Tag Archives: Credit

China’s Belt and Road: The new geopolitics of global infrastructure development

By Amar Bhattacharya, David Dollar, Rush Doshi, Ryan Hass, Bruce Jones, Homi Kharas, Jennifer Mason, Mireya Solís, and Jonathan Stromseth – The growing strategic rivalry between the United States and China is driven by shifting power dynamics and competing visions of the future of the international order. China’s Belt and Road Initiative (BRI) is a leading indicator of the scale of China’s global ambitions.

Originally conceptualized as a “going out” strategy to develop productive outlets for domestic overcapacity and to diversify China’s foreign asset holdings, Beijing later branded the effort as its “Belt and Road Initiative.” While the initiative began with a predominantly economic focus, it has taken on a greater security profile over time.

China’s initiative has attracted interest from over 150 countries and international organizations in Asia, Europe, the Middle East, and Africa. This is due, in part, to the fact that the initiative is meeting a need and filling a void left by international financial institutions (IFI) as they shifted away from hard infrastructure development. But there is a real possibility that the BRI will follow in the footsteps of the IFIs, encounter the same problems, and falter.

BRI shouldn’t be seen as a traditional aid program because the Chinese themselves do not see it that way and it certainly does not operate that way. It is a money-making investment and an opportunity for China to increase its connectivity.

The initiative has a blend of economic, political, and strategic agendas that play out differently in different countries, which is illustrated by China’s approach to resolving debt, accepting payment in cash, commodities, or the lease of assets. The strategic objectives are particularly apparent when it comes to countries where the investment aligns with China’s strategy of developing its access to ports that abut key waterways. more>

How the market is betraying advanced economies

The idea that ‘the market’ must be the organizing principle for collective decision-making should be abandoned.
By Diane Coyle – Despite ever-improving conditions for millions of people around the world—documented by entities like the University of Oxford’s Our World in Data and highlighted by scholars like Steven Pinker—popular discontent is on the rise in many places.

The reason is simple: whereas the first trend is being driven by low- and middle-income countries, the second is concentrated in high-income countries.

Throughout the developed world, conditions for many workers are deteriorating, with no recovery in sight. Income inequality is near historic highs, wealth inequality is even higher and economic insecurity is widespread.

As the United Kingdom tears itself apart politically and constitutionally over Brexit, many of its citizens struggle with low-quality jobs, inadequate housing and poverty so severe that they rely on food banks.

France’s yellow-vest protests have been hijacked by violent extremists, but they reflect real grievances about the growing challenge of maintaining living standards.

In the United States, the Economic Report of the President touts the supposed elimination of poverty, but life expectancy does not decline in a prosperous country.

In short, the post-World War II social contract in many of today’s developed economies is breaking down. And even more uncertainty and insecurity are on the way, as new technologies such as artificial intelligence and robotics take root.

Given the depth of the transformation ahead, however, it is not just the policies themselves that must change, but the very framework on which they are based. This means abandoning the idea—which has shaped public policy for more than a generation—that the ‘market’ must be the organizing principle for collective decision-making. more>

Green money without inflation

Funding an ecological transition in Europe via ‘green money’ bonds would be economically justifiable.
By Paul De Grauwe – To what extent can the money created by the central bank be used to finance investments in the environment?

This is a question often asked today. The green activists respond with enthusiasm that the central bank—and, in particular, the European Central Bank (ECB)—should stimulate the financing of environmental investments through the printing of money.

The ECB has created €2,600 billion of new money since 2015 in the context of its quantitative easing (QE) program. All that money has gone to financial institutions which have done very little with it. Why can’t the ECB inject the money into environmental investments instead of pouring it into the financial sector?

Most traditional economists react with horror.

Who is right? It is good to recall the basics of money creation by the ECB (or any modern central bank). Money is created when that institution buys financial assets in the market. The suppliers of these assets are financial institutions. These then obtain a deposit in euro at the ECB, in exchange for relinquishing these financial assets. That is the moment when money is created. This money (deposits) can then be used as their reserve base by the financial institutions to extend loans to companies and households.

There is no limit to the amount of financial assets the ECB can buy.

