It's hard to trim this article to be a reasonable quote - so I encourage you to read it all. It's not news, we've discussed the illusory nature of some of the financial sector profits that have been booked plenty of times, but it's good to see the Bank of England publishing research on the topic...
Not since the Great Depression of the 1930s had the public held the financial sector in such low esteem. Yet that was not the picture of the banks painted by government data. The national accounts published by the Office for National Statistics showed that the financial sector was making its biggest contribution since the mid-1980s to the UK economy; between the third and fourth quarters there was a record increase in the value of the services provided by the banks.
Confused? Clearly, there's something not quite right about a state of affairs where banks are both contributing massively to the economy while at the same time being rescued from collapse. Fortunately, an answer to this conundrum was provided given today in a paper by Andrew Haldane, the Bank of England's director of financial stability. It also has much wider ramifications, which we'll get to later.
Haldane's paper, given at a London School of Economics' conference on the future of finance argues that the answer to the puzzle lies in the way the ONS measures the value of financial services.
FISIM is calculated by subtracting the interest rate on deposits from the interest rate on loans and multiplying by the number of outstanding bank balances.
What happened in the fourth quarter of 2008 was that banks assumed there would be a massive increase in defaults on loans. They responded, entirely rationally, by increasing interest rates to cover the expected losses. That meant the gap (spread) between interest rates on deposits and interest rates on loans widened, the value of the financial sector's services as measured by FISIM increased, and this showed up in the national accounts as an increase in output.
"In other words," Haldane says, "at times when risk is rising, the contribution of the financial sector to the real economy may be overestimated." If he is right, the recession during the winter of 2008-09 was probably even worse than the official statistics suggest.
But there are longer-term implications too. The waves of financial liberalisation seen in Britain from the early 1970s to 2007 were justified on the grounds that the City was booming, providing higher returns to the economy than other sectors. Indeed, as Haldane notes, finance outstripped the rest of the economy in terms of growth by around 1.5 percentage points a year.
But what if that growth was in large part the result of higher risk taking, manifested in the increased leverage of the banks and speculative trading in increasingly exotic financial instruments? Haldane wonders whether the contribution made by the financial sector these past few decades has been more mirage than miracle. Looking at how the returns to banking have reversed as some of the risks they were taking have materialised, there is only one answer: mirage
In our new book, The Power of Pull, we summarize the metrics that we developed for the Shift Index - the first attempt to quantify the longer-term trends that have been re-shaping the business landscape over the past four decades. Of the 25 metrics in the Shift Index, one metric in particular stands out: return on assets for all public companies in the US. Since 1965, return on assets has collapsed by 75% - it has been a sustained and substantial erosion in performance. There is no evidence of any flattening of this trend, much less turning it around.
The bailout of Greece, while still not fully consummated, has brought an eerie calm in European financial markets. It is, for sure, a massive bailout by historical standards. With the planned addition of IMF money, the Greeks will receive 18% of their GDP in one year at preferential interest rates. This equals 4,000 euros per person, and will be spent in roughly 11 months.
Despite this eye-popping sum, the bailout does nothing to resolve the many problems that persist. Indeed, it probably makes the euro zone a much more dangerous place for the next few years.
Next on the radar will be Portugal. This nation has largely missed the spotlight, if only because Greece spiralled downwards. But both are economically on the verge of bankruptcy, and they each look far more risky than Argentina did back in 2001 when it succumbed to default.
The main problem that Portugal faces, like Greece, Ireland and Spain, is that it is stuck with a highly overvalued exchange rate when it is in need of massive fiscal adjustment. Portugal spent too much over the last several years, building its debt up to 78% of GDP at end 2009 (compared to Greece's 114% of GDP and Argentina's 62% of GDP at default). The debt has been largely financed by foreigners, and as with Greece, the country has not paid interest outright, but instead refinances its interest payments each year by issuing new debt. By 2012 Portugal's debt-GDP ratio should reach 108% of GDP if they meet their planned budget deficit targets. At some point financial markets will simply refuse to finance this Ponzi game.
To resolve its problems, Portugal needs major fiscal tightening. For example, just to keep its debt stock constant and pay annual interest on debt at an optimistic 5% interest rate, the country would need to run a 5.4% of GDP primary surplus by 2012. With a 5.2% GDP planned primary deficit this year, they need roughly 10% of GDP in fiscal tightening. It is nearly impossible to do this in a fixed exchange rate regime - i.e., the eurozone - without massive unemployment. The government can only expect several years of high unemployment and tough politics, even if they are to extract themselves from this mess.
Yesterday I argued that Latvia's cost-cutting efforts are evident compared to a cross-section of European Union countries. Latvia's efforts, while commendable, were very much a function of the emergency IMF loan in December 2008 and the ensuing recession in 2009.
After an email exchange with Marshall Auerback, and thinking more about the cross-section of Europe, I now see a very scary trend emerging across Europe: the fight for exports.
