Tag Archives: Credit

Recovery is Not Resolution

By Carmen Reinhart – A few days ago, Greece, the most battered of Europe’s crisis countries, was able to tap global financial markets for the first time in years. With a yield of more than 4.6%, Greece’s bonds were enthusiastically snapped up by institutional investors.

Do recent positive developments in the advanced countries, which were at the epicenter of the global financial crisis of 2008, mean that the brutal aftermath of that crisis is finally over?

Good news notwithstanding, declaring victory at this stage (even a decade later) appears premature. Recovery is not the same as resolution.

It may be instructive to recall that in other protracted post-crisis episodes, including the Great Depression of the 1930s, economic recovery without resolution of the fundamental problems of excessive leverage and weak banks usually proved shallow and difficult to sustain.

During the “lost decade” of the Latin American debt crisis in the 1980s, Brazil and Mexico had a significant and promising growth pickup in 1984-1985 – before serious problems in the banking sector, an unresolved external debt overhang, and several ill-advised domestic policy initiatives cut those recoveries short. more> https://goo.gl/oQBpm1

Why Wall Street Went Astray: Eight Ways To Humanize Finance

BOOK REVIEW

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return, Author: Mihir Desai.

By Steve Denning – Why did Wall Street go astray?

For most of the last several centuries, bankers and financiers were the pillars of society, the bastions of morality, the people in society that everyone respected.

Yet over the last few decades, Wall Street has become almost a synonym of evil. What went wrong? What can be done to restore the financial sector to the level of respect that it once enjoyed?

For people outside finance: Finance is deeply misunderstood, and we need to make it understandable to people so that they don’t demonize it. The way to do that is not through equations or graphs, but through stories. Finance is central to our lives and ignorance of it is very costly on an individual and societal level.

For people in finance: The core ideas of finance are quite life affirming and very noble — we should make people in finance aspire to them rather than expect so little of them. If finance is going to rehabilitate itself, and I do think it’s broken in many ways, the way to rehabilitate is not through regulation, or outrage, but rather returning to its basic underlying ideas, which are actually quite wonderful. In the long run, that’s how we make finance better — by getting back to the core ideas. more> https://goo.gl/Kr4Mnj

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> https://goo.gl/exG06C

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In praise of cash

BOOK REVIEW

The Heretic’s Guide to Global Finance, Author: Brett Scott.
The Curse of Cash, Author: Kenneth Rogoff.

By Brett Scott – So here I am, the tired individual rationally seeking sugar. The market is before me, fizzy drinks stacked on a shelf, presided over by a vending machine acting on behalf of the cola seller. It’s an obedient mechanical apparatus that is supposed to abide by a simple market contract: If you give money to my owner, I will give you a Coke. So why won’t this goddamn machine enter into this contract with me?

This is market failure.

To understand this failure, we must first understand that we live with two modes of money. ‘Cash’ is the name given to our system of physical tokens that are manually passed on to complete transactions. This first mode of money is public. We might call it ‘state money’. Indeed, we experience cash like a public utility that is ‘just there’.

This second mode of money is essentially private, running off an infrastructure collectively controlled by profit-seeking commercial banks and a host of private payment intermediaries – like Visa and Mastercard – that work with them. The data inscriptions in your bank account are not state money.

Rather, your bank account records private promises issued to you by your bank, promising you access to state money should you wish. Having ‘£500’ in your Barclays account actually means ‘Barclays PLC promises you access to £500’. The ATM network is the main way by which you convert these private bank promises – ‘deposits’ – into the state cash that has been promised to you. The digital payments system, on the other hand, is a way to transfer – or reassign – those bank promises between ourselves.

The cashless society – which more accurately should be called the bank-payments society – is often presented as an inevitability, an outcome of ‘natural progress’. This claim is either naïve or disingenuous. Any future cashless bank-payments society will be the outcome of a deliberate war on cash waged by an alliance of three elite groups with deep interests in seeing it emerge. more> https://goo.gl/KRlMGW

The California Challenge

How (not) to regulate disruptive business models
By Steven Hill – The latest trend from Silicon Valley is known as the “sharing economy,” sometimes referred to as the “gig economy,” “on-demand,” “peer-to-peer” or “collaborative-consumption” economy. Dozens of »disruptive« companies like Uber, Airbnb, Up-work, TaskRabbit, Lyft, Instacart and Postmates have proven to be attractive to consumers and those who would like to “monetize” their personal property (real estate, car) or find flexible, part-time work.

In some ways, these new platforms have the potential to provide new opportunities. But they also display a number of troubling aspects.

With this latest wave of Silicon Valley startup companies, the business model of US corporations is in the process of being redesigned.

The post-Second World War era was dominated by vertical, industrial powerhouses, such as auto companies, in which end-to-end production, design, research, marketing and sales were all performed under a single company roof. Many of these companies – such as GM, Volkswagen, Ford, IBM, Siemens, BMW and Daimler – created a huge number of jobs, numbering in the hundreds of thousands.

Today that company model is yielding yet again, to a new one typified by companies such as taxi service Uber, hospitality company Airbnb and labor brokerages Upwork and Task Rabbit. Their precursor was Amazon, which blazed the way for how to market and sell online. These corporations are little more than websites and an app, who utilize technology to oversee an army of freelancers, contractors and part-timers.

The quality of jobs created by many of the Silicon Valley disruptors is also troubling. The business-friendly “happy talk” of Silicon Valley tells us that these new companies are creating new opportunities by allegedly “liberating workers” to become “independent entrepreneurs” and “the CEOs of their own businesses.” In reality, these workers have ever-smaller part-time jobs (called “gigs” and “micro-gigs”), with low wages and no job guarantee or safety net benefits, while the companies profit handsomely.

