Category Archives: Banking

Updates from Chicago Booth

How to make money on Fed announcements—with less risk
By Dee Gill – Andreas Neuhierl and Michael Weber find gains of about 4.5 percent when investors bought or shorted markets in the roughly 40 days before and after Federal Open Market Committee (FOMC) announcements that ran counter to market expectations. Investors can make money on these “surprises,” even if they did not take positions before the announcements, the findings suggest.

Markets routinely forecast the content of FOMC announcements, which reveal the Fed’s new target interest rates, and usually react when the Fed does not act as expected. An FOMC announcement is an expansionary surprise when its new target rate is lower than the market forecasts and contractionary when it’s higher than expectations.

Share prices moved predictably ahead of and following both types of surprises, the study notes. Prices began to rise about 25 days ahead of an expansionary surprise, for about a 2.5 percent gain during that time. Before a contractionary surprise, prices generally fell. The researchers find that the movements occured in all industries except mining, where contractionary surprises tended to push share prices higher. more>

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How a World Order Ends

And What Comes in Its Wake
By Richard Haass -A stable world order is a rare thing. When one does arise, it tends to come after a great convulsion that creates both the conditions and the desire for something new. It requires a stable distribution of power and broad acceptance of the rules that govern the conduct of international relations. It also needs skillful statecraft, since an order is made, not born. And no matter how ripe the starting conditions or strong the initial desire, maintaining it demands creative diplomacy, functioning institutions, and effective action to adjust it when circumstances change and buttress it when challenges come.

Eventually, inevitably, even the best-managed order comes to an end. The balance of power underpinning it becomes imbalanced. The institutions supporting it fail to adapt to new conditions. Some countries fall, and others rise, the result of changing capacities, faltering wills, and growing ambitions. Those responsible for upholding the order make mistakes both in what they choose to do and in what they choose not to do.

But if the end of every order is inevitable, the timing and the manner of its ending are not. Nor is what comes in its wake. Orders tend to expire in a prolonged deterioration rather than a sudden collapse. And just as maintaining the order depends on effective statecraft and effective action, good policy and proactive diplomacy can help determine how that deterioration unfolds and what it brings. Yet for that to happen, something else must come first: recognition that the old order is never coming back and that efforts to resurrect it will be in vain.

As with any ending, acceptance must come before one can move on.

Although the Cold War itself ended long ago, the order it created came apart in a more piecemeal fashion—in part because Western efforts to integrate Russia into the liberal world order achieved little. One sign of the Cold War order’s deterioration was Saddam Hussein’s 1990 invasion of Kuwait, something Moscow likely would have prevented in previous years on the grounds that it was too risky. Although nuclear deterrence still holds, some of the arms control agreements buttressing it have been broken, and others are fraying.

The liberal order is exhibiting its own signs of deterioration. Authoritarianism is on the rise not just in the obvious places, such as China and Russia, but also in the Philippines, Turkey, and eastern Europe. Global trade has grown, but recent rounds of trade talks have ended without agreement, and the World Trade Organization (WTO) has proved unable to deal with today’s most pressing challenges, including nontariff barriers and the theft of intellectual property.

Resentment over the United States’ exploitation of the dollar to impose sanctions is growing, as is concern over the country’s accumulation of debt. more>

How Bronze Age Rulers Simply Canceled Debts

By Michael Hudson – My book And forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year  is about the origins of economic organization ad enterprise in the Bronze Age, and how it shaped the Bible. It’s not about modern economies. But the problem is – as the reviewer mentioned – that the Bronze Age and early Western civilization was shaped so differently from what we think of as logical and normal, that one almost has to rewire one’s brain to see how differently the archaic view of economic survival and enterprise was.

Credit economies existed long before money and coinage. These economies were agricultural. Grain was the main means of payment – but it was only paid once a year, at harvest time. You can imagine how awkward it would be to carry around grain in your pocket and measure it out every time you had a beer.

We know how Sumerians and Babylonians paid for their beer (which they drank through straws, and which was cleaner than the local water). The ale-woman marked it up on the tab she kept. The tab had to be paid at harvest time, on the threshing floor, when the grain was nice and fresh. The ale-woman then paid the palace or temple for its advance of wholesale beer for her to retail during the year.

If the crops failed, or if there was a flood or drought, or a military battle, the cultivators couldn’t pay. So what was the ruler to do? If he said, “You owe the tax collector, and can’t pay. Now you have to become his slave and let him foreclose on your land.”

Suddenly, you would have had a slave society. The cultivators couldn’t serve in the army, and couldn’t perform their corvée duties to build local infrastructure.

To avoid this, the ruler simply cancelled the debts (most of which were owed ultimately to the palace and its collectors). The cultivators didn’t have to pay the ale-women. And the ale women didn’t have to pay the palace.

All this was spelled out in the Clean Slate proclamations by rulers of Hammurabi’s dynasty in Babylonia (2000-1600 BC), and neighboring Near Eastern realms. They recognized that there was a cycle of buildup of debt, reaching an unpayably high overhead, followed by a cancellation to restore the status quo ante in balance.

