Category Archives: Financial Crisis

Risk Doesn’t Stand Still – Online Library of Law & Liberty

Ip begins his book two decades before that, in 1989, at a high-level conference on the topic of financial crises. (Personally I have been going to conferences on financial crises for 30 years.) He cites Hyman Minsky, who “for decades had flogged an iconoclastic theory of business cycles that fellow scholars had largely ignored.” Minsky’s theory is often summarized as “Stability creates instability”—that is, periods of safety induce the complacency and the mistakes that lead to the crisis. He was right, of course. Minsky (who was a good friend of mine) added something else essential: the rise of financial instability is endogenous, arising from within the financial system, not from some outside “shock.”

At the same conference, the famous former Federal Reserve Chairman Paul Volcker raised “the disturbing question” of whether governments and central banks “end up reinforcing the behavior patterns that aggravate the risk.” Foolproof shows that the answer is yes, they do.

Besides financial implosions, Ip reflects on a number of natural and engineering disasters, including flooding rivers, hurricane damage, nuclear reactor meltdowns, and forest fires, and concludes that in all of these situations, as well, measures were taken that made people feel safe, “and the feeling of safety allowed danger to re-emerge, often hidden from view.”

Risk Doesn’t Stand Still – Online Library of Law & Liberty

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe: Greg Ip: 9780316286046: Amazon.com: Books

Foolproof was excellent and much more subtle and thought provoking than its subtitle “Why Safety Can Be Dangerous and How Danger Makes Us Safe” would lead you to think. Instead of a retread of the well known Peltzman effect (the idea that innovations design to enhance safety just lead to greater risk taking without necessarily increasing safety) the book is actually a subtle and wide-ranging exploration of when it is true, when it is not, and its implications (e.g., seatbelt—the original Peltzman claim—actually don’t have the effect because people forget they are wearing them so don’t actually alter their behavior much, but antilock breaks are something you directly engage with while driving and lead to less safe driving). The wide-ranging aspect is a substantial amount of economics which is Greg Ip’s speciality, especially the recent financial and eurozone crises, but also safety in areas like food, floods, wildfires, automobiles, airplanes and professional football. Although Ip somewhat heroically tries to extract some lessons from all of this, the real strength of the book is tying together disparate topics and making you realize that there are no easy answers to any of these questions. That said, I personally find myself generally more sympathetic to what Ip calls the engineers (i.e., the people who try to make innovations to increase safety) rather than the ecologists (i.e., the people who worry about preserving the ecosystem as a whole without disturbances like new safety innovations). But overall an exciting read and thought provoking whether or not you agree with every part of it.

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe: Greg Ip: 9780316286046: Amazon.com: Books

Economic Crisis This Year? Let’s Look at the Forecast | Institutional Investor

That said, there are real mechanisms that could lead to contagion from a China crisis. The country’s economic and financial situation influences Europe’s financial markets for two main reasons. First, the deterioration in the competitiveness of Chinese industry leads to a decline in the volume of China’s imports, and therefore a decline in the volume of euro zone exports to China and to countries that have trade ties with China. Second, depreciation of the yuan would lead to a decline in the value of euro zone exports to China. We would consequently see a decline in European share prices, which would then lead to weaker household consumption and corporate investment.

Any economic forecast depends on myriad factors, though an economic crisis of a magnitude greater than that of 2008 seems highly unlikely in the short to medium term. Indeed, the reforms of the Basel III Accord on bank capital have been read by many bankers as an extended mea culpa for getting things so grievously wrong before the crisis.

Despite the widespread belief of a new crisis roughly every eight years — 1990, 1998, 2007–’08 and perhaps 2016 — what seems more likely is a cyclical slowdown in the U.S. and Europe, because of the ongoing decline of the corporate investment cycle in the U.S. and the weakness of exports to emerging-markets and oil-exporting countries. Let’s hope that Brazil continues to float in 2016.