Latvia's model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It's impossible that the whole of the Eurozone will drop wages to increase export income. It's especially bad for countries like Latvia or Hungary, where the lion's-share of trade occurs withing the boundaries of Europe.
And what happens when export income does not provide the impetus for aggregate demand growth? Well, there's not much left. Can't devalue the currency (via printing money), and tax revenues will fall faster than a ten-pound weight: rising deficits; rising debt; rising debt service (via surging credit spreads). Sovereign default seems like a near-certainty somewhere in the Eurozone!
Comments focussed on the hyperbole about sovereign defaults... but I think the heart of the piece asks questions about an important assumption - is export-led growth the panacea?
Is Global Warming Unstoppable?
ScienceDaily (Nov. 24, 2009) -- In a provocative new study, a University of Utah scientist argues that rising carbon dioxide emissions -- the major cause of global warming -- cannot be stabilized unless the world's economy collapses or society builds the equivalent of one new nuclear power plant each day.
Now that's a pretty hyped up opening statement. I think there are some holes in it, but that result isn't what I find interesting about the model. What caught my eye comes further down...
Bright, eager--and unwanted. While unemployment is ravaging just about every part of the global workforce, the most enduring harm is being done to young people who can't grab onto the first rung of the career ladder.
Affected are a range of young people, from high school dropouts, to college grads, to newly minted lawyers and MBAs across the developed world from Britain to Japan. One indication: In the U.S., the unemployment rate for 16- to 24-year-olds has climbed to more than 18%, from 13% a year ago.
For people just starting their careers, the damage may be deep and long-lasting, potentially creating a kind of "lost generation." Studies suggest that an extended period of youthful joblessness can significantly depress lifetime income as people get stuck in jobs that are beneath their capabilities, or come to be seen by employers as damaged goods.
Equally important, employers are likely to suffer from the scarring of a generation. The freshness and vitality young people bring to the workplace is missing. Tomorrow's would-be star employees are on the sidelines, deprived of experience and losing motivation. In Japan, which has been down this road since the early 1990s, workers who started their careers a decade or more ago and are now in their 30s account for 6 in 10 reported cases of depression, stress, and work-related mental disabilities, according to the Japan Productivity Center for Socio-Economic Development.
When today's unemployed finally do get jobs in the recovery, many may be dissatisfied to be slotted below people who worked all along--especially if the newcomers spent their downtime getting more education, says Richard Thompson, vice-president for talent development at Adecco Group North America, which employs more than 300,000 people in temporary positions. Says Thompson: "You're going to have multiple generations fighting for the jobs that are going to come back in the recovery."
Insurers had a strong interest in building this business, of course, and those interested in "institutional entrepreneurship" might find a great tale in how insurance companies managed to persuade state regulators that companies had an "insurable interest" not only in current employees but in those they had fired years ago. (The Wall Street Journal describes one bank that bought life insurance on a credit risk manager who had already survived two brain surgeries; fired him four months later; and subsequently collected $1.6 million when he died.)
The Cayenne was built with the US market in mind but the Panamera - Porsche's first saloon/sedan car - has an Asian tilt. The Chinese car market has become the second most important luxury car market in the world, and the Panamera is being launched there in January.
One distinctive quality of the Chinese market is that rich consumers often employ a chauffeur to signal their elevated status and they prize long wheelbase cars. BMW even makes a long wheelbase Series 5 car for the market - a rare variation on its global product approach.
I suspect that what goes for the luxury market obtains more widely. The crisis in the US auto market - and the fall of Detroit - will further undermine its dominant status.
The history of a region or people encompasses a multitude of aspects of social life: culture, religion, political institutions, social movements, environmental change, technology, population--and the circumstances and processes of economic change that the region undergoes. One does not need to be a reductionist in order to observe that the economic circumstances a society experiences, and the processes of change that these circumstances undergo, have a profound influence on other aspects of social and cultural change. Improved agricultural productivity can support population growth; it can enhance the coercive power of state institutions; and it can make possible the flourishing of intricate institutions of religion and education. Likewise, the constraints created by slow or negative economic productivity growth in a region can stifle the development of other important social processes. So economic history, as a discipline within history more broadly, is a crucially important field of historical inquiry.
We've discussed the Welsh railway network and possible North-South plans on ET before. Monbiot comes up with an interesting historical point about infrastructure as the sign of an extractive economy and highlights a new proposal. Had any of our Welsh types heard of it?
n this spirit I have to record that something is missing. Its absence offends my newfound national pride. It mocks our attempt to become a coherent country. It means that the Gogs (of north Wales) and the Hwntws (of south Wales) will for ever be at each other's throats. It means that the greenest nation in the UK is locked into unsustainability. It is also bleeding ridiculous. As far as I can discover, this is the only country in Europe that you cannot traverse by train without spending most of the journey passing through another. The only rail link that allows you to travel from north to south crosses the border near Llangollen and doesn't re-enter Wales until it approaches Abergavenny, 100 miles away.