This concept is very hard for Westerners to understand. more>

AI’s Ethical Implications: The Responsibility Of Firms, Policymakers and Society?

By Frederick Ahen – The market for AI is massive.

The expertise needed in the field is growing exponentially; in fact, firms are unable to meet the demand for specialists. Contributions of AI to both advanced and emerging economies is significant and it is also powering other fields that once depended on manual labor with painstakingly slow processes.

For example, precision agriculture now uses drones to help irrigate and monitor plant growth, remove weeds and take care of individual plants. This is how the world is being fed.

Journalists are using drones to search for truth in remote areas. Driverless cars are being tested. Drones are doing wonders in the logistics and supply chain areas. But drones are also used for killing, policing and tracking down criminal activities.

There are many other advantages of AI in the health sector, elderly care and precision medicine. AI machines have the capacity to do things more efficiently than humans or even tread spaces that are more dangerous for humans.

This is the gospel. Take it or leave it.

But there is more to the above. What is also true is that ‘the world is a business’ and business is politics that controls science, technology and information dissemination. These three entities know how to subliminally manipulate, calm, manage and shape public sentiments about anything.

They control how much knowledge we can have and who can be vilified for knowing or speaking the truth, demanding an ethical approach to the production and use of AI or turned into a hero for spinning the truth.

So, the question is, which industrial policies will promote the proper use of AI for the greater good through ethical responsibility in the midst of profits, power, politics and polity? more>

How the Incas governed, thrived and fell without alphabetic writing

By Christopher Given-Wilson – Between the 1430s and the arrival of the Spanish in 1532, the Inkas conquered and ruled an empire stretching for 4,000 kilometers along the spine of the Andes, from Quito in modern Ecuador to Santiago in Chile. Known to its conquerors as Tahuantinsuyu – ‘the land of four parts’ – it contained around 11 million people from some 80 different ethnic groups, each with its own dialect, deities and traditions. The Inkas themselves, the ruling elite, comprised no more than about one per cent.

Almost every aspect of life in Tahuantinsuyu – work, marriage, commodity exchange, dress – was regulated, and around 30 per cent of all the empire’s inhabitants were forcibly relocated, some to work on state economic projects, some to break up centers of resistance. Despite the challenges presented by such a vertical landscape, an impressive network of roads and bridges was also maintained, ensuring the regular collection of tribute in the capacious storehouses built at intervals along the main highways. These resources were then redistributed as military, religious or political needs dictated.

All this suggests that the Sapa Inka (emperor) governed Tahuantinsuyu both efficiently and profitably. What’s more, he did so without alphabetic writing, for the Inkas never invented this. Had they been left to work out their own destiny, this state of affairs might well have continued for decades or even centuries, but their misfortune was to find themselves confronted by both superior weaponry and, crucially, a culture that was imbued with literacy. As a result, not only was their empire destroyed, but their culture and religion were submerged. more>

Why Brexit Won’t Cure Britain’s Broken Economic Model

By Simon Deakin – The critical thing with Brexit is to think about trade and regulation as being two sides of the same coin. When we talk about international trade we are really asking, which regulatory regime do we want to sign up to?

Inside the single market there is high degree of harmonization and convergence of rules, or what is sometimes called alignment. Regulatory alignment is the condition of frictionless trade in the European single market. It is a uniquely deep international trading arrangement because of the high degree of regulatory compliance that goes with EU membership.

We can’t achieve regulatory autonomy post-Brexit without giving up frictionless trade. So UK policy makers have to think about the consequences of moving away from the single market.

The first impact will be felt in those industries which rely upon regulatory alignment in order to function. For the car industry, and large manufacturers like Airbus, European supply chains will be very negatively affected by regulatory divergence.

That is why it is not surprising to hear that the car companies are going to put their production on hold if there is a prospect of a hard Brexit. They have said that they will pause their production lines for a while to see how their new supply chain arrangements can work. That will have a very serious impact on jobs.

Restrictions on migration from the EU after the transition period ends will not result in more jobs for British workers. The British government is likely to extend bespoke arrangements to allow firms in sectors such as agriculture, hospitality and construction to employ foreign workers outside the scope of British labor laws.

In some sectors, employers faced with rising wage costs are likely to respond by investing in labor-saving technologies, but that while this will improve productivity, it will not lead to net job creation. more>

How Capitalism Actually Generates More Inequality

By Geoffrey M. Hodgson – At least nominally, capitalism embodies and sustains an Enlightenment agenda of freedom and equality.

Typically there is freedom to trade and equality under the law, meaning that most adults – rich or poor – are formally subject to the same legal rules. But with its inequalities of power and wealth, capitalism nurtures economic inequality alongside equality under the law.