Economic Crisis This Year? Let’s Look at the Forecast | Institutional Investor

The World Is Slowing Down

In this week’s letter we will take a quick look at the condition of a slowing global economy (the IMF just downgraded its own forecast this last week). Then we’ll grapple with a Plan B scenario, because I have a confession of sorts: I am not entirely optimistic that Congress and the new president can get their act together, so I offer a proposal from former Oklahoma Senator Tom Coburn as to what we, the people, can do to actually change the country’s direction without having to depend on a Congress that may prove dysfunctional. Again.

The World Is Slowing Down

Jeffrey Snider of Alhambra Investment Partners sent out a note last week highlighting some of the current conditions. In his piece entitled “Not Just Manufacturing, the Global Slowdown Is Monetary,” Jeffrey cites a Wall Street Journal article that highlights the very serious slowdown in orders for new big rigs and other trucks. Inventories are at their highest level since before the financial crisis, and sales in March were down 37% from a year ago as fleets remained very cautious about expanding in this environment. Quoting:

What Condition My Condition Is In | Thoughts from the Frontline Investment Newsletter | Mauldin Economics

World faces ‘lost year’ as policymakers sleepwalk towards fresh crisis, warns IMF

The world is sleepwalking into a fresh crisis as investors start to lose faith in policymakers’ ability to revive the global economy, according to the International Monetary Fund.

In its bluntest warning to date on the costs of policy inaction, the IMF said “financial and economic stagnation” could take hold unless governments prevented a “pernicious feedback loop of fragile confidence, weaker growth, low inflation and rising debt burdens” from forming.

José Viñals, the head of the IMF’s financial stability division, said a prolonged slowdown could knock around 4pc off global output relative to current expectations over the next five years amid repeated bouts of market turmoil.

World faces ‘lost year’ as policymakers sleepwalk towards fresh crisis, warns IMF

China’s leaders are blowing their last chance to avert an economic crisis

There you have the nub of the matter. Stripped of IMF circumlocutions, he is telling us that the Communist Party has once again let rip with debt-driven stimulus for the housing market and rust-bowl industries already chocking with overcapacity, stoking yet another mini-cycle to put off the day of reckoning.

The likelihood that China will fail to grasp the nettle of reform in time to avert a structural crisis is rising from probable to almost certain. As the well-meaning premier Li Keqiang keeps warning his colleagues in the Standing Committee, the current course leads straight into the middle income trap.

We can put away those charts projecting China’s ‘sorpasso’, the moment when the country overtakes the US to become the world’s biggest economy. It is not going to happen in 2020, and will look even less likely in 2030, when China’s demographic dividend turns to deficit and the workforce goes into precipitous decline.

China’s leaders are blowing their last chance to avert an economic crisis

Global recovery in danger of stallling

The world economy is beset by feeble growth and a recovery that is “weak, uneven and in danger of stalling yet again,” according to the latest Brookings Institution-Financial Times tracking index.

In a publication ahead of the spring meetings of the International Monetary Fund and World Bank this week, the index provides sober reading, highlighting sluggish capital investment, falling industrial production and declining business confidence.

The results of the index are likely to be reflected in IMF forecasts for the global economy on Tuesday, prompting Christine Lagarde, fund managing director, to warn of the need to be “alert” to global risks with growth “too low for too long”. The IMF is widely expected to revise its 3.4 per cent forecast for growth in 2016 down again.

Global recovery in danger of stallling

China and the U.S. Are Both Malinvesting | National Review Online

Student loans are Chinese apartment blocks are Jiang Jianqing’s private jet.

Jiang Jianqing is the boss at the Industrial and Commercial Bank of China (ICBC), which bought a few private jets a while back — with your money. As the invaluable Timothy Carney explains, this was another in the Export-Import Bank’s long line of shenanigans. ICBC, the largest bank in the world, set up a leasing company to buy the jets from Hawker Beechcraft, which was at the time owned by Goldman Sachs. The Export-Import Bank offered sweetheart financing to make the deal happen. As Carney summarized: “The U.S. taxpayer was lending money to the largest bank in the world (owned by the Chinese government) to buy corporate jets from Goldman Sachs.”

