Category Archives: Banking

We must break the cycle of panic and neglect

Health, global security and international stability are inextricably linked. And our globalised, urbanised and at the same time politically fragmented world has never been as prone to pandemics as it is today. Wolfgang Ischinger and Stefan Oschmann present five points that are critical in order to be better prepared for situations like these in the future.
By Stefan Oschmann and Wolfgang Ischinger – The number of coronavirus cases as reported on the website of Johns Hopkins University continues to skyrocket. The International Monetary Fund is preparing the world for a massive recession.

Governments around the world have mobilized incredible sums of money in order to strengthen healthcare systems in the short term and to cushion the economic consequences of the crisis in the long term. Without a doubt, health crises can pose a serious threat to all of humanity, one no less serious than the dangers of atomic weapons, terrorism or the impact of climate change.

The fact that health, security and stability are inextricably linked is not a new realization. The devastating consequences of pandemics – from the plague to the Spanish flu – are a firm part of human history.

Yet they are still being massively underestimated – despite the fact that our globalized, urbanized and at the same time politically fragmented world has never been as prone to pandemics as it is today.

At the moment, the focus is on acute crisis management. How can a lockdown be managed? When and how can a return to normalcy be responsibly permitted? And what exactly will the new normal look like?

These topics are currently being widely discussed, and rightly so. With this article, however, we want to point out that it is also necessary to plan beyond this period. We should urgently think about the following five points:

First: Overall, the global community has not succeeded in breaking the cycle of panic and neglect that characterizes the way in which it responds to pandemics. No doubt, after SARS 2002/03, significant progress was made in the areas of pandemic preparedness, in research and development as well as in vaccine development.

Countries such as China have considerably strengthened their healthcare systems. Yet unfortunately, this was not enough. At the Munich Security Conference (MSC) in 2017, Bill Gates spoke about the sad irony that the global costs of a pandemic massively eclipse the expenditure needed to successfully prevent a global pandemic.

According to Gates, the cost of ensuring adequate pandemic preparedness worldwide is estimated at US$ 3.4 billion a year, while the projected annual loss from a pandemic could run as high as US$ 570 billion.

The amounts being called up right now for global crisis management show that at the time, these estimates were a rather conservative estimate of the potential follow-on costs. One thing is clear: Pandemic preparedness is an absolute must and pays off, not only in financial terms. There is no price as high as the one we are paying right now as a global community. more>

The IMF: The World’s Controversial Financial Firefighter

The International Monetary Fund, both criticized and lauded for its efforts to promote financial stability, continues to find itself at the forefront of global economic crisis management.
By Jonathan Masters and Andrew Chatzky – Since its inception in July 1944, the International Monetary Fund (IMF) has undergone considerable change as chief steward of the world’s monetary system. Officially charged with managing the global regime of exchange rates and international payments that allows nations to do business with one another, the fund recast itself in a broader, more active role following the 1973 collapse of fixed exchange rates, intervening in developing countries from Asia to Latin America. In 2010, it gained renewed relevance as the European sovereign debt crisis unfolded.

The fund has received both criticism and credit for its efforts to promote financial stability.

Forty-four allied nations convened at the Bretton Woods Conference in 1944 to establish a postwar financial order that would facilitate economic cooperation and prevent a rehash of the currency warfare that helped usher in the Great Depression. The new regime was intended to foster sustainable economic growth, promote higher standards of living, and reduce poverty. The historic accord founded the twin institutions of the World Bank and the IMF and required signatory countries to peg their currencies to the U.S. dollar. However, the system of fixed exchange rates broke down in the late 1960s and early 1970s due to an overvaluation of the U.S. dollar and President Richard Nixon’s decision to suspend the greenback’s convertibility into gold.

The IMF is akin to a credit union that permits its membership access to a common pool of resources—funds that represent the financial commitment or quota contributed by each nation, relative to its size. In theory, members with balance-of-payments trouble seek recourse with the IMF to buy time to rectify their economic policies and restore economic growth. The fund pursues its mission in three fundamental ways:

Surveillance. A formal system of review monitors the financial and economic policies of member countries and offers macroeconomic and financial policy advice.

