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May 2, 2013

Reshaping the Global Banking Industry

April 25, 2013 by

Home in foreclosure

The subprime crisis – and the following global crisis – set in when a bank considered “too big to fail” was actually allowed to fail and go bankrupt. Despite five years of reform efforts, the too-big-to-fail syndrome is far from a memory, and it is imperative that economic decision-makers do not divert their attention from this issue so easily. On the contrary, more research into analyzing the costs and benefits of various structural reform schemes would help monetary authorities put the world’s financial system back on the right track.

Prior to the subprime crisis, 29 large global banks saw their ratings raised to just over one point by credit rating agencies because markets expected that they would be able to get state support. Today, those same behemoths benefit from hidden support of nearly three notches, and expectations of public funds support have tripled since the beginning of the crisis.

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History of Economic Growth in India

April 24, 2013 by

Manmohan Singh, the prime minister of India during the World Economic Forum’s India Economic Summit 2009 held in New Delhi. Photo by Eric Miller

Last month, Morgan Stanly and HSBC lowered India’s economic growth forecast for fiscal years 2013 and 2014 from 5.2 to 5 percent and from 6.2 to 6 percent respectively. These numbers do not sound encouraging, but compared to a GDP growth of 4.5 percent for October-December quarter of FY2013, this news provides some encouragement for India’s economy. According to Finance Minister Chidambaram Palaniappan, India’s economy would grow 6.2-6.7 percent during FY 2014. If accurate, it would be a good economic recovery.

Although it is nowhere near the double digit GDP growth India was enjoying a few years ago, the recent news of an economic turnaround is a cause for celebration, especially when U.S. and European economies are still struggling to get back to pre-recession levels.

India’s economic journey from an impoverished country to an emerging global economy is an inspiring example for many developing nations. In order to understand India’s economic voyage, it is essential to shed some light on India’s political and economic history. After 200 years of British rule, India became an independent sovereign nation in 1947. This newly born nation faced a number of issues including a shattered economy, a minimal rate of literacy and horrific poverty. It was a mission impossible for Indian leaders, but Sardar Patel, Nehru and others transformed India into a secular and democratic nation.

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The Errors of Austerity: The Blanchard Prescription

January 9, 2013 by

IMF chief economist Olivier Blanchard. Stephen Jaffe/IMF

Economists were created and feted to make witchdoctors respectable. The harm that economists can produce, while still not quite in the vicinity of those of doctors, can be extensive. Errors are tolerated, fictions propagated. Dangerous doctrines become impenetrable and the mainstay of governments.

It was therefore interesting that the IMF’s chief economist Olivier Blanchard, along with his colleague Daniel Leigh, made a confession in a recent paper that, “Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation”. Last October, they were already busy at work seeking to pull the carpet from under the very organisation they are employed by, taking issue with the orthodox school of austerity. The calculations upon which the austerity measures were then inflicted upon such countries as Greece were deemed inaccurate.

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Could the Global Bond Market cause another Global Financial Crisis in 2013?

January 5, 2013 by

With Christmas and New Year cheer and optimism still bubbling away for most of us we now need to turn our attention to the major risk factors that are likely to impact upon the world economy and financial markets during 2013.  While the world economy is estimated to have grown by over 3 percent in 2012 overall and has enjoyed such a remarkable escape from the paralysis affecting some of its constituents like Europe, a major issue is whether this stable growth trajectory will continue for the foreseeable future.

At the end of the day the global stock market has been a secular bear market for over a decade and we are now at the juncture of ascertaining whether the bear will have its final growl in 2013 or we will enter a new market phase.

