Tag Archives: Debt

A decade after the crisis’ first tremor, are we ready for another?

By David Wessel – It was 10 years ago, on Aug. 9, 2007, that France’s BNP Paribas suspended withdrawals from three funds that held U.S. mortgages, a move seen in hindsight as the first tremor of the global financial crisis that shook the world economy.

So this seems a good moment to ask if we are ready for the next financial crisis. The short answer is: No.

Dodd-Frank created a way to “resolve” (that is, wipe out the shareholders, convert some debt to equity and sell off the pieces) of any future Bear Stearns, Lehman Brothers or AIG so that the Federal Reserve and other agencies don’t have to improvise the way it did in 2008 and we don’t suffer the aftershocks of a Lehman-style bankruptcy. This “orderly liquidation authority” is under assault from Republicans in Congress. My bet is that it will survive, but we really won’t know how well this new mechanism works until it has been tested.

The politics of responding to an economy-shaking financial crisis are never easy: What’s needed to protect the economy from another Great Depression will never be popular politically because it looks like bailing out the very folks who created the problem in the first place. more> https://goo.gl/btZKrd

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Why a Consumption Tax May not Make any Sense at All

By Steve Roth – You often hear calls out there — mostly from Right economists but also from some on the Left — for a consumption tax in the U.S. As presented, it’s a super-simple idea: tally your income, subtract your saving, and what’s left is your consumption. You pay taxes on that.

We want to encourage thrifty saving and discourage profligate consumption, so what’s not to like?

Start with a simple pared-down household. The only accounting complication is that they own a house.

How much did this household “save”? Should the interest payments count as consumption? The principal payments almost certainly should not. But what about home maintenance? A new paint job increases your home’s asset value. Should you depreciate that asset value over some years? Or say you buy new appliances for your kitchen: You’re cash out of pocket, but your home is worth more. Are those purchases “consumption”?

This notion of some simple tally of your “saving” starts to look more complicated.

The tuition line raises a particularly vexing question, and brings us back to the second question: what economic effects would we see from a consumption tax, under various accounting and taxation rules? Clearly, if you tax tuition, you discourage education.

And consider more-prosperous families paying for private school. Are those families “consuming” more education than public-school families? Those households would be especially hard hit if tuition counts as taxable consumption — as would those private schools. Is that A Good Thing? more> https://goo.gl/LZSRZd

Venezuela’s Unprecedented Collapse

By Ricardo Hausmann – Media worldwide have been reporting on Venezuela, documenting truly horrible situations, with images of starvation, hopelessness, and rage.

The cover of The Economist’s July 29 issue summed it up: “Venezuela in chaos.”

The most frequently used indicator to compare recessions is GDP. According to the International Monetary Fund, Venezuela’s GDP in 2017 is 35% below 2013 levels, or 40% in per capita terms. That is a significantly sharper contraction than during the 1929-1933 Great Depression in the United States, when US GDP is estimated to have fallen 28%. It is slightly bigger than the decline in Russia (1990-1994), Cuba (1989-1993), and Albania (1989-1993), but smaller than that experienced by other former Soviet States at the time of transition, such as Georgia, Tajikistan, Azerbaijan, Armenia, and Ukraine, or war-torn countries such as Liberia (1993), Libya (2011), Rwanda (1994), Iran (1981), and, most recently, South Sudan.<

Put another way, Venezuela’s economic catastrophe dwarfs any in the history of the US, Western Europe, or the rest of Latin America. more> https://goo.gl/xXWCgg

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

The end of globalisation as we know it?

By Durukal Gun , Christian Keller, Sree Kochugovindan, Tomasz Wieladek – Modern globalisation has gone well beyond the trade of goods, as technology allowed for transfer of know-how and skills.

Since glottalization began in the middle of the 1800s, it has been through several different cycles. Now it appears to have reached yet another turning point.

Only recently has globalization matched the heights it reached before World War I.

  • First wave of globalization (1850s to 1914)
  • Protectionism (1914 to 1945)
  • Second wave of glottalization (1945 to 1990)
  • Hyperglobalization (1990 to present)

Among the clear beneficiaries of hyperglobalization are the emerging economies, which have become increasingly integrated into more and more complex global value chains. Their role in processing raw materials, and in value-added manufacturing and services has grown rapidly.

The first signs of opposition to hyperglobalisation emerged amid major demonstrations at the 1999 meeting of the World Trade Organization in Seattle. Concerns mounted in the wake of the 2008-09 financial crisis and subsequent global recession, reflected more recently in public resistance to trade and investment agreements such as the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership.

