SECRETARIA DE ESTADO DE ECONOMIA Y APOYO A LA EMPRESA MINISTERIO DE ECONOMÍA Y DIRECCION GENERAL DE POLÍTICA ECONOMICA COMPETITIVIDAD '$' UNIDAD DE APOYO CUADERNO DE DOCUMENTACION Número 102.2 ANEXO V Alvaro Espina 17 Septiembre de 2014 Entre el 12 de junio y el 1 de julio ft.com comment Columnists July 1, 2014 6:59 pm Bad advice from Basel’s Jeremiah By Martin Wolf The Bank for International Settlements’ proposals for post-crisis policy have serious flaws ©Ingram Pinn I admire the Bank for International Settlements. It takes courage to accuse its owners – the world’s main central banks – of incompetence. Yet this is what it has done, most recently in its latest annual report. It would be easy to dismiss this as the rantings of a prophet of doom. That would be a mistake. Whether or not one agrees with its pre- 1930s view of macroeconomic policy, the BIS raises big questions. Contrariness adds value. One can divide the BIS analysis into three parts: what caused the crisis; where we are now on the way out of it; and what we should do. More ON THIS STORY// Central banks urged to end loose policy/ BIS warns over ‘euphoric’ markets/ Business Blog Financial herd flees investment banking/ Bank of England Crashing the party/ Markets Insight Don’t bank on a comfortable rate ride ON THIS TOPIC// Forward guidance could ‘encourage risk’/ BIS warns over loose lending conditions/ On Monday Red flags wave over Asian corporate debt/ Trading in yen soars on ‘Abenomics’ drive MARTIN WOLF// No cause for complacency/ Defend Argentina from vultures/ Effects of climate fix/ UK has to be in or out of EU On the first, the perspective is that of the “financial cycle”. This analysis goes back to the work of the great Swedish economist Knut Wicksell at the turn of the 20th century. The core idea is that if the rate of interest is too low, a boom driven by expanding credit and rising asset prices may ensue. One of the crucial (and correct) implications is that credit and money are endogenous: they are created by the economy. When the financial cycle turns from boom to bust, crises erupt. Then follow the “balance sheet recessions” described by Richard Koo of the Nomura Research Institute – painful deleveraging and extended periods of feeble growth. Such cycles, argues the BIS, “tend to play out over 15 to 20 years on average”. To give credit where it is due, the BIS gave such warnings well before the crisis hit the high-income countries from 2007. On the second, the BIS notes that growth has picked up over the past year, with advanced economies gaining momentum, while emerging economies lose it. Nevertheless, recovery has been slow and weak in crisis-hit countries. While global growth is not far from rates seen in the 2000s, the shortfall in the path of gross domestic product persists. Meanwhile, overall indebtedness continues to rise. Crises, we are reminded, cast a long shadow. Furthermore, the policies of central banks are exerting extraordinary influence on financial markets, generating a “search for yield”, a disappearance of pricing for risk and a collapse in market volatility. This is true even though balance sheets remain so stretched. Meanwhile, credit excesses have emerged in a number of emerging economies. The BIS is particularly concerned about new sources of vulnerability in the latter, including foreign borrowing by non-financial corporates. Overall, concludes the BIS wryly, “it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments”. (See charts.) 2 It is on the third point – what is to be done – that the BIS turns into a prophet from the Old Testament: it demands austerity now. In countries that have experienced a financial crisis it recommends balance sheet repair and structural reform – deregulation, improved labour flexibility and “trimming public sector bloat”. It demands fiscal retrenchment. But unlike, say, George Osborne, the UK chancellor of the exchequer, the BIS wants to see monetary stimulus withdrawn, too, emphasising the risks of “exiting too late and too gradually”. It plays down both risks and costs of deflation, despite the huge overhang of debt that it also stresses. Even Jens Weidmann, the Bundesbank president, does not do that. Being more hawkish than the Bundesbank is quite something. Meanwhile, in countries that have experienced financial booms (the report points to Brazil, China and Turkey), it recommends pre-emptive monetary tightening and imposition of macroprudential restraints. To me, then, this is a blend of the wise, the foolish and the doubtful. Start with the doubtful. The BIS is right to emphasise the enormous costs of credit- driven booms. But it ignores the context in which policy makers allowed these to occur. In particular, it ignores the evidence of a global savings glut