Coppola Comment

In a lecture presented at the 2011 IMF Annual Research Conference, Hyun Song Shin of Princeton University argued that the driver of the 2007-8 financial crisis was not a global saving glut so much as a global banking glut. He highlighted the role of the European banks in inflating the credit bubble that abruptly burst at the height of the crisis, causing a string of failures of banks and other financial institutions, and economic distress around the globe. European banks borrowed large amounts of US dollars through the money markets and invested them in US asset-backed securities via the US's shadow banking system. In effect, they acted as if they were US banks, but in Europe and therefore beyond the reach of US bank regulation. This diagram shows how it worked (the “border” is the residency border beyond which US bank regulation has no traction): But it is not the model itself so much as Shin's remarks about the role of European regulation after the introduction of the...

This post originally appeared on Pieria in July 2014.  Roger Farmer has a blogpost in which he shows that labour markets don’t clear. Specifically, employment varies with the business cycle, whereas the labour force participation rate and hours worked only show long-term secular trends. During cyclical downturns, therefore, we must conclude that there is more labour available than there are jobs. New Keynesians say that the reason for this is sticky wages . If only nominal wages could fall enough,the market would clear and there would be no cyclical increase in unemployment. Therefore there should be labour market deregulation so that wages can flex with the business cycle. Roger Farmer questions this: he argues that the market simply does not clear at any wage. I disagree. I think the market does clear – when wages fall to starvation level. Humans need a minimum income to sustain life, but employers have no responsibility for ensuring that the remuneration of employee...

My latest post at Pieria looks at the role of design in a time of change. Using mirrors and glass as metaphors, it maps the transformation of the "spirit of the age" from anxiety to empathy as the world heals from the trauma of the twentieth century's three Great Wars (yes, you read that correctly). And although it is optimistic about the new opportunities for collaboration and sharing that technology creates, it asks whether replacing introspection with connection and opacity with transparency is always a good thing. Read the whole post here . It is also my last post for Pieria. With immediate effect, I am stepping down from my role as Associate Editor and staff writer. Pitches and requests for publication should in future be sent to Marco Nappolini via the "Contact Us" tab on the Pieria site. My writing will of course continue both here on Coppola Comment and at Forbes. And perhaps elsewhere, in due course. I shall be looking for a new job.... I wish the...

  Older people tend to want their pensions and benefits protected and the burden of cuts to be borne by the young. Of course, this is only natural: Most people want government to spend more money on them than on anyone else. This applies regardless of their tax contributions (those who don’t pay tax often demand more than those who do). And it is completely understandable. After all, charity begins (and when times are hard, ends) at home. But it is also foolish. In my latest post at Pieria , I explain why older people should be demanding that governments invest in the young. 

My Pieria post on EU unemployment and inflation: One of the things that struck me about the EU's stress tests was the high levels of unemployment in the baseline conditions for the tests. Levels were elevated across not only the Eurozone, but the entire EU: the aggregate baseline unemployment level for the Eurozone was 12%, largely because of very high unemployment in some Eurozone periphery countries, but that for the entire EU was not far behind at 10.7%. The baseline conditions did assume that unemployment would reduce. But the forecast was for a drop of less than one percentage point in three years: in the Eurozone it would drop to 11.3% and in the EU to 10.4%. If these baselines are at all realistic, then unemployment is a HUGE problem in the EU. But inflation, or rather disinflation, is also a problem. In fact the two combine to create a terrible stability. Read about it here . 

At Pieria, I deliver my verdict on the EU's stress tests. The ECB did a good job with the AQR, but the EBA's stress tests were not stressful enough . And then I turn my attention to the UK's forthcoming stress tests. On Forbes, I complain that despite the Bank of England's intention to make its stress tests both more severe and more realistic, it fails on both counts. The UK's stress tests are just as flawed as the EU's . Oh dear.

The Conservatives are promising to eliminate the entire deficit by 2018 and run an absolute surplus thereafter. And when the deficit is gone, they are promising widespread tax cuts. All of this if they are re-elected, of course. But in this post at Pieria I look at what they would have to do to deliver these promises, and conclude that it's not at all clear how they can eliminate the deficit in that timeframe, let alone deliver tax cuts. There's a very large hole in their fiscal plans.  

Ah, but which Ed? You'll have to read the post to find out..... it's at Pieria . All I will say here is that whichever Ed it is, the economics are woeful. Enjoy. (I did!) (you don't really want to know who is responsible for these photos, do you?)

Over at Pieria, I've posted the text and some of the images from the presentation I gave at the UK Society of Co-operatives conference on September 7th 2014 at the University of Essex. It's the full story of the decline and fall of the Co-Op Bank. Well, not just the Co-Op Bank.....we often forget that there were two banks involved in the Co-Op disaster. One of them was a mutual, but perhaps not the one that you might expect. The post can be found here .

Q . What further monetary easing measures do I expect the ECB to announce? A . Maybe a few basis points off interest rates. Q . Will they announce QE? A . No. Q . Why not? A . Because the ECB needs the Germans to co-operate, and at the moment they aren't co-operating. There's a fuller explanation at Forbes here . And the deeper story behind Draghi's Jackson Hole speech at Pieria here . Depressing.

At Pieria, I dissect what Draghi actually said at Jackson Hole on 22nd August, and conclude that he has not called for short-term monetary and fiscal stimulus to kickstart growth, as some have argued: "Some analysts have claimed that this speech was Draghi's “Abenomics” moment. Nouriel Roubini   argues that   Draghi has outlined a similar “three arrows” approach: structural reforms in periphery countries fiscal easing focused on investment and on demand stimulus in the core quantitative and credit easing But Roubini, like others, ignores the context of this speech. It is not fundamentally about restoring growth in the short term. Nor is it about the balance of monetary and fiscal policy, or about the responsibilities of core versus periphery. In fact it is not about short-run economic policy at all. It is about unemployment." Specifically, it's about cyclical unemployment becoming structural, and the prospect of permanently elevat...

At Pieria, I discuss the inadequacy of monetary policy and the implications of the Fiscal Theory of the Price Level for the conduct of government policy. There needs to be a greater role for fiscal policy, and an end to the fear of debt and inflation that is preventing governments from taking the actions required to restore growth. But this means reversing the prevailing direction of economic thought for the last 30 years: "In the present situation - what Sims calls “fiscal pessimism” - FTPL predicts disinflation. Fiscal pessimism means that people look with horror at rising government debt burdens and future fiscal commitments such as those arising from an ageing population, and think “how on earth are we going to afford this”? They expect much higher taxes in the future and/or serious cuts to spending programmes. If this is also combined with very low interest rates, so they make little or nothing on their growing holdings of government debt, they feel poorer even though...

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 .

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...

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)

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 . 

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 . 

At the  HACT House Party  last week, I ran a workshop in which we examined the UK housing market in the context of a game of  Monopoly . The famous board game Monopoly is a land and property speculation game, in which the object eventually is to own all property and bankrupt all competitors. It is simple, and old-fashioned – prices by modern standards are simply unbelievable. But it conveys some important messages regarding our attitude to property. In this picture, the Monopoly board is set up in rather an odd way.  To find out why, read on here .....

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!

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 .