Category Archives: Globalization

Jeffrey Frankel: The ECB’s three mistakes in the Greek crisis and how to get sovereign debt right in the future

Yves here. While Frankel’s take on the ECB’s errors has some merit, his recommendation, of imposing much harder limits on eurozone members who run deficits in excess of permitted levels, is more debatable.

Any country running a large intra-eurozone trade deficit is going to show rising debt levels. If the increase in debt funds investments that increase economic productivity, that might work out fine in the long run, but that seldom proves to be the case. We’ve seen that big debtors either rack up rising government debt levels directly (Greece) or have rising private sector debts that eventually result in outsized financial sectors that produce financial crises that lead to collapses in tax revenues that then lead to rising government debt levels (or directly via bailouts, see Ireland). Note in most countries the explosion in debt to GDP is primarily the result of the impact of the global financial crisis on tax revenues). So fiscal deficits cannot be addressed independent of trade and cross border capital flows.

By Jeffrey Frankel, Professor of Economics at the Kennedy School of Government, Harvard. Cross posted from VoxEU

It is a year since Greece was bailed out by EU and IMF and there are many who label it a failure. This column says that while there is plenty of blame to go around, there were three big mistakes made by the European Central Bank. Number one: Letting Greece join the euro in the first place

IMF Chief Strauss-Kahn in Custody for Alleged Sexual Assault (Updated)

I’m not easily astonished, but this qualifies. From the Wall Street Journal:

Wall Street Journal:

A law enforcement official said Dominique Strauss-Kahn, head of the International Monetary Fund, was taken into police custody after being removed from an airplane at Kennedy Airport.

According to the official, Mr. Strauss-Kahn allegedly forced a cleaning woman onto his bed and sodomized her at about noon Saturday inside his room at the Sofitel Hotel near Times Square.

Mr. Strauss-Kahn allegedly allowed the woman to leave then departed for the airport, the official said.

The alleged victim informed co-workers who then alerted authorities, the official said…

More on Greece Restructuring and Eurozone Worries

While the Euro recovered from its stumble last week and the EU officialdom put out a round of denials of a story on Friday that Greece was considering an exit from the eurozone, the Euro tea leaf readers are still chewing over the significance of a not at all secret secret meeting over the weekend. The trigger is the fact that Greece is already on the verge of breaking the terms of its loans last year. This is hardly a surprise; austerity does not work and the Greek debt burden was clearly unsustainable. Per the Guardian:

Geithner Blocked IMF Deal to Haircut Irish Debt

Was the US Treasury Secretary’s deep sixing of a plan by the seldom-charitable IMF to give the Irish some debt relief Versailles redux? By that I mean the Treaty of Versailles, the agreement at the end of World War I devised by the victors to dismember the German economy. Bear with me as I tease out this conceit.

Euro Whacked by Reports that Greece May Leave the Eurozone?

The Euro has fallen from roughly 1.49 to the dollar to 1.43 in a mere two days, which is a huge move. Many pundits have argued that the ECB’s newly accommodative stance is the trigger, but there may be additional forces at work. Most experts have deemed the idea that any eurozone member would exit the currency to be simply inconceivable, that it would be too costly and disruptive. But with the hair shirt that Greece is being asked to wear, all bets may be off.

As of this juncture, this reports in Der Spiegel does not appear to have gotten traction among the Usual Suspects in the MSM. Headline: “Greece Considers Exit from Euro Zone” (hat tip readers John M and Illya F).

UBS’s Magnus Warns of Risk of Chinese Minsky Moment

UBS strategist George Magnus helped popularize economist Hyman Minsky’s thinking in the runup to the financial crisis by warning of the likelihood of a “Minsky moment.” For those not familiar with Minsky’s work, a short overview from ECONNED:

Hyman Minsky, an economist at Washington University, observed [that] periods of stability actually produce instability. Economic growth and low defaults lead to greater confidence and, with it, lax lending.

In early stages of the economic cycle, thanks to fresh memories of tough times and defaults, lenders are stringent. Most borrowers can pay interest and repay the loan balance (principal) when it comes due. But even in those times, some debtors are what Minsky calls “speculative units” who cannot repay principal. They need to borrow again when their current loan matures, which makes
them hostage to market conditions when they need to roll their obligation. Minsky created a third category, “Ponzi units,” which can’t even cover the interest, but keep things going by selling assets and/or borrowing more and using the proceeds to pay the initial lender. Minsky’s observation:
Read more...

Guest Post: Beware of runaway headline inflation

Yves here. As much as this post makes an interesting observation, note the emphasis on reducing labor bargaining power as the solution to booms and busts, when the era of weak labor bargaining power (which started taking hold in a serious way in the Reagan/Thatcher eras) showed far more financial instability that the preceding period where productivity gains were shared with workers. As a result, consumers didn’t need to resort to debt to compensate for stagnant worker wages. As long as we keep resorting to failed remedies, there isn’t much reason to hope for better outcomes.

