Tag Archives: Financial crisis

The $7 Trillion Hazard That Lies Beneath the M&A Boom

By Chris Bryant Tara Lachapelle – The global M&A boom has left a giant footprint on corporate balance sheets, and we’re not just talking about all that debt. Goodwill — the difference between what assets are worth on paper and how much an acquirer paid for them — is also soaring, and that could spell trouble for corporate earnings.

At S&P 500 companies, goodwill has risen by two-thirds over the past decade and accounts for more than one-third of net assets.

In the past two years, takeover targets have sold for a median of 11 times Ebitda — essentially 11 years of profit — whereas the multiple was only about 7-9 times in the years leading up to the recent merger frenzy.

As for who’s sitting on the most absolute goodwill, beer takes the cake. Anheuser-Busch InBev SA’s goodwill doubled to a cool $136.5 billion after its $100 billion takeover of SAB Miller Plc.

Impairments deplete shareholder equity, which makes lenders and bondholders nervous. Companies that financed takeovers with lots debt are particularly exposed. more> https://goo.gl/Ube7e8

Old economics is based on false ‘laws of physics’ – new economics can save us

By Kate Raworth – In the 1870s, a handful of aspiring economists hoped to make economics a science as reputable as physics. Awed by Newton’s insights on the physical laws of motion – laws that so elegantly describe the trajectory of falling apples and orbiting moons – they sought to create an economic theory that matched his legacy. And so pioneering economists such as William Stanley Jevons and Léon Walras drew their diagrams in clear imitation of Newton’s style and, inspired by the way that gravity pulls a falling object to rest, wrote enthusiastically of the role played by market forces and mechanisms in pulling an economy into equilibrium.

Their mechanical metaphor sounds authoritative, but it was ill-chosen from the start – a fact that has been widely acknowledged since the astonishing fragility and contagion of global financial markets was exposed by the 2008 crash.

The most pernicious legacy of this fake physics has been to entice generations of economists into a misguided search for economic laws of motion that dictate the path of development. People and money are not as obedient as gravity, so no such laws exist. Yet their false discoveries have been used to justify growth-first policymaking. more> https://goo.gl/hbL9yx

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

Related>

The dangers of ultra-long-term bonds

By Judd Gregg – The dollar is the key to world commerce. It is used by most nations as their reserve currency. It is essentially other countries’ insurance against their governments pursuing profligate fiscal policy.

This fact would possibly make the sale of 50- or 100-year U.S. bonds acceptable in the world market. But it should also give us significant pause.

If we want our currency to be the reserve currency of choice around the world, then we need that currency to be respected.

If we start issuing general obligation bonds that have 50- or 100-year terms, we will inevitably call into question the long-term integrity of our nation’s fiscal house. Financing current expenses for 5, 10 or even 30 years may be an accepted practice, but to go out 50 or 100 years is not. more> https://goo.gl/t5bjEg

Adequate Housing: Global Financial Institutions Hold the World to Ransom

By Aisha Maniar – Global real estate is valued at around USD 217 trillion, representing 60% of all global assets.

At a recent press conference, the UN Special Rapporteur on the Right to Adequate Housing, Leilani Farha, stated that “Residential real estate is valued at $USD 163 trillion or more than twice the world’s total GDP.” She added, “Imagine if that capacity was harnessed for the realization of the right to housing instead of speculation and profit.’

In presenting a new hard-hitting report on 1 March, which “focuses on the “financialization of housing” and its impact on human rights”, Farha stated that “Housing has lost its currency as a human right” and “has been financialized: valued as a commodity rather than a human dwelling.”

The housing crisis, which “has not often been considered from the standpoint of human rights,” is global.

Many Western governments have adopted a “let them eat cake” response to the crisis. Rather than address the question of affordable and adequate housing, governments have acquiesced to market forces, with the governments of the UK and Ireland, for example, seeing a solution in building more private homes, to the benefit of developers, even though many properties lie empty in both states.

The Australian government continues to grant tax concessions to developers. more> https://goo.gl/5vYwcy

The Only Thing, Historically, That’s Curbed Inequality: Catastrophe

By Walter Scheidel – The pressures of total war became a uniquely powerful catalyst of equalizing reform, spurring unionization, extensions of voting rights, and the creation of the welfare state. During and after wartime, aggressive government intervention in the private sector and disruptions to capital holdings wiped out upper-class wealth and funneled resources to workers; even in countries that escaped physical devastation and crippling inflation, marginal tax rates surged upward.

Concentrated for the most part between 1914 and 1945, this “Great Compression” (as economists call it) of inequality took several more decades to fully run its course across the developed world until the 1970s and 1980s, when it stalled and began to go into reverse.

