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Showing posts from July, 2014

Strange things are happening in Hungary's banking sector

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Continuing my Forbes series on the mysteries of banking in Eastern Europe:
The Hungarian banking system has been a thorn in the Hungarian government’s side for quite some time. A large proportion of it is foreign-owned, which makes it more likely that there would be outflows of capital and restriction of essential lending activity in a crisis. And, of course, it’s more difficult to coerce foreign-owned banks into doing things that the government wants, such as cheap lending to favored borrowers and buying up government debt Not only are many of its banks foreign-owned, they lend foreign currencies too. A high proportion of Hungarian mortgages are in euros or Swiss francs. Banks extended foreign-currency mortgages to Hungarian households at a time when the exchange rate to forints was favorable. But since then the international value of the forint has fallen, mainly due to a sustained period of monetary easing by the Hungarian central bank. This has improved economic conditions but le…

The not-so-pure retail bank

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I've decided I don't like Lloyds Banking Group*. It presents itself as this pure retail bank that would never behave in such a dastardly manner as the universal banks with their greedy rapacious investment banking arms. But the reality is far different.

LBG has just been fined a total of £218m jointly by the FCA and American regulators for rigging benchmark rates including Libor. That is the crime for which the Barclays' chief Bob Diamond lost his job. But we're all used to hearing about Libor fines now: LBG is the seventh bank to be fined (and there are more to come). The seven banks fined so far, with the amounts, are as follows (chart courtesy of the Wall Street Journal):



OK, so LBG's fine doesn't look that bad, does it? It's the smallest fine of any of the big banks. But in this case the size of the total fine is not a good indicator of the seriousness of the offence. To find out what is really going on, we need to break it down.

The fine is made up of …

The EU should beware of Russian interest in Balkan banks.

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Especially when it is disguised.

My latest post at Forbes takes a jaundiced look at who is in the race to acquire Hypo Alpe Adria's network of Balkan banks. I'm not usually much of a conspiracy theorist, but this is the Balkans, after all - the far-fetched is mundane in that part of the world. There is something very shady going on, and I reckon the Russians are behind it.

Read about it here.

Oh, and in case the Balkans look like a black hole to you, here's a map (courtesy of Wikipedia).

No, it's not party time yet

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It seems the UK is something of a poster child for economic recovery. The ONS reports that GDP has grown by 0.8% in Q2 and by 3.1% since Q2 2013. This is a pretty solid performance. And it's an important milestone, too: the UK's GDP is now back to its pre-crisis peak.





















And the UK has become one of the few bright spots in the IMF's generally gloomy forecast for world growth. Upgrading the UK's growth forecast to 3.2% by the end of the year, the IMF said that the UK would maintain its position as one of the world's fastest-growing economies.

Predictably, the Coalition government and its supporters claimed this as success. George Osborne tweeted that the IMF's upgrade showed his economic plans were working:


IMF upgrades UK growth by more than any other major economy. Further evidence that our #LongTermEconomicPlan is working
— George Osborne (@George_Osborne) July 24, 2014
And Matthew Holehouse,  political correspondent of The Telegraph, describes the IMF's upg…

The stocks and the flows

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There have been calls for interest rate rises to discourage risky new lending. But the Resolution Foundation shows that it is the stock of existing debt that is the real problem. Household debt still stands at over 90% of GDP, and many of these households already have difficulty paying their mortgages: there is a real risk that raising interest rates would make their debts unaffordable, forcing them into default and the economy into recession. The Resolution Foundation has important recommendations for policy makers to reduce the risks of interest rate rises. But they don't go quite far enough....

Find out more here. (Pieria)

QE is fiscal policy

A new paper by Johnston and Pugh of the legal department of the University of Sheffield discusses the legality and the effectiveness of QE and its relatives, including the ECB's OMT "whatever it takes" promise.

The background to this is the German Constitutional Court's ruling that OMT amounts to monetary financing of government deficits and is therefore unlawful. Although the European Court of Justice is still to give its judgment in this matter - and is widely expected to dissent - the ECB is evidently doing its best to avoid outright QE, quite possibly because of questions over its legitimacy. The ECB has stated that in its opinion QE is legal, but then it said that about OMT too. The truth is that it is by no means clear that QE is legal in the Eurozone.

So the University of Sheffield's legal eagles have had a good look at the legality of both OMT and QE with respect to the Lisbon Treaty. And they concur with the German Constitutional Court. OMT does indeed a…

The not-so-new (but very uncertain) neutral

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My latest post at Pieria considers the likely future path of interest rates and central bank reaction functions. History shows that central banks delay raising interest rates for too long after a recession, then panic and raise them too much, causing another one. Will they do this again? Probably....

Read the whole post here.





























