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Showing posts from August, 2014

Fear the fear

"Debt isn't always bad, fearing inflation is stupid and governments should spend far more, suggest top economists", reads a headline in the Guardian. Reporting on proceedings at the Lindau Economics Meeting last week, Philip Inman highlights Christopher Sims's lecture "Inflation, Fear of Inflation and Public Debt", in which Sims argues that fear of both inflation and government debt is driving the developed world into a never-ending slump. As Inman explains, the timing and location of this speech are particularly telling:
Sims was well aware he was speaking in a Germany that fears inflation much as the villagers in the Asterix comic books fear the sky falling on their heads. Without naming Angela Merkel, he said anyone who feels threatened by inflation is stupid. Ouch.

But actually it is worse than that. Fear of inflation is not just stupid, it is dangerous. And the Germans above all should understand this.

Popular mythology in Germany has it that the Weima…

Ultra-liquidity

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My first Pieria post about matters discussed at the Lindau Economics Meeting looks at the ever-increasing liquidity of financial assets and the consequences for monetary policy: Several economists at the Lindau meeting were severely critical of central banks' conduct of monetary policy in the light of continuing depression in the US, Japan and much of Europe, and called for greater use of fiscal policy to bring about recovery. Among the most critical was Christopher Sims, who gave a trenchant presentation on “Inflation, Fear of Inflation and Public Debt”. He started by announcing the death of the quantity theory of money, MV=PY. Due to interest on reserves and near-zero interest rates, “money” can no longer be clearly distinguished from other financial assets.... Read on here.


Nobel laureates, halo effects and idiosyncratic markets

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Chatting to a young Indonesian economist over breakfast this morning, I discovered that his impression of Nobel laureates had been radically changed by the Lindau meeting.
“I used to think that being a Nobel Laureate meant being a world expert in economics”, he said. “Now I know that's not the case. Nobel Laureates are world experts in their own particular area of research. But they aren't experts in economics as a whole.”
The tendency to regard people who are highly qualified and experienced in one area as therefore competent to pronounce upon everything under the sun is a form of what is known as the “halo effect”. And it can have absurd consequences. In a press briefing that I attended, a journalist from a well-known news publication asked the American economist Peter Diamond to comment on the Eurozone. The journalist in question is an EU citizen resident in Frankfurt who has been reporting on European matters for several years. She has far more practical knowledge and e…

The Bulgarian Banking Disaster

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Another in the Bulgarian banking series at Forbes. Two months on, CorpBank is still closed and there is no end in sight. Depositors are angry, bondholders are nervous after the bank's recent default, and the Bulgarian authorities are making increasingly desperate attempts to find the money to reimburse depositors and - perhaps - recapitalize the bank so it can be reopened. Meanwhile, Tsvetan Vassilev, the bank's majority owner, is in hiding after an international arrest warrant for him was issued on charges of embezzlement. And Delyan Peevski's power base becomes ever larger....

Read the article here.



Depositors protesting about CorpBank's closure. Picture credit: Novinite



Oil, Angola, and corruption

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From Forbes:
The US oil company Cobalt International Energy Inc. has been issued with a Wells Notice by the U.S. Securities and Exchange Commission in relation to its operations in Angola. The Wells Notice formally warns Cobalt that it may face enforcement action for breaches of “certain federal securities laws”: In connection with such investigation, on the evening of August 4, 2014, the Company received a “Wells Notice” from the Staff of the SEC stating that the Staff has made a preliminary determination to recommend that the SEC institute an enforcement action against the Company, alleging violations of certain federal securities laws. In connection with the contemplated action, the Staff may recommend that the SEC seek remedies that could include an injunction, a cease-and-desist order, disgorgement, pre-judgment interest and civil money penalties. The Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows the Company the opportunity to provide its reas…

The ECB is not doing its job. Again.

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At the risk of sounding like a broken record, I'm going to say it again. The ECB is not doing its job. It is sitting on its hands and muttering about inflation while the Eurozone sinks further into depression. Even the mighty Germany's economy is shrinking, France is on the floor, Italy is in a slump and Spain's once-promising recovery looks set to be curtailed as consumer prices slide. What is the ECB doing about it? This:

The targeted longer-term refinancing operations (TLTROs) that are to take place over the coming months will enhance the accommodative monetary policy stance. These operations will provide long-term funding at attractive terms and conditions over a period of up to four years for all banks that meet certain benchmarks applicable to their lending to the real economy. This should help to ease funding conditions further and stimulate credit provision to the real economy.

In other words - nothing. Apart from lending money to banks in the hope they will lend it…

South Africa Has Bailed Out A Predatory Lender

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An incendiary post at Forbes about South Africa's rescue of African Bank, which was lending far too much money at exorbitant interest rates to poor people who were otherwise shut out of the financial system. How on earth is this a justifiable use of public funds?