This equalizing was a rare outcome in modern times but by no means unique over the long run of history. Inequality has been written into the DNA of civilization ever since humans first settled down to farm the land.

Throughout history, only massive, violent shocks that upended the established order proved powerful enough to flatten disparities in income and wealth. They appeared in four different guises:

  1. mass-mobilization warfare,
  2. violent and transformative revolutions,
  3. state collapse, and
  4. catastrophic epidemics.

Hundreds of millions perished in their wake, and by the time these crises had passed, the gap between rich and poor had shrunk. more> https://goo.gl/b2D6Dj

Economists Get Too Much Credit — and Blame

By Victoria Bateman – Now, with the threat of deglobalization hanging over us, economists stand on the sidelines, feeling ignored.

This recent turn of events might leave us wondering: Do economists have the power and influence required to affect political and policy outcomes, or is it politics that determines which strains of economics are cherry-picked and ultimately championed?

Were John Maynard Keynes alive today, he would no doubt argue that the global financial crisis, Brexit and the election of Donald Trump are all a result of a failed free-market economic agenda, resulting in rising inequality and a slowdown in economic growth, leaving the general public reeling. Economists would be squarely in the dock.

As far as that great rival to Keynesian thinking, Milton Friedman, was concerned, it is the public’s experiences and not the writings of economists that drive economic and policy revolutions. more> https://goo.gl/4J5c2x

Economics is fundamentally flawed

By David Spencer – Economics should be in crisis. But in reality it is not. Rather, economics remains largely the same as it was before the financial crisis – in effect, it remains just as problematic now as in the past. This is an issue not just for economics but for society as a whole, given the enduring power and influence of the discipline on policy and public life.

To think of economics in terms of forecasting is to limit its nature and scope. Economics ought to be about explanation. It should be able to make sense of the world beyond forecasts of the future. It is not clear that as it exists now, economics is able to understand the world in its present form. To this extent, it cannot help understand the frequency and depth of crises.

As things stand, there is little chance that economics will open up to the ideas and methods of other disciplines. Instead, the discipline has embraced a project of “economic imperialism” seeking to colonize other social sciences. Genuine interdisciplinary debate has lost out in this process. more> https://goo.gl/xDk2Mv

A General Logic of Crisis

BOOK REVIEW

How Will Capitalism End? Author: Wolfgang Streeck.
Buying Time, Author: Wolfgang Streeck.
The Deluge: The Great War and the Remaking of Global Order 1916-31, Author: Adam Tooze.

By Adam Tooze – The core of Streeck’s crisis theory is non-Marxian. It does not rest on the violence of original primitive accumulation, or on the alienation or exploitation inherent to the productive process, or even primarily on the declining rate of growth or accumulation.

In one disarming passage he describes capitalism as a ‘a non-violent, civilized mode of material self-enrichment through market exchange’. What makes capitalism toxic is its expansiveness, its relentless colonization of the rest of society. Drawing on Karl Polanyi, Streeck insists that capitalism destroys its own foundations.

It undermines the family units on which the reproduction of labor depends; it consumes nature; it commodifies money, which to function has to rest on a foundation of social trust. For its own good, capitalism needs political checks.

The significance of 2008 and what has happened since is that it is now clear these checks are no longer functioning. Instead, as it entered crisis, capitalism overran everything: it forced the hand of parliaments; it drove up state debts at taxpayers’ expense at the same time as aggressively rolling back what remained of the welfare state; the elected governments of Italy and Greece were sacrificed; referendums were canceled or ignored. more> https://goo.gl/T9bS8i

How the Profound Changes in Economics Make Left Versus Right Debates Irrelevant

BOOK REVIEW

The Origin of Wealth, Author: Eric Beinhocker.
The Gardens of Democracy, Authors: Eric Liu and Nick Hanauer.

By Eric Beinhocker – Economic thinking is changing. If that thesis is correct – and there are many reasons to believe it is – then historical experience suggests policy and politics will change as well. How significant that change will be remains to be seen.

It is still early days and the impact thus far has been limited. Few politicians or policymakers are even dimly aware of the changes underway in economics; but these changes are deep and profound, and the implications for policy and politics are potentially transformative.

For almost 200 years the politics of the west, and more recently of much of the world, have been conducted in a framework of right versus left – of markets versus states, and of individual rights versus collective responsibilities.

New economic thinking scrambles, breaks up and re-forms these old dividing lines and debates. It is not just a matter of pragmatic centrism, of compromise, or even a ‘third way’. Rather, new economic thinking provides something altogether different: a new way of seeing and understanding the economic world. When viewed through the eyeglasses of new economics, the old right–left debates don’t just look wrong, they look irrelevant. more> https://goo.gl/80n0Ke