Tag Archives: Financial crisis

The next financial crisis is probably around the corner—we just don’t know from where

By John Detrixhe – The German bank’s study of developed markets uses this criteria to define a financial crisis: on a year-over-year basis, a 15% drop in stock markets, 10% decline in foreign-exchange, 10% fall in bonds, 10% increase in inflation, or a sovereign default.

Deutsche Bank argues that crises have been increasingly frequent since the breakdown of the Bretton Woods system, which, after World War II, fixed exchange-rates and essentially linked them to the price of gold. That coordination ended in the 1970s when the US broke the dollar’s peg to the yellow metal. The link to a finite commodity helped limit the amount of debt that could be created.

As strategists at the Frankfurt-based lender see it, the resulting fiat money system has encouraged rising budget deficits, higher debts, global imbalances, and more unstable markets. At the same time, banking regulations have been loosened. In the US, the industry may soon have fewer restrictions and less oversight, a mere 10 years since the last worldwide crisis. more> https://goo.gl/vDnQ2w

How Does Fascism Sneak Into Pop Culture?

BOOK REVIEW

Against the Fascist Creep, Author: Alexander Reid Ross.

By Elizabeth King – Donald Trump’s rise from real-estate businessman and washed-up reality television star to United States president has many people thinking anew about fascism.

The fascist tradition of using the arts as vehicles for expanding the movement is visible in the U.S. today, in some cases in eerily similar ways to the original rise of European fascism in the early 20th century.

In Futurism, we see some early examples of “cultural fascism,” if you will. Filippo Marinetti, founder of the Futurist movement, would be a good place to start. Futurism was founded in Italy in the early 1900s, and was one of the earliest proto-fascist and, in some cases, fascist movements. The idea [of Futurism] was to return to the noble myth [of] the new man who stands for family and tradition, but in a super-powered world of dynamism and adventure.

But if you look at the emergence of fascism and the development of fascism in its original form, one of the interesting things that you see in cultural avenues is that they are often primarily interested in disruption.

And, inevitably, there are liberals in mainstream institutions who accept the expressions of [fascist disruptors] insofar as it is expression, and insofar as it’s good to explore the arts and humanities. So there’s a tendency to accept these movements to some degree, and perhaps even adopt some of their mindsets under this position. This is incredibly dangerous, because fascism is so vitriolic and mercurial that it’s difficult to contain. more> https://goo.gl/gSRBwt

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Five Stages of Economic Grief

BOOK REVIEW

Economyths: 11 Ways That Economics Gets it Wrong, Author: David Orrell.
A Failure of Capitalism: The Crisis of ’08 and the Descent, Author: Richard Posner.
Economics Rules, Author: Dani Rodrik.
The Trouble With Physics, Author: Lee Smolin.

By David Orrell – When Economyths first came out, most economists were in a state of denial – especially those at the top of the profession. Future laureate Tom Sargent said in a 2010 interview “It is just wrong to say that this financial crisis caught modern macroeconomists by surprise.” (No mention of whether the non-modern macroeconomists saw it coming too.)

Laureate Robert Lucas preferred to see the unpredictability as a natural result of future laureate Eugene Fama’s efficient market hypothesis (though as Posner notes, that didn’t stop him from predicting, shortly after Lehman’s collapse, that the crisis would soon go away).Fama agreed that the efficient market hypothesis ‘did quite well in this episode’. The Nobel committee apparently agreed too.

As reality sank in, economists soon began lashing out in anger at anyone who dared criticize their field, including yours truly (I’m going to talk about this because it seems to be quite a general problem). At Canada’s top-ranked economics blog Worthwhile Canadian Initiative, for example, a group of prominent academics, including regular contributors to national publications (Globe and Mail, National Post, Maclean’s, Literary Review of Canada, etc.), shared their professional thoughts about the book online.

Descriptors used included idiotic, ignorant, intellectually lazy, juvenile, random, rubbish, semi-articulated, and ‘sort of like Malcolm Gladwell without the insight’ – ouch. Someone even compared me to a climate change denier (not uncommon, as it turns out). more> https://goo.gl/nAhwBT

The Next Crisis Will Start in Silicon Valley

By William Magnuson – It has been 10 years since the last financial crisis, and some have already started to predict that the next one is near. But when it comes, it will likely have its roots in Silicon Valley, not Wall Street.

Our banks are better capitalized than ever. Our regulators conduct regular stress tests of large institutions. And the Dodd-Frank Act imposes strict requirements on systemically important financial institutions.

But while these reforms have managed to reduce the risks that caused the last crisis, they have ignored, and in some cases exacerbated, the emerging risks that may cause the next one.

These financial technology (or “fintech”) markets are populated by small startup companies, the exact opposite of the large, concentrated Wall Street banks that have for so long dominated finance. And they have brought great benefits for investors and consumers. By automating decision-making and reducing the costs of transactions, fintech has greased the wheels of finance, making it faster and more efficient.

