European Court’s Pringle judgment: good law, bad economics

March 8, 2013 12:48 pm by Financial Times

European court ruled that stability mechanism was not contrary to EU law. Image by Getty

By Professor Simon Deakin

Courts don’t often try to decide the direction of economic policy. However, in effect, this is what the European Court has recently done. In its Pringle judgment the court made a number of important decisions on the legality of bail-out policies being pursued by the European Union.

It ruled that the establishment of the European Stability Mechanism – the fund through which financial assistance will in future be channelled to eurozone states facing the possibility of bankruptcy – was not contrary to EU law. By implication, the ruling also supports the recent attempts by the European Central Bank to shore up the euro by buying the government bonds of debtor states on secondary markets (that is, buying them from commercial banks that have first purchased them from governments). Read more

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Posted in Economics, Eurozone |

Don’t trade away financial stability in Trans-Pacific Partnership

March 6, 2013 12:38 pm by Financial Times

By Kevin P. Gallagher

Negotiators will meet in Singapore this week for yet another round of talks on a Trans-Pacific Partnership – it is the 16th time in just a few years. A TPP would bring together key Pacific-rim countries into a trading bloc that the US hopes would counter China’s growing influence in the region.

Among other sticking points, talks remain stalled because the US insists that its TPP trading partners dismantle regulations for cross-border finance. Many TPP nations will have nothing of it, and for good reason. The US stance stands on the wrong side of country experience, economic theory and guidelines issued by the International Monetary Fund. Read more

Posted in Economics |

Interest rates should take blame for recession

March 1, 2013 1:45 pm by Financial Times

By Heleen Mees

With anger directed towards bankers and rating agencies alike, this may be a good time to remember that low interest rates, rather than faulty mortgage products, are the root cause of the financial crisis and ensuing Great Recession.

I once quipped that to understand the origins of the financial crisis and recession, one should not read Michael Lewis’s The Big Short, but economist and Nobel Laureate Arthur Lewis’s Economic Development with Unlimited Supplies of Labor instead.

The Big Short provides an entertaining account of how low-income households in the US were force-fed unaffordable subprime mortgages, for the sole purpose of adding to the fortunes of Wall Street bankers. But if less subprime mortgages had been originated in the 2000s, the bubble (and bust) in the prime US mortgage market would arguably have been more extensive than it was. Read more

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Posted in Economics, Recession |

How could Africa use China to spur economic development?

February 21, 2013 1:42 pm by Financial Times

By Mthuli Ncube and Michael Fairbanks

Which is more probable: Africa becomes a virtual international province of China, the main source of its sub-soil assets, and the major component of China’s strategy for its own domestic stability; or China becomes a way African nations upgrade their economies and integrate into the global value chain for manufacturing. The answer lies in the demographics of China, and what African nations decide to do next.

The greatest challenges facing China are an ageing population, gender disparity, migration to cities, rural health care and income inequality. Poverty declined from more than 60 per cent to less than 7 per cent since 1978, eradicating more poverty than in the rest of human history. That happened because of China’s “going out” into the world strategy and Africa is, arguably, the most important part of that strategy. Read more

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Posted in Development, Economics, Globalisation |

America’s higher education faces economic hurdles

February 18, 2013 4:47 pm by Financial Times

By Catharine B. Hill

The recession continues to create challenges for higher education in the US. Appropriate responses depend on expectations for the economy in the future, and whether the shocks we have experienced are short- or longer-term trends. Moody’s US Higher Education Outlook Negative in 2013 report does little to address these issues.

The optimal response to a cyclical change is to not allow significant changes to the structure of the colleges and universities. But if a change is permanent, adjustments are warranted. Of course, it is difficult to know whether shocks are permanent or temporary – there is a tendency to assume positive shocks are permanent and negative ones temporary, leading to inappropriate policy responses when wrong. This explains some of the problems facing many colleges and universities. Read more

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Posted in Economics, US economy |

Time for mutual funds to favour shareholders

February 14, 2013 6:08 pm by Financial Times

By Dr Miles Livingston

The legendary John Bogle, founder and former chief executive of The Vanguard Group, recently met with the US Securities and Exchange Commission to urge it to propose a rule that would require anyone providing retail investment advice to act as a fiduciary.