Technical assistance. Practical support and training directed mainly at low- and middle-income countries help manage their economies.

Lending. The fund gives loans to member countries that are struggling to meet their international obligations. Loans, or bailouts, are provided in return for implementing specific IMF conditions designed to put government finances on a sustainable footing and restore growth. more>

Why the recent debt buildup is a concern

By Peter Nagle – Since 2010, debt in emerging market and developing economies has grown to record highs.  Current low interest rates —which markets expect to be sustained in the medium term—appear to mitigate some of the risks associated with high debt. However, emerging market and developing economies (EMDEs) also face weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood of the current debt wave ending in crises and, if crises were to take place, to alleviate their impact.

Global debt reached a record-high of about 230 percent of global GDP in 2018.  Total EMDE debt also reached an all-time high of about 170 percent of GDP in 2018, an increase of 54 percentage points of GDP since 2010.

Over the past fifty years, there have been four historical waves of debt accumulation:  1970-89, 1990-2001, 2002-09, and since 2010. The latest wave, which started in 2010, has been the largest, fastest and most broad-based increase of the four.

Rapid increases in debt are common among EMDEs. Between 1970 and 2009, the sector accumulating debt shifted from the public to the private sector. However, since 2010, both governments and private sectors have rapidly accumulated debt. more>

Low unemployment isn’t worth much if the jobs barely pay

By Martha Ross and Nicole Bateman – Each month, the Bureau of Labor Statistics releases its Employment Situation report (better known as the “jobs report”) to outline latest state of the nation’s economy. And with it, of late, have been plenty of positive headlines—with unemployment hovering around 3.5%, a decade of job growth, and recent upticks in wages, the report’s numbers have mostly been good news.

But those numbers don’t tell the whole story. Are these jobs any good? How much do they pay? Do workers make enough to live on?

Here, the story is less rosy.

In a recent analysis, we found that 53 million workers ages 18 to 64—or 44% of all workers—earn barely enough to live on. Their median earnings are $10.22 per hour, and about $18,000 per year. These low-wage workers are concentrated in a relatively small number of occupations, including retail sales, cooks, food and beverage servers, janitors and housekeepers, personal care and service workers (such as child care workers and patient care assistants), and various administrative positions. more>

Updates from Chicago Booth

Why central banks need to change their message
The US and European central banks thought they could manage their economies by bringing their secretive plans for interest-rate regulation into the light. But they didn’t account for an unreceptive public.
By Dee Gill – A lot of people don’t have a clue what central banks do, much less how the institutions’ ever-changing interest-rate targets ought to affect their household financial decisions. Recent studies, including several by Chicago Booth researchers, find Americans and Europeans oblivious to or indifferent to the targets’ implications.

This is a serious problem for policy makers. For a decade, monetary policy in many developed economies has relied heavily on forward guidance, a policy of broadcasting interest-rate targets that works only if the public knows and cares what its central bankers say.

“The effects of monetary policy on the economy today depend importantly not only on current policy actions, but also on the public’s expectation of how policy will evolve,” said Ben Bernanke, then chairman of the US Federal Reserve, in a speech to the National Economists Club in 2013. At critical times since 2008, forward guidance has been the Fed’s and the European Central Bank’s go-to tool for revitalizing their ailing economies and holding off widespread depression.

Forward guidance usually involves central banks announcing their plans for interest rates, which traditionally were guarded as state secrets. The openness is intended to spur investors, businesses, and households to make spending and savings decisions that will bolster the economy; typically, to spend more money during economic slowdowns and to save more when the economy is expanding.