Discriminatory protectionist tariffs and trade measures are on the rise. more> https://goo.gl/K54eeK

The world is sitting on a $400 trillion financial time bomb

By Allison Schrager – Financial disaster is looming, and not because of the stock market or subprime loans. The coming crisis is more insidious, structural, and almost certain to blow up eventually.

The World Economic Forum (WEF) predicts that by 2050 the world will face a $400 trillion shortfall (pdf) in retirement savings. (Yes, that’s trillion, with a “T”.)

The US will find itself in the biggest hole, falling $137 trillion short of what’s necessary to fund adequate retirements in 2050. It is followed by China’s $119 trillion shortfall.

Much of the massive shortfall is baked into retirement systems; setups in which nobody, neither individuals nor the government, saves enough.

About three-quarters of the projected comes from underfunded promises from governments, with the rest mostly accounted for by under-saving on the part of individuals. more> https://goo.gl/UUisEk

End-times for humanity

BOOK REVIEW

Death of the Posthuman: Essays on Extinction, Author: Claire Colebrook.
This Changes Everything: Capitalism vs the Climate, Author: Naomi Klein.
Antifragile, Author: Nicholas Taleb.
A Vindication of the Rights of Woman, Author: Mary Wollstonecraft.
The Social Contract, Author: Jean-Jacques Rousseau.

By Claire Colebrook – The panic isn’t merely about civilisational threats, but existential ones. Beyond doomsday proclamations about mass extinction, climate change, viral pandemics, global systemic collapse and resource depletion, we seem to be seized by an anxiety about losing the qualities that make us human.

Social media, we’re told, threatens our capacity for empathy and genuine connection.

How did we arrive at this moment in history, in which humanity is more technologically powerful than ever before, and yet we feel ourselves to be increasingly fragile?

What contemporary post-apocalyptic culture fears isn’t the end of ‘the world’ so much as the end of ‘a world’ – the rich, white, leisured, affluent one. Western lifestyles are reliant on what the French philosopher Bruno Latour has referred to as a ‘slowly built set of irreversibilities’, requiring the rest of the world to live in conditions that ‘humanity’ regards as unlivable.

And nothing could be more precarious than a species that contracts itself to a small portion of the Earth, draws its resources from elsewhere, transfers its waste and violence, and then declares that its mode of existence is humanity as such. more> https://goo.gl/1nriI9

Our obsession with GDP and economic growth has failed us, let’s end it

BOOK REVIEW

Wellbeing Economy: Success in a World Without Growth, Author: Lorenzo Fioramonti.

By Lorenzo Fioramonti – The idea that the economic “pie” can grow indefinitely is alluring. The “growth first” rule has dominated the world since the early 20th century. No other ideology has ever been so powerful: the obsession with growth even cut through both capitalist and socialist societies.

But what exactly is growth? Strangely enough, the notion has never been reasonably developed.

For common sense people, there is growth when—all things being equal—our overall wealth increases.

Paradoxically, our model of economic growth does exactly the opposite of what common sense suggests.

Here are some examples. If I sell my kidney for some cash, then the economy grows. But if I educate my kids, prepare and cook food for my community, improve the health conditions of my people, growth doesn’t happen.

If a country cuts and sells all its trees, it gets a boost in GDP. But nothing happens if it nurtures them. more> https://goo.gl/k6G27r

Updates from Chicago Booth

By Robert Shiller – The human species, everywhere you go, is engaged in conversation. We are wired for it: the human brain is built around narratives.

We call ourselves Homo sapiens, but that may be something of a misnomer—sapiens means wise. The evolutionary biologist Stephen Jay Gould said we should be called Homo narrator. Your mind is really built for narratives, and especially narratives about other humans. That is why advertisers tend to focus not on a product itself, but rather on somebody doing some human action related to the product.

Narratives are contagious: they spread from one person to another. Some narratives disappear quickly; others can last a long time.

The stock market gives us opportunities to construct narratives. For instance, earlier this year there were narratives around the Dow-Jones Industrial Average eclipsing 20,000 points for the first time in its history.

In reality, that’s absolutely meaningless: the Dow started at 40 points in 1896, but it could have started at 50, or something else. Yet we constructed narratives around this moment.

Why do narratives affect economics? Because when we want to understand a depression or recession, for instance, we have to understand why some people will stop spending. Recessions happen when people stop buying things: they don’t buy a new car; they don’t buy a new house. So why not? They might say they stopped spending because recession struck, but that doesn’t tell me why the recession started. I think the catalysts for events such as that are related to narratives. more> https://goo.gl/hjpU4r

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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