Posts Tagged ‘financial crisis’

It takes an anthropologist…

June 20, 2013

… to tell us what neo-classical economists never could. Read this. And then, if you are a neo-classical economist, try fitting it in your spreadsheet.

Joris Luyendijk writes a banking blog for The Guardian.

After some reflection, I think that the Vickers report is too tame, driven by some rather weak desire to be different to the US re-regulation of the finance industry. Britain should be different by doing better than US re-regulation.

The place I would start would be by turning the retail banking operations of RBS, and perhaps Lloyds as well, into mutuals, controlled by employees and depositors and restricted to doing what the customers want and think is right. Of course, this is not simple. I bank with Nationwide, which offers better service and costs than normal banks, but whose senior management still spends too much time aping the behaviour of bankers rather than trying  to think like a mutual society. We should go mutual at the retail level and concurrently improve mutual governance and incentives for mutuals to lend in ways that are profitable and help the economy (like encouraging them to develop project finance units for business lending).

Beyond that, no ring-fence. Just a total separation of the retail and industrial working capital functions of the banking system from more speculative activities. The bankers say it can’t be done. But that is because they don’t want it to be done.

It can be done. It just requires the political cojones.


Bank of England calculates a £27bn capital shortfall at UK banks at end 2012 as the deleveraging process continues. Reported in the FT (sub needed) here.  Reported here in The Guardian, which notes that Nationwide was only short £400m. Note that the capital shortfalls will largely be paid up by the poor, who do not own equities and keep what little money they have in banks, which pay no interest as a result of the financial crisis. The poor are also beginning to pay in terms of rising inflation. Socialism for the rich, mon brave, capitalism for the proles!

Even more:

Just seen that Obama repeatedly referred to George Osborne as ‘Jeffrey’ at G8. Then he claimed he was confusing George with his ‘favourite’ r&b artiste, Jeffrey Osborne. Surely this is some bad-ass mind games? Obama can’t really like Jeffrey Osborne, can he? On the Wings of Love? What he’s really saying is that Jeffrey Osborne is probably George Osborne’s idea of an r&b artiste… I am actually sitting here feeling sorry for George.

Next day:

Spurred on by the anthropologist, Martin Wolf makes his boldest statement on bank/financial system reform (that I have seen) in the FT (sub needed). Not sure why they aren’t flagging it on the front page just now (FT pension fund all in bank stocks?). I agree with most of what Wolf says, though I reiterate that this ring-fence idea is silly. If the Americans don’t need it – and the concomitant risk – why do we? Also, I don’t think we need special laws for locking up bankers. I am as keen as the next man to see some City types doing time, but it should be done through regular legislation. The game is to have a simple regulatory structure that forces the money people to write stuff down, so that when they break the law there is a piece of paper that the lawyer can hold up in court and say: ‘M’lud, this asshole needs to go to prison.’ If you want a good new law, let’s have one to make the granting of honours in the British system a matter for an independent panel, so that people like Fred the Shred and Howard Davies don’t get knighthoods in the first place.

A reader sends in this link to a Youtube video. It’s kind of funny, although the authors of the skit don’t understand the first thing about John Maynard Keynes, judging from the lyrics. It’s kind of British liberal Tea Party humour, if that is possible, which I guess it must be because they’ve done it. Thank god it’s Friday…

Spare Ball

May 26, 2013

Astana1 Astana2 Astana3 Astana4 Astana5 Astana6

An interesting couple of days in Astana in Kazakhstan at what I initially dubbed ‘Davos in the desert’.

Except that the steppe around Astana is surprisingly fertile, and the new capital that has been constructed there sits on a large river. They spent a lot of money.

I wasn’t sure about coming. A ‘World Anti-Crisis Conference’ run by a low-population petro-state with a developing onshore financial centre structure didn’t seem the obvious place to address the world’s problems.

Kazakhstan’s global image is largely defined by the Borat movie, Prince Andrew selling his home to a Kazakh politician for what was reported to be a lot more than the asking price (he is also patron of the British-Kazakh society), the loucheness of Astana’s nightclubs, and the generally hedonistic behaviour that goes on.