Chicago Booth’s Michael Weber and his research colleagues, in several studies, tested the basic assumption that households will respond to forward guidance, and find it flawed. Most people, the researchers conclude, generally do not make spending and savings choices on the basis of inflation expectations. In personal financial decisions—for example, to pay or borrow money for a boat, refrigerator, or renovations, or to sock away funds for rainy days—words from central bankers hardly register. more>

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Capitalism’s Case for Abolishing Billionaires

Adam Smith wanted to keep the power of the rich in check.
By Linsey McGoey – Adam Smith is remembered as the patron saint of unregulated commerce, as the world’s greatest prophet of profit. His idea of the “invisible hand” has been used by countless economists and politicians to argue that capitalism works, despite its excesses and inequalities.

But this fairytale version is wrong. The actual Smith wrote of his dream for a more equal society, and condemned the rich for serving their own narrow interests at the expense of the wider public.

“The establishment of perfect justice, of perfect liberty, and of perfect equality,” he writes in Wealth of Nations, “is the very simple secret which most effectively secures the highest degree of prosperity to all the three classes.”

Today Smith’s call for “perfect equality” is either ignored or deliberately misrepresented.

But with 1% of the world’s population now owning half its wealth, that belief is being forcefully called into question. There are growing calls to abolish billionaires and their privileges, including preferential tax treatment, handouts to corporations, and grossly inflated executive salaries that are often subsidized by taxpayers.

Smith was scathingly critical of the wealthy’s disproportionate power over government policymaking. He complained about the tendency of the rich to shirk tax obligations, unfairly passing tax burdens on to poor workers. He heaped scorn on government bailouts of the East India Company. He thought dirty money in politics was akin to bribery, and that it undermined the duty to govern impartiality. He wasn’t alone.

The reality is that the historical case for abolishing billionaire privileges has a long heritage, stretching to enlightenment thinkers and the revolutionaries they inspired, including countless enslaved and working-class people in forgotten graves. more>

The Greatest Balancing Act

Nature and the global economy
By David Attenborough and Christine Lagarde – In nature, everything is connected. This is equally true of a healthy environment and a healthy economy. We cannot hope to sustain life without taking care of nature. And we need healthy economies to lift people out of poverty and achieve the United Nations Sustainable Development Goals.

In our current model these goals sometimes seem to collide, and our economic pursuits encroach too closely on nature. But nature—a stable climate, reliable freshwater, forests, and other natural resources—is what makes industry possible. It is not one or the other. We cannot have long-term human development without a steady climate and a healthy natural world.

The bottom line is that when we damage the natural world, we damage ourselves. The impact of our growing economic footprint threatens our own future directly. By some estimates, more than 50 percent of the world’s population is now urbanized, increasing the likelihood of people losing touch with nature.

With the projected rise in ocean levels and increase in the average temperature of the planet, large swaths of land, even whole countries, will become uninhabitable, triggering mass climate-induced migration. Never has it been more important to understand how the natural world works and what we must do to preserve it.

A necessary first step is to recognize that waste is the enemy. Wasting food, energy, or materials flies in the face of sustainability. Producing plastics fated to end up as litter is a waste, especially when these plastics pollute our oceans. If we could live by the simple injunction to “do no harm,” both individually and as businesses and economies, we could all make a difference. Overconsumption and unsustainable production have put the planet in peril.

Since the natural and economic worlds are linked, similar principles apply to both.

In the financial world, for example, we would not eat into capital to the point of depletion because that would bring about financial ruin. Yet in the natural world, we have done this repeatedly with fish stocks and forests, among many other resources—in some cases to the point of decimation. We must treat the natural world as we would the economic world—protecting natural capital so that it can continue to provide benefits well into the future. more>

Why Corporations Can No Longer Avoid Politics

By Alana Semuels – For decades, most companies went to great lengths to avoid opining on social issues. No longer.

What’s changed? Frustrated with political gridlock, consumers have turned to business for leadership. “I think business has to pick up the mantle when governments fail you,” Patagonia CEO Rose Marcario told TIME earlier this year. Young consumers are also more likely to patronize brands whose business models claim to include social change.

