Summary:
Philip Stevens argues that once the financial storm has settled, politicians will need to consider what the crisis tells us about the nature of the world we live in. One thing it revealed is that governments have been left with responsibility without power. The grip of individual states on the levers of economic management decisively weakened, but the loss of control has not been matched by any corresponding diminution of responsibility. Tensions like this, resulting from globalization, are not restricted to just the economy. Voters want the ease of movement across national borders that comes with cheap travel, but they also want governments to control immigration and cross-border crime. They want to buy cheap electronics from China, but they blame politicians when global supply chains threaten job security at home. If the politicians want the liberal market system to work, they will have to make multilateralism work. We need global governance, and a set of credible international rules. (Published: 18/09/08)
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Friday, September 19, 2008
Why global capitalism needs global rules - FT.com
Thursday, September 18, 2008
Roubini Misses the Boat on Regulation - Mish's blog
Summary:
Mike Shedlock argues that the cause of the financial crisis is not lack of regulation, as argued by by Roubini et al., but government intervention in free markets and fractional reserve banking. Government promoted an ownership society mentality and established HUD, FHA, Fannie, Freddie, and hundreds of affordable housing programs. But government promotion of housing put an artificial bid on housing that a free market never would have, raising the price of housing. In addition, the simple reason Moody's, Fitch, and the S&P do such a miserably poor job is government sponsorship. If Moody's, Fitch, and the S&P had to survive based on how good their ratings were instead of a model where the SEC says they have to rate everything, the problem with rating agencies would be cleared up overnight. The Fed is part of the problem too. The creation of the Fed was a blatant intrusion on the free market in the first place, but the Greenspan Fed's allowance of sweeps was economically equivalent to reducing the reserve-requirement ratio to zero for banks with sweep programs. Ultimately, the problems can be blamed on fractional reserve lending and the ability to create money (credit really) at will by borrowing it into existence. (Published: 10/09/08)
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Saturday, September 13, 2008
Dangerous Economic Territory - The Globalist
Summary:
David Smick ("The World is Curved") thinks that the politicization of globalization is putting a quarter of century of amazing prosperity and global poverty reduction at risk, potentially sending the US back to Seventies-like period of economic devastation. Globalization, free trade and liberalized financial markets have been a bipartisan success story (Reagan and Clinton). Was a tool to break away from the economically suffocating 70s. But this period of political consensus is at risk of coming to an end. Part of the financial market turbulence, and dollar weakness, in recent times stems not only from subprime-related credit uncertainties, but also from uncertainties about the direction of U.S. politics. Growing belief that the financial world, politically speaking, has entered uncharted political waters. Today’s voters look at globalization’s downsides with not enough appreciation of its tremendous upsides, and the political community is at risk of creating the conditions for a global financial disaster. Urgent need to expand the base of financial capital ownership and reduced the wealth gap. (Published: 09/09/08)
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Ownership vs markets - Stumbling and Mumbling
Summary:
Chris Dillow argues that the traditional capitalist ownership structure is responsible for the credit crunch, not free markets as others have argued. Banks lost money on mortgage derivatives because of principal-agent failings, i.e. bosses (principals) don't know what the traders (agents) are doing. Traders have an incentive to take risk: life-changing bonus; gains exceeds benefits of prudence. Also, little pressure upon banks' executives to be prudent because when shareholding is dispersed, no individual shareholder has much incentive to rein in management. There has been more "bad" financial innovation that good ones. With good financial innovation it is very difficult for anyone to own its beneficial effects, it's a public good. Gains from “bad” financial innovation are more appropriable, hence we get more of it. Finally, banks' reluctance to lend to each other stems from the inability of management of such complex organisations to know everything. Banks should become more like venture capitalists, i.e. using an internal market, allocating capital to semi-independent divisions, which put in their own capital. (Published: 12/09/08)
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Friday, September 12, 2008
Falling Down - The New Republic
Summary:
Jospeh Stiglitz blames the current crisis are the financial system's latest innovations, fee structures that were often far from transparent. Imperfections of information (resulting from the non-transparency) led to imperfections in competition. Allowed banks to generate enormous profits and private rewards that were not commensurate with social benefits. Worst problems (e.g. subprime mortgage market) occurred when non-transparent fee structures interacted with incentives for excessive risk-taking. Too much effort has been devoted to increasing profits, creating financial products that enhanced risk, and not enough to increasing real wealth. Financial markets frequently fail to do what they are supposed to do in allocating capital and managing risk. Painful lesson from the 1930s and today is that the invisible hand often seems invisible because it's not there. (Published: 10/09/08)
