Tag: Finance and economics

MICROECONOMISTS are wrong about specific things, Yoram Bauman, an economist and comedian, likes to say, whereas macroeconomists are wrong in general. Macroeconomists have borne the brunt of public criticism over the past decade, a period marked by financial crisis, soaring unemployment and bitter arguments between the profession’s brightest stars. Yet the vast majority of practising dismal scientists are microeconomists, studying the behaviour of people and firms in individual markets. Their work is influential and touches on all aspects of social policy. But it is no less fraught than the study of the world economy, and should be treated with corresponding caution.

For decades non-economists have attacked the assumptions underlying economic theory: that people are perfectly informed maximisers of their own self-interest, for instance. Although economists are aware that markets fail and humans are not always rational, many of their investigations still rely on neoclassical assumptions as “good…Continue reading

The new NAFTA model has many moving parts

ONE year ago, a member of President Donald Trump’s administration drafted a short executive order to withdraw America from the North American Free-Trade Agreement (NAFTA), a trade deal with Canada and Mexico. The obvious interpretation was that Mr Trump was irresponsibly bullying the Mexicans and Canadians into giving America better terms. A kinder view held that he was aiming at a domestic audience. Congress was dragging its feet at the time over the confirmation of Robert Lighthizer, the president’s chosen trade negotiator. Mr Trump’s threats were a way to kick it into action.

One year on, with Mr Lighthizer long since in place, America’s attitude to NAFTA seems no less hostile. Its threat of withdrawal still hangs over the talks, and in March Mr Trump waved the stick of tariffs on steel and aluminium in case a deal to revise NAFTA could not be reached by May 1st. This tough talk may yield an agreement within the next few…Continue reading

THE pattern is familiar. Computer geeks develop technology that threatens to overturn established markets and habits. Regulators then scramble to understand and tame the beast. This is what is happening in the financial world in the wake of an explosion of crypto-currencies. Over the past year the pool of virtual currencies has both deepened, from $30bn to $400bn, and widened, with the spread of “initial coin offerings” (ICOs, a form of fundraising in which investors in young companies are issued with virtual tokens). Hedge funds, students and pensioners have all been caught up in the crypto craze.

This worries authorities, because the crypto-sphere is far from risk-free. Valuations can leap and plunge: after a giddy rise, between December and February the price of bitcoin dropped from nearly $20,000 to less than $7,000. (It is now around $9,000.) Several ICOs have turned out to be scams. Legitimate tokens are in danger of being stolen. Some crypto-currency exchanges have been…Continue reading

AS LONG as dirty money has been around, so has money-laundering. Between $800bn and $2trn, or 2-5% of global GDP, is washed annually, estimates the United Nations Office on Drugs and Crime. Criminals have swapped money for precious metals, mis-stated invoices, rinsed cash through casinos or simply strapped it to their bodies and flown to places where banks don’t ask questions. Now they have a new detergent: crypto-currencies.

Such data as there are suggest that crypto-laundering is still a small share of the whole. But crypto-currencies’ attractions—global availability, the speed and irreversibility of transactions and the ability to hide identities—are plain. Rob Wainwright, head of Europol, Europe’s police agency, has estimated that 3-4% of the continent’s annual criminal takings, or £3bn-4bn ($4.2bn-5.6bn), are crypto-laundered. He thinks the problem will get worse. America’s Drug Enforcement Administration believes international gangs are using crypto-currencies…Continue reading

SO THIS is how normality feels. Between April 13th and April 18th America’s biggest banks reported a strong set of first-quarter earnings, with a helping hand from the taxman. Some are more profitable than they have been for years. They are paying billions to shareholders; regulatory reins are being loosened. Yet the stockmarket shrugged. On April 18th the S&P 500 index of banks’ share prices was 4.1% lower than at the start of reporting season.

Banks expected three main effects from the corporate-tax cut signed into law by President Donald Trump in December. The first was a write-down of deferred tax assets—past losses that could be set against future bills—which clobbered most lenders’ bottom lines in the fourth quarter but did no real damage. (Some, including Wells Fargo, carried deferred liabilities and hence recorded a gain.) The second was a permanent reduction in their tax bills. The third was a boost to business from a more lightly taxed America Inc.

The direct benefits of lower taxes are plain. Although pre-tax profits at the six biggest banks rose by $4.3bn, compared with the first quarter of 2017, taxes fell at five of them. (At the sixth, Goldman Sachs, the bill was unusually low a year ago because of a change in the treatment of employees’ shares and options.) Of a total increase in net profit of $5.4bn at those five, lower…Continue reading

MOST governments are happy when foreigners want their bonds, especially when those foreigners are long-term holders, like central banks. But America is different. It worries that some foreign governments buy its debt to keep the dollar pricey and their own currencies cheap. This “currency manipulation” gives other countries a competitive edge, raising their own trade surpluses and America’s deficit.