shown in low pre-crisis long-term real interest rates and huge net flows of capital from countries with good investment opportunities to countries with far worse ones. Similarly, it ignores the impact of adverse shifts in the distribution of income and in business behaviour on propensities to save and invest. Again, the BIS insists that losses in output relative to trend are inevitable. There is no doubt that most crises end up with huge long-term losses. But, by the 1950s, the US had recovered fully from the gigantic losses relative to the pre-1929 trend in GDP per head caused by the biggest crisis of all: the Great Depression (see chart). Is this not because, unlike in the pusillanimous present, the US subsequently experienced the biggest fiscal stimulus ever – the second world war? I can imagine how the BIS would have warned against such fiscal irresponsibility. Turn, now, to the wise. First, the BIS is right to add to warnings over credit booms. Their joy is fleeting and the hangover agonising. This is particularly true for countries unable to borrow easily in their own currencies or without large holdings of foreign exchange reserves. Pre-emptive action is indeed required. Second, the BIS is right to emphasise the case for accelerating post-crisis recognition of bad debt and reconstruction of balance sheets of both borrowers and intermediaries. This process of deleveraging is nearly always too slow. Professors Atif Mian and Amir Sufi, of 3 Princeton and Chicago universities respectively, make much of this argument in their important book, House of Debt. Unfortunately, it is also politically difficult to make this process work. Finally, consider the foolish. There is indeed an important argument to be had over the right balance to strike between fiscal and monetary reactions to financial crises. I believe we have relied too much on monetary policy, which does carry with it many of the risks the BIS rightly emphasises. But the notion that the best way to handle a crisis triggered by overleveraged balance sheets is to withdraw support for demand and even embrace outright deflation seems grotesque. The result, inevitably, would be even faster rises in real indebtedness and so yet bigger waves of bankruptcy that would lead to weaker economies and so to further increases in indebtedness. The reasons for abandoning the pre-Keynesian consensus were powerful, whatever the BIS (and many others) may think. The BIS is entitled to warn. Central banks should listen to it politely. But they must reject important parts of what it advises. http://www.ft.com/intl/cms/s/0/bf235058-00fc-11e4-a938- 00144feab7de.html#axzz36IQHvNpV 4 ft.com comment Columnists July 1, 2014 6:30 pm A British identity crisis has hobbled the No campaign By John Kay The real question is whether Scots also feel loyal to the UK ©Getty The referendum on Scottish independence is now only two months away. Opinion polls have never shown a majority of the Scottish population ready to vote for secession. And most experience around the world of referendums on constitutional issues is that as the vote approaches, the electorate moves towards the status quo. But such a nervous reversion to the familiar has not happened in Scotland. If anything, support for independence has stabilised at about 40 per cent. The outcome will therefore depend on how reliably expressions of intention are translated into votes on the day. There is a possibility, although not a very strong one, of a Yes result for which no one either in London or in Scotland is really prepared. More ON THIS STORY// Scotland Yes camp losing battle, poll finds/ Tax take from oil and gas at decade low/ Forces do battle with tradition at Stirling/ Comment A secessionist lust/ Academic costs Scots Yes at £600m-£1.5bn ON THIS TOPIC// Scots scrap council tenants’ Right to Buy/ China premier opposes Scottish Yes vote/ Notebook Has Salmond already won?/ Gideon Rachman Political donations JOHN KAY// The NHS might not keep us alive/ Fine art and finance/ How to curb moral hazard/ No banking crises in Canada Although that is just an outside chance, it is now probable that the vote for independence will be large enough to keep the issue alive. John Curtice, the Scotland- based doyen of pollsters, offers an important insight into why matters stand as they are. The key to voters’ preference, he explains, is not whether they feel a strong sense of Scottish identity; the overwhelming majority of Scots do. The question is whether they also feel a strong sense of British identity. In that lies the source of the failure of the No campaign to make greater headway. Its tone has been predominantly negative. Gordon Brown, the former prime minister, has warned his fellow Scots to ponder the future of their pensions.