Thursday, June 28, 2012

A Manifesto for Economic Sense

A Manifesto for Economic Sense

More than four years after the financial crisis began, the world’s major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s. And the reason is simple: we are relying on the same ideas that governed policy in the 1930s. These ideas, long since disproved, involve profound errors both about the causes of the crisis, its nature, and the appropriate response.
These errors have taken deep root in public consciousness and provide the public support for the excessive austerity of current fiscal policies in many countries. So the time is ripe for a Manifesto in which mainstream economists offer the public a more evidence-based analysis of our problems.
  • The causes. Many policy makers insist that the crisis was caused by irresponsible public borrowing. With very few exceptions - other than Greece - this is false. Instead, the conditions for crisis were created by excessive private sector borrowing and lending, including by over-leveraged banks. The collapse of this bubble led to massive falls in output and thus in tax revenue. So the large government deficits we see today are a consequence of the crisis, not its cause.
  • The nature of the crisis. When real estate bubbles on both sides of the Atlantic burst, many parts of the private sector slashed spending in an attempt to pay down past debts. This was a rational response on the part of individuals, but - just like the similar response of debtors in the 1930s - it has proved collectively self-defeating, because one person’s spending is another person’s income. The result of the spending collapse has been an economic depression that has worsened the public debt.
  • The appropriate response. At a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilizing force, attempting to sustain spending. At the very least we should not be making things worse by big cuts in government spending or big increases in tax rates on ordinary people. Unfortunately, that’s exactly what many governments are now doing.
  • The big mistake. After responding well in the first, acute phase of the economic crisis, conventional policy wisdom took a wrong turn - focusing on government deficits, which are mainly the result of a crisis-induced plunge in revenue, and arguing that the public sector should attempt to reduce its debts in tandem with the private sector. As a result, instead of playing a stabilizing role, fiscal policy has ended up reinforcing the dampening effects of private-sector spending cuts.
In the face of a less severe shock, monetary policy could take up the slack. But with interest rates close to zero, monetary policy - while it should do all it can - cannot do the whole job. There must of course be a medium-term plan for reducing the government deficit. But if this is too front-loaded it can easily be self-defeating by aborting the recovery. A key priority now is to reduce unemployment, before it becomes endemic, making recovery and future deficit reduction even more difficult.
How do those who support present policies answer the argument we have just made? They use two quite different arguments in support of their case.
The confidence argument. Their first argument is that government deficits will raise interest rates and thus prevent recovery. By contrast, they argue, austerity will increase confidence and thus encourage recovery.
But there is no evidence at all in favour of this argument. First, despite exceptionally high deficits, interest rates today are unprecedentedly low in all major countries where there is a normally functioning central bank. This is true even in Japan where the government debt now exceeds 200% of annual GDP; and past downgrades by the rating agencies here have had no effect on Japanese interest rates. Interest rates are only high in some Euro countries, because the ECB is not allowed to act as lender of last resort to the government. Elsewhere the central bank can always, if needed, fund the deficit, leaving the bond market unaffected.
Moreover past experience includes no relevant case where budget cuts have actually generated increased economic activity. The IMF has studied 173 cases of budget cuts in individual countries and found that the consistent result is economic contraction. In the handful of cases in which fiscal consolidation was followed by growth, the main channels were a currency depreciation against a strong world market, not a current possibility. The lesson of the IMF’s study is clear - budget cuts retard recovery. And that is what is happening now - the countries with the biggest budget cuts have experienced the biggest falls in output.
For the truth is, as we can now see, that budget cuts do not inspire business confidence. Companies will only invest when they can foresee enough customers with enough income to spend. Austerity discourages investment.
So there is massive evidence against the confidence argument; all the alleged evidence in favor of the doctrine has evaporated on closer examination.
The structural argument. A second argument against expanding demand is that output is in fact constrained on the supply side - by structural imbalances. If this theory were right, however, at least some parts of our economies ought to be at full stretch, and so should some occupations. But in most countries that is just not the case. Every major sector of our economies is struggling, and every occupation has higher unemployment than usual. So the problem must be a general lack of spending and demand.
In the 1930s the same structural argument was used against proactive spending policies in the U.S. But as spending rose between 1940 and 1942, output rose by 20%. So the problem in the 1930s, as now, was a shortage of demand not of supply.
As a result of their mistaken ideas, many Western policy-makers are inflicting massive suffering on their peoples. But the ideas they espouse about how to handle recessions were rejected by nearly all economists after the disasters of the 1930s, and for the following forty years or so the West enjoyed an unparalleled period of economic stability and low unemployment. It is tragic that in recent years the old ideas have again taken root. But we can no longer accept a situation where mistaken fears of higher interest rates weigh more highly with policy-makers than the horrors of mass unemployment.
Better policies will differ between countries and need detailed debate. But they must be based on a correct analysis of the problem. We therefore urge all economists and others who agree with the broad thrust of this Manifesto to register their agreement at www.manifestoforeconomicsense.org, and to publically argue the case for a sounder approach. The whole world suffers when men and women are silent about what they know is wrong.