The railway map of Wales is a classic indicator of an extractive economy. The lines extend either towards London or towards the ports. As Eduardo Galeano established in The Open Veins of Latin America, the infrastructure of a country is a guide to the purpose of its development. If the main roads and railways form a network, linking the regions and the settlements within the regions, they are likely to have been developed to enhance internal commerce and mobility. If they resemble a series of drainage basins, flowing towards the ports and borders, they are likely to have been built to empty the nation of its wealth for the benefit of another. Like Latin America, Wales is poor because it was so rich. Its abundant natural resources gave rise to an extractive system, designed to leave as little wealth behind as possible.
Graham Watson is the Liberal Democrat Member of the European Parliament for South West England and Gibraltar. Graham is also the leader of the Alliance of Liberals and Democrats in the European Parliament. The ALDE Group is the largest third force ever in the 28 year history of the European Parliament.
In his Dec. 12 videoblog Graham Watson welcomes the launch of Libertas as a party for the European elections and hopes it will draw them into honest debate. He further hopes that Mr Ganley will be more open about Libertas funding and contacts with the United States.
He finally challenges him to a public debate in the European Parliament in January about the future of Europe.
The blog also contains segments on the possibilities for "Green New Deal" stimulus and thoughts on the Lisbon process.
What if (just if) tax cuts make a problem, not a solution? What if we are on the way to coordinated collapse while we all follow the same and faulty (be it libertarian or communist) theory?
What would coordinated tax cuts would solve, compared with non-coordinated tax cuts? Aren't world's economies already under tax cuts steroids for a decade already? How strange it is: the deep crisis happens with the infamous "race to the bottom", while economies were blooming under "punitive" taxes in the 60s.
We have seen reports on various China-focused blogs and even in the US media that China is increasingly chafing over the US dominance in financial affairs, and is particularly unhappy about the role of the dollar.
A Lazy Quote Diary that serves its purpose: setting off a good discussion - afew
Asian and European leaders today called for more international regulation and a stronger role for the International Monetary Fund in response to the worst financial crisis since the 1930s.
The call for changes to the international financial system came at the end of a two-day summit of 43 Asian and European leaders in Beijing, discussing what began as a crisis in the US housing market that went on to infect the global economy.
Echoing the call from Beijing, the US president, George Bush, said that agreement on principles for reform would be essential in preventing another disaster.
Bush, who will host a global summit on the financial crisis next month, said in his weekly radio address: "In recent weeks, concerns about the availability of credit, the safety of financial assets, and the volatility of the stock market have made many families understandably anxious about their economic future."
Today I came across a great article by John Harris in The Guardian about the consequences of Thatcher's "Right to Buy" legislation.
In the global scheme of things, this is perhaps a smaller issue, although the provision of government housing interacts with that issue of the day - the property boom. However, it shines a light on a microcosm of the overall neo-liberal scam - creating temporary prosperity by selling off the wealth accumulated in the past and stealing from future generations, in this case by offloading the negative consequences on to them. I've synthesised his article with some experiences from estates near to where I live to try to understand the phenomenon.
[In banking the theft from the future appears more direct, monetizing future cash flows into the present.]
Whilst the Tories are most famous for privatising the British Railways organisation, it's often forgotten that they spent 10 years before that championing the motor car and air travel and denigrating and running down the finances of rail.
To that extent, this announcement at their party conference is somewhat surprising, and indicates that some things do seem to have shifted:
Austria becomes the first country in the European Union to grant its 16-year-olds the right to vote in a general election this weekend but the move has provoked widespread controversy and criticism, even from the teenagers heading for the ballot box for the first time.
The new law lowering the voting age from 18 to 16 was passed last year by Austria's grand coalition government of conservatives and Social Democrats. It was expected to be used for the first time in polls scheduled for 2010, but the governing coalition was consumed by infighting and collapsed in July. And 200,000 new Austrian voters aged 16 and 17, now have a chance to vote on Sunday.
The move is designed to offset what is seen as a demographic imbalance caused by the Alpine state's rapidly ageing population. Last year Austria's 65-year-olds exceeded the number of 15-year-olds in the country. However, critics have argued that given the snap elections, the youngsters have not had enough time to prepare themselves as a result. And some of the would-be voters - who can purchase beer and wine even though they cannot drive or do military service - concur.
"I don't agree with the idea of teenagers of my age being given the right to vote," said Julia Tauschek, a 16-year-old high school pupil from the Austrian town of Linz yesterday. "We simply don't know enough about politics and we are not taught much about them at school either."
Within the EU, this is the first national election in which 16 and 17 year olds will vote.
According to Wikipedia municipal elections in some states in Germany and of course lower level elections in Austria have already taken place under similar rules, but I would argue that the election of the national government is a psychologically different affair that we should all be watching closely.