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Latvia’s Economic Disaster as a Neoliberal Success Story

January 3, 2013 by

Street in Riga, Latvia. Photo by Pablo Pecora

A generation ago the Chicago Boys and their financial supporters applauded General Pinochet’s anti-labor Chile as a success story, thanks mainly to its transformation of their Social Security into Employee Stock Ownership Plans (ESOPs) that almost universally were looted by the employer grupos by the end of the 1970s. In the last decade, the Bush administration, seeking a Trojan Horse to privatize Social Security in the United States, applauded Chile’s disastrous privatization of pension accounts (turning many over to US financial institutions) even as that nation’s voters rejected the Pinochetistas largely out of anger at the vast pension rip-off by high finance.

Today’s most highly celebrated anti-labor success story is Latvia. Latvia is portrayed as the country where labor did not fight back, but simply emigrated politely and quietly. No general strikes, nor destruction of private property or violence, Latvia is presented as a country where labor had the good sense to not make a fuss when faced with austerity. Latvians gave up protest and simply began voting with their backsides (emigration) as the economy shrank, wage levels were scaled down, and where tax burdens remained decidedly on the backs of labor, even though recent token efforts have been made to increase taxes on real estate. The World Bank applauds Latvia and its Baltic neighbors by placing them high on its list of “business friendly” economies, even though at times scolding their social regimes as even too harsh for the Victorian tastes of the international financial institutions.

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America’s Deceptive 2012 Fiscal Cliff

December 28, 2012 by

Capitol Hill in Washington, DC. Bjoertvedt/Wikimedia

When World War I broke out in August 1914, economists on both sides forecast that hostilities could not last more than about six months. Wars had grown so expensive that governments quickly would run out of money. It seemed that if Germany could not defeat France by springtime, the Allied and Central Powers would run out of savings and reach what today is called a fiscal cliff and be forced to negotiate a peace agreement.

But the Great War dragged on for four destructive years. European governments did what the United States had done after the Civil War broke out in 1861 when the Treasury printed greenbacks. They paid for more fighting simply by printing their own money. Their economies did not buckle and there was no major inflation. That would happen only after the war ended, as a result of Germany trying to pay reparations in foreign currency. This is what caused its exchange rate to plunge, raising import prices and hence domestic prices. The culprit was not government spending on the war itself (much less on social programs).

But history is written by the victors, and the past generation has seen the banks and financial sector emerge victorious. Holding the bottom 99 percent in debt, the top 1 percent are now in the process of subsidizing a deceptive economic theory to persuade voters to pursue policies that benefit the financial sector at the expense of labor, industry, and democratic government as we know it.

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Reality Economics: Review of the Economists and the Powerful

December 20, 2012 by

Economists and the Powerful
by Norbert Häring and Niall Douglas “Whom the gods would destroy, they first make mad.” And if they would destroy economies, they first create a wealthy class on top, and let human nature do the rest. The acquisition of power soon leads to its abuse, to economic and social hubris. By seeking to protect its gains, perpetuate itself and make its wealth hereditary, power elites lock in their position in ways that exclude and injure those below. Turning government into an oligarchy, the wealthy indebt and shift the tax burden onto the less powerful.

It is an ancient tale. The Greeks got matters right in seeing how power leads to hubris, bringing about its own downfall. Hubris is the addiction to wealth and power, an arrogant over-reaching that involves injury to others. By impoverishing economies it destroys the source of profits, interest, capital gains, and even recovery of the original savings and debt principal.

This abusive character of wealth and power is not what mainstream economic models describe. That is why economic theory is broken. The concept of diminishing marginal utility implies that the rich will become more satiated as they become wealthier, and hence less addicted to power. This idea of progressive satiation returns gets the direction of change wrong, denying the basic thrust of the past ten thousand years of human technology and civilization.

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The Arctic Gold Rush: How Global Warming can lead to Increased Global Energy Security

November 30, 2012 by

Offshore drilling rig. Image via Conflict & Security

At the end of August, NASA delivered a statement, later confirmed by the American National Snow and Ice Data Centre (NSIDC), as well as the Norwegian Polar Institute (NPI), in which it stated that the extent of Arctic sea ice in 2012 has reached dramatically low levels.

