Monday, August 31, 2009

Germany Needs Tax and Spending Cuts: Solms

The potential new Minister of Finance in the future German coalition, after the September 27 elections, has some interesting economic policy views to propose, as reported in The Daily Capitalist blog here .

A major reform to be confirmed if he is elected, and an example for other European countries to follow.

Saturday, August 29, 2009

Concentration in US Banking

According to The Washington Post (Friday, August 28) since federal regulators pumped tens of billions of dollars into the leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system, the biggest of those banks have grown even bigger.

J.P.Morgan Chase now holds more than 10 percent of the country’s deposits, as does Bank of America (partly government-owned as a result of the crisis) and Wells Fargo.

Those three banks, plus government-rescued and –owned Citigroup, now issue one of every two mortgages and about two of every three credit cards.
As a result, depositors are seeing fewer choices and higher prices for financial services. “The oligopoly has tightened” comments Mark Zandi, chief economist of Moody’s, even though the concentration ratios are much higher in other countries’ banking sectors added Treasury Secretary Timothy F. Geithner in an interview.

Another unhappy consequence is that “moral hazard”, the accrued incentive for these larger banks to return to the risky behavior that led to the crisis if they figure federal officials will rescue them again, is increased too.

The question now is: will this regulatory-induced concentration lead to a reduction of the sector’s excess capacity, one of the main causes of the crisis? (more on that on a future post). Since letting the capacity reduction operate through bank failure was obviously too dangerous, the chosen alternative way to do it is by merging big firms first, and then let the managers reduce the capacity of the merged institutions, thus avoiding to jeopardize their survival.

But managers do not like to do that as Michael Jensen (emeritus Harvard Business School) often emphasized: internal control systems often fail. It is to be seen if some pressure from the legal-political-regulatory system will succeed in reining in banking excess capacity.

Thursday, August 27, 2009

Which Path for Stocks : 1973 or 1929 ?

The above chart of four bad bear markets is informative … to a point. What’s next? A continuing rebound similar to the post oil crisis one, or another downtrend followed by stagnation after an initial rebound, à la 1929? Or else still, an in-between path? Read the analysis in the Online Stock Trading Guide here . And also have a look at their “1930 Stock Chart”.

Monday, August 24, 2009

US Green shoots … and doubts

Menzie Chinn posted this graph of current forecasts of US monthly Gdp (above) on his blog Econobrowser (August 19), under the title “Stabilization and Upswing … for Now”.

Among comments on his post I found this one interesting:

"Wow, even you guys are finally seeing the green shoots. Although the stock market has already ran up 50%."

But that one is more informative:

“Stock markets are a bad indicator for the status of the economy, since perception in the markets and reality can diverge to a large degree, and this for a long time.
As for economic recovery. Massive stimulus spending by governments has to show up somewhere. Thus, no surprise here, when there is one or more quarters of GDP-growth. The more important question is, whether this is the start of a new self-sustaining cycle of capital accumulation. I have big doubts here, since I don't see that any of the pre-conditions, the disproportions that led to the global recession have been really eliminated from the system. The world is still sitting on a mountain of debt. The total debt in the US-markets (private, companies, and government debt all together) to US GDP ratio was at about 375% as of Q1 2009, far higher than the debt bubble before and during the Great Depression, which deflated back then.
50 trillion US-dollars of debt and assuming 5% average interest rate means 2.5 trillion US-dollars a year alone to pay off interest, which has to be paid from generated income, if you don't want to deplete the capital stock. To generate a nominal income of 2.5 trillion in an 14 trillion US-dollar economy, the nominal GDP would have to rise by almost 18% a year, just to maintain the nominal debt level. In reality, it would be even more, of course, since the debt isn't equally distributed. The society is split in net creditors and net debtors. The 2.5 trillion interest payment would have to come from the income of the net debtors, which is smaller than the total income in society.
If this biggest debt bubble maybe in history bursts, and I don't really see how a deflation of this debt could be prevented forever, despite all efforts by governments globally, then, I am afraid, the global recession we have seen so far is nothing compared to what could be coming.
Posted by: rootless cosmopolitan at August 20, 2009 07:59 AM “.

Maybe economists are too pessimistic, really …

Friday, August 21, 2009

The Microchip Undermines European Centralization

Readers of The Second XXth Century: How the Information Revolution Shapes Business, States and Nations (Hoover Press 2006, Grasset 2000) know that already, but now David Howell, former UK Secretary of State for Energy, warns that the Information Age is also robbing governments of their age-old monopoly of foreign policymaking. And of their other monopolies too I would like to add.

Despite its still substantial share of world production and its military spending vastly greater than that of the rest of the world put together, the US influence is on the wane. Pax Americana is today as much of history as Pax Britannica. The reason lies in one word – the microchip. “Size no longer equates with power. (…) The miniaturization of weaponry, combined with the communications revolution, has given birth to an irreversible asymmetry of warfare and violence. The power to organise, to coerce and to strike has been placed in the hands of a horde of non-state players and activists, both good and bad. (…) This power is in the reach of the smallest extremist group and the most rogue-inclined rulers.”

