B Optimism, Financial Fear Bank Balance Sheets Could Torpedo Recovery By Beat Balzli, Markus Dettmer, Armin Mahler and Christian Reiermann Germany's economy is booming thanks to a rapid recovery of global exports. But Europe isn't out of the woods yet. Few know exactly what nasty surprises might be lurking on bank balance sheets across the Continent -- and stress tests might not be enough to reveal them. Strict confidentiality is the order of the day when the elite of the German financial world gather. No pictures were taken of the memorable meeting which took place on Wednesday of last week. Only a laconic press release, nine lines long, informed the public of the event -- after it was all over. The CEOs of the largest banks had accepted an invitation extended by Axel Weber, the president of Germany's central bank, the Bundesbank, and by Jochen Sanio, the head of Germany's Federal Financial Supervisory Authority (BaFin). Deutsche Bank CEO Josef Ackermann didn't attend personally, but he sent a representative -- Chief Risk Officer Hugo Bänziger. It was a fitting choice. Tops on the agenda for the meeting were the risks currently faced by
Germany's largest banks. They are to be assessed in a stressH test H -- and then made public. In a subsequently released statement, the bankers in attendance declared "their fundamental willingness" to back this plan. Still, it remains highly controversial whether such a course of action is a good idea, and the gathered bank representatives hotly debated the issue last Wednesday. Stress tests are designed to enhance transparency and engender trust. But they can also expose new risks -- or reveal old hazards that the public has since chosen to ignore. A high-profile stress test of German banks could thus mean even more stress for an industry that currently needs mutual trust and tranquility more than anything. It could bring a renewed sense of insecurity to the financial markets, which already act with hypersensitivity to every fresh news report. Won't Last? The insecurity can easily be seen in the rapid yo-yoing of the markets in recent weeks. Risk premiums for Greek and Spanish government bonds are rising, even though euro-zone countries have committed themselves to securing the financing of ailing member states. Stock markets often vacillate within hours from depression to optimism and back again. Every bit of not entirely positive news from the US or China is seen as an indication that the world economy could suffer another relapse and the surprisingly rapid recovery won't last. Since the beginning of this year alone, the price of gold has risen by 13 percent. Gold is always in high demand when confidence in economies and currencies flags. The precious metal is seen as a safe haven in times of uncertainty.
407 Positive news has it rough in such times -- it's hardly even noticed and quickly forgotten. And yet there is good news. It comes from companies and from the labor market, and it tells of astonishing growth rates, fullH order books H and new jobs -- particularly in Germany. Economic pundits are looking to the near future with increasing confidence. Recently the Kiel Institute for the World Economy (IfW) significantly revised upwards its growth forecast for this year. The experts in Kiel now anticipate a growth rate of 2.1 percent for 2010. Similar predictions have been made by the German economic research institute RWI in Essen. The German Chambers of Industry and Commerce (DIHK) even expect growth of 2.3 percent. Economic advisors to Chancellor Angela Merkel's government have also been infected by the wave of optimism. In April, Berlin predicted 1.4 percent growth. That forecast has not been officially revised, but there is broad realization that it will ultimately be quite a bit higher. "Everything points to a figure of 2 percent, perhaps even slightly above that," says one government economic advisor. Opposite Has Occurred Even the pundits have been caught off guard by how quickly the German economy is finding its feet again. Only a few months ago, they were predicting that Germany's export-driven economy would lag behind other countries for years. But the opposite has occurred. The global economy will grow by 4 percent this year, and global trade will even soar by 7 percent. The big winners are precisely those companies in Germany that focus on exports. "We have to be part of this -- and we will be part of this," says Economy Minister Rainer Brüderle of the business-friendly Free Democratic Party (FDP). While other countries like France and the UK are still struggling to pull out of the recession, Germany has become the motor for economic growth in Europe. Researchers also don't appear concerned that the German government's austerity program could strangle the recovery. Next year, when the measures go into effect, they expect an effect on growth of just two-tenths of a percentage point, and perhaps lower than that. German Chancellor Angela Merkel of the Christian Democratic Union (CDU) also feels that the concerns are unfounded. She says that the austerity program only makes up a fraction of the federal government's overall budget of some €300 billion ($375 billion). In addition, Merkel points out that Germany's financial policy remains expansive. Her proof: Next year the German government will take on new debts to the tune of €57.5 billion. This is the figure proposed by the government's draft budget, which the cabinet intends to approve on Wednesday. The chancellor feels that there are no grounds to fear that the government is saving money at the expense of economic recovery. Economic Blip The current sense of optimism is driven by developments on the labor market. The German job machine is revving up again, as if the downturn of the past two years were nothing more than an economic blip and not the worst global financial crisis in decades. When orders for core sectors of German industry plummeted by over 40 percent in the wake of the Lehman Brothers bankruptcy, there were already predictions of impending mass unemployment. Month after month, the anticipated onset of this horror scenario had to be postponed because unemployment rose only slightly -- if at all. Billions of euros spent on government-funded programs to reduce worker hours -- known as short-time, or Kurzarbeit in German -- helped as a buffer. Now the labor market is recovering with surprising strength.