By Heleen Mees, Researcher, Erasmus School of Economics and Assistant Professor, University of Tilburg. Cross posted from VoxEU

The latest figures from the US show that the consumer price index rose 0.5% in March, whilst the core personal consumption expenditure price index rose only 0.1%. This column explains the roles of these competing measures and argues that US monetary policymakers should pay close attention to headline inflation. It warns that neglecting headline inflation risks feverish boom-and-bust cycles with prolonged periods of high unemployment.

Michael Pettis: Is it time for the US to disengage the world from the dollar?

By Michael Pettis, a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management. Cross posted from China Financial Markets

The week before last on Thursday the Financial Times published an OpEd piece I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency. My basic argument is that every twenty to thirty years – whenever, it seems, that American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar’s dominance as the world’s reserve currency. Needless to say in the last few years these warnings have intensified to an almost feverish pitch. In fact I discuss one such warning, by Barry Eichengreen, in an entry two months ago.

But these predictions are likely to be as wrong now as they have been in the past. Reserve currency status is a global public good that comes with a cost, and people often forget that cost.

Guest Post: China is Different

Cross posted from MacroBusiness

We need a new framework for understanding and interpreting what is happening in China. As a friend recently commented to me, there should be three categories of economies: developed, developing and China. China may struggle, but it will struggle in a uniquely Chinese way, and inevitably pose deep questions about the future of capitalism. Pundits, especially of the bearish persuasion, are fond of deriding the comment that “this time it is different”. But are things always the same? Analytics should match the subject matter (methodology should match ontology), and what has happened in China already is very different to anything yet seen. It has been the most sustained wealth creation in history, largely unpredicted. Two recent comments reported on MacroBusiness, one by Michael Pettis and the other by Nouriel Roubini reveal the problem.

Both pundits focus on China’s extremely high levels of investment, which is about half GDP, instead of about a tenth in most developed economies. Viewing China through the lens of a developed economy, they argue there is trouble ahead. But Pettis also sees the frameworks used for developed economies start to fail:

Thomas Palley on How to Fix the Fed

The Roosevelt Institute hosted a conference yesterday on the future of the Federal Reserve, with the speakers including Joe Stiglitz, Jeff Madrick, Matt Yglesias, Joe Gagnon, Dennis Kelleher, Mike Konczal and Matt Stoller. Yours truly broke her Linda Evangelista rule to attend.

The discussion included the contradictions in the central bank’s various roles, its neglect of its duty to promote full employment, and its overly accommodative stance as a regulator, which has been enlarged thanks to Dodd Frank.

You can visit the Roosevelt site to view each of the three panels in full (they include the Q&A, which were very useful), the introductory remarks by Joe Stiglitz, or the presentations by each speaker separately. I encourage you to watch some of the panels, and to entice you, I’ve included videos from two talks I particularly liked below.

Marshall Auerback: QE2 – The Slogan Masquarading as a Serious Policy

By Marshall Auerback, a portfolio strategist and hedge fund manager Cross posted from New Deal 2.0.

Bernanke’s QE2 program has hurt savers, done nothing for banks, and eviscerated middle class living standards.

The U.S. Federal Reserve signaled the end of its controversial $600 billion bond-buying program as planned. And not a moment too soon.

Why Does Reputation Count for So Little on Wall Street?

There is a very peculiar article by Steven Davidoff up at the New York Times: “As Wall St. Firms Grow, Their Reputations Are Dying.” It asks a good question: why does reputation now matter for so little in the big end of the banking game? As we noted on the blog yesterday, a documentary team was struggling to find anyone who would go on camera and say positive things about Goldman, yet widespread public ire does not seem to have hurt its business an iota.

Some of Davidoff’s observation are useful, but his article goes wide of the mark on much of its analysis of why Wall Street has become an open cesspool of looting and chicanery (as opposed to keeping the true nature of the predatory aspects of the business under wraps as much as possible).

Jim Boyce: Tax Havens or Financial Sinkholes?

By James K. Boyce, who teaches economics at the University of Massachusetts, Amherst. He is co-author, with Léonce Ndikumana, of Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent, to be published this year by Zed Books.

Tax havens have got a lot of press lately. In Britain, the UK Uncut movement has mounted demonstrations across the country against tax dodging by large corporations and wealthy individuals – making the connection between profits parked abroad and deficits and budget cuts at home.

Will German Push for Greece Restructuring Tank the Greek Banking System?

Funny what a difference a few months makes. Whenever this blog would suggest that Greece, and potentially other eurozone members, might have to restructure their debts, the idea was treated by some readers as a nefarious euroskeptic plot, particularly since badmouthing embattled governments could worsen their conditions by raising their funding costs.

It might now be accurate to upgrade discussion of a Greek default to being an Anglo-Saxon plot.

Rationalization of Biggest Foreign Bank Bailout Misses Regulatory Failure

Some aggressive spinning on the Fed data releases about its lending during the financial crisis has surfaced at Bloomberg (admittedly with some less favorable facts also included). The Friends of the Fed and other Recipients of Largesse are defending the central banks’ panicked and indiscriminate responses to the crisis. These efforts to rationalize emergency responses fail to acknowledge underlying regulatory failings that remain unaddressed.

The PR push surrounds the foreign bank that got the most support during the post-Lehman phase, namely, Dexia.