Today, in the USA, the richest 1 per cent own 34 per cent of the wealth and the richest 10 per cent own 74 per cent of the wealth. In the UK, the richest 1 per cent own 12 per cent of the wealth and the richest 10 per cent own 44 per cent of the wealth. In France the figures are 24 cent and 62 per cent respectively. The richest 1 percent own 35 percent of the wealth in Switzerland, 24 per cent in Sweden and 15 percent in Canada.

To what extent can inequalities of income or wealth be attributed to the fundamental institutions of capitalism, rather than a residual landed aristocracy, or other surviving elites from the pre-capitalist past? A familiar mantra is that markets are the source of inequality under capitalism. Can markets be blamed for inequality?

In real-world markets different sellers or buyers vary hugely in their capacities to influence prices and other outcomes. When a seller has sufficient salable assets to affect market prices, then strategic market behavior is possible to drive out competitors.

Would more competition, with greater numbers of market participants, fix this problem? If markets per se are to be blamed for inequality, then it has to be shown that competitive markets also have this outcome. more>

The Liberal Conception Of ‘Freedom’ Is Incapable Of Addressing The Problems Of Contemporary Capitalism

By Andrea Lorenzo Capussela – In a forthcoming book, Branko Milanović identifies four ‘troublesome features’ in ‘meritocratic liberal capitalism’.

In its simplest form, liberal theory – equal rights for all citizens, which guarantee their freedom, which is in turn conceived as absence of interference – has no obvious answer to those problems. For if freedom is non-interference, then it is compatible with both inequality and private domination, at least within certain bounds, as neither directly interferes with people’s individual choices.

Indeed, accepting precarious employment is a choice. And as liberals cannot say that Milanović’s four ‘troublesome features’ pose a fundamental challenge to their idea of a good society, their answer is a Ptolemaic one: sets of diverse, if potentially effective remedies such as redistribution, poverty relief, active labor market policies, civic education, and policing fake-news.

For the liberal conception of freedom is not the only conceivable one. Another notion, equally negative, is the republican or neo-roman one, which views freedom as non-domination. If I depend on someone else’s arbitrary will, or am subject to their enormous and unchecked power, I am not free, irrespective of how that power is exercised.

Hence the paradox of the ‘free slave’, frequent in republican literature: liberal theory implies that the slave who has a kind master is free, as she suffers no interference in her choices; republicans object that this depends entirely on the master’s benevolence, which can be revoked at will and may have to be cultivated: domination and unfreedom remain, therefore, and typically lead to self-censorship and a slavish mentality. more>

The Finnish Basic Income Experiment – Correcting The Narrative

By Jurgen De Wispelaere, Antti Halmetoja and Ville-Veikko Pulkka – The Finnish government’s refusal to extend or expand the experiment may not come as much of a surprise once the budgetary implications are taken into account but it nevertheless amounts to one more disappointment amongst those closely watching how the experiment is progressing. And disappointments have been plentiful with this project.

After a promising start, the first blow came when the Sipilä government ignored most of the suggestions and recommendations of the research consortium led by Kela (the Social Insurance Institution of Finland) and charged with preparing the experimental design — incidentally, appointed by the very same Juha Sipilä.

The design now being rolled out is much more limited than many had hoped for. Repeated requests for additional budget or postponing the starting date were ignored. Much-needed coordination between the different ministries involved was not forthcoming. The government also delayed appointing the team charged with evaluating the result until the experiment was well into its second year – with detrimental effects for any attempt to gain a more comprehensive insight into the experiment’s wellbeing effects. more>

Is The Monetary System Facing The Risk Of Recession?

By Francesc Raventós – The International Monetary Fund, other economic institutions, politicians, experts, and a good number of indicators predict a new economic downturn. The causes will be diverse but the significant one is that debt worldwide has grown at an exaggerated rate.

According to the report of the International Finance Institute, IIF, global debt is $247-plus trillion, 318% of GDP.

In the 2000s or noughties an expansive fiscal and monetary policy with low interest rates generated significant public deficits, a strong increase in borrowing and created a stock market and real estate bubble that erupted in 2007, forcing central banks to push for a huge monetary expansion – Quantitative Easing – to get out of the crisis eventually.

With a lot of financial liquidity in the market at a cost close to zero, the economy has regained growth and, for now, inflation is under control. But the economic cycle cannot be considered closed until central banks’ debt and interest rates return to normal. Trust in the International Monetary System, and the main currencies remains, but if some day trust in one important currency is lost, the situation would be very delicate.

Now the economic recovery has been achieved, it is time to gradually restore debt and interest rates to reasonable levels (aka tapering). The US Federal Reserve (Fed) has already increased its interest rate and announced that it will continue to do so.

The consequences have been immediate, with the withdrawal of investments from emerging countries, such as Argentina, Brazil, South Africa, India or Turkey, to invest in American bonds. The European Central Bank (ECB) has also announced that by the end of 2018 it will stop buying debt and that interest rates will rise as the economy improves (but not before the summer of 2019).

What will be the consequences of tapering?

Will it destabilize the economy?

What are the risks of entering a new recession?

Will the current monetary system resist?

How will the governments that are highly indebted deal with recession? more>