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Thursday, September 11, 2008
Is there an exit strategy? - The Guardian
Summary:
Kenneth Rogoff argues that weak banks must be allowed to fail or merge (with ordinary depositors being paid off by government insurance funds), so that strong banks can emerge with renewed vigour. Efforts to block a healthy and normal dynamic will ultimately only prolong and exacerbate the problem. Number of central banks currently very exposed. Have to ways of dealing with hits to their balance sheet: through inflation, or recapitalisation by taxpayers. Both solutions are extremely traumatic. Fairness issue: why should ordinary taxpayers foot the bill to bail out the financial industry? Poorest will be hardest hit by inflation tax. More regulation is necessary but is not the whole answer. Today's financial firm equity and bond holders must bear the main cost, or there is little hope they will behave more responsibly in the future. (Published: 08/09/08)
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Monday, September 8, 2008
All in this together? - FT.com
Summary:
Overview of the economic situation and outlook for the UK, Eurozone, US and Japan. The global slowdown is the result a of a number of simultaneous shocks (the commodities shock, the housing shock and the credit shock) that have hit countries in different ways. In the US the focus is on the credit crunch, and the economy has proved resilient in the face of the commodities and housing shocks, whereas the UK and the Eurozone appear more affected by the commodities shock. The UK appears particularly vulnerable, with utility price rises feeding through fast. The ECB is mainly concerned about sticky prices and inflation. The US may be experiencing a Road Runner moment, and plummet as of yet. Doubts as to whether the credit crunch or the commodities shocks dominates the slowdown. Different outcomes depending on the true cause. (Published: 07/08/08)
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Sunday, September 7, 2008
Greenspan: Housing Stabilization Key to Crisis End - WSJ
Summary:
Greenspan: A necessary condition for an end to the current global financial crisis is the stabilization of the price of homes in the U.S. Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities. We won’t really know the market value of the asset side of the banking system’s balance sheet — and hence banks’ capital — until then. Public policy can hasten this process by not prematurely propping up housing starts and by expanding the underlying demand for homes generally. The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants. Skilled immigrants tend to form new households, by far the most important source of new home demand. (Published: 13/08/08)
Credit Crisis 'Only Now Beginning' - Bloomberg
Summary:
David Goldman, a portfolio strategist at Asteri Capital, talks about the outlook for the U.S. financial-services industry, the impact of the hedge-fund model on market volatility and his investment advice. This is not a mere recession, it's a change in the lives of Americans. We're still in the credit bubble, because of contractual obligations the banks have. The credit crunch hasn't started yet, merely a mild indisposition so far. The credit crunch is what comes next, and it will be brutal. The hedge fund business is very vulnerable. All in the same trade all the time and every turn is like a stampede out of a crowded theater. Only the big funds that have a lock on capital may do well. If you marked everyone to market now, the banks would be in very bad shape, many insolvent. Isn't going to happen and banks will try to generate enough earnings in order to bring in the capital back while they pretend that they're still solvent. But losses from consumer lending may pile up faster. We may have a deflationary outcome, destroying huge amounts of wealth in the form of homes and equities and companies is in principle inflationary. (Published: 14/08/08)
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Globalisation and the costs of international trade from 1870 to the present - Vox EU
Summary:
Many analysts suggest that rising oil prices will sharply reduce international trade. This paper argues to the contrary, noting that transport costs constitute a limited share of trade costs (about 1/3rd). Instead of transportation costs, the biggest reversal of international trade in recent history is linked to large increases in protectionist measures. Moreover, evidence from the first wave of globalisation suggests that higher shipping costs are unlikely to significantly dampen international commerce – only protectionism would seriously threaten trade. Compared with historical patterns, the level of bilateral trade costs is still high for many country pairs, especially for those that are far away from each other. This means that there is scope for trade costs to fall further. Unless there is a backlash in the form of rising protectionism, world trade has the potential to keep growing strongly over the coming decades. (Published: 16/08/08)
Back to bust? High technology on course for harder times - FT.com
Summary:
The IT industry may be about to face its toughest period since the dotcom bust due to the slowdown in the economy. Corporate demand, the IT industry's main source of prosperity, will fall significantly. Instability in the financial markets, declining new hires and weakening corporate profits will result in a lowering of capital expenditure and a premium being placed on operational efficiency. This is likely to play out over the next 9 months, with tech stock, already down 19% over the last 12 months, to fall further. Other recent trends that will compound the impact of the economic slowdown are the increase in choice leading to price deflation; the rise of software as a service and virtualisation. Consumer spending and spending on advertising, an important source of revenues for many Web 2.0 startups are also in decline. The downturn, however, may be less painful than the dotcom crash. There is less overcapacity in the industry, and increasing demand from the emerging world for IT services is compensating for the slowdown in the US and UK. (Published: 14/08/08)