But revolutions often end in destruction. And the fintech revolution has created an environment ripe for instability and disruption. It does so in three ways. …

Wall Street is no longer the future of finance. Silicon Valley is. more> https://goo.gl/LK6CsY

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Where Friedman Was Wrong

A new paper by Oliver Hart and Luigi Zingales argues that a company’s objective should be the maximization of shareholders’ welfare, not value.
By Asher Schechter – In 1970, Milton Friedman famously argued that corporate managers should “conduct the business in accordance with [shareholders’] desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

Since then, Friedman’s view that the sole social responsibility of the firm is to maximize profits—leaving ethical questions to individuals and governments—has become dominant both in finance and law. It also laid the intellectual foundations for the “shareholder value” revolution of the 1980s.

Friedman’s position has been attacked by many critics on the grounds that corporate boards should consider other stakeholders in their decisions.

Yet, if the owner of a privately held firm is under no obligation to care about anybody’s interest but her own, why should it be different for a publicly traded company? more> https://goo.gl/8y3wWZ

The Political Fabric Unravels: Diagnosing The Current Crisis

By Steve Denning – Perhaps not many expected to see the day when an American president would from the Oval Office be issuing a threat of nuclear war, advocating the commission of a war crime, thanking a chief adversary for expelling our diplomats, despising the international fight again climate change, delivering multiple false or misleading statements on a daily basis, systematically vilifying the media and demeaning the freedom of the press, fomenting gender discrimination, picking fights with the leadership of his own party, and defending as ‘fine people’ those who march with neo-Nazis, white supremacists and anti-Semites.

What is striking to the mainstream media is that more than 70% of Republicans still support the president—despite everything he has said and done.

The continuing Republican support of the current president—despite everything—reflects a deeper and more pervasive level of personal desperation than the mainstream media generally recognizes. There is a lack of hope that things will ever get any better. Those negatively affected by economic setbacks become willing to go along with almost anything in order to get change.

As previously accepted norms and values are disregarded and undermined, the political fabric of the nation is at risk of unraveling. more> https://goo.gl/hcTZ3H

Are Index Funds Evil?

A growing chorus of experts argue that they’re strangling the economy—and must be stopped.
By Frank Partnoy – Index funds have grown exponentially since John Bogle founded Vanguard in the mid-1970s.

The top three families of index funds each manage trillions of dollars, collectively holding 15 to 20 percent of all the stock of major U.S. corporations. Best of all for their investors, index funds have consistently beaten the performance of stock-pickers and actively managed funds, whose higher fees may support the Manhattan lifestyle of many bankers, but turn out not to deliver much to customers.

Concerns about the potential dangers of shareholder diversification first surfaced back in 1984, not long after index funds themselves did. Julio Rotemberg, then a newly minted economist from Princeton, posited that “firms, acting in the interest of their shareholders,” might “tend to act collusively when their shareholders have diversified portfolios.” The idea, which Rotemberg explored in a working paper, was that if investors own a slice of every firm, they will make more money if firms compete less and collectively raise prices, at the expense of consumers. Knowing this, the firms’ managers will de-emphasize competition and behave more cooperatively with one another. more> https://goo.gl/AWXivG

How Trump v Kim can wreck the world economy without a shot being fired

By Larry Elliott – The assumption underlying the muted response is that there will be no war between the US and North Korea, nuclear or otherwise, and that the smart investment play is to buy into any dips.

The markets are part right. It still looks unlikely that Trump will sanction a pre-emptive strike. Kim knows that, which is why he would be dumb to up the ante by aiming some missiles into the sea off Guam first.

But the financial markets – and the broader global economy – could still turn nasty in an repeat of what happened 10 years ago even without a shooting war.

For a start, the world has never really recovered from the last crisis. Growth rates have been weak and have only been possible because years of low interest rates and quantitative easing have encouraged consumers and businesses to rack up large amounts of debt. As the economist Steve Keen notes in his new book Can we avoid another financial crisis (Polity), many countries have become what he calls debt junkies.

“They face the junkie’s dilemma, a choice between going ‘cold turkey’ now, or continuing to shoot up on credit and experience a bigger bust later.”

Keen says the countries to watch out for have two characteristics: they already have high levels of personal debt and have relied substantially on credit as a source of demand in the past five years. Australia, Canada, South Korea, Sweden and Norway are all on his list of candidates to be future debt zombies. But so is China. more> https://goo.gl/f7WBnq

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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Away from Oil: A New Approach

By Basil Oberholzer – Two main problems arise from the connections between monetary policy, financial markets and the oil market: the first is financial and economic instability caused by oil price volatility. The second is an environmental problem: a lower oil price inevitably means more oil consumption. This is a threat to the world climate.

Is there a joint answer to these problems? There is. While hitherto existing policy propositions like futures market regulation or a tax on fossil energy face some advantages and disadvantages, they are not able to deal with both the economic instability and the environmental problem at the same time. What is proposed here is a combination of monetary and fiscal policy. Let’s call it the oil price targeting system.

First, to achieve economic stability in the oil market, a stable oil price is needed. Second, to reduce oil consumption, the oil price should be increasing. So, let us imagine that the oil price moves on a stable and continuously rising path in order to fulfill both conditions. To implement this, the oil price has to be determined exogenously. Due to price exogeneity, speculative attacks cannot have any influence on the price and bubbles cannot emerge anymore. The oil price target can be realized by monetary policy by means of purchases and sales of oil futures. Since the central bank has unlimited power to exert demand in the market, it can basically move the oil price wherever it wants. more> https://goo.gl/eUh85j