That is a sentence that makes me feel like I need a shower.

But the Chinese bankers may want to make sure that those jets last: It could be a while before they’re in a position to buy new ones.

China and the U.S. Are Both Malinvesting National Review Online

When governments hand out free money, or loans at very low rates, then surprise, a lot of it gets misallocated. In the US that misallocation goes to student loans. In China it goes to empty apartment buildings, empty cities and a whole lot of other things. And surprise again, a lot of that misallocated money is not going to be paid back.

 

World Bank says Russia crisis to send poverty to highest in decade | Reuters

Russian poverty rates will return to 2007 levels this year as the economy continues to contract and inflation reduces people’s purchasing power, the World Bank said on Wednesday.

The international lender’s comments add to the view that it is ordinary Russians who have borne the brunt of the country’s economic crisis, as the blow for many firms has been cushioned by the weaker rouble and state aid.

The number of poor people in Russia will rise to more than 20 million out of a population of over 140 million, the World Bank said, the largest

World Bank says Russia crisis to send poverty to highest in decade | Reuters

China’s debt explosion threatens financial stability, Fitch warns

China’s huge debt levels will weigh on growth over the next five years and could threaten the country’s financial stability unless policymakers rein in credit, Fitch has warned.

The rating agency said a “remarkable build-up in leverage across China’s economy” since the 2008 financial crisis meant Beijing’s ability to meet ambitious annual growth targets of 6.5pc to 7pc between 2016 and 2020 looked “extremely challenging”.

While China’s public debt ratio stood at 55pc of gross domestic product (GDP) at the end of last year, total credit in the world’s second largest economy, excluding equity raising, climbed to almost 200pc of GDP in 2015, from 115pc in 2008, according to official estimates.

Fitch said the “true figure” was likely to be closer to 250pc. It expects this to climb to 260pc of GDP by the end of this year as total debt continues to grow faster than the economy.

China’s debt explosion threatens financial stability, Fitch warns

About the Panama Papers

Over a year ago, an anonymous source contacted the Süddeutsche Zeitung (SZ) and submitted encrypted internal documents from Mossack Fonseca, a Panamanian law firm that sells anonymous offshore companies around the world. These shell companies enable their owners to cover up their business dealings, no matter how shady.

In the months that followed, the number of documents continued to grow far beyond the original leak. Ultimately, SZ acquired about 2.6 terabytes of data, making the leak the biggest that journalists had ever worked with. The source wanted neither financial compensation nor anything else in return, apart from a few security measures.

The data provides rare insights into a world that can only exist in the shadows. It proves how a global industry led by major banks, legal firms, and asset management companies secretly manages the estates of the world’s rich and famous: from politicians, Fifa officials, fraudsters and drug smugglers, to celebrities and professional athletes.

Panama Papers: This is the leak

Panama Papers: Iceland – A storm is coming

The interrogation room in which Iceland’s recent history was rewritten is sparse, furnished only with a table, some chairs, and a computer. A camera is fixed to the wall, and the frosted, double-glazed windows have completely blocked out the sound of the gale-force winds in Reykjavik’s Faxafloi Bay.

It was in this room that some of Iceland’s most powerful bankers, executives, and investors had to answer to special investigator Olaf Hauksson. A tall man with a heavy build, Haukkson has spent the past six years investigating the transactions that brought Iceland’s economy to its knees in October 2008.

At the time, the country’s three biggest banks folded within just three days, in part because their senior executives had illegally doctored the stock listings of their own banks. “Market manipulation”, as Hauksson curtly calls it.

When asked what happened to the three bank bosses in the end, Hauksson grins. “They all went to jail,” he says, pointing to the empty chairs. “They sat right there.”

Olafur Hauksson has only just begun to wrap up proceedings for the biggest scandal in Iceland’s history. And it’s entirely possible that the publication of the Panama Papers will trigger the next one.

Panama Papers: Iceland – A storm is coming