Brad Setser of the Council on Foreign Relations, a think-tank, sees an “arc of intervention” across Thailand, Singapore, Taiwan and South Korea that has slowed the dollar’s decline over the past nine months. America has reportedly persuaded South Korea to forswear currency manipulation in a “side-agreement” to their revised trade deal. And on April 16th President Donald Trump tweeted that “Russia and China are playing the Currency Devaluation game…Not acceptable!”

Mr Trump’s tweet was at odds with his Treasury Department’s assessment. Every six months it must tell…Continue reading

DURING the financial crisis, Western governments poured hundreds of billions of dollars into their banks to avert collapse. The search for ways to avoid future bail-outs started before the turmoil ended. One of the niftiest proposals was the “contingent convertible” (coco) bond, which turns into equity when the ratio of a bank’s equity to risk-weighted assets falls below a predetermined danger point (since set at a minimum of 5.125% for cocos, although it can be up to around 7%). The ambition was grand. As the Squam Lake Group, composed of mostly American academics, put it in 2009, the automatic conversion of cocos would “transform an undercapitalised or insolvent bank into a well-capitalised bank at no cost to taxpayers”.

At first, regulators were keen. In 2010 Mervyn King, then the governor of the Bank of England, said he wanted contingent capital to be a “major part of the liability structure of the banking system”. Swiss regulators, too, pushed for coco issuance. The hybrid nature of cocos seemed a way to satisfy both regulators, who wanted banks to have bigger safety buffers, and bankers, who were reluctant to issue new shares because of the high cost of capital. The hope was that investors, too, might see the appeal of an asset that offered a higher yield than bank bonds but lower risk than bank shares.

Nine years after the first cocos…Continue reading

THE Hong Kong dollar is one of the most and least manipulated monies in the world. For over 34 years the territory’s monetary authority, the HKMA, has kept it pegged to America’s currency at around HK$7.80 to the dollar, resisting all temptations to let it fall or rise. In 2005 it refined the peg with two promises: to buy dollars at the price of HK$7.75 and to sell them for HK$7.85.

The strength of the Hong Kong dollar has obliged the HKMA to keep the first promise many times since. Its purchases of American dollars have even drawn the accusation that it manipulates its currency for competitive advantage.

In fact, the HKMA has always been ready to manipulate its currency upwards, too. But since 2005 it has had no occasion to, until last week. On April 12th the Hong Kong dollar weakened to HK$7.85, forcing the authority to buy HK$51bn over the next few days in exchange for American dollars.

The Hong Kong dollar’s weakness reflects the gap between rising American interest rates and…Continue reading

WATCHING financial markets can be like watching a horror film. A character walks into the darkness alone. A floorboard creaks. The latest spooky sign is the spread between the three-month dollar London interbank offered rate (LIBOR) and the overnight index swap (OIS) rate. It usually hovers at around 0.1%, but has recently climbed to 0.6% (see chart). As it widens, bankers are bracing for a jump scare.

To see why, consider what each rate represents. LIBOR is the rate that banks charge other banks for unsecured loans. The OIS rate measures expectations for the federal funds rate, which is set by the central bank. As LIBOR rises above the OIS rate, that suggests banks fear it is getting riskier to lend to each other. (The gap was 3.65 percentage points in the depths of the crisis, after Lehman Brothers filed for bankruptcy.)

Market-watchers were already twitchy. Last November they shuddered as the yield curve, which plots the yields of Treasury bonds of different maturities, abruptly flattened….Continue reading

THE aftermath of the 2007-08 financial crisis ought to have been a moment of triumph for economics. Lessons learned from the 1930s prevented the collapse of global finance and trade, and resulted in a downturn far shorter and less severe than the Depression. But even as the policy remedies were helpful, the crisis exposed the economic profession’s continued ignorance of the business cycle. That is bad news not just for the discipline, but for everyone.

The aim of those studying the macroeconomy has always been to understand the economy’s wobbles, and to work out when governments should intervene. That is not easy. Downturns come often enough to be a serious irritant, but not often enough to give economists sufficient data for rigorous statistical analysis. It is hard to distinguish between short-run swings and structural economic changes resulting from demography or technology. Most classical economists were sceptical of the idea that the macroeconomy needed much oversight at all.

By…Continue reading