In principle, it could purchase all existing financial assets (all bonds and shares, for example), but that would increase the money supply in such a way that inflation would increase dramatically. In other words, the value of the money issued by the ECB would fall sharply. To avoid this, the bank has set a limit: it promises not to let inflation rise above 2 per cent. That imposes a constraint on the amount of money which the ECB can create. So far, it has been successful in remaining within the 2 per cent inflation target. more>

Updates from Chicago Booth

Raghuram G. Rajan says capitalism’s future lies in stronger communities
By Raghuram G. Rajan – You have a new book out called The Third Pillar. What is the third pillar?

It is the community. Around the world, there is widespread economic anxiety, domestic political tension, strife between countries, and now talk of a cold war reemerging between the United States and China. Why?

I argue that every time there’s a big technological revolution, it upsets the balance in society between three pillars: the political structure—that is, government or the state; the economic structure—that is, markets and firms; and the sociological, human structure—that is, communities.

When that balance is upset, we see anxiety and conflict, a signal that we’re striving for a new balance.

To really understand capitalism’s success, one has to understand the important role of the community. As it voices its concerns through democracy, the community is critical to maintaining the balance between the state and markets. When the community is appropriately motivated and engaged, it enables liberal market societies to flourish.

Recently, some communities have been weakened significantly while others have sped ahead. Technological change is creating a new meritocracy, but one that is turning out to be largely hereditary, denying opportunities to many. The many, in economically disadvantaged and thus socially dysfunctional communities, could turn their backs on markets. The consequent imbalances could undermine liberal democratic society. more>

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To end poverty, think like a spy

By Paul M. Bisca – For anyone working to end poverty, fragile states call for the ultimate juggling act. Countries in conflict seldom control their territories, and even when most areas are at peace, others may still be engulfed by violence for decades to come.

The intensity of civil wars can ebb and flow, while forcibly displaced people cross borders in search of shelter. Politicians and warlords can shift alliances abruptly and neighboring states often interfere militarily to prop up local proteges.

When geopolitics is not at play, internal disputes over land, water, or other scarce resources can ignite fighting between local populations. To make sense of all these moving parts, even the most knowledgeable experts must look for new ways to comprehend the world.

What can be done?

To better manage the unknown, development professionals might want to take a leaf from the intelligence community book and draw inspiration from how spies try to predict the future. Reduced to its simplest terms, the CIA defines intelligence as “knowledge and foreknowledge of the world around us—the prelude to decisions by policymakers.”

Other definitions emphasize the collection, processing, integration, analysis, and interpretation of available information from closed and open sources.

Development practitioners are not spies, nor should they aspire to be. Further, the idea that project managers and economists should behave like spies is bound to raise eyebrows for professionals driven by the quest for sustainability and equity.

Yet, the methodology of intelligence is well-suited to paint in our minds the interplay of actions, information, and analysis needed to navigate the complex, uncertain, and downright dangerous environments where extreme poverty stubbornly persists.

This approach is not about acting like James Bond, but rather about thinking like him. more>

Debunking Deregulation: Bank Credit Guidance and Productive Investment

Deregulated banking in rich countries delivers more “investment” in speculative asset markets, not productive businesses.
By Josh Ryan-Collins – Mortgage and other asset-market lending typically does not generate income streams sufficient to finance the growth of debt. Instead, the empirical evidence suggests that after a certain point relative to GDP, increases in mortgage debt typically slows growth and increase financial instability as asset prices rise faster than incomes.

These new empirical findings support a much older body of theory that argues that credit markets, left to their own devices, will not optimize the allocation of resources.

Instead, following Joseph Schumpeter’s, Keynes’ and Hyman Minsky’s arguments, they will tend to shift financial resources away from real-sector investment and innovation and towards asset markets and speculation; away from equitable income growth and towards capital gains that polarizes wealth and income; and away from a robust, stable growth path and towards fragile boom-busts cycles with frequent crises.

This means, we argue, there is a strong case for regulation, including via instruments that guide credit. In fact, from the end of World War II up to the 1980s, most advanced economy central banks and finance ministries routinely used forms of credit guidance as the norm, rather than the exception. These include instruments that effected both the demand for credit for specific sectors (e.g. Loan-to-Value ratios or subsidies) and the supply of credit (e.g. credit ceilings or quotas and interest rate limits).

In Europe, favored sectors typically included exports, farming and manufacturing, while repressed sectors were imports, the service sector, and household mortgages and consumption. Indeed, commercial banks in many advanced economies were effectively restricted from entering the residential mortgage market up until the 1980s. Public institutions — state investment banks and related bodies — were also created to specifically steer credit towards desired sectors. more>

Updates from Chicago Booth

Viewing FICO scores spurs better financial habits
By Carla Fried – When it comes to financial matters, consumers tend to have a lot of confidence but a dearth of knowledge.