Read the whole article here, and weep.

Related reading:

African Bank has not learned its lesson - SABC


Of course Scotland can use the (Scottish) pound

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The Scottish currency question is in the news again as Alex Salmond insists that an independent Scotland would use the pound "come what may". At Forbes, Tim Worstall and I both look at what this might mean in practice. But we have slightly different views....
"My colleague Tim Worstallargues correctly that an independent Scotland would still be able to use the pound if it chose. Just as the US has no power to prevent Panama, Ecuador and even Zimbabwe using the US dollar as their currency, so the remainder of the UK would have no power to prevent an independent Scotland using the pound. But equally, independent Scotland using the UK pound as its currency without any form of monetary union with the UK would have no control whatsoever over monetary policy. In Zimbabwe this is a good thing, since the last thing anyone wants is the government to have any control of monetary policy. But Scotland is not Zimbabwe: the whole point of the independence campaign is that Scotland s…

Banco Espirito Santo: The Angolan Story

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If you thought what I described in my recent pieces on Bulgaria was corruption, just read this.....it makes Bulgaria look like the Garden of Eden. Honestly, I was shocked. What was supposed to be a post about the failure of the Angolan arm of BES turned into a post about the systematic looting of Angola by its corrupt political elite. And I've only scratched the surface, really. Horrifying.

I am grateful to Nicholas Shaxson for pointing me in the direction of this piece of analysis.

Related reading

The BES story so far:

Banco Espirito Santo: a Portuguese disaster, not a European crisis
How to rip off a bank, Espirito Santo style
How to rip off a country, Espirito Santo style

Plus, for comparison purposes, the Bulgaria sequence:

What on earth is going on in Bulgaria?
The curious case of the Bulgarian bank runs
The Bulgarian Game of Thrones
The EU should beware of Russian interest in Balkan banks

Oh, and if' you'd like some more Angolan and Portuguese horror, here's David Malone

Marginally confusing

When the efficacy of (unconventional) monetary policy is discussed, the point that is often raised is that QE is ineffective because it directs money to the rich, who have a lower marginal propensity to consume than the poor. People argue that if only we could direct money to the poor - perhaps by throwing money out of helicopters into deprived areas - monetary stimulus would be far more effective.

The same argument appears in debates about the effect of inequality on growth. Consumption drives growth (well, it's not quite that simple, but bear with me); inequality concentrates income in the hands of a few at the expense of the many; the rich few have a lower marginal propensity to consume than the (relatively) poor many, so spending is less than it would be if inequality were lower. Therefore rising inequality impedes growth.

But here is John Cochrane:
"Didn't Milton Friedman demolish the whole concept of "marginal propensity to consume" 70 years ago?" Wel…

When darkness falls

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Photo credit: Getty Images

At Pieria, I reflect on the centenary of the outbreak of war in 1914. It is not enough to remember World War I. We must learn from it.
On Monday August 4th 2014, the British people remembered the words of Edward Grey: “The lamps are going out all over Europe; we shall not see them lit again in our lifetime.” And at 11 pm, the time at which World War I started on this day a century ago, they turned out all but one of their lights..... Read on here

The Austrian savings banks are on their own as government withdraws support for the banking system

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My latest at Forbes looks at the implications of Moody's downgrade of Oesterreichische Volksbanken AG:
The Austrian government’s recent decision to overturn the guarantee provided by the State of Carinthia to holders of Hype Alpe Adria’s subordinated debt has come back to haunt it. Citing reduced government support, inadequate capital and poor performance, the ratings agency Moody's has downgraded Oesterreichische Volksbanken AG (VBAG) and its senior debt to Ba3 with a negative outlook.  This downgrade follows on from Moody’s recent announcement that the Austrian government’s decision with regard to HAA would be “credit negative” for the Austrian banking system and possibly also for the sovereign....  But this downgrade has much wider implications. Read the whole article here.




















(photo credit: Financial Times)

How to rip off a country, Espirito Santo style

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In my latest post at Pieria, I took a hard look at the half-year results of Portugal's distressed Banco Espirito Santo. They are pretty grim reading. No, they are worse than that. They read like an instruction manual for how to rip off a bank. It's no surprise that the losses are appalling.

But now it seems that Banco Espirito Santo is to be bailed out by the Portuguese government. The rescue plan was announced by the Bank of Portugal late in the evening of 3rd August, and the European Commission confirmed that it complied with existing state aid rules.

The Bank of Portugal's statement describes the dramatic events that led to the decision to rescue BES (my emphasis):
On July 30, Banco Espírito Santo, SA announced losses which greatly exceeded those anticipated from the information previously provided by Banco Espírito Santo, SA and its external auditors. Results released on July 30 reflect management acts seriously prejudicial to the interests of Banco Espírito Santo, SA…