Category Archives: Banking

What a State-Owned Bank Can Do for New Jersey

By Ellen Brown – Consider the possibilities, for example, for funding infrastructure. Like most states today, New Jersey suffers from serious budget problems, limiting its ability to make needed improvements. By funding infrastructure through its own bank, the state can cut infrastructure costs roughly in half, since 50 percent of the cost of infrastructure, on average, is financing.

Again, a state-owned bank can do this by leveraging its capital, with any shortfall covered very cheaply in the wholesale markets. In effect, the state can borrow at bankers’ rates of 1 percent or less, rather than at market rates of 4 to 6 percent for taxable infrastructure bonds (not to mention the roughly 12 percent return expected by private equity investors).  The state can borrow at 1 percent and turn a profit even if it lends for local development at only 2 percent—one-half to two-thirds below bond market rates.

That is the rate at which North Dakota lends for infrastructure. In 2015, the state legislature established a BND Infrastructure Loan Fund program that made $150 million available to local communities for a wide variety of infrastructure needs. These loans have a 2 percent fixed interest rate and a term of up to 30 years; and the 2 percent goes back to the State of North Dakota, so it’s a win-win-win for local residents.

The BND is able to make these cheap loans while still turning a tidy profit because its costs are very low: no exorbitantly-paid executives; no bonuses, fees, or commissions; very low borrowing costs; no need for multiple branch offices; no FDIC insurance premiums; no private shareholders. Profits are recycled back into the bank, the state and the community. more>


The $7 Trillion Hazard That Lies Beneath the M&A Boom

By Chris Bryant Tara Lachapelle – The global M&A boom has left a giant footprint on corporate balance sheets, and we’re not just talking about all that debt. Goodwill — the difference between what assets are worth on paper and how much an acquirer paid for them — is also soaring, and that could spell trouble for corporate earnings.

At S&P 500 companies, goodwill has risen by two-thirds over the past decade and accounts for more than one-third of net assets.

In the past two years, takeover targets have sold for a median of 11 times Ebitda — essentially 11 years of profit — whereas the multiple was only about 7-9 times in the years leading up to the recent merger frenzy.

As for who’s sitting on the most absolute goodwill, beer takes the cake. Anheuser-Busch InBev SA’s goodwill doubled to a cool $136.5 billion after its $100 billion takeover of SAB Miller Plc.

Impairments deplete shareholder equity, which makes lenders and bondholders nervous. Companies that financed takeovers with lots debt are particularly exposed. more>

Old economics is based on false ‘laws of physics’ – new economics can save us

By Kate Raworth – In the 1870s, a handful of aspiring economists hoped to make economics a science as reputable as physics. Awed by Newton’s insights on the physical laws of motion – laws that so elegantly describe the trajectory of falling apples and orbiting moons – they sought to create an economic theory that matched his legacy. And so pioneering economists such as William Stanley Jevons and Léon Walras drew their diagrams in clear imitation of Newton’s style and, inspired by the way that gravity pulls a falling object to rest, wrote enthusiastically of the role played by market forces and mechanisms in pulling an economy into equilibrium.

Their mechanical metaphor sounds authoritative, but it was ill-chosen from the start – a fact that has been widely acknowledged since the astonishing fragility and contagion of global financial markets was exposed by the 2008 crash.

The most pernicious legacy of this fake physics has been to entice generations of economists into a misguided search for economic laws of motion that dictate the path of development. People and money are not as obedient as gravity, so no such laws exist. Yet their false discoveries have been used to justify growth-first policymaking. more>

Here’s the real Rust Belt jobs problem — and it’s not offshoring or automation

By Josh Pacewicz and Stephanie Lee Mudge – Many struggling U.S. cities and states compete fiercely with one another to attract and keep firms that offer jobs. Unfortunately, these are not the “good” jobs that Americans are looking for, jobs with middle-class pay, benefits and security.

This race to the bottom drains public coffers, preoccupies local leaders and fuels voter cynicism. “America First” sidesteps the problem.

Since the corporate mergers and restructurings in the 1980s, most cities depend not on one or two large factories but on many small subsidiary operations — light manufacturing, food processing, professional service firms, call centers, hotels and retail. These smaller subsidiaries mostly move between struggling cities and towns rather than leaving for other countries.

Much of the blame for that falls on federal policy. Unions have been hobbled by a changing legal environment. A corporate merger wave unleashed by financial deregulation eliminated local owners who paid workers living wages and contributed generously to their towns.

Tax code changes led to ballooning senior managers’ earnings at the expense of line-workers’ wages. Without changing the federal policies that led to these trends, bringing manufacturing back will not create good, safe jobs. more>

Brexit – A Lose-lose Proposition

By Per Wijkman – The UK government hopes to limit its losses by negotiating a new trade agreement giving what EU membership now offers apart from the free movement of labor and trade subject effectively to the European Court of Justice.

This will be difficult. The UK’s negotiating position is weak since the EU Commission plans to start negotiations on a new trade agreement only after the UK has withdrawn from the EU. The UK thus leaves the EU without knowing what will replace membership. Deprived of a secure fall-back position, it will have little leverage.