In the end it took a fee to get me there, although less than I get from multinationals, brokerages and industry associations (so that’s ok, then). I don’t know what the assorted economics Nobel laureates and politicians were being paid, but I had a pretty good turnout for a talk organised by UNCTAD on the theme of ’50 years of development: what have we learned?’ This next link should connect you to my official statement to the conference based on what I said.

Joe Studwell Astana Statement final

I thrust copies of the statement into the hands of Romano Prodi, Dominique Strauss-Kahn, the Saudi development minister, the Chinese Under-Secretary General of the UN, Domingo Cavallo and Edward Prescott. Well, what’s the point in going, otherwise? Mr Prescott, I am afraid, moved swiftly into poll position as the single most historically illiterate Nobel laureate in economics I have met. Note that the sample size is only 4. In his remarks about Japan’s 20-year economic hiatus, Prescott ‘explained’ that Japan developed through policies of free trade and then, from the early 1990s, ‘started to subsidise everything’ (my italics). I kid you not.

Finally, a bit of cultural fun. Standing in line at an event at this conference, someone started telling me about the very popular Kazakh game of kokpar. It is a kind of polo, played with a dead goat as the ball. This guy claimed the animal is decapitated before play commences although I didn’t have time to check. Two teams wrestle this dead goat, drop it, lean out of the saddle to pick it up, ram each other’s horses and so on, all in an effort to dunk the goat into a pile of tyres at either end of the field that is the goal. But what really took me is that sometimes the goat carcass gets eviscerated or otherwise damaged beyond a limit acceptable for play. The teams therefore have a spare ball, in the form of a live goat shackled at the side of the pitch. That must be one very unhappy spectator.


Apparently I am among the world’s greatest minds.

The trip to the Kazakh embassy in London made me think about where comedians get their ideas from. I went to the Kazakh embassy in South Kensington, but unfortunately they had moved it to Pall Mall. They just forgot to change the web site. That was half a day gone, so I didn’t feel so bad about the fee. (I see that now, 26 May, they have changed the site.)

Filling out the form, I read that:

‘Wrong filling of application form can become a cause of refuse in issue of entry visa.’

Thank gog my submission accurate was.

Still, the thing was a lot more worthwhile than I expected and if it keeps getting better it could even be important.

How bubbly?

May 18, 2013

The FT decides that what I predicted in 2010 has already come true — namely an equity market bubble. I have been thinking about this myself and am more prone to concur with Krugman that this is not yet a bubble. Meanwhile, the answer to one of the sub-questions Krugman poses — about the strength of corporate profits in the last two years — is probably the one given by Hyman Minsky. Minsky argued that financial crises in countries where governments are a large share of the economy are perversely good periods for corporate profitability as costs fall but government steps in to make up for missing private sector demand (in this latest case more with QE than with direct fiscal action, but with a fair bit of the latter in the US).

Another sub-question is why employment has held up much better in the UK (less fiscal stimulus versus the US) than almost anyone predicted (see charts below showing forecasts by the British government’s Office of Budgetary Responsibility. Graham Gudgin, who provided these graphs, argues that employment has been better than expected in Britain because very low interest rates have benefited firms’ cash flows (highly sensitive to interest rates) and encouraged them to hang on to staff, even as they rein in capital expenditure. Firms can be profitable and maintain reasonable employment levels even as they doubt the economic outlook. This sounds plausible, but if true it suggests, as Gudgin further argues, that unemployment is unlikely to fall more as QE is reduced, and then interest rates rise. In other words, on the present policy trajectory, the employment outlook in the UK is less sanguine than most people believe.

Gudgin image 1

Gudgin image 2


Tangentially related, here is a piece from John Kay from earlier this month that is worth reading if you want to understand the sneaky moves George Osborne is making towards creating a British Fannie Mae (60 years after the US one was actually needed), and thereby creating off-balance sheet financial risk in a manner that both Blairite and Cameronite governments been guilty of. As Kay says, Osborne should support the construction sector by increasing housing supply by on-the-books investment, not through voodoo accounting that encourages more turnover of the existing stock of property. It is hard to know whether to dislike him more for the narrowness of this thinking or for his political sliminess.