Nine in 10 members of Generation Z, who account for as much as $150 billion in spending power globally, believe that companies have a responsibility to social and environmental issues, according to McKinsey. In an age when companies have detailed information on customers’ ages, incomes and political persuasions, they’re calculating that these socially aware consumers are more lucrative than those who might be put off by social-justice campaigns.

“In a politically polarized world that is saturated in social media, you’re not going to escape politics,” says Jerry Davis, a professor of management and sociology at the University of Michigan. “This is a sea change–in the past, companies kept their heads down and did their best to never be seen.” more>

Updates from Chicago Booth

How multinational companies help spread recessions
By Bob Simison – The Great Recession a decade ago was one example of how economic cycles across the world can move in parallel, a phenomenon that economists don’t fully understand. It could be that a common event, such as a surge in oil prices, affects many economies at the same time—or perhaps linkages between countries transmit economic shocks from one country to the world economy.

One such linkage is multinational corporations,  according to Marcus Biermann, a postdoctoral scholar at the Catholic University of Louvain, and Chicago Booth’s Kilian Huber, who explore the role of multinationals in spreading the global recession by analyzing the ripple effects of one German bank’s struggles during the 2008–09 financial crisis.

Commerzbank was Germany’s second-biggest commercial lender behind Deutsche Bank. Losses on trading and investments abroad hammered the bank, especially after Lehman Brothers collapsed in September 2008. Commerzbank’s capital fell by 68 percent between December 2007 and December 2009, which forced the bank to reduce its aggregate lending stock by 17 percent. Biermann and Huber find that this pullback in credit available to German parent companies affected subsidiaries in other countries, thus helping to transmit the economic contraction. more>

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What’s Elizabeth Warren’s wealth tax worth?

By Isabel V. Sawhill and Christopher Pulliam – On both sides of the Atlantic, economic inequality has rocketed up the political agenda and inspired a new wave of populism. Wealth inequality is high and rising in the UK and staggeringly so in the US. The top 1% of American households now have more wealth than the bottom 90%. In the UK, the top 10% holds over half the wealth. The richest 400 individuals in the US average a net worth of $7.2 billion.

How did we get to this point? As Thomas Piketty, in his book Capital, famously argued, a capitalist economy left to its own devices will tend to produce not just inequality but ever-rising inequality of wealth – and the income derived from wealth. The main reason is because the returns earned on assets such as stocks and bonds normally exceed the growth of wages.

Imagine an economy with one capitalist and one wage earner. If the annual rate of return to financial assets is, say, 3%, but wages are only growing by 2%, more and more income ends up in the hands of the capitalist. Wealth then begets more wealth as the capitalist, not needing to spend all of his added income, adds to his existing wealth and reaps ever-growing income from that wealth. Unless a war or other shock destroys his wealth (think depression or the devastation in Europe after the Second World War), or government decides to tax it away, we end up with the rise in wealth inequality that we are now seeing in many rich countries – the US in particular.

There is something deeply disturbing about Piketty’s work. If one takes his thesis seriously, it means that the inequality of wealth and its corollary, income inequality, along with their continued growth, is the new normal. They are baked into a capitalist economy.

Of course, some financial capital gets invested in productive assets that help the economy grow. But productive investment and growth have slowed in recent decades, making it hard to argue that the rise in wealth at the top has benefited everyone. In the meantime, the accumulation of wealth in high-income households is one reason that income inequality is rising so sharply at the very top. While the richest 20% of US households, which benefit from a lot of human capital but not a lot of wealth, saw their market incomes rise by 96% between 1979 and 2016, the top 1% – which receives far more of their income from wealth – saw their incomes rise by a staggering 219%.

In short, growing wealth inequality spawns growing income inequality, so if we care about the latter, we cannot focus only on redistributing income. We need to tackle the accumulation of wealth as well.

What to do? Senator Elizabeth Warren, a serious contender for the US presidency, has proposed a wealth tax. more>