“Suddenly, it is no longer a question of Western dominance and who between Europe and America calls the shots. The answer is neither. (…) In this international scene of extraordinary fluidity and uncertainty, the EU cannot afford the stilted rigidity of direction which treaty procedures and formalities of hierarchy impose.”

This clearly spells the end of the centralist project. Some European countries can act effectively on specific issues, but not on everything, and not all together. A united (read “monopolist and vertically integrated") Europe “cannot substitute for the growing mesh of bilateral relations that the information age has created.”

The whole paper is worth reading, here.

Monday, August 17, 2009

Appetite for Risk Wanes Again

I just published today's post on Nouriel Roubini’s analysis and stock markets vindicate his forecast. Today the DAX has lost 2%, the CAC40 2,3% the Ibex 35 2,8%, the FTSE 2,8%, the DOW 1,9%, the S&P 500 2,2 % and the NASDAQ 2,4 %. In Asia the Nikkei lost 3,1%, the H Seng 3,6 % while the China’s benchmark stock index fell almost 6 %.

The information circulates so rapidly in our globalized world that as soon as a diagnosis is formulated, and if correct, events follow. A rule for investing in rather efficient markets: don't wait.

Anaemic Rather than Robust Recovery in Advanced Economies

That’s what Nouriel Roubini sees for the near future. Read his analysis here .

The bottom of the recession is quite close but it has not yet been reached. Households need to deleverage and save more, the financial system is severely damaged , the corporate sector faces a glut of capacity and deflationary pressures still persist, while the public sector’s debt accumulation risks crowding out a recovery in private sector spending.

A double-dip is not to be excluded and growth is likely to be below trend for “at least a couple of years”. As to the recent market rallies in stocks, commodities and credit, they may have gotten ahead of the improvement in the real economy. “If so, a correction cannot be too far behind.”

Sounds reasonable.

Saturday, August 15, 2009

Casey Mulligan Signals US Industrial Production Recovery

Not bad ….

Are Economists Too Cautious ?

According to Rebecca Wilder (News N Economics) economists currently forecast a “pathethic recovery” (July 21, 2009). But this is usually what they do writes Angry Bear’s Spencer:

“they have a long and repeated history of underestimating the strength of the recovery”.

Rebecca then looked for data and came out with the above graph.

Despite a general consensus that the exit from the current recession will be L-shaped (if not W-shaped) some pleasant surprises still are a possibility.

Sunday, August 9, 2009

Mr. Ackermann and the Case for Big Banks

A few days ago Josef Ackermann, CEO of the Deutsche Bank, argued in the Financial Times (July 30) that large banks are no more dangerous to the health of the financial system than smaller banks. According to him the systemic danger comes mostly from the fact that banks are “interconnected”.

Simon Johnson disagrees here .

Saturday, August 8, 2009

Health Care : Market Solutions

Greg Mankiw mentions on his blog an interesting paper by Jeffrey Flier, dean of the Harvard Medical School, on the market solutions to providing health care, all the more interesting since it was published in 1994, here (be patient, it is very slow-loading).

All the current problems have been debated for a long time. See for instance the book I edited in 1990, Comparative Health Systems in Ten Industrial Countries (JAI Press), and (in French) my recent paper “Comment Gagner Plus?” Commentaire, Printemps 2009).

I maintain that most of the alleged "excessive cost" problem of health care comes from the tax financing of health care spending in socialized medecine systems – a tax on labor that hinders economic growth - and not from a somewhat “excessive” level of consumption, that no one can define except the consumers themselves.

Minimize the tax financing by limiting its use to a policy of subsidizing private buying of health care insurance for low income houselholds, and the problem will disappear.

Flier shows convincingly that all the current objections to market solutions do not resist a serious evaluation.

Unemployment rate down in the US

But it is due mainly to discouraged workers leaving the labor force – and thus not being counted in the unemployed anymore -- rather than to an increase in employment figures. This is not a sign of an early and strong recovery.

See the article in The Atlantic here, and in News N Economics here .

Thursday, August 6, 2009

Jews As Overseas Chinese …

… and Kikuyu, Yoruba, Parsis, Lebanese, and Indian Gujaratis as well. That’s what George Gilder writes in The American (Monday, July 27) here .

Gilder mentions Thomas Sowell of the Hoover Institution who reports that in Indonesia the Chinese were 5 percent of the population, but they controlled 70 percent of private domestic capital and ran three-quarters of the nation’s top 200 businesses. These “middlemen minorities”, "their wealth inexplicable, their superiority intolerable”, typically arouse hatred from competing intellectuals. Yes, you correctly read it: intellectuals, not low brow, ordinary blue collar people, and social rivals, feeling threatened.