Weekend reading: Italy and Spain and more

April 28, 2013

Italy gets a government that surely cannot last, led by a ‘left-wing’ politician whose uncle is the chief of staff to Silvio Berlusconi. Front up  a younger guy and put more women in the cabinet so the Germans think we’ve grown up, seems to be the plan. FT (sub needed) has a sensible leader about how political reform may be the only way to unlock the door to economic reform.

Meanwhile, in The Guardian Simon Hattenstone writes about his long correspondence with Amanda Knox, who faces a retrial for failing to be guilty of murder when everybody in Perugia knows she’s a witch.

In Spain, Almodovar has a new movie out about his country’s economic crisis. It sounds dark, funny and uplifting — whereas Italy has become shallow, unfunny and boring.

I quite like Krugman’s habit of leavening his blog with some decent music. And he has this very funny take-down of the Reinhart-Rogoff controversy over the relationship between debt and GDP from Colbert (you may need a VPN set to the US to view this). The theme of picking your data points to fit the hypothesis you already decided on is entirely consistent with what How Asia Works describes happening in World Bank reports about east Asian development in the 80s and 90s. Harvard, eh? Martin Wolf (sub needed) has a nice reminder of British industrial revolution history when debt was twice GDP. The best thing in How Asia Works on the non-linear relationship between debt and GDP growth is the financial history of South Korea, set out in Part 3. South Korea was more indebted than any Latin American state in the 1970s and 1980s but, unlike them, didn’t go bust because of what the debt was spent on.

If you are in London, this is superb. And very much on the theme of development.

Need more mirth?

Have a look at the curious tale of the Management Today review of How Asia Works…

Infrastructure to-do list No.1

April 25, 2013

The UK has, for now, avoided a third recession. According to data released today, the economy grew 0.3% in Q1. However, as the Labour Party was quick to point out, cumulative growth since George Osborne’s epochal 2010 Spending Review has been 1.1%, when he promised it would amount to 6% over the period. And the construction sector shrank 2.5% in Q1, offset only by strong growth in services (related, one wonders, to booming stock markets and The City?). In reality, the British economy remains weak.

When aggregate demand in an economy falls because private sector investment has collapsed, government is the only spender that can step in to make up the difference until confidence returns.

When governments decide whether to spend money in these circumstances, the critical issue is whether they can find capital expenditures which will contribute to long-run productivity gains. In other words, can you spend to create demand today by buying something that will have ongoing value in the future. The most obvious target investments are in infrastructure, because construction creates lots of jobs and has big economic ‘multipliers’ by creating demand for all sorts of goods and service inputs into construction.

So let’s start making a list.

On Monday I have to go from Cambridge, the fastest-growing urban centre in the UK, to Warwick University, near Coventry, to give a talk. The distance is just 80 miles. But if I go by train, I have to go via London and it will take over 2.5 hours to get to Coventry, and nearly 3 hours to get back.

Write that down on a piece of paper, George.


Martin Wolf can make us feel dumb, but George Osborne makes us all feel clever…

February 27, 2013

Martin Wolf has a nice review of policies of economic austerity employed in different states since the start of the global financial crisis. (You will need an FT sub.) Although he doesn’t articulate it as strongly as I would like, his basic point is simple: the crisis is not a macro-economic problem soluble by austerity. It is a micro-economic problem, or rather two different micro-economic problems.

The first problem, in the ‘Anglo-Saxon’ countries, is the need to re-regulate finance in order to stop bankers taking unreasonable risks with other people’s money. This is sort of being dealt with (including in the UK by the Vickers Commission on which Wolf sat), albeit for me in a somewhat ham-fisted, messy way that will eventually bring us more problems.

The second micro-economic problem is that a bunch of states that developed fast after the Second World War by means of close government control in order to foster industrialisation (Japan, Italy, France are the main ones) need micro-economic deregulation, especially of their labour markets and government and legal institutions, in order to return to growth and pay off the large debts they built up while becoming rich countries.

So the crisis (or two distinct crises), as Wolf writes today, has very little to do with macro-economics and is, in general, made worse by austerity. If it has taken you a while to wake up to this, however, do not fear. For in Britain we have the person who will perhaps be the last in the entire world to understand what is going on around him: George Osborne.