In short, workers’ labor value is reduced to only those exact minutes they are producing a report, designing a logo or cleaning someone’s house. It’s as if a football star only got paid when kicking a goal or a chef were paid by the meal. In the name of hyper-efficiency, suddenly the “extraneous” parts of a worker’s day, such as rest and bathroom breaks, staff meetings, training, even time at the water cooler are being eliminated. more> https://goo.gl/hMV72j

Finance Is Not the Economy

By Dirk Bezemer and Michael Hudson – To explain the evolution and distribution of wealth and debt in today’s global economy, it is necessary to drop the traditional assumption that the banking system’s major role is to provide credit to finance tangible capital investment in new means of production.

Banks mainly finance the purchase and transfer of property and financial assets already in place.

This distinction between funding “real” versus “financial” capital and real estate implies a “functional differentiation of credit,” which was central to the work of Karl Marx, John Maynard Keynes, and Schumpeter. Since the 1980s, the economy has been in a long cycle in which increasing bank credit has inflated prices for real estate, stocks, and bonds, leading borrowers to hope that capital gains will continue. Speculation gains momentum — on credit, so that debts rise almost as rapidly as asset valuations.

When the financial bubble bursts, negative equity spreads as asset prices fall below the mortgages, bonds, and bank loans attached to the property. We are still in the unwinding of the biggest bust yet. This collapse is the inevitable final stage of the “Great Moderation.” more> https://goo.gl/GmDT72

What Trump Didn’t Learn From the Financial Crisis

By Noah Smith – There’s this old idea that what’s good for American companies is good for Americans. But that’s not necessarily true, and it’s certainly not true in the case of financial companies.

One well-known reason is moral hazard. Big banks, with their implicit guarantees of future bailouts, have an incentive to take more risk than is good for society.

Another reason is that sometimes banks and other finance companies use business models that hurt their customers.

Anyone who has studied behavioral finance knows that there are many ways in which the average borrower and the average investor predictably make bad decisions. Taking advantage of these lapses in rationality is the dark side of behavioral finance, and in general it’s perfectly legal.

The 2000s housing bubble provides a fairly clear example. Many mortgage lenders made loans to customers who couldn’t pay them back. The borrowers, not realizing that they couldn’t pay back the loans, suffered negative consequences such as foreclosure, repossession and bankruptcy.

The mortgage lenders sold the loans to banks, thus washing their hands of any of the risks they had created. more> https://goo.gl/WlWsLK

It’s not just Deutsche. European banking is utterly broken

By Jeremy Warner – Nine years after the initial eruption, it still rumbles on, with the epicentre now moved from the US to Europe. Only it’s not the same crisis; in large measure, it is completely different.

Today’s mayhem is not so much the result of reckless bankers and asleep at the wheel regulators, but rather of the public policy response to the last crisis itself – that is to say, regulatory over-reach and central bank money printing.

It all goes to show that there is no mess quite so bad that government intervention to correct it won’t make even worse.

There are essentially four factors at work here. First, it’s virtually impossible to make money out of banking in a zero interest rate environment, frustrating attempts to rebuild capital buffers after the bad debt write-downs of recent years.

In circumstances where central banks have bought right along the yield curve, flattening it down to virtually nothing, the margin from maturity transformation all but disappears. more> https://goo.gl/KqGo7Y

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Wells Fargo’s Scandal Is a Harbinger of Doom

BOOK REVIEW

Makers and Takers: The Rise of Finance and the Fall of American Business, Author: Rana Foroohar.

By Rana Foroohar – The irony is that the Wells case isn’t about anything as complicated as Tier 1 capital requirements. It’s about straight-up fraud — tellers were incentivized to make profits above all else.

But why did the trouble come in the consumer division, as opposed to any of the more complicated areas of the business? That’s where the story becomes more interesting, illuminating a more fundamental problem in the business model of banking.

Finance has moved away from its original model of supporting companies (and thus, economic growth), and now makes the majority of its money buying and selling existing assets, as well as issuing corporate and consumer debt.

Until the 1980s, banks mainly took deposits and lent them out to new businesses, which then grew jobs and supported the economy. In the 1970s, for example, the majority of financial flows coming out of the largest U.S. financial institutions went into new business investment. Today, only 15% of it does.

Until we craft a financial system that is once again focused on its true economic function — funding new business, rather than issuing debt, creating asset bubbles, and focusing on boosting profit share at whatever cost — I fear that we can expect more of the bad behavior we’ve seen at Wells. more> https://goo.gl/3cgijT

Peak Finance Looks Like It’s Over

By Noah Smith – It’s time to ask a scary question: How much of the financial industry will soon be obsolete?

There are many examples of technologies that have been replaced by something newer and better — film replaced by digital cameras, typewriters replaced by word processors. Finance isn’t quite like that — businesses will always need to finance their investments and their day-to-day expenses, property buyers will always need mortgages and everyone will always need places to save their money. As long as capitalism lives, there will be a financial industry.

What’s happening, however, is a winnowing. Finance may have outgrown the sustainable limits of its role in the U.S. economy, and might now have to endure a long and painful era of retrenchment.

For the past seven decades, but especially since 1980, finance has grown fat indeed. The share of gross domestic product going to the finance, insurance and real estate industries rose from less than 4 percent in the early 20th century to more than 8 percent by the start of the 21st.

Financial-industry profits also soared, briefly topping 40 percent of all U.S. business profits in the first years of the century. more> https://goo.gl/3KEtVh