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Showing posts from June, 2014

What on earth is going on in Bulgaria?

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At Forbes:
Things move quickly in Bulgaria. Less than a month ago, the IMF gave Bulgaria's banking system a clean bill of health, saying it was "stable and liquid, with banks' non-performing loans buffered by provisions and significant capital, as well as a positive net foreign asset position".But yesterday, the President of Bulgaria was forced to issue a statement reassuring people that their money was safe after a week of bank runs. And the EU has now granted Bulgaria an emergency line of credit to support its banking system.
So what on earth went wrong? Find out here.

Of interest rates and deficits

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(I was tempted to call this post "Sumner's Here" but thought that might be a bit too FT Alphaville.)

Recently, the American economist Scott Sumner visited the UK, among other things giving a presentation at the Adam Smith Institute and interviews on the BBC's Today programme and Newsnight. Sadly I missed these events, but fortunately he has written about what he saw.

He notes that all the talk in the UK is about raising interest rates. Indeed it is, and I am one of a rapidly diminishing number of voices who urge caution: premature interest rate rises in a fragile economy with high levels of household indebtedness could kill off the nascent recovery. The UK economy needs to be strong enough to support reduction in the fiscal deficit before interest rates start to rise. On this, Sumner and I seem to be in agreement:
Since 2008, the UK has run extremely large budget deficits, bigger than the US as a share of GDP. Everyone agrees these are too large, and need to be reduc…

Austria falls out with Bavaria over zombie banks

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There’s a nice little storm brewing in the Eurozone core. Reuters reportsthat the German province of Bavaria is considering legal action against Austria. And it is seeking support for its action not only from the German federal government, but also from the EU.

The background to this is the failure and nationalization of the Austrian bankHypo Alpe Adria(HAA) in December 2009. HAA was bought by the Austrian state from the Bavaria-based Landesbank BayernLB for a nominal 1 euro. But it seems that BayernLB left behind about 2.3bn euros in subordinated debt. And the Austrian government wants to bail this in as part of the winding-up procedure for HAA.....

Read on here. UPDATE: Klaus Kastner, who knows much more about this than I do, has posted a really illuminating comment on the Forbes post about the background to HAA and BayernLB's relationship. And David Keohane has reminded me about this FT Alphaville post on the subject from December 2013.

The picture is of BayernLB's lions. Se…

Lagarde's apology may prove costly for the Euro area

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The IMF’s Article IV consultation with the Euro area makes grim reading. It starts off upbeat:
"The euro area recovery is taking hold. Real activity has expanded for four consecutive quarters. An incipient revival in domestic demand is adding to the impetus from net exports. Financial market sentiment has improved dramatically, particularly after the recent ECB measures. Sovereign and corporate yields are now at historic lows in many countries, and lower funding costs have helped banks raise more capital." And it then goes on to praise the efforts national governments have made to clean up their balance sheets. It also commends policy-makers and regulators for the nascent banking union and the clean-up currently in progress. “Strong policy actions have boosted investor confidence and laid the foundations for recovery”, it cheerfully proclaims. But that’s where the cheerfulness ends. The fact is that the Euro area is still in deep, deep trouble....
Read on here.

Are the lights going out for Barclays' investment bank?

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My latest post at Forbes looks at the implications for Barclays and for the whole financial industry of the latest in a long line of lawsuits.

A few weeks ago, following awful trading results, much of Barclays’ FICC business was consigned to the outer darkness – placed in Barclays’ internal “bad bank” for eventual sale or wind-up. Barclays’ investment bank was to be reduced to a customer service business around an equities trading core – the former Lehman Brothers equities business. But now that equities trading core has itself been dealt a major blow. The New York Attorney General has filed a lawsuit against Barclays for misleading clients regarding the presence and activities of HFT traders in its so-called “dark pool”, Barclays LX. Read on here.


Into the Light: the changing face of private equity

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I recently had the pleasure of attending the European Venture Capital Association's 2014 Symposium in Vienna. Perhaps surprisingly, the theme of the conference was not "how can we survive secular stagnation?", but "how can we get people to understand the value we bring to society?". Though perhaps these two concerns are one and the same.....

Read my thoughts at Pieria here.

Oh, and this was the view from my hotel room window in Vienna!

Transmission mechanisms do matter

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I'm always astonished when someone argues that financial transmission mechanisms don't matter - that somehow money produced by the central bank magically "flows" to the real economy without restriction. I don't think this argument is remotely supported by the evidence: transmission mechanisms do matter, and when they are blocked, restricted or diverted, the effect of central bank reflation on the real economy is much reduced. I should be clear here that by "transmission mechanism" I do not necessarily mean banks: investors, companies, markets and fiscal authorities are all means by which money flows around the economy, and they too can restrict, block or divert the flow of funds from the central bank.
Here is Giles Wilkes arguing that transmission mechanisms don't matter, using Smaug the Dragon to illustrate his point. The deflationary effect of Smaug's gold hoarding has previously (and elegantly) been discussed by Frances Woolley. In this piec…

Towards a new Golden Age

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At the launch of Nesta's book “Our Work Here Is Done: Visions of a Robot Economy”, Carlota Perez described how our current economic troubles are an inevitable and necessary part of the process of technological change. We are at a turning point: if we get it right, there could be a new Golden Age. But for this to happen, there needs to be radical change in current social structures and norms. Do we have the vision and courage to make this happen?