408 In June of this year, 3.15 million Germans were out of work, more than a quarter of a million fewer than a year ago. This is the lowest figure since December 2008. The upward trend is particularly strong in eastern Germany, where there were 977,000 unemployed in June -- the lowest figure of the past 19 years. The situation is "significantly better than expected in view of the overall economic conditions," says Germany's Federal Employment Agency. All signs indicate that the number of unemployed could drop below three million in the coming months. Other numbers are equal cause for celebration. The number of those with gainful employment in Germany has risen to 40.28 million. The figure for the month of May was "the highest number since German reunification," Germany's Federal Statistical Office said last week. Experts offer a range of explanations for the German job miracle: the large-scale use of short- time programs during the crisis, the rapid increase in exports and the weaker euro, which makes German goods cheaper abroad. Extreme Unease More than anything else, though, trade unions have practiced wage restraint for many years, which has helped enhance Germany's competitiveness. Unions and employers have agreed to differentiated and flexible working hour systems. The Hartz reforms introduced under the coalition of Social Democrats and Greens led by then-Chancellor Gerhard Schröder stripped much of the structural rigidness from the German labor market. Over the past decade, this has resulted in one of the most robust and flexible economies in the world. Germany is the only European country with an unemployment rate that is lower today than what it was before the outbreak of the global financial crisis in the spring of 2008. Meanwhile, unemployment has doubled in the US. Over the long run, however, the export-dependent German economy won't be able to disengage itself from trends in the global economy, which is already showing initial signs of fatigue, both in the US and China. Some experts even fear that after a brief recovery, the global economy could fall back into a recession as economic stimulus programs run their course. They speak of the possibility of a double-dip recession. Renewed Turbulence Guaranteed Indeed, as long as the financial markets refuse to shed their anxiety, the foundation of the new recovery remains fragile. Renewed turbulence is virtually guaranteed. The banks still have enormous quantities of toxic assets on their books. Nobody knows when or to what extent these debts will have to be written off. In some cases, these bad investments consist of junk bonds from the days before the crisis, including second-class US real estate loans called subprimes. In other cases, they include burdens that hardly anyone was aware of a year ago, like government bonds from Greece and other southern European countries, which were touted as a fairly sound investment at the time. Analysts at the US investment bank Morgan Stanley say that Europe is caught in a "vicious cycle." Instead of using government funds to forcibly recapitalize all banks, as the US did, the euro countries opted for another approach. After the Lehman Brothers bankruptcy, many banks loaded up on cheap cash from the European Central Bank (ECB). According to Morgan Stanley, they have been using this money since October 2008 to finance the purchase of government bonds worth €420 billion. During this spending spree, the banks targeted high-yielding bonds from shaky southern European countries, primarily Spain, Greece
409 and Portugal. They then deposited these bonds with the ECB as security for more loans from the central bank. At the outset these lucrative deals soothed nerves on the markets, but they have now turned out to be time bombs. Nobody knows exactly how these bonds are weighted on the balance sheets -- and even less can be said about what they will actually be worth in the end. Indeed, despite euro-zone bailout packages for ailing members of the currency union, few doubt that Greece will eventually have to restructure its mounting debt. Creditors would be forced to forego some of their claims. Breeding Mistrust Would all banks survive such a haircut? And what happens if further euro-zone members run into trouble, plunging even more banks into difficulties? There is an enormous sense of uncertainty, and that breeds mistrust. Banks recently parked over €300 billion with the ECB overnight for the ridiculously low interest rate of 0.25 percent. Anyone who borrows money for 1 percent, only to turn around and deposit it overnight with the ECB for just 0.25 percent -- instead of earning considerably more by loaning it to the competition -- has one problem above all: fear. Last week the banks borrowed significantly less money in new loans than what they had to pay back to the Bundesbank, but that only briefly reduced the edginess. "There is still a great deal of tension," says Hans-Günter Redeker, head foreign exchange strategist for the major French bank BNP Paribas. He says that the balance sheets are too shadowy. "We need a sound stress test on the table, which will also be made public." This is something, at least in principle, that everyone attending last Wednesday's meeting in Frankfurt also agreed on. But there were differing opinions on what was sound and what wasn't. There have been a number of stress tests in the past. But they weren't made public, and they did not take into account -- of all things --the greatest risk on the banks' balance sheets: the government bonds from the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain). Horror Scenario What the markets fear most of all is that these assets could plummet in value -- that these countries could declare bankruptcy and their debts would need to be refinanced. But this horror scenario is not taken into consideration in the current stress test. Otherwise critics could insinuate that the Bundesbank and the BaFin have doubts about the success of the bailout package. Instead, the bank auditors went on the assumption that a deepening of the debt crisis could drive up the price of credit default swaps on bonds from countries like Portugal and Spain, causing their value to drop and leading to write-offs for the banks. An additional routine scenario goes on the assumption that there could be another economic downturn. Many questions remain unanswered, however, and the representatives of the banks, the Bundesbank and the BaFin will no doubt have to meet again soon. Translated from the German by Paul Cohen
URL: http://www.spiegel.de/intH ernational/business/0,1518,704663,00.html H RELATED Prospering at the Expense of Others?: Germany's Export Boom Has Trade Partners
Stewing (06/30/2010) http://www.spiegel.de/internH ational/business/0,1518,703617,00.html H
410
Governor43B Kevin Warsh
At50B the Atlanta Rotary Club, Atlanta, Georgia