http://www.manifestoforeconomicsense.org/A-MANIFESTO-FOR-ECONOMIC-SENSE.pdf In PDF

Sign the Manifesto: http://www.manifestoforeconomicsense.org/

Europe Situation May Turn Disorderly, Roubini Says

Wednesday, June 27, 2012

Barclays fined for attempts to manipulate Libor rates


Barclays has been fined £290m ($450m) for trying to manipulate a key bank interest rate which influences the cost of loans and mortgages.
Its traders lied to make the bank look more secure during the financial crisis and, sometimes - working with traders at other banks - to make a profit.

Philip A. Falcone and Harbinger Charged with Securities Fraud

Washington, D.C., June 27, 2012 — The Securities and Exchange Commission today filed fraud charges against New York-based hedge fund adviser Philip A. Falcone and his advisory firm, Harbinger Capital Partners LLC for illicit conduct that included misappropriation of client assets, market manipulation, and betraying clients. The SEC also charged Peter A. Jenson, Harbinger’s former Chief Operating Officer, for aiding and abetting the misappropriation scheme. Additionally, the SEC reached a settlement with Harbinger for unlawful trading.
http://sec.gov/news/press/2012/2012-122.htm


Additional Materials

EES: Europe Going back to the Middle Ages

A recent article by Spiegel explains that leaders of countries and businesses in Europe are secretly planning for a complete collapse of the EU. 

http://seekingalpha.com/article/687551-europe-going-back-to-the-middle-ages

XGD Greek Drachma on Bloomberg Terminal getting ready to trade

ORIGINAL POST, SEE UPDATES BELOW: We're looking into this, but we can confirm: There's something called the 'Greek Drachma (post Euro)' that's shown up on the Bloomberg terminal.
There's nothing really behind the ticker. No quotes or anything. It's just there.


Read more: http://www.businessinsider.com/xgd-greek-drachma-bloomberg-2012-6#ixzz1z0eJoq2a


@russian_market / It′s really weird to see Drachma back on Bloomberg $XGD
@russian_market / It's really weird to see Drachma back on Bloomberg $XGD



Traders around the world have been staring at their Bloomberg screens, hardly believing their eyes. The electronic information platform has been showing details for possible Greek Drachma trading.
The Bloomberg helpdesk described it as "an internal function which is set up to test."
The news comes in the wake of the heated discussions over the future of the euro zone and the membership of Greece. While many experts insist that Greece should leave the Euro and default, some suggest it should remain the union and introduce a parallel currency to the Euro to repay the country’s debt.

Germany: No to Eurobonds, Yes to Financial Transaction Tax


Angela Merkel has firmly rejected the use of eurobonds ahead of a crucial summit in Brussels this week, ruling out jointly guaranteed eurozone debt for "as long as I live".




Ms Merkel told the German Parliament on Wednesday ahead of a European Union summit there is no "magic formula" that will make the crisis immediately go away.
She insists that Europe must tackle its problems at the roots - which she says are a lack of competitiveness and high debts - in a step-by-step process. Ms Merkel says any other approach is condemned to failure. http://www.telegraph.co.uk/finance/financialcrisis/9359138/Angela-Merkel-No-quick-and-easy-solution-to-debt-crisis.html

http://www.guardian.co.uk/business/2012/jun/27/eurozone-crisis-live-merkel-address-german-parliament?newsfeed=true 12.45pm: Germany is going to ask the EU commission to introduce a financial transaction tax.


http://en.wikipedia.org/wiki/European_Union_financial_transaction_tax The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU. It would cover 85% of the transactions between financial institutions (banks, investment firms, insurance companies, pension funds, hedge funds and others), but not affect citizens and businesses. House mortgages, bank loans to small and medium enterprises, contributions to insurance contracts, as well as spot currency exchange transactions and the raising of capital by enterprises or public bodies through the issuance of bonds and shares on the primary market would not be taxed, with the exception of trading bonds on secondary markets.[10]
Following the "R plus I" (residence plus issuance) solution an institution would pay the tax rate appropriate to the country of its residence, regardless of the location of the actual trade.[11] In other words, the tax would cover all transactions that involve European firms, no matter whether these transactions take place within the EU or elsewhere in the world. If acting on behalf of a client, e.g., when acting as a broker, it would be able to pass on the tax to the client. Hence, it would be impossible for say French or German banks to avoid the tax by moving their transactions offshore.[12]

Tuesday, June 26, 2012

France's Historic Geographic Challenge

EES: Currency ETFs: An alternative to trade Spot FX

http://seekingalpha.com/article/683181-currency-etfs-and-etns-a-stock-investor-s-alternative-to-trade-the-euro-crisis While the European crisis is filling the news, many stock investors do not have access to Forex markets. Many brokers such as TD Ameritrade (AMTD) now offer Forex, but some still do not have access to trade spot Forex directly without opening an additional brokerage account. Even so, a direct Euro short may not be the only way to profit from the Eurozone crisis.