Read on here.



Robots and the future of work

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NESTA's book "Our work here is done: visions of a robot economy" was launched yesterday. I had the honour to contribute a chapter to the book, and also to speak at the launch yesterday.

The launch, hosted by Stian Westlake, featured presentations by Ryan Avent, Izabella Kaminska, Ellie Truitt, Nick Hawes and the awesome Carlota Perez, and demonstrations of real live robots. I think the robots rather stole the show - perhaps that is a sign of things to come!

The text of my speech at the launch is below.

Robots and the future of work
Last September, a research paper by Frey and Osborne scared the world. It concluded that as many as half of all American jobs could be automated. Not content with the loss of jobs from offshoring, the capitalist system now threatened further destruction of the American way of life.
Not surprisingly, the “robots will eat your job” movement went into overdrive. The Atlantic listed some of the jobs most at risk: telemarketers sewers ( though I tho…

Carney on interest rates

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Markets are a gullible lot. In my latest Forbes post I explain how they have been comprehensively outflanked by a very clever Bank of England governor:  In his speech at the Mansion House last week, Mark Carney appeared to indicate that interest rates might rise sooner in the UK than markets have been expecting. Predictably, media and market hawks seized upon this as indication that rates will rise towards the end of 2014. Sterling rose, gilt yields rose and the yield curve steepened. This was, of course, exactly what Carney wanted....Read on here. (picture: Carney speaking at the Mansion House dinner. Courtesy of the Wall Street Journal)
















How a Danish king ruined some hopeful research

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This post on VoxEU purports to show that there is no house price bubble in the UK, and perhaps more importantly, that there was no house price bubble in the run up to the 2007 crash.

This may come as something of a surprise to those who are used to looking at charts like this:


This chart shows the rise in average UK house prices since 1973 (source: Nationwide). There is clearly a steep rise in prices from 1995 to the crash in Q4 2007, which dwarfs the previous housing boom and bust in 1987-8. Many people would regard such a dramatic rise and fall as evidence of a bubble.

But the VoxEU authors don't think it is. And they base their argument on a unique feature* of the UK housing market - the existence of very long-term leases as well as freeholds.

Typically, in the UK housing market, houses are freehold and apartments leasehold, though this is not universally the case. A lease is a right to use a property for a period of time. In effect, it is a time-limited, pre-paid form of owner…

The British obsession with property

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This is a version of a speech given at IPPR North on 10th June 2014.

How many people reading this post own their own home, or would like to do so?
I do. I am one of the 60% or so of people in the UK who own their own home. The percentage is currently falling, as housing becomes more expensive and mortgage standards are tightened. But it is still well over half the population.
Opinion surveys consistently show that most people aspire to buy their own home. For many young couples, buying a home together has become a statement of commitment: the traditional sequence of engagement followed by marriage is replaced with moving in together then buying a home together. Property has replaced children as the outward sign of shared lives and shared responsibilities.
Nor is it just couples. Single people, too, aspire to buy property. They may not want a relationship but they want to own their own place.
But why are we so obsessed with property? It's expensive to buy and expensive to mai…

Consumption booms and housing busts

A bit of detective work at Pieria. I was puzzled by Mian & Sufi's claim in their book House of Debt that from 2006-8, falling house values caused householders to cut back spending sharply enough to cause a recession. Although wealth effects were severe, particularly for lower-income households, there didn't seem any reason for them to have such a dramatic effect. What was really going on? And what has this got to do with current London house prices?

Read the article here.

There's more than one kind of money demand

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We are used to money demand diagrams that look like this:



If the money supply is fixed, the demand for money reduces as the interest rate rises. This is because investors substitute interest-bearing assets for zero-interest money. As the interest rate falls toward zero, investors become indifferent between other assets and money, and demand for money rises.

In this sort of model we talk about investors being willing to "hold" money in preference to other assets. This is, of course, stock thinking. It says nothing at all about the flow of money. Indeed in the quantity of money equation MV = PY, V (the velocity of money) is often assumed to be constant. Yet we know that the velocity of money reduces as economic activity slows, and increasing the stock of money does not necessarily increase its velocity. Indeed, it could be argued that providing investors with all the money they want to hold itself tends to slow velocity. If money is hoarded, it is not spent - and it is spendin…