Border controls, rather than tariffs, generate the major costs involved in cross-border trade, especially when cross-border supply chains are extensive. In order to avoid border controls between the EU and the UK, they must apply a common set of rules concerning technical standards, sanitary and phytosanitary standards, rules of origin, rules for financial services, etc. In addition, they must apply a common legal system in order to guarantee application of the common rules. The less extensive the common legal system, the more shallow the economic integration must be.

Since one of Prime Minister May’s key objectives with Brexit is to re-establish UK sovereignty over its legal system, a common legal system is ruled out. more>


Updates from Chicago Booth

How sales taxes could boost economic growth
By Dee Gill – Many big economies are stagnating, and economists are running out of options to fix them.

The conventional monetary policy for encouraging spending has been to drop short-term interest rates. But with rates already near, at, or below zero, that method is all but exhausted. Some economists have also started to empirically and theoretically question the power of forward guidance, in which central banks publicize plans for future interest-rate policies, at the zero lower bound.

To create the rising prices that fuel higher wages and economic growth, central banks must convince consumers and companies to spend more money. But controversial asset-buying programs that brought down long-term interest rates have not also produced sustained price increases as hoped, and they have inflated central-bank balance sheets.

The idea that the threat of a sales-tax hike might stimulate stagnant economies has been around for some 25 years. But before the researchers homed in on the German VAT increase, economists had not documented such an effect in real life. more>


Staying Rich Without Manufacturing Will Be Hard

By Noah Smith – One common assertion is that while manufacturing jobs have declined, output has actually risen. But this piece of conventional wisdom is now outdated. U.S. manufacturing output is almost exactly the same as it was just before the financial crisis of 2008:

It isn’t just manufacturing employment and the sector’s share of gross domestic product that are hurting in the U.S. It’s total output. The U.S. doesn’t really make more stuff than it used to.

And, more troubling, the U.S. is now losing computer manufacturing. Susan Houseman et al. show that U.S. computer production began to fall during the Great Recession. In semiconductors, output has grown slightly, but has been far outpaced by most East Asian countries. Meanwhile, trade deficits in these areas have been climbing.

Faced with this evidence, many skeptics will question why the sector is important at all.

Why should a country specialize in making things, when it can instead specialize in designing, marketing and financing the making of things? more>

The Future of Work — 3 Mega-Trends

By Graham Brown-Martin – Technology is just part of a broader spectrum of human activity and social change is driven by society rather than machines, that is, we have agency to act independently and make free choices.

The path of innovation and its social consequences are almost entirely shaped by society as a result of numerous social factors such as culture, politics, regulatory mechanisms and economic arrangements. The latter one is particularly apposite given the post-WWII obsession with neoclassical economics, as taught in most universities.

Political decisions supported by economic frameworks have excluded citizens from the discourse and, as a result, are now unraveling across the western world. It turns out that the things we value most are the things that are difficult or impossible to measure.

This obsession for economics and measuring what could be measured and ignoring what it couldn’t gave us global agencies such as the World Bank, IMF and OECD.

But these organizations have been unable to apply their frameworks, wedded as they are to a single metric of GDP, to the worlds most pressing challenges such as climate change, increasing population or growing inequalities, rather they have exacerbated them. more>

The dangers of ultra-long-term bonds

By Judd Gregg – The dollar is the key to world commerce. It is used by most nations as their reserve currency. It is essentially other countries’ insurance against their governments pursuing profligate fiscal policy.

This fact would possibly make the sale of 50- or 100-year U.S. bonds acceptable in the world market. But it should also give us significant pause.

If we want our currency to be the reserve currency of choice around the world, then we need that currency to be respected.

If we start issuing general obligation bonds that have 50- or 100-year terms, we will inevitably call into question the long-term integrity of our nation’s fiscal house. Financing current expenses for 5, 10 or even 30 years may be an accepted practice, but to go out 50 or 100 years is not. more>

Updates from GE

Charged Up: GE Shows Investors Its Energy Playbook
By Tomas Kellner – The acquisition of Alstom’s energy assets delivered $1.5 billion in synergies in 2016, $300 million above GE’s original five-year target for Alstom synergies, GE’s Chief Financial Officer Jeff Bornstein told investors at a conference in New York held by GE’s Power and Renewable Energy businesses last week. “Alstom makes us more competitive,” Bornstein said. “It broadens the service base and creates long-term incremental value.”

Jobs, cash, costs and software were the key themes at the conference. Bornstein said GE Oil & Gas was now “applying the same methodology” to its planned merger with Baker Hughes. “The businesses are very complementary,” he said. “It’s going to be a merger of equals.” Bornstein said he was “highly confident” the deal would “deliver a lot more value than $1.6 billion” in synergies by 2020, the target the companies released when they announced the deal last October.

Bornstein also talked about the need to speed up the shrinking of GE’s $25 billion in “structural costs,” which are funding support functions, R&D, corporate operations and other expenses. more>