June506B 28, 2010 It's Greek to Me It is tempting to view the economic events of the last three years as a series of unrelated, 1 unpredictable, unfortunate financial shocks.H H And it is easy--too easy, really--to bemoan the latest flare-up of crisis conditions, and chalk it up to the global economy's continued string of bad luck. If what ails us is nothing more than a case of bad fortune, then the mixed metaphor of the moment has it about right: the black swans are caught up in the perfect storm. And if what is needed to induce a durable global economic expansion amounts to more doses of the now-familiar spending packages and weekend shock therapies, then we would know that our luck was indeed changing. If only it were so. In my view, a strong, sustainable U.S. economic expansion is not in the hands of the fates. It rests in our hands--the hands of fiscal, regulatory, trade, and monetary policymakers. Equally, it rests with business leaders like you here at the Atlanta Rotary Club. We will soon give notice to the third anniversary since the onset of the global financial crisis. As we mark this occasion--and continue to witness shocks arising intermittently and unevenly- -it might be worth debunking some popular views that have become part of the crisis narrative. In their stead, I will begin with what I believe are some truths, perhaps hiding in plain sight all along. Subprime mortgages were not at the core of the global crisis; they were only indicative of the dramatic mispricing of virtually every asset everywhere in the world. The crisis was not made in the USA, but first manifested itself here. The volatility in financial markets is not the source of the problem, but a critical signpost. Too-big-to-fail exacerbated the global financial crisis, and remains its troubling legacy. Excessive growth in government spending is not the economy's salvation, but a principal foe. Slowing the creep of protectionism is no small accomplishment, but it is not the equal of meaningful expansion of trade and investment opportunities to enhance global growth. The European sovereign debt crisis is not upsetting the stability in financial markets; it is demonstrating how far we remain from a sustainable equilibrium. Turning private-sector liabilities into public-sector obligations may effectively buy time, but it alone buys neither stability nor prosperity over the horizon. In the balance of my remarks, I will survey recent economic and financial market developments. Next, with the benefit and burden of recent U.S. experience, I will offer some changes for the next edition of policymakers' Crisis Response Guide. Finally, even amid greater uncertainty about economic prospects, I will seek to further the discussion about a path for policy. Economic and Financial Market Developments Recent economic data support a moderate recovery in economic activity. As the Federal Open Market Committee (FOMC) noted last week, information received in the past couple of
411 months suggests that the recovery is proceeding and that the labor market is improving, albeit gradually. Household spending is increasing, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak. Owing to a less-than-assured economic outlook and broad uncertainty about public policy, employers appear quite reluctant to add to payrolls. After sizable increases in March and April, private nonfarm payroll employment rose by only 41,000 in May. Employers, however, continue to lengthen workweeks for existing employees. Notably, the workweek for production and nonsupervisory workers in manufacturing reached its highest level since July 2000, and overtime hours per worker now stand at pre-recession levels. Meanwhile, most broad measures of inflation remain subdued. And long-term inflation expectations appear stable. Financial conditions, notably, have become less supportive of economic growth. In early May, concerns intensified regarding fiscal difficulties in some European countries. Financial market volatility resurfaced with a vengeance in U.S. markets. The implied volatility of equity prices (VIX) jumped to levels not seen in more than a year. In short-term funding markets, spreads between the Libor (London interbank offered rate) and the OIS (overnight indexed swap) rate widened and commercial paper rates for many issuers jumped. Investors became decidedly less willing to provide funds at longer tenors. Treasury yields fell to near historic lows, in part as investors sought refuge in dollar- denominated, highly liquid, safe-haven assets. Equity prices, reacting to increased risk and prospects for weaker global growth, also fell. Broad equity price indexes touched lows as much as 14 percent below their recent peak in April. And retail investors may have experienced one scare too many; outflows from equity mutual funds appear to rival the retreat in late 2008. Risk spreads on U.S. investment-grade and high-yield bond prices rose, and corporate bond issuance fell to about half the run-rate of earlier this year. Broad measures of industrial commodity prices decreased substantially from their peaks--mostly on account of weaker expected global demand. There has been, however, some modest improvement across some markets in the most recent weeks. As I noted, a moderate cyclical recovery characterizes the last several quarters in the United States. But while the recovery is proceeding, investors remain uncertain about its trajectory. Financial market participants are still searching--perhaps better characterized as lurching--for a new equilibrium. The economy's path depends in part on whether a new market and public policy equilibrium is established to keep the financial repair process on track. If volatility in financial markets persists at elevated levels, the expected pickup of business fixed investment may disappoint. Business leaders in the United States may react to the latest in a long series of shocks by postponing investments in capital and labor alike. In that way, massive excess cash balances might not be a source of strength, but a reminder of caution. If, however, volatility levels across asset markets abate--indicating that the financial repair process is continuing--the economic recovery should continue apace. Businesses and consumers would then be better positioned to convert the recovery into a more durable expansion. An Updated Crisis Response Manual
412 Given recent U.S. experience in responding to the financial crisis, allow me to offer for consideration some ideas to inform the policy response going forward. You can judge for yourselves whether policymakers--at home or abroad--will be receptive to these ideas. First, don't blame the mirror. In times of economic weakness or financial distress, policymakers are often troubled by the messages embedded in financial market prices or bank lending statistics. Some supervisors might disagree--even strongly--with the prices markets assign to a banking system's financial wherewithal. Some elected officials may blame commercial banks for the low levels of lending. Some out-of-favor fiscal authorities may take great umbrage at the prices assigned to their funding costs. Still, outlawing a class of securities or upbraiding an industry tends to be counterproductive. Second, don't fall in love with the mirror. In benign economic times, market prices can lull investors and policymakers into a false sense of security. Financial market prices may appear more sanguine about prospects than fundamentals suggest. The cost of issuing a 10-year Treasury bond or German bund might be exceptionally low by historical standards. Inflation expectations may appear well anchored. But this is no guarantee of future performance. Market prices adjust slowly and steadily…until they don't. Then, market prices can act in a nonlinear fashion. That's when policymakers end up with fewer, less desirable options. And economies are done harm. So, in each of these messages, we might think of the financial markets as a mirror, a very imperfect but still telling reflection of reality. Third, facts, not force, should be the predominant policy response. Prevailing wisdom has it that policymakers must overreact when markets do. In my view, this is an uncertain proposition. If a problem were unique or isolated, game theory suggests that overwhelming force might serve policymakers' interests. But, these problems are not isolated. And it is no game. Markets will continue to clamor for more explicit government commitments. Better to feed the proverbial beast with more facts than force. The Federal Reserve-led stress tests are but one example where the balance was reasonably struck. Fourth, there are no free lunches, but there is an early-bird special for dinner. Economic trends--fiscal, monetary, trade, or