Mr Bogle and two other representatives of The Institute for the Fiduciary Standard argued that investment advisers at large mutual fund companies and other financial institutions often operate with conflicts of interest and do what is best for themselves rather than their shareholders. The Investment Company Act of 1940 requires that mutual funds be organised and managed in the interest of shareholders, rather than their managers or directors, but Mr Bogle pointed out that in practice, the spirit of the law is violated. Read more

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Posted in Economics |

Shares for rights – why entrepreneurial firms need employment law too

February 11, 2013 6:11 pm by Financial Times

By Professor Simon Deakin

Under the government’s current proposals for employment law reform, employees will be able to give up rights concerning unfair dismissal, redundancy pay, flexible working and time off for training in return for receiving shares in the company that employs them, gains on which will be exempt from capital gains tax.

It is right for the government to be encouraging worker ownership in companies; there is abundant evidence suggesting this improves labour productivity. What is completely unnecessary and counterproductive is to link this to the loss of employment protection rights. Read more

Posted in Economics, UK economy |

Go Fitch, go

January 31, 2013 5:37 pm by Financial Times

By Heleen Mees

The fourth largest bank in the Netherlands, SNS Reaal NV, finds itself in trouble. The banking and insurance group, with €134bn worth of assets on its balance sheet as of the end of June 2012, has suffered €2.3bn in losses on its foreign – mostly Spanish – property investments. SNS Reaal’s capital reserves have fallen below levels allowed under international banking rules, while it still owes the Dutch treasury €750m from a government bailout it received in 2008.

SNS Reaal has been designated a systematically important financial institution, and therefore deemed not allowed to fail, by the Dutch government, mostly because the Dutch financial sector is already overly concentrated. That is also the reason why the European Commission in January apparently thwarted a rescue plan in which Rabobank, ING and ABN Amro would buy SNS Reaal. Read more

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Posted in Banks, Economics |

Trillion dollar deficits are sustainable for now – unfortunately

January 29, 2013 12:52 pm by Financial Times

Latest US spending programme could tip country into a recession. Getty Images

By John H. Makin and Daniel Hanson

An abrupt spending sequester at a rate of about $110bn per year ($1.1tn over 10 years) scheduled to begin March 1 could cause a US recession, coming as it does on top of tax increases worth about 1.5 per cent of GDP enacted in January. The April deadline for a continuing resolution to fund federal spending could lead to a fight that shuts down the government, placing a further drag on growth.

These ad hoc measures, aimed at creation of an artificial crisis, will fail to produce prompt, sustainable progress towards reduction of “unsustainable” deficits because deficits have been, and will continue to be for some time, eminently sustainable. The Chicken Little “sky is falling” approach to frightening Congress into significant deficit reduction has failed because the sky has not fallen. Interest rates have not soared as promised and, in fact, interest costs for the federal government have remained steady at a tiny 1.5 per cent of gross domestic product since 2002, having fallen to that level from a 3 per cent average during the decade prior to 1997. Read more

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Posted in Economics |

The financial crisis: of Keppra and convulsion

January 10, 2013 3:44 pm by Financial Times

The collpse of Lehman was similiar to a stroke causing neuronal hubs to die. Getty Images

By James Park

With the start of QE3 and indefinite bond buying by the Fed, the financial crisis continues to morph. This idea was promulgated by El-Erian of Pimco who claims that a crisis of bank balance sheets may evolve into a crisis of sovereign balance sheets.

We already see an outline of what a sovereign balance sheet crisis may look like in Greece. Previously, we discussed the metaphor of septic shock and the need for emergent resuscitation with liquidity as a temporary salve, as covered in the first piece – Of Lasix and liquidity. In the last of this three-part series, we look at how a complement metaphor in the form of epileptic activity may forewarn and outline steps to minimize the chances or aftermath of the next possible financial convulsion. Read more

Posted in Crisis, Economics |
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