A great, enjoyably politically incorrect article, and a must read.

Wednesday, August 5, 2009

The End of the iPhone ?

Have a look at The Atlantic piece on the topic here .

The communication revolution goes on …

The Modern Decline of Violence

Wars are less deadly than they’ve been for 12,000 years, writes John Horgan in Slate (Tuesday, August 4) here , and things could even get better.

While “all the horrific wars and genocides of the 20th century accounted for less than 3 percent of all death worldwide, according to one estimate (...) the anthropologist Lawrence Keeley estimates in his influential book War Before Civilization, that violence accounted for as many as 25 percent of all deaths among early societies.” War emerged and rapidly spread as hunter-gatherers adopted a sedentary lifestyle and agriculture, and as populations grew.

Horgan also reports the reasons that Harvard psychologist Steven Pinker suggests as an explanation for the (relatively) peaceful attitude of modern men. The complete article is well worth reading, even at the beach.

Tuesday, August 4, 2009

Bankers’ Bonuses

« Big bonuses ? It would be wrong to stop paying them » is the title of an article in The Independent (Tuesday 4, 2009).

“Bank bosses were adamant yesterday that they would continue to pay seven-figure bonuses to workers, describing them as ‘essential if we want people to work in our industry’ ” write journalists James Moore and Nigel Morris.

But precisely that’s the question: which people should they hire? Should banks continue their operations in sophisticated and high risk products that require these high-calibre graduates? In the past, when they were content with selling traditional credit products, they apparently did not need very sophisticated (and expensive) personnel, any more than insurance companies did.

In a narrow banking perspective – much more favorable to depositors’ and taxpayers’ interests – banks should stop paying these big bonuses, and stop recruiting these specialists.

Maybe such a reorientation is not just wishful thinking after all. As reported by The Independent, banks “also claimed that high-calibre graduates were starting to think twice about working in the financial services industry because of the growing backlash against bankers.” Let’s hope that they correctly anticipate future trends.

Monday, August 3, 2009

Too Big To Fail : A Tentative List

Who is too big to fail? Simon Johnson (The Baseline Scenario, August 1, 2009) refers the reader to the 2004 Brookings book by Gary Stern and Ron Feldman, “Too Big To Fail: The Hazards of Bank Bailouts”, and especially to their list of such banks “on the basis of their qualitative assessment, reading of the regulatory tea leaves, and a deep understanding of the available data”.

Here are the first 17 largest banks of their Box 4-1 out of a list of 34:

Bank ( Assets in billions of US dollars)

Citicorp (1.068)
J.P. Morgan Chase and Company (799)
Bank of America Corporation (640)
Deutsche Bank AG (514)
Misuho Holdings (422)
Stitching Prioriteit ABN AMRO (382)
UBS AG (357)
Wachovia Corporation (326)
Wells Fargo and Company (298)
Bank One Corporation (270)
Credit Suisse Group (255)
MetLife (252)
HSBC Holdings PLC (240)
FleetBoston Financial Corporation (202)
U.S. Bankcorp (168)
BNP Paribas SA (119)
Mitsubishi Tokyo Financial Group (114)

At a time when the financial industry that was bailed out at taxpayer expense is paying itself gigantic bonuses while the economy is still deeply depressed (as Paul Krugman writes in the New York Times, “Rewarding Bad Actors”), Josef Ackerman, head of the Deutsche Bank and of the global bankers’ trade union, the Institute of International Finance, makes the case for big banks in the Financial Times. The problem, he writes, is not size, but that the banks are too interconnected to be allowed to fail.

This would not be the case if the “narrow banking proposal” or other “classical banking” schemes were adopted. Separate lines of business would be served by specialized institutions, each of which would be of a size small enough (as defined by regulation) not to jeopardize the security of the whole system.

See also the commentary in the August 2 issue of the Financial Times by Tony Jackson, with a proposal that banks be obliged to pay insurance premiums in every country where they do business not only to insure against going bust but also in case they should be rescued (“A bank-weary taxpayer’s pipe-dream”).

“The obvious counter is if one country introduced such a scheme, banks would emigrate. But the simpler and more local the banks, the less that is an option.”

That’s why narrow banking and small size limits are now necessary.

The Classical Banking Club welcomes Paul Krugman and Tony Jackson.

Saturday, August 1, 2009

Is GDP growth undermining democracy?

An interesting post by Brad Setser and Paul Swartz of the Council on Foreign Relations (“Geoeconomics, in pictures”, July 31) here , shows how the share of world GDP by governance form, i.e. autocracy and democracy, could be converging during the next few years, due to the new growth of emerging economies which are ruled by an autocratic regime.

It could well be, on the other hand, that economic development would bring about a change of political regime in many countries, and raise the number and GDP weighted share of democratically governed countries.