regulatory--tend not to improve when the immediate is continually given preference over the important. The economy's long-term growth prospects must be given top billing. As economist Charles Schultze reminded us, it is not the wolf at the 2 door but the termites in the walls that require attention.H H The sooner the house's structure is strengthened, the better. A Way Forward The job for policymakers, like business leaders, is not getting any easier. There is an understandable tendency--amid an uncertain environment--to defer the tough decisions. But, we might find framing the policy choices--and confronting tough judgments--a prudent way forward. The most recent round of turmoil in financial markets caused many fiscal authorities around the world to reconsider whether they can spend their way to prosperity. Some are concluding that fiscal consolidation may be the better path to economic expansion. That spending cuts are key to establishing a credible path of fiscal sustainability. That channeling government funds from higher-yielding private-sector activities to lower-yielding public-sector activities undermines economic potential. That fine-tuning aggregate demand requires a precision that is difficult for governments to execute effectively. And, that market forces are often more certain than promised fiscal spending multipliers. Fiscal policymakers must wrestle with difficult questions of timing, external conditions, economic potential, and policy credibility. Ultimately, in my view, fiscal consolidation
413 happens either when policymakers choose the path, or it gets chosen for them. The former is preferred. The events in Europe remind us that the latter is likely if policymakers do not act in a timely way. What About the Conduct of Monetary Policy? The challenges for monetary policy are not dissimilar from those confronting the fiscal authorities. The allure of short-term gains must be balanced dispassionately against longer-term and potentially larger consequences. Last week, the FOMC announced that it would maintain the target range for the federal funds rate at 0 to 1/4 percent, and it continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Fed announced no changes in the size or composition of its balance sheet. However, the published minutes of recent FOMC meetings make clear that the Committee has been carefully considering critical aspects of its balance sheet policy. In my view, the Fed should pursue a deliberate, well-communicated strategy that clearly differentiates the path of the Fed's policy rate from the size and composition of its balance sheet. The Fed's policy tools should not be conflated or confused. One of the surviving features of the Fed's extraordinary actions is the breadth of tools at our disposal. They comprise a handy set, and should remind us that every problem is not a nail. And that we have more than the hammer in our toolkit. By considering, communicating, and, potentially, deploying our policy tools independent of one another, we have the best chance to achieve the Federal Reserve's dual objectives of price stability and maximum employment. I consider the Fed's policy rate--the federal funds rate--to be the dominant tool in the conduct of operations going forward. It is far and away the most powerful, its effects on the economy and financial markets most clearly understood, and it is the most effective in communicating our intentions. The Fed's balance sheet of $2.3 trillion--of which $1.6 trillion represents long-term Treasury securities, agency mortgage-backed securities, and agency debt acquired since late 2008-- should be considered, sized, and comprised independently of the policy rate. In my view, the macroeconomic effects of these extraordinary holdings are less significant, their effects on financial market conditions less clear, and the markets' understanding of our objectives less understood than our dominant tool. Still, if federal fiscal policy is approaching its political or economic limits, some believe that the Federal Reserve should do more, including expansion of its balance sheet. In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny. I would want to be convinced that the incremental macroeconomic benefits outweighed any costs owing to erosion of market functioning, perceptions of monetizing indebtedness, crowding-out of private buyers, or loss of central bank credibility. The Fed's institutional credibility is its most valuable asset, far more consequential to macroeconomic performance than its holdings of long-term Treasury securities or agency securities. That credibility could be meaningfully undermined if we were to take actions that were unlikely to yield clear and significant benefits. Indeed, the Federal Reserve should continue to give careful consideration to the appropriate size and composition of its existing holdings. Actual sales will not take place in the near term. But, depending on the evolution of the economy and financial markets, we should consider a gradual, prospective exit--communicated well-in-advance--from our portfolio of mortgage- backed securities. In making this judgment, we should continue to assess investor demand for
414 these assets. Ultimately, in my view, gradual, predictable asset sales by the Fed should facilitate improvements in mortgage finance and financial markets. Any sale of assets need not signal that policy rates are soon moving higher. Our policy tools can indeed be used independently. I would note that the Fed successfully communicated and demonstrated its ability to exit from most of its extraordinary liquidity facilities over late 2009 and early 2010, even as it continued its policy of extraordinary accommodation. Conclusion The United States is not Greece. We have the largest, most robust economy in the world. We have the deepest, most liquid financial markets. And the dollar is the world's reserve currency, bestowing key advantages upon us. But, none of this is our birthright. It must be earned, and re-earned. The events of the past several years underscore that unanticipated, nonlinear events can happen, even to the most well-intentioned policymakers in the strongest economies in the world. We ought not to be dismissive of the threats to our privileged position in the world. And we should take the necessary measures to ensure that our economy is strong over the long term.
1. The views expressed here are my own and not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee. Nellie Liang, Daniel Covitz,
William English, and Brian Madigan of the Board's staff contributed to these remarks. ReturnH to text H 2. Charles L. Schultze (1989), "Of Wolves, Termites, and Pussycats: Or, Why We Should
Worry about the Budget Deficit," Brookings Review, vol. 7 (Summer), pp. 26-33. ReturnH to text H
http://www.federalreserve.gov/neH wsevents/speech/warsh20100628a.htm H
415 - Credit Writedowns - http://www.creditwritedowns.com - Spinoza, Descartes and suspension of disbelief in the ivory tower of economics
Posted By EdwardU Harrison U On May 14, 2010 @ 10:34 am In EconomicsU U | Here’s something I want to run by you on behavioural economics and the way economic issues are being debated in the blogosphere. We are witnessing an implosion of long-held belief structures that go the core of how we believed our economic system functioned. You heard Alan Greenspan admit this after the financial system collapsed in his testimony in October 2008 before Congress: "Yes, I found a flaw," Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. "That is precisely the reason I was shocked because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well." Greenspan said he was "partially" wrong in opposing regulation of derivatives and acknowledged that financial institutions didn’t protect shareholders and investments as well as he expected.