George Osborne fixes cufflink

I haven’t written anything about George since the UK’s loss of its AAA credit rating, because there is nothing to add. Here is what I said about George in January 2011. And here is an update from November 2011. What happened since? Looks to me like four out of the past five quarters showed negative growth. The graph below is from the Office of National Statistics…

UK Quarterly GDP to Q4 2012 inc














Ten days later:

Martin Wolf follows up with another attack on Osborne’s policy (FT sub needed), which Brave Dave has come out to endorse without reservation. Meanwhile, latest data suggest the chances of a triple dip recession are now as high as 50:50. All I would add to what Wolf says is that the contrast with the early 80s recession turns on the fact there are no major structural adjustments to the labour market that can be made in this crisis to get the economy moving. Unlike in the early 80s, Britain already has a very flexible labour market. This is why (as in the United States and unlike in continental Europe) unemployment has been lower than the scale of economic contraction would suggest. But it also means that monetary policy alone cannot solve the problem and actually discourages many people from undertaking the deleveraging their finances require. Back in 2010 I thought Osborne would realise this within a couple of years and listen to Vince Cable. Ho, ho, ho…


Vote Romney

September 18, 2012

Extraordinary. Mitt Romney has come out during a private meeting with donors and finally told it like it is. I wake up this morning to find a video on YouTube in which Mr. Romney angrily states:

‘Ninety-eight percent of people who work in banking and private equity are dependent on government, believe they are victims, believe the government has a responsibility to care for them. These are people who pay almost no tax.’ He goes on to remark that: ‘These people think they should get a bonus whatever. No serious politician could be expected to represent them and I’ll never convince them they should take responsibility and care for their lives… they are frankly beyond redemption’.

What a ballsy guy. I’m a born-again Republican. Go Mitt!


Sure enough…

Reading the rest of the press I discover that less principled Republicans are already urging Romney to stay away from THE TRUTH and merely reiterate the tear-jerking story of his childhood.

The cavalry mounts up

September 6, 2012



It isn’t yet Custer’s last stand, for Euroland is the longest Hollywood movie ever made. But Flexible Mario’s press conference today gave us the predictable shape of the final showdown.

Mario’s ECB holds in one hand the promise of unlimited sovereign bond purchases of up to three years maturity (this may include buying long bonds with less than three years to expiry, his language was unclear on the detail). The seniority of the ECB claim on the bonds will be no greater than that of private investors. In the other hand, Mario holds the great northern European stick of what he repeatedly called ‘strict and effective conditionality’. Indeed Mario promised a stick more flesh-splitting still, holding out the prospect of not only EFSF-ESM supervision, but also IMF involvement as well.

As a former Italian bureaucrat who was closely involved in his country’s successful efforts to avoid structural reforms in the 90s and 00s, Mario knows better than most that you need to point the gun directly at the heads of club-Med types such as himself.


If conditionality is agreed, and sov’ bond buying in the primary market goes ahead, it will be known as OMT. We must be careful not to confuse this with OMD. OMT means Outright Monetary Transactions. OMD was the 1980s’ band Orchestral Manoeuvres in the Dark. Clearly, the two things are unrelated.

Mr Market, meanwhile, is very happy. He continues to believe that Flexible Mario’s pronouncements mean that Frau Merkel will pick up the tab for Club Med Europe. But it is not so. All that Flexible Mario has done is to prepare the stage on which politicians will play, a point which he repeatedly stressed.

Finally, the other salient point today: Mario claimed there was zero discussion in the ECB council of the possibility of NOT sterilising some of the bond purchases, if they happen. In other words, quantitative easing is not yet under discussion.

Comic interlude of the day:

Some genius from Fox News asked Mario how dangerous it is that the ECB already has bonds to the value of 33% of Euro-area GDP on its balance sheet. The ECB balance sheet actually contains bonds to the value of about 3% of Euro-area GDP. Yo, Murdoch…

Graphic of the day

This BIS graphic shows how French banks, which had the biggest exposure to the mess to begin with, have also been slower than their German counterparts to unwind their exposure to ‘peripheral’ Europe. Put another way, when you are very deep in ‘le poo poo’, it is that much harder to climb out.


