Category Archives: Banking

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>

Why Wealth Is Determined More by Power Than Productivity

By Laurie Macfarlane – The process of how wealth is accumulated has been subject of much debate throughout history.

If you pick up an economics textbook today, you’ll probably encounter a narrative similar to the following: wealth is created when entrepreneurs combine the factors of production – land, labor and capital – to create something more valuable than the raw inputs. Some of this surplus may be saved, increasing the stock of wealth, while the rest is reinvested in the production process to create more wealth.

How the fruits of wealth creation should be divided between capital, land and labor has been subject of considerable debate throughout history. In 1817, the economist David Ricardo described this as “the principal problem in political economy.”

The measure of wealth used by the OECD is ‘mean net wealth per household’. This is the value of all of the assets in a country, minus all debts. Assets can be physical, such as buildings and machinery, financial, such as shares and bonds, or intangible, such as intellectual property rights.

But something can only become an asset once it has become property – something that can be alienated, priced, bought and sold.

The amount of wealth does not just depend on the number of assets that are accumulated – it also depends on the value of these assets. The value of assets can go up and down over time, otherwise known as capital gains and losses.

The price of an asset such as a share in a company or a physical property reflects the discounted value of the expected future returns. If the expected future return on an asset is high, then it will trade at a higher price today. If the expected future return on an asset falls for whatever reason, then its price will also fall. more>

Updates from Chicago Booth

Foreign currency? No thanks. Investors prefer their own currencies and the US dollar
By Chana R. Schoenberger – Globalization and integrated financial markets allow companies and investors worldwide to work together more closely—but investors still strongly prefer to buy assets in their own currency or in the US dollar, research suggests. This means US companies that issue bonds only in the dollar are uniquely able to borrow from abroad.

Harvard’s Matteo Maggiori, Chicago Booth’s Brent Neiman, and Columbia’s Jesse Schreger looked at international capital flows from investors’ purchases of corporate securities, using a data set of $27 trillion in investment positions provided to them by Morningstar, an independent investment-research company. They find that investor portfolios are more strongly biased toward their own currencies than standard models, such as the kind used at the Federal Reserve or International Monetary Fund, would imply.

If a German company issues securities denominated in Canadian dollars, for example, the buyers of those securities will mainly be Canadian. This bias is so strong “that each country holds the bulk of all securities denominated in their own currency, even those issued by foreign borrowers in developed countries,” the researchers write. more>

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How The Handling Of The Financial After-Crisis Fuels Populism

By Guillaume Duval – Ten years after the collapse of Lehman Brothers people are frequently asking themselves why the crisis has done so much to strengthen populism and nationalism everywhere you go. However, economically and socially, the process that lies behind this development is, unfortunately, all too easy to describe.

During the aftermath of the 2008 crisis, central banks’ rescue of finance continued on an unprecedented scale for ten years with what is called Quantitative easing (QE). The striking effect of this was to send prices of financial assets sky-high and thereby substantially enrich the bankers, speculators and the already rich holders of these assets at levels that are much higher than before the crisis.

At the same time, ordinary people found themselves lastingly out of work on a huge scale. Governments whose own finances deteriorated steeply – not least because of their aid to the financial sector – rushed to cut back on their spending, especially on welfare. Everywhere, classic right-wing governments but also social-liberal left ones as in France adopted deflationary policies to cut the cost of labor and loosen up the labor market rules, thus making ordinary people’s working and living conditions far worse. While cutting again the taxes on the super-rich and corporate earnings to preserve the country’s “attractiveness.”

These public policies – that have put all European countries permanently on the edge of recession and deflation – are also the main reason for the pursuit of the above-mentioned monetary policy that has so significantly increased inequalities. more>

Four Lessons (Not) Learned From The Financial Crisis

By John T. Harvey – That’s fantastic. Good work, Presidents Bush, Obama and Trump. But just because we bailed the water out of the sinking ship doesn’t mean we patched all the holes. And while the former is a necessary first step, without the latter we won’t remain upright for long.

So what didn’t we fix that could still potentially cause a catastrophic leak? Too much. Here’s a short list of what we should have learned but didn’t.

  1. If you are going to bail someone out, bail out the debtor and not the creditor
  2. Financial institutions should be very closely supervised
  3. The market is not always right
  4. Deficit spending doesn’t cause inflation or bankruptcy

Most people assume that what financial institutions do is loan out other people’s money. That is, of course, part of what they do, but what is far more significant is the fact that they create money. I don’t just mean the intro-econ, money-multiplier story where banks make loans after the Federal Reserve injects new funds. In fact, that view is so wrong that economics professors are beginning to eliminate it from their curriculum (not nearly fast enough, but it’s getting there).

Rather, the standard scenario is one in which banks increase the money supply first by making loans to customers and then the Federal Reserve steps in second to supply the necessary reserves. Financial institutions make money out of thin air, not from someone’s savings, and if that leaves the system short of reserves then the Fed buys securities from banks. They do this to prevent interest rates from rising above their targeted rate and therefore the central bank accommodates rather than dictates when it comes to the supply of money. more>

Lessons From The Greek Tragedy Unlearnt

By Simon Wren-Lewis – Private banks were happy to lend to the Greek government because they mistakenly believed their money was as safe as if they were lending to Germany.

Other governments first delayed and then limited Greek default because they were worried about the financial health of their own banks. They replaced privately held Greek debt with money the Greek government owed to other Eurozone governments.

From that point voters would always want all their money back. In an effort to achieve that the Troika demanded and largely achieved draconian austerity and a vast array of reforms.

The result was a slump which crippled the economy in a way that has few parallels in history. Most economists understand that in situations like this it is ridiculous to insist that the debtor pays all the money back. For basic Keynesian reasons this insistence just destroys the ability of the debtor to pay: it is not a zero sum game between creditor and debtor. This is why so much of German debt was written off after WWII.

By July 2015 the Greek government was able to pay for its spending with taxes, so all it needed was loans rolled over. The Troika would only do that if the Greek government started running a large surplus to start paying back the debt i.e. further austerity. more>