-GreenspanH Concedes to `Flaw’ in His Market Ideology,H Bloomberg, 23 Oct 2008 [video below] The implosion of this neo-classical laissez-fair belief system of economics is a death about which we now grieve. Disbelief However, the grief is getting in the way of rational conversation. It goes to suspension of disbelief, cherished values, strongly-held beliefs and fear. I believe these are major issues in how accepting we are of new ideas — and consequently for why this particular financial crisis is so devastating. I have run into this problem on two specific occasions recently. Despite my Austrian economics sympathies, I recently posted some articles inspired by Modern Monetary Theory (MMT).
• MMT:H Hyperinflation in the USA H
• MMT:H Economics 101 on government budget deficits H Now, I don’t buy into some of what Modern Monetary Theory says about source of money’s value and the role of the state in monetary affairs. But I do very much appreciate MMT’s understanding of the mechanics of the fiat currency monetary system (a system I don’t fully support, by the way). So I have presented some MMT-based ideas from a neutral frame in order to demonstrate their applicability to the present financial crisis. Invariably, I run into a lot of spurious arguments by people who sound like they don’t understand the accounting. Or maybe they just feel threatened on some strange existential level – as if what I am writing threatens their core belief system. I think that is a lot of what is going on. So I am writing this post to explain how the human brain processes information. And then I will make a few remarks about how this applies to the present day situation. Suspension of disbelief The core of my argument will come from James Montier, now at the fund manager GMO. As a strategist at Dresdner Kleinwort Benson in 2005, he wrote a timeless piece on the debate between two
416 17th century philosophers RenéH Descartes H of France and BaruchH de Spinoza H of the Netherlands. Descartes was of the view that people process information for accuracy before filing it away in memory. Spinoza made the opposite claim, that people must suspend disbelief in order to process information. The two competing ideas were put to the test; and it appears that Spinoza was right about the need for naïve belief, something that has grave implications for investing, the subject of Montier’s essay. Here is a long excerpt of what Montier wrote. The article is available online via John Mauldin (the link is at the bottom). This is a fantastic look into how people process information. Sometime ago a client asked us to compile a list of myths that the markets seemed to hold dear. We came up with twelve potential myths ranging from stocks for the long run to dividends don’t matter via such topics as commodities for the future and bond supply matters. However, this exercise also made me wonder why it was that supposedly smart people ended up believing such strange things. This pondering sent me (as is usually the case) to the annals of psychology. To some extent these errant beliefs seem to stem from bounded awareness/inattentional blindness and framing. We have explored such elements before. However, there may well be another factor at work. We seem to be hard wired to ‘believe’. Daniel Gilbert, a professor of psychology at Harvard, has explored how we go about believing and understanding information. In a series of truly insightful papers Gilbert and co-authors have explored the belief process using two alternative philosophical viewpoints. Cartesian systems The first view is associated with the work of Rene Descartes. When it came to belief, Descartes suggested the mind performs two separate mental acts. First it understands the idea. Secondly, the mind assesses the validity of the idea that has been presented. This two stage process seems intuitively correct. After all, we can all imagine being presented with some novel idea, holding it in our minds and then pondering the truth or otherwise associated with the idea. The Cartesian approach fits well with folk psychology. Descartes was educated by Jesuits and like many 17th century philosophers generally deployed psychology and philosophy in the aid of theology. Like anyone of any sense Descartes was well aware that people were capable of believing things that weren’t true. In order to protect the Church, Descartes argued that God had given man the power to assess ideas. So it clearly wasn’t God’s fault when people believed things that weren’t true. As Gilbert (1993, op cit) notes, Descartes approach consisted of two axioms. Firstly, the mental separation and sequencing of understanding and believing and secondly, that people have no control over how or what they understand, but are totally free to believe or disbelieve ideas as they please. Spinozan systems Spinoza’s background and thinking could not be much more different than Descartes. Born a Jew, Barauch de Espinoza (later to become Benedict Spinoza) outraged his community and synagogue. The tensions finally resulted in Spinoza being excommunicated, accused of abominable heresies and monstrous deeds. The order of excommunication prohibited other members of the synagogue from having any contact with Spinoza. Freed of the need to conform to his past, Spinoza was able to explore anything he chose. One of the areas he turned his considerable mental prowess to was the faults contained in the Cartesian approach. Spinoza argued that all ideas were first represented as true and only later (with effort) evaluated for veracity. Effectively Spinoza denied the parsing that Descartes put at the heart of his two step approach.Spinoza argued that comprehension and belief were a single step. That is to say, in order for somebody to understand something, belief is a necessary precondition. Effectively all information or ideas are first accepted as true, and then only sometimes
417 evaluated as to their truth, once this process is completed a ‘corrected belief’ is constructed if necessary. Libraries Gilbert et al (1990, op cit) use the example of a library to draw out the differences between these two approaches. Imagine a library with several million volumes, of which only a few are works of fiction. The Cartesian approach to filing books would be to put a red tag on each volume of fiction and blue tag on each volume of non-fiction. Any new book that appeared in the library would be read, and then tagged as either fiction or nonfiction. Any book that is unread is simply present in the library until it is read. In contrast, a Spinozan library would work in a very different fashion. Under this approach a tag would be added to each volume of fiction but the non-fiction would be left unmarked. The ease of this system should be clear; it requires a lot less effort to run this system than the Cartesian approach. However, the risk is that if a new book arrives it will be seen as non- fiction. Gilbert et al note that under ideal conditions both systems produce the same outcome if allowed to run to conclusion. So if you pick up a copy of Darwin’s ‘The expression of emotions in man and animals’ and asked the Cartesian librarian what he knew about the book, he would glance at the tag and say non-fiction. The Spinozan librarian would do pretty much the same thing, concluding the book was non-fiction because of the absence of a tag. However, imagine sneaking a new book into the library, say the latest Patricia Cornwell thriller. If you took the book to the librarian and asked them what they knew about the book, their response would reveal a lot about the underlying process governing the library’s approach to filing. For instance, the Cartesian librarian would say "I don’t know what sort of book that is. Come back later when it has been read and tagged appropriately". The Spinozan librarian would glance up and see the absence of a tag and say "it doesn’t have a tag so it must be non-fiction" – an obviously incorrect assessment.