Since 1979, satellite recordings of the Arctic have provided valuable data on the annual variations of the region’s changing ice sheet. The Arctic ice sheet is in constant motion. It grows during the cold arctic winters, and shrinks during the warmer periods reaching peak melt in mid September. However, since the measurements began, a steady decline of 13 percent per decade has been noted.

Additionally, alternative ways of measuring the extent of Arctic ice, such as sonar scans performed by submarines and seabed tethered buoys, have indicated to a drop in the thickness of the ice by over 40 percent compared to the levels recorded in the 1980s. Combining the loss in extent as well as in thickness, the total volume of Arctic ice is now a mere third of what it was in the 1980s.

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Is Democracy Good For Economic Growth? Part 3

November 28, 2012 by

Source: Wall Street Journal via Conflict & Security

So, economic development precipitates the growth of a middle class, which, in turn, ferments political reform, best manifested through democratization.  But does this transition promote further growth?  The answer is yes, it does; however, this renewed economic growth is not the same as before. To understand this, it is worth considering the finite nature of economic expansion. Figures of GDP growth such as the annual 8 percent that China has been regularly posting are only sustainable for a limited amount of time.

As has been stated previously in this series, the driving force of national economic growth is competitive advantage. This is achieved, quite simply, by undercutting international competition, and selling goods or services to foreign markets at a lower price. This can only be achieved for so long, because the increasing export sales of national goods bring more money into the country, which leads to a subsequent increase in the value of domestic currency, which accounts for this financial increase.

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Is Democracy Good For Economic Growth? Part 2

November 28, 2012 by

The Kings of Saudi Arabia and Bahrain. These monarchs are able to use the vast energy resources of their countries to maintain authority. Image via Conflict & Security

I previously argued that democracy often inhibits the economic growth of developing states. This is because democracy generally results in the diffusion of economic decision making throughout the population, which exposes domestic businesses to larger, more efficient, foreign competitors. Thus, I contended that centrally coordinated control over economic policy allows for greater long term growth, and the political conditions most favourable for this are authoritarian ones.

For example, all of the so called ‘Asian Tigers’ achieved economic growth through the implementation of protectionist economic policies, which were coordinated via a centralised authority. Moreover, almost all of these countries democratised only after their economies had become developed.

Nonetheless, they did democratise, which brings us to another question: Is economic growth good for democracy. And the answer is, initially, no

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Is Democracy Good For Economic Growth? Part 1

November 28, 2012 by

Democracy in action, but does this process promote economic growth? Image via Conflict & Security

As the world becomes increasingly fearful of the economic crisis which has emerged within the Eurozone, it seems poignant to contrast the fate of Greece, the home of democracy, and the centre of Europe’s economic malaise, with that of China, the poster boy for authoritarian governance. Whilst there are, of course, vast differences between these two countries, the economic rise of China under an authoritarian regime suggests that it is worth posing the question; is democracy good for the economy?

To begin, it is worth stating that democracy is a complex concept, so for the purpose of this article, we shall consider democracy in its most basic terms: A political system based upon the right of citizens to participate in political decision making through representation; whereby only laws essential to maintaining democratic procedures are necessary criteria to terming a state democratic.

Out of the world’s twenty richest countries, measured by nominal GDP, only three are governed by non-democratic systems: Russia, China, and Saudi Arabia. Moreover, this striking correlation of strong markets and democratic political systems is, theoretically speaking, logical. This correlation is underpinned, not by democracy per se, but by liberalism, most commonly manifested politically as liberal democracy.

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Mark Carney to head the Bank of England

November 27, 2012 by

Mark Carney in Davos, Switzerland. Jolanda Flubacher/swiss-image.ch

As a Canadian, perhaps I should feel a surge of patriotic pride now that Mark Carney has been designated the new head of the Bank of England – quite a step up for the current governor of the Bank of Canada. There is no question that Mr. Carney is a market-savvy guy (he did, after all, work for the vampire squid), and his experiences as Chairman on the Financial Stability Board (FSB) suggests that he is sensitive to the ongoing systemic risks present in our increasingly complex global banking system.

