Archive for May, 2014

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Bucked off

Fly Title: 

Buttonwood

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Criticism of the financial sector from an unexpected source

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20140531_FND002.jpg

HO made these remarks in a recent speech? “Inclusive capitalism is fundamentally about delivering a basic social contract comprised of relative equality of outcomes.” Or: “Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith.” Or this: “Market fundamentalism…contributed directly to the financial crisis and the associated erosion of social capital.” Was it François Hollande? Ed Miliband? Thomas Piketty?
No, all these leftish-sounding quotes came from Mark Carney, the governor of the Bank of England, at a conference* on inclusive capitalism on May 27th. Nor did Mr Carney’s apparent heresy stop there. He also remarked that banks operated “in a privileged heads-I-win-tails-you-lose bubble” and observed that “there was widespread rigging of benchmarks for personal gain.” …

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India’s strongman

Fly Title: 

The return of moderation

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Volatility has disappeared from the economy and markets. That could be a problem

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WASHINGTON, DC

A DECADE ago, the business cycle was an endangered species. Recessions in the rich world had become rare, shallow and short; inflation was predictably low and boring. Economists dubbed this the “Great Moderation” and gave credit for it to deft macroeconomic management by central banks. Such talk, naturally, ended abruptly with the financial crisis.
But obituaries of the Great Moderation may have been premature. Since America emerged from recession in 2009, its growth, although low, has been as stable as during the Great Moderation’s heyday, from the early 1980s to 2007, judging by the volatility of quarterly gross domestic product (see chart) and monthly job creation. That, in turn, has pushed the gyrations of stock and bond prices to their lowest levels since 2007. The trend is less …

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India’s strongman

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The world economy

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How to make the rich world’s recovery stronger and safer

ECONOMISTS expected 2014 to be the year in which the global expansion stepped up a gear. Instead, nearly five years into its recovery from a deep recession, the rich world’s economy still looks disappointingly weak. America’s GDP grew at an annualised rate of only 0.1% in the first quarter. Euro-area growth, at 0.8%, was only half the expected pace. Some of the weakness is temporary (bad weather did not help in America), and it is not ubiquitous: in Britain and Germany, for example, growth has accelerated, and Japan has put on a brief spurt. Most forecasters still expect the recovery to gain momentum during the year.
But there are reasons to worry. The stagnation in several big European countries, notably Italy and France, is becoming more entrenched. Thanks to a rise in its consumption tax in April, Japan’s growth rate is set to tumble, at least temporarily. America’s housing rebound has stalled. And across …

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India’s strongman

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The European Central Bank

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Having promised action, the central bank will have to deliver it in June

ALTHOUGH the European Central Bank (ECB) is often accused of timidity, it has nonetheless acted decisively on occasion, notably by pledging in 2012 to buy unlimited amounts of government bonds under siege from the markets. Still untested, this commitment is widely credited with saving the euro. Now the ECB faces a different danger from a long spell of low inflation, currently just 0.7%, well below its target of almost 2%. The longer this persists the greater the risk of a slide into deflation, imperilling countries laden with excessive debt. When the bank’s governing council meets on June 5th it is likely to adopt a battery of measures to counter “lowflation”.
After the council’s meeting in May Mario Draghi, the ECB’s president, came close to pre-announcing bold action in June. The council only waited, he said, to see the bank’s next round of economic forecasts. These seem sure to show …

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India’s strongman

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Inequality

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How the financial crisis affected the distribution of British wealth

IN HIS improbable blockbuster, “Capital in the Twenty-First Century”, the French economist Thomas Piketty argues that inequality is rising inexorably across the West. Recent British history hints at a wrinkle in that smooth picture. Figures released by the Office for National Statistics suggest that, adjusting for inflation, the middle of Britain’s wealth distribution was squeezed by the recession that followed the financial crisis. But both the rich and the poor came through with roughly the same level of assets that they had before the crisis (see chart).
The poor had little wealth to start with, of course, and it was mostly in possessions such as cars and sofas, which are hardly susceptible to financial chaos. Housing wealth, which is fairly widely spread among the rich and middle classes, was hit harder. Real house prices fell by 12% between 2007 and 2011, though they are now surging again.

Yet that …

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Tim Geithner didn’t originally plan to write a book. He changed his mind, he tells us in Stress Test, because “our response to the global financial crisis is still wrapped in myth, and haze and misperception.”Mr Geithner’s greatest frustration is his inability to persuade the public that saving the financial system was necessary to saving the economy. He couldn’t ask for better proof than the simultaneous appearance this week of a book by two leading economists taking issue with that central plank of his legacy.In this week’s issue, we both review Stress Test and devote Free Exchange to House of Debt, by Atif Mian and Amir Sufi. Mr Geithner’s book is part personal narrative and part treatise, laying out how he fought financial crises and why. Mr Mian’s and Mr Sufi’s book is an academic work laying out the case for why Mr Geithner’s approach (though they don’t associate it with him personally) was wrong.          Banking crises, by conventional thinking, are damaging because they cut off the flow of credit to business. Mr Mian and Mr Sufi dispute this view: The real cause of the post-crisis slump, they argue, was not the damage to the banks, but the run-up in household debt that came before, which became an anchor on consumption when home prices subsequently collapsed.They compile data and research that shows that economic …

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Europe goes to the polls

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Free exchange

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A new book argues that household debt, not broken banks, fuelled the recent recession

BEFORE Ben Bernanke found himself trying to prevent a second Great Depression as chairman of the Federal Reserve, he had become well known in economic circles for explaining why the first one happened. In a paper published in 1983, Mr Bernanke blamed the collapse of the banking system for constricting the supply of credit, which “helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression”.
The notion that financial crises are transmitted to the broader economy by the “bank-lending channel” has dominated subsequent policymaking. It is why Mr Bernanke fought so hard to stop the panic in 2008 and to recapitalise the banking system afterwards. Tim Geithner, who was at the Fed with Mr Bernanke and then became Barack Obama’s treasury secretary, spends much of his new memoir reiterating their argument (see article): “When the financial system stops …

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