A testing structure The picture below taken from Gilbert (1993) shows the essential differences between the two approaches, and also suggests a clever way of testing which of the two approaches has more empirical support.
Say an idea is presented to the brain, and then the person considering the idea is interrupted in some fashion. Under a Cartesian system, the person is left merely with an understanding of a false idea, but no belief in it. However, if people are better described by a Spinozan approach then interrupting the process should lead to a belief in the false idea. So giving people ideas or
418 propositions and then interrupting them with another task should help to reveal whether people are Cartesian or Spinozan systems when it comes to beliefs. The empirical evidence It has long been known that distracting people can impact the belief they attach to arguments. For instance, in their 1994 review Petty et al report an experiment from 1976 which clearly demonstrated the impact of distraction techniques. To test the impact of distraction, students were exposed to a message arguing that tuition at their university should be cut in half. Students listened to the ideas which were presented over headphones. Some heard strong arguments, others heard relatively weak arguments. At the same time, the students were subjected to a distraction task which consisted of tracking the positions of Xs that were flashed on a screen in front of them. In the high distraction version of the task, the Xs flashed up at a fast pace, in the low distraction task the rate was reduced heavily. The results Petty et al found are shown in the chart below. When the message was weak, people who were highly distracted showed much more agreement with the message than did the people who only suffered mild distraction. When the message was strong and distraction was high, the students showed less agreement than when the message was strong and the distraction was low. Distraction did exactly what it was meant to do… prevented people from concentrating on the important issue.
Petty et al conclude "Distraction, then, is an especially useful technique when a person’s arguments are poor because even though people might be aware that some arguments were presented, they might be unaware that the arguments were not very compelling." Something to bear in mind at your next meeting with brokers perhaps? The next time an analyst comes around and starts showing you pictures of the next generation of mobile phones, just stop and think about the quality of their investment arguments. Is there more direct evidence of our minds housing a Spinozan system when it comes to belief? Gilbert et al (1990, op cit) decided to investigate. They asked people to help them with an experiment concerning language acquisition in a natural environment. Participants were shown ostensibly Hopi words with an explanation (such as a monishna is a bat). They had to wait until the experimenter told them whether the word they had been given was actually the correct word in Hopi or whether it was a false statement. Subjects also had to listen out for a specific sound which if they heard required them to press a button. The tone sounded very shortly after the participant had been told whether the statement was true or false. This was aimed at interrupting the natural processing of information. Once they responded to the tone, the next Hopi word appeared preventing them from going back and reconsidering the previous item.
419 When subjects were later asked about their beliefs, if they worked in a Spinozan way then people should recall false propositions as true more often after an interrupt than the rest of the time. As the chart below shows, this is exactly what Gilbert et al uncovered.
Interruption had no effect on the correction identification of a true proposition (55% when uninterrupted vs. 58% when interrupted). However, interruption did significantly reduce the correct identification of false propositions (55% when uninterrupted vs. 35% when interrupted). Similarly one could look at the number of true-false reversals (the right side of the chart above) When false propositions were uninterrupted, they were misidentified as true 21% of the time, which was roughly the same rate as true propositions were identified as false. However, when interrupted the situation changes, false propositions were identified as true some 33%, significantly higher than the number of true propositions were identified as false (17%). In another test Gilbert et al (1993, op cit) showed that this habit of needing to believe in order to understand could have some disturbing consequences. They set up a study in which participants read crime reports with the goal of sentencing the perpetrators to prison. The subjects were told some of the statements they would read would be false and would appear on screen as red text, the true statements would be in black text.
By design, the false statements in one case happened to exacerbate the crime in question; in the other case they attenuated the crimes. The statements were also shown crawling across the screen – much like the tickers and prices on bubble vision. Below the text was a second row of crawling numbers. Some of the subjects were asked to scan the second row for the number (5) and when they saw it, they were asked to press a button. At the end of experiment, subjects were asked to state what they thought represented a fair sentence for the crimes they had read about. The chart below shows that just like the previous
420 example, interruption significantly reduced the recognition of false statements (69% vs. 34%), and increased the recognition of false statements as being true (23% vs. 44%). The chart below shows the average recommended sentence depending on the degree of interruption. When the false statements were attenuating and processing was interrupted there wasn’t a huge difference in the recommended jail term. The interrupted sentences were around 4% lower than the uninterrupted ones. However, when the false statements were exacerbating and interruption occurred the recommended jail term was on average nearly 60% higher than in the uninterrupted case!