That said, his recent attack on the Bank of England’s Andy Haldane in a Euromoney interview last month, does give one some cause for concern, particularly as it evinces the usual complacency that most Canadians seem to feel about the basic soundness of their own banking system, which essentially upholds the universal banking model as a viable one. By contrast, in his famous “dog and frisbee speech” delivered last August at Jackson Hole, Wyoming, Haldane suggested that: “Regulation of modern finance is almost certainly too complex. That configuration spells trouble…Because complexity generates uncertainty, it requires a regulatory response grounded in simplicity, not complexity.”

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The Fiscal Cliff and the American Economy

November 24, 2012 by

Looking at the latest US data, business sentiment and capital spending have been eroding, and given the lagged impact of capex, that trend looks set to continue for the next few months. Against that, a number of consumer sentiment indicators remain upbeat and housing looks like it is in a firmly established uptrend, after a 5 year bear market. In fact, the existing home inventory to sales ratio is as low as it ever gets, and that is with still very depressed sales. If sales pick up further, given low inventories and with new housing starts still below the replacement rate, home prices could lurch forward.

That said, the markets have been fairly upbeat given the rising perception of a deal to avert the US falling off the ‘fiscal cliff’. But even a deal that drains, say, 1-1.5% of GDP will have negative consequences for the US economy. Bear in mind that the U.S. still has a very high ratio of private debt to GDP. Therefore any such fiscal restriction as contemplated by the two parties may result in a significantly lower economic growth rate than the average 3% rate of the last five quarters (which is what the revised economic data of the past few quarters will eventually show).

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The Social Economics of Thorstein Veblen

October 24, 2012 by

The Social Economics of Thorstein Veblen
by David Reisman Those who wish to understand the many and deep contributions of Thorstein Veblen to economics will find that this offering falls short of the mark. The title promises to treat the social policy content of Veblen’s economic thought. Describing the ways in which markets were being distorted by predatory finance and other special interests, Veblen was read by every socialist leader and most progressives in early and mid-20th century America.

Written in a popular sarcastic style, his books showed how the behavior of wealth and high finance was having perverse effects after World War I.  Instead of funding economic growth, Wall Street was becoming the protector of privilege and engaging in artful deception, distorting economies away from passing on the fruits of technology to populations in the form of rising living standards and falling costs of living and doing business. Mainstream economics was ripe with hypocrisy in saying (and even trying to demonstrate mathematically) that all this was for the best and depicting all wealth and income as being fairly earned.

This new mainstream emerged largely to counter the application of classical political economy by Progressive Era reformers advocating regulation, property taxation and other threats to the vested interests. The ideas of Simon Patten, John Commons and other institutionalists prompted a counter-reaction denying the classical concept of unearned income and wealth. Economics was decoupled from the reform process to justify the status quo – just the opposite policy of socialist regulation and progressive taxation. Given the force of this new mainstream, Veblen was obliged to fight largely a rear-guard battle showing its tunnel vision. It would take the New Deal renew Progressive Era reforms – and even this was done more on a purely pragmatic basis than in conjunction with economic theory.

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In the Midst of Plenty: American Plutocracy

September 19, 2012 by

Image via Reuters

This is part 3 of a 4 part series. Part 1 can be found here and part 2 can be found here.

In the lead up to the global financial collapse, America’s top 1 percent held nearly 35 percent of the nation’s wealth; a 275 percent increase over the past 30 years. Growing income inequality has been a concern for generations; however, the nation’s shift away from its traditional economic policies succeeded in silencing the most vocal critics. America’s transition into a service economy and subsequent push for market dominance has created an elite class that has superceded its predecessors in expanding enterprise and cementing personal advantages. The economic reforms that enabled the spread of ideas, innovation, and wealth also centralized power into the hands of a new plutocracy.

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