Forgot to mention:

Since the cavalry are mounting up, I should repeat my little ditty of December 2011

IMF, IMF, riding as to war

We all hope you will not be…

As clueless as before

Oh! [repeat indefinitely until IMF arrives]

What is it with the FT and Italians?

The FT’s love affair with Monti spilleth over (sub needed) even unto Draghi… I can only assume it is because the badly-dressed FT journalists suffer well-cut suit envy.

La mamma severa

September 3, 2012

Queuing on the south side of the San Gottardo tunnel in Switzerland surrounded by Dutch and German cars, I wonder whether my fellow travellers have been convinced by their summer sojourns in Italy that their southern neighbour is changing. Myself, I cannot see it. Italy is miserable from the cuts that have been going on for years. But structurally the story is the same. In this respect, Mario Monti appears to be a continuation of Silvio Berlusconi, minus the bunga bunga.

What has Monti done? A labour law that no one in Italy believes is more liberal than the old one. Nothing to simplify legislation, the tax regime, or the bureaucracy. And absolutely nothing to create a functioning, more efficient judicial system. Just budget cuts. In sum: Berlusconi 2.0.

I am sitting in a German petrol station pondering this when I realise I have to get out of my car to fill it up with LPG. Unlike in Italy, there is no law in Germany that mandates that only a petrol station employee can fill a car up with gas. I glance wistfully over my shoulder, recognising that feudalism has its upside.

Mr Market, meanwhile, is feeling quite sanguine, having convinced himself that Frau Merkel is readying her cheque-book to bail Italy out. Or at least being ready to let Flexible Mario at the ECB write the cheque. The ECB is to announce the latest terms of its support for so-called ‘peripheral’ countries later this week.

Mr Market, methinks, underestimates Frau Merkel. Italians have been asking for 20 years for a northern European mamma who will put the kibosh on their bad habits, and I suspect they are to be rudely surprised by getting what they wished for. One way or another, with the failure of Monti, a bunch of Germans and IMF folk are going to end up moving to Rome to oversee the structural reforms that Italy requires. Either that, or it’s out of the Euro.

Related posts:

Why Super Mario is made of paper. As his 2012 budget foretold. My own cunning plan to solve the Italian debt crisis. How the buck stops in Paris.  The global picture of what we are dealing with. Why you should never listen to the Brits about Europe.

Back on the blog

August 20, 2012

It’s been a while.

Back in February I was infuriated when WordPress suffered an IT breakdown and failed to remind me of the need to renew my blog domain. The domain was ‘cyber-squatted’ by some monkeys who stuck up porno pics, links in Chinese for cheap flights, and demanded Euro200 to get the domain back. After a week, I paid up, but kinda lost the urge to blog. WordPress admitted their cock-up, but showed no inclination to cover the expense they created for me.

It is a great, FREE service. But I was pissed.

Meanwhile, I had to do a revision of a new book, which took time and pain. The results, I think, are worth it. The book will be out in March 2013 and, whatever people say, is the most important thing I have written. The title: ‘How Asia Works’. You heard it first.

This blog needs some amending. Since September last year we have been living in Cambridge. But, right now, we are back in Italy, which is still a great holiday destination, even if it doesn’t work as a country.

We drove down through Germany, my new favourite European state, following the spine of western civilisation, aka the Rhine. Starting in the offshore port-financial centre called Holland we progressed to Aachen, imperial seat of Charlemagne — he who made European power shift decisively north after the end of the Roman empire. Fantastic kit in the chapel and museums and a local 35% liquor made with herbs (‘Printen’) that can compete with anything I have tried in Italy. From there to the Mosel valley, just off the Rhine, and very beautful. The youngest counted 23 castles to win the castle-counting prize. Wenches in trad dresses serving, er, German food. Finally Freiburg, university town, with fresh water flowing down shallow gutters around town, a bit like Cambridge. Very nice.

The people seemed not entirely infuriated by the bills they will have to pay on behalf of their southern neighbours. Indeed the polls suggest that Frau Merkel can win a third term. The Germans are truly the grown-ups of Europe. Even if they take the neatness and prissiness thing a little too far.

And so it was that we returned to the Third World. Albeit on holiday this time. But still. You couldn’t make this shit up.

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