The reptilian response Edward Here. What Gilbert, Petty, and Montier have demonstrated is that human beings have to suspend disbelief to process information and make judgments based on that information. Unfortunately, distractions (think bread and circuses) can lead people to believe something is true when in fact it is not – with grave implications for investing. However, that’s not what happens with strongly-held beliefs at all. I remember talking to my mother about the Montier post, asking her about her own strongly held views on religion. Her answers were interesting because it demonstrated to me an unwillingness to even process information that ran counter to her most cherished and strongly-held beliefs. She admitted this interpretation was correct when we discussed it afterward. Remember what Montier said "in order for somebody to understand something, belief is a necessary precondition." The point was that she didn’t even process the information – such an existential threat it was to her. Human beings have a very clear view of self and this is strongly intertwined with a belief system which generates what we describe as core values. So, if you attack those core values, you are likely to get anH irrational and reptilian response.H There is no processing of information as I described in "ThroughH a glass darkly: the economy and confirmation bias in the econoblogosphere"H going on; the cognitive dissonance is too great. Instead what you get is fear and an irrational defence. This is what my mother described. The resolution of cognitive dissonance So the world view widely held in Anglo-Saxon economies that markets are self-regulating and self- equilibrating is under threat because of the dislocations of the last two years. However, this view is deeply entrenched, having built up over nearly three decades of history. It is now adhered to with almost religious fervour (see my thoughts on this in TheH year in review at Credit Writedowns –
Kleptocracy).H People are not going to relinquish the self-equilibrating/regulating view overnight and not without overwhelming evidence to the contrary; the cognitive dissonance would be too great. What this effectively means for me is that financial calamity and economic collapse are really the only way to dislodge this thinking. Maybe I’m wrong – and, in fact, the markets are self-regulating and self- equilibrating. Recent events suggest otherwise as does the frequency of what were viewed as similarly
421 improbable market disturbances. And maybe I’m wrong about suspension of disbelief. Perhaps, humans are resilient and can process information despite the existential threat it poses to their sense of self. I sure hope I am wrong for the sake of the economy. Source
ScepticismH is rare, or, Descartes vs. Spinoza H – Investor Insight After reading this article, people also read:
• TheH future of economics as posited by Richard Thaler H
• OnH Why The Doomsayers Are Wrong And Other Links H
• Rosenberg:H Fundamental Trendline Is Still Down H
• TheH year in review at Credit Writedowns – Kleptocracy H
• MMT:H Economics 101 on government budget deficits
Related posts
• AH few thoughts on the difference between blogs and news H
• CarolineH Baum: Bernanke’s defense of easy money is ivory tower nonsense H
• WillH the iPad be a success? H
• TheH future of economics as posited by Richard Thaler H
• DemographicsH and the Macroeconomic Environment H
Article printed from Credit Writedowns: http://www.creditwritedowns.com
URL to article: http://www.creditwritedowns.com/2010/05/spinoza-descartes-and-suspension-of-H disbelief-in-the-ivory-tower-of-economics.html H
422 - Credit Writedowns - http://www.creditwritedowns.com - The year in review at Credit Writedowns – Kleptocracy
Posted By EdwardU Harrison U On December 23, 2009 @ 12:30 pm In RetrospectiveU U | 24H Comments Yesterday, I indicated I would write a few thematic posts as a look back at some of the more important economic topics that this credit crisis has uncovered. Tying posts together in a theme definitely gives a better holistic view of a the themes than the posts do in isolation. But I also enjoy writing this because the review process gives me a better perspective of where we have come from and helps judge where we are headed. Yesterday, I wrote about economic stimulus. My conclusion was that while stimulus may have helped avert crisis, the process made clear that crony capitalism is alive and well. So, the second topic I wanted to address today was crony capitalism. However, in writing this post, the lead in describing kleptocracy became so long that I decided to cut this into two bits; this first one is on kleptocracy and a later one will be on crony capitalism.
The first post I wrote related to kleptocracy was in March of 2008 called “AH populist interpretation of the latest Boom-Bust cycle.”H At the time, I wasn’t really blogging very seriously. I had just started two weeks earlier and wanted to flesh out some ideas that I had long considered germane to the understanding of the credit crisis. But, in retrospect, the thesis I developed in this post has become central to my thinking about how the American and global economy have evolved in the fiat currency era. Kleptocracy defined as the status quo The thesis was this: [Jared] Diamond postulates that more stratified societies are by definition less egalitarian, but more efficient and are, thus, able to eradicate or conquer more egalitarian, less stratified societies. Thus, all ‘advanced’ societies with high levels of GDP are complex and hierarchical. The problem is: these more stratified, more complex societies are in essence
KleptocraciesH ,H where those in power re-distribute societal wealth to themselves. Those at the bottom of the society’s pyramid accept this unequal, non-egalitarian state of affairs because they too benefit from their society’s relative advancement. It’s a case of a rising tide lifting all boats. In short, the playing field in all modern day nation states is by definition unequal. The question is whether this should be tolerated, mitigated or eliminated. An unwritten assumption I made when I wrote the post is that humans are genetically programmed for fairness. My understanding is that scientific studies have convincingly demonstrated that human beings will actually consciously disadvantage themselves to seek revenge as a means of restoring justice and fairness. This would suggest that a major flaw in neoclassical economic models, especially as regards a self-equilibrating economy, is the focus on rational expectations and efficiency at the expense or fairness and/or irrationality. A neoclassical economist might tell you that a rising tide lifts all boats and it is rational self-protection for economic agents (aka real human beings) to accept inequality for this very reason. But, in the real world, fairness and justice are important
423 as well. And when an economic system is deemed unfair, people will go so far as to hurt themselves economically in order to level the playing field. Stability of status quo leads to overreach and instability So, my thinking is this: because of the natural state of inequality endogenous to any stratified society, over time the natural tendency of any ruling elite is to deploy the state’s coercive power for greater and greater self-benefit. I liken this to HymanH Minsky’s instability of economic stability H theorem. The stability of power leads to overreach and overthrow. This is a view largely consistent with Paul Kennedy’s themes of imperial overstretch in his book TheH
Rise and Fall of the Great Powers.H In the post I expressed these sentiments saying: Diamond says the Kleptocrats maintain power using 4 different methods: “1. Disarm the populace, and arm the elite.” “2. Make the masses happy by redistributing much of the tribute received, in popular ways.” “3. Use the monopoly of force to promote happiness, by maintaining public order and curbing violence. This is potentially a big and underappreciated advantage of centralized societies over noncentralized ones.” “4. The remaining way for kleptocrats to gain public support is to construct an ideology or religion justifying kleptocracy.” Kleptocracy in America?