FOMC meeting. Photo credit: Wikipedia

The clash of micro and macro

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As I said in a recent blogpost, failing to provide microfoundations for a macroeconomic argument doesn't make the macroeconomics wrong. Conversely, providing lots of lovely microeconomic detail - right down to the "I met a man" level - does not necessarily add up to a convincing macroeconomic argument. 
So here is Chris Dillow taking Tim Montgomerie to task for claiming that the UK's remarkable employment performance is due to the Coalition government's welfare reforms. Montgomerie isn't the only one making this claim: Fraser Nelson does so too in more detail, in an op-ed in the Telegraph. Both Tim and Fraser say that the Coalition's welfare reforms, by forcing lots more people into work, have somehow created a massive jobs boom. Say's Law, applied to labour markets? Hmm. Maybe I'm a bit fonder of microfoundations than I thought. I want to know where these workers really come from - the increase looks too much to be entirely due to benefit reform…

U.S. sanctions on Russia are financial warfare

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At Forbes:
On June 17, the US announced further sanctions against Russia because of its support for rebels in the Ukrainian civil war. The new sanctions are widely considered to be tough. But they are also difficult to understand. The extent of their legal and practical application is by no means clear. Yet – they are very clever. However they are interpreted, they are bad news for Russia. Find out here how they should be interpreted and why they amount to financial warfare.

Espirito Santo: complexity, opacity and moral hazard

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There is absolutely nothing holy or spiritual about Portugal's Espirito Santo Group. It's a complex, opaque structure much of which is incorporated in a tax haven and part of which is suspected of fraud. It's impossible to regulate and some of the funding relationships are distinctly odd. And it includes a bank. Moral hazard de luxe. 
But haven't we seen this before? Oh yes. Read about it here


The Bulgarian "Game of Thrones"

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No, not a film. Or a book. And as far as I know there are no Starks. Or dragons. But otherwise, the saga of the Bulgarian oligarchs and their political machinations is remarkably similar to "Game of Thrones". Politicians are the puppets of oligarchs, oligarchs are controlled by mobsters, banks are pawns in the game, and the people of Bulgaria pay through economic stagnation and entrenched poverty.

All three posts in the saga (so far) are linked here.

What on Earth is Going On in Bulgaria?

The Curious Case of the Bulgarian Bank Runs

The Bulgarian Game of Thrones






















Bank run on First Investment Bank, Bulgaria. (Photo credit: BBC)

Why did they borrow?

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In my last post, I placed into a sectoral balances framework Piketty's argument that rising US inequality drove the financial crisis. This is not to say, as some do, that excessive savings from China fed directly through into excessive household debt in the US. If only it were that simple. My argument is that trade dynamics between the two countries fed a capital surplus in the US, which inevitably found its way into higher household borrowing because of a relatively tight fiscal position and a sustained surplus in the corporate sector. 

Various people have criticised this on the grounds that it is not microfounded. Philip Booth of the IEA, probably my severest critic, says is "not economics". I think this is a somewhat narrow definition of "economics": just because I have not given a microeconomic explanation for a macroeconomic argument doesn't mean the macroeconomics is wrong. But we do need a human explanation for the high borrowing of low-to-middle inco…

Inflation is always and everywhere a political phenomenon

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My latest at Pieria picks apart the irrational basis for beliefs about inflation:
"So we don't understand the causes of inflation, we don't agree about what we mean by inflation and we have no reliable means of measuring it. Yet we are absolutely terrified of it. And we want government (via its central bank) to make sure that inflation NEVER HAPPENS. How very dare government rob us of our precious savings by means of inflation!
Underlying this statement, and indeed all statements about the control of inflation, is a powerful and fundamentally irrational belief. Inflation can be prevented by government. Therefore, if inflation happens, it is because government has allowed it to. Inflation is therefore always and everywhere a POLITICAL phenomenon."There is lots more - and a worrying conclusion. Read the whole piece here

Creeping nationalisation

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The FOMC June meeting minutes reveal an interesting discussion about the conduct of monetary policy in an era of excess reserves. The principal policy tools are to be interest on excess reserves (IOER) and the Fed's new overnight reverse repo facility (ONRRP). IOER has already become the principal tool for controlling short rates, and there was some discussion as to whether ONRRP is really needed as well. But in a world where USTs perform the same function for non-banks as reserves do for banks, it makes sense to control both.
The FOMC do at last appear to have accepted that excess reserves are here to stay for the foreseeable future. They still talk about “normalisation” of policy: some members clearly still hanker after a speedy return to the “old ways”, wanting target ranges for the Fed Funds rate still to be published and hoping that overnight reverse repos (ONRPP) will eventually be phased out. But ten years from now, when the system still has excess reserves (it will, trust…

Explaining Piketty: inequality and the financial crisis

Ryan Bourne complains that my takedown of Sumner didn't actually address Sumner's main criticism of Piketty. Indeed, that is is a fair complaint. I was so busy disagreeing with Sumner that I failed to explain Piketty. So I shall remedy the oversight now.

Here's the paragraph from Piketty that Sumner critiqued:
"In my view, there is absolutely no doubt that the increase of inequality in United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms." This paragraph does need some explanation. It …