More than 400,000 customers of Sallie Mae, a private college-loan lender and servicer, were included in a study that tracked whether a quarterly email letting them know how to view their FICO score for free on Sallie Mae’s website might lead to better financial habits.

The FICO score is the ubiquitous financial report card businesses use to size up the creditworthiness of consumers.

Tatiana Homonoff, Rourke O’Brien, and Abigail Sussman find that Sallie Mae borrowers who received a quarterly email “nudge” were 65 percent more likely to log in to the website and view their FICO scores than customers who did not get the inbox prompt. Moreover, during the two-year study period that ended last June, participants who received the messages saw their FICO scores rise and were less likely to be delinquent in paying their bills. more>

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But Can The Government Afford It?

By John T. Harvey – We’ve been hearing that a lot lately, being asked about things like the proposed U.S.-Mexico border wall, the possibility of universal health care, and even regarding existing programs like Social Security. It’s a relevant question, to be sure, but 99 times out of 100 (or maybe 999 out of 1000), the context in which it is placed is completely wrong.

I say this because the question is almost always asked regarding whether or not we have enough money. If there is one place where the economics discipline has most substantially let down the general public, it’s in explaining how the financial sector works.

Long story short: money is not a scarce resource. Labor is, oil is, clean water is. Money is not.

Money can be and is created with a keystroke, just as easily as I am typing these words. This is true in both the public and private sectors. The private sector creates brand new money every time someone takes out a loan.

It is a widespread belief that banks simply loan out people’s savings. Certainly that’s part of what they do, but only a very small part. Imagine if we really had to wait for people to save up enough cash for entrepreneurs to build restaurants, shopping centers, movie theaters, car dealerships, etc. Economic expansions would be very few and very weak.

Fortunately, that’s not what happens. Instead, when banks make loans, they simply create a deposit for the borrower out of thin air. Their only problem then is meeting the government’s reserve requirement. However, if the Federal Reserve wants to hit its interest rate target, it must supply those reserves (because if it doesn’t, banks will find themselves short of reserves which will drive up interest rates as they compete for them).

If the bank agrees that you have a clever idea, the money to fund it will be created. more>

The Western Illusion of Chinese Innovation

By Zhang Jun – In the West, many economists and observers now portray China as a fierce competitor for global technological supremacy. They believe that the Chinese state’s capacity is enabling the country, through top-down industrial policies, to stand virtually shoulder-to-shoulder with Europe and the US.

This is a serious misrepresentation.

While it is true that digital technologies are transforming China’s economy, this reflects the implementation of mobile-Internet-enabled business models more than the development of cutting-edge technologies, and it affects consumption patterns more than, say, manufacturing.

In fact, Western observers – not just the media, but also academics and government leaders, including US President Donald Trump – have fundamentally misunderstood the nature and exaggerated the role of China’s policies for developing strategic and high-tech industries. Contrary to popular belief, these policies do little more than help lower the entry cost for firms and enhance competition. In fact, such policies encourage excessive entry, and the resulting competition and lack of protection for existing firms have been constantly criticized in China. Therefore, if China relies on effective industrial policies, they would not create much unfairness in terms of global rules.

Clearly, there is a big difference between applying digital technologies to consumer-oriented business models and becoming a world leader in developing and producing hard technology. more>

Why The Only Answer Is To Break Up The Biggest Wall Street Banks

By Robert Reich – Glass-Steagall’s key principle was to keep risky assets away from insured deposits. It worked well for more than half century. Then Wall Street saw opportunities to make lots of money by betting on stocks, bonds, and derivatives (bets on bets) – and in 1999 persuaded Bill Clinton and a Republican congress to repeal it.

Nine years later, Wall Street had to be bailed out, and millions of Americans lost their savings, their jobs, and their homes.

Why didn’t America simply reinstate Glass-Steagall after the last financial crisis? Because too much money was at stake. Wall Street was intent on keeping the door open to making bets with commercial deposits. So instead of Glass-Steagall, we got the Volcker Rule – almost 300 pages of regulatory mumbo-jumbo, riddled with exemptions and loopholes.

Now those loopholes and exemptions are about to get even bigger, until they swallow up the Volcker Rule altogether. If the latest proposal goes through, we’ll be nearly back to where we were before the crash of 2008. more>