The obvious corollary of this theory is that most successfulH modern societies
are,H in fact, kleptocracies. The key is to use the four methods to gain popular support in order to re-distribute as much wealth to the ruling class as the populace will support. If the ruling class takes too much, it will be overthrown and replaced by a new ruling class (which in turn will re-distribute wealth to itself using the same four methods). How the status quo maintains the status quo Let me take these points one by one. I will preface this by saying that, as the stability of the economic status quo disintegrates into instability via economic depression, you should expect the ruling elite to step up uses of these methods of retaining power. So when I wrote in my
Depression piece about “Hmore muscular forms of government,”H this is part of what I was referring to. As Libertarians see it, the right to bear arms is an essential in stopping the elite from maintaining power unjustifiably. Obviously, which arms, when they can be borne and how is a constitutional issue that goes to the heart of American democracy. The second issue is about “bread and circuses” or what I call the anesthetizing of the populace as ironically demonstrated in this Star Trek “BreadH and Circuses”H from TV, our own modern- day agent of mental anesthesia. The third issue is about totalitarianism. Civil libertarians like myself see the permanent war state as promulgated by the Bush administration post 9/11 – and now maintained by the Obama Administration – as a clear sign that the state’s use of the monopoly of force to promote order is rising and will continue to do so. Eisenhower’sH military industrial state
424 warnings H were warranted. You can see some of the articles on that very topic hereH in my bookmarks.H And you should note Obama’sH H poorH H recordH H on civilH H libertiesH .H The last (and perhaps most important) issue, in my view, has to do with the unabiding faith in free markets that many now have. It is with religious zeal that these so-called Libertarians defend the primacy of markets over all else when in reality common sense would tell you that those with the greatest influence and money will always be at an advantage without some check on that influence and power. How ideology is central to retaining the status quo ante I think this last point is important. Think of how Diamond phrased this: The remaining way for kleptocrats to gain public support is to construct an ideology or religion justifying kleptocracy. The important thing to realize here is that ideology is a tool used to control the masses while those in power re-distribute to themselves. Diamond was probably talking here about ancient societies: the Mayans, Incas, the Greeks, the Romans, Easter Island. But, it does apply quite well to the modern-day. After all, in the U.S.H average hourly earnings peaked more than 35 years ago.H And we can see that most of the economic gains of the last two decades has been an illusionH masked by gobs of debt.H But freshwater economists have this view that the economy is always self-equilibrating and this means government must be held at bay any- and everywhere lest it reduce the efficiency of the free market. This is an extreme ideological position which gained sway inH the aftermath of the disaster of the 1970s.H Fed Chairman AlanH Greenspan was an adherent of this ideology H despite holding a central planning position as Federal Reserve Chairman which was antithetical to the views he espoused. Markets are wonderful. A largely market-based economy is certainly more ‘efficient’ than a non-market based one (ask the Soviets). But, markets are not self-regulating. They fail – and catastrophically so. But no manner of real world experience seems to shake ideologues’ free- market zeal. To give you an example of the mindset, Alan Greenspan is reported to have thought that markets could even self-regulate fraud – no regulatory oversight necessary.
See the video in FrontlineH – The Warning: Who Knew About the Looming Financial Crisis H for this particular revelation and Ms.H Watkins, why does Charlie have lit dynamite? H for why this is absurd. Even when you think Greenspan has learned something, he proves time and again that heH just doesn’t get it.H And don’t think he is alone in officialdom. Former Fed official FredericH
Mishkin has shown he doesn’t get it either.H Not only is the freshwater view of rational economic agents and efficiency completely ignorant of the role of fairness, it also disregards the very real tendency for power to consolidate over time and to lead to crony capitalism. This is what I refer to as “deregulationH as crony capitalism.”H I see it as central to the causes of the crisis. I will pick up on this theme in a later post. Next up on my year in review is a post on crony capitalism in action and how the credit crisis solutions reveal that the ruling elite want to return to the status quo ante. Overreach has been the order of the day and will ultimately invite an opposing response. After reading this article, people also read:
• JamesH Galbraith: How financial stability creates instability H
• AH populist interpretation of the latest Boom-Bust cycle H
425 • ChartsH of the day: US macro disequilibria H
• Ms.H Watkins, why does Charlie have lit dynamite? H
• TheH recession is over but the depression has just begun Related posts
• TheH year in review at Credit Writedowns: Crisis Solutions H
• TheH year in review at Credit Writedowns – Stimulus H
• AH more in-depth description of how elites maintain status quo ante H
• TheH year in review at Credit Writedowns – Crony Capitalism H
• DefinitionH of terms H
http://www.creditwritedowns.com/2009/12/thH e-year-in-review-at-credit-writedowns- kleptocracy.html H
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