Monday, June 25, 2012

Germans resist Eurozone debt fund

Billionaire investor George Soros called on Europe to start a fund to buy Italian and Spanish bonds, warning that a failure by leaders meeting this week to produce drastic measures could spell the demise of the currency.
http://www.bloomberg.com/news/2012-06-24/soros-pushes-eu-to-start-joint-debt-fund-or-risk-summit-fiasco.html

Chancellor Angela Merkel hardened her resistance to euro-area debt sharing to resolve the region’s financial crisis, setting Germany on a collision course with its allies at a summit of European leaders this week.


http://www.bloomberg.com/news/2012-06-25/merkel-rejects-joint-euro-bonds-bills-with-all-eyes-on-germany.html

(Reuters) - The German government and opposition reached a deal on Thursday on growth that will allow parliament to approve the euro zone's permanent bailout scheme next week, but Germany's top court may delay the rescue fund's start date.
http://www.reuters.com/article/2012/06/21/us-eurozone-germany-esm-idUSBRE85K0LU20120621

Wednesday, June 20, 2012

Operation Twist Extended by Fed


The Federal Reserve will expand its program to replace short-term bonds with longer-term debt by $267 billion through the end of the year in a bid to reduce unemployment and protect the expansion.
The continuation of Operation Twist “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said today in a statement at the conclusion of a two-day meeting in Washington.


http://www.bloomberg.com/news/2012-06-20/fed-expands-operation-twist-by-267-billion-through-year-end.html

What is "Operation Twist" :


Operation Twist (2011)

The Federal Open Market Committee concluded its September 21, 2011 Meeting at about 2:15PM EDT by announcing the implementation of Operation Twist. This is a plan to purchase $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years, thereby extending the average maturity of the Fed's own portfolio.[4] This is an attempt to do what Quantitative Easing (QE) tries to do, without printing more money and without expanding the Fed's balance sheet, therefore hopefully avoiding the inflationary pressure associated with QE.[5] This announcement brought a bout of risk aversion in the equity markets and strengthened the US Dollar, whereas QE I had weakened the USD and supported the equity markets.

http://en.wikipedia.org/wiki/History_of_Federal_Open_Market_Committee_actions

Monday, June 18, 2012

EES: Is it time to sell the Euro?

While markets have relief that the mainstream, pro-bailout party has won the Greek elections, the European crisis is far from over.

http://seekingalpha.com/article/666471-is-it-time-to-sell-the-euro

Oanda closes for Greek election

The street corners are stocked with waiting riot police. One of the few global currency trading platforms which operates at the weekend, Oanda, is closing today for the first time in its history.
http://www.telegraph.co.uk/news/worldnews/europe/greece/9336240/Greek-election-despatch-no-panic-no-fear-no-hope.html

Pro-bailout party wins Greek election


WASHINGTON (AP) -- A slim victory for the main conservative party in an election in Greece should relax fears that a country will stop using the euro for the first time and possibly unleash global financial turmoil.
But when it comes to Greek politics - and European economic policy - it's never that easy. So the bumpy ride for financial markets isn't over yet.


http://hosted.ap.org/dynamic/stories/U/US_GREECE_MARKETS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2012-06-17-21-46-56


Although the Greek poll result eased imminent fears of a Greek exit from the euro, concerns over Spain's sovereign debt problems prompted a rise in the country's 10-year bond yields, which spiked over 7pc. Italy's 10-year yield breached 6pc.
Political parties, led by New Democracy leader, Antonis Samaras, began forging a government on Monday. David Cameron, who is in Mexico for the G20 summit, said the outcome of the Greek election looked clear, but warned a delay in forming a government "could be very dangerous".
"The outcome of the Greek election looks clear in terms of a commitment to stay in the eurozone and to accept the terms of the memorandum," the prime minister said. "But I think those parties that want that to happen can't afford to delay and position themselves. If you are a Greek political party and want to stay in the eurozone and accept the consequences that follow you have got to get on with it and help form a government. A delay could be very dangerous."