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Saturday, September 6, 2008
Quote of the Day
"This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down. Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation. It is the most complicated financial crisis I have ever experienced, and I have experienced a few... Changes are going to have to be made to the global financial system." - Paul Volcker
Thursday, September 4, 2008
Globalisation as the great unbundling(s): What should governments do? - Vox EU
Summary:
Richard Baldwin describes the evolution of globalization in terms of stages in an unbundling process. The first and second industrial revolutions let to a spatial unbundling of factories and consumers. The social consequence were dire. Governments reacted by partially unbundling income and consumption. In the late part of the 20th century, as a result of ever-lower transport and labour costs, the factories themselves became unbundled as supply chains were internationalized. This caused relatively few problems as the manufacturing sector was greatly reduced by then. Around the start of the 21st century, the resolution of globalization increased further, as offices came to be unbundled next. Various service components are now being outsourced and offshored. This radically widens the circle of affected workers. The three key characteristics of this new wave of globalization are the unpredictability of its consequences; the suddenness with which it can affect jobs; and its greater resolution, acting on the level of individuals, rather than firms, sectors or skill groups. As was the case with the first unbundling phase, this latest wave of globalization will require a revamp of education policies, welfare states, and labour organisations. (Published: 04/09/08)
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Wednesday, September 3, 2008
Sterling takes a royal pounding - FT.com
Summary:
In the UK, high borrowing costs, a painful housing market correction and losses in the financial sector mean most of the UK's assets have been dramatically revalued down. Sterling has suffered as a result. However, was overvalued. Sterling s likely to fall further in the long run, as the North Sea fields wind down and the UK imports more oil and gas. Questionable government schemes have reduced confidence in the pound. Bank of England, needs to worry about weaker pound, not government. The MPC must now contend with rising import costs. Weakness of sterling means the Bank will need tighter monetary policy than would otherwise be necessary to bring inflation back down to the target of 2 per cent from its August level of 4.4 per cent. (Published: 03/09/08)
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China's next gold - FT.com
Summary:
China's rise as a manufacturing powerhouse should be no cause for hysteria. Above all, it is a story of human progress: millions of Chinese are being lifted out of poverty each year by the country's rapid economic growth. Furthermore, consumers in developed countries benefit from the "China price". Competition from China may lead to job losses, but so can competition from across the street or new technology. This merely reinforces the need for the governments of rich countries to help workers who have lost their jobs, just as they should also be providing business-friendly regulations and infrastructure, and an excellent education system. Bankruptcies and job losses are part of the incessant process of economic change. The developed world needs to continue to increase the quality and sophistication of its manufactured products. The true challenge posed by China as the workshop of the world is likely to be environmental: by buying so many products from China, we have moved greenhouse gas emissions to a place where they will not be curbed by the schemes of western regulators, and where they make a wonderful excuse for western inaction. China must be persuaded to play its part in global efforts to cut emissions. (Published: 12/08/08)
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Quote of the Day
“Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works”. - John Stuart Mill
Globalization: Where to from here? - Rogue Economist Rants
Summary:
Rogue Economist argues that global inflation is the result of the type of globalization that we witnessed in the past three decades, a very different from kind of globalization from what we have seen in previous periods in history. Whereas before, globalization was really nothing more than global trade among nations, in the last 30 years it also involved the outsourcing of businesses activities, from manufacturing to back-end processes. Initially this led to increased productivity for the developed nations: increased profitability for the firms, and lower prices for consumers. Newly created wealth looking for investments led to bubbles such as the sub-prime crisis. More recently, the outsourcing of back-end process led to higher pay for workers in developing countries, creating demand for the same goods (previously unaffordable). Governments started to invest trade surplusses in much needed infrastructure projects. Both the increased demand and the increased number of infrastructure projects led to globally inflationary prices. Developed countries have become consumerist economies, where outsourcing has led to stagnant wages for many. So far that has been mitigated by lower prices of goods. (Published: 20/08/08)
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