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  • Marketplace Whiteboard: Indexes as Baskets

    If you have students who can’t quite get their heads around how indexes work, Paddy Hirsch is ready to help. In his latest Marketplace Whiteboard , your mate Paddy tells us to just think of indexes as baskets:
  • Draghi on Eurozone's 'Path from Crisis to Stability'

    Well, isn't this a change. At this year's annual World Economic Forum in Davos, European Central Bank President Mario Draghi spoke about reduced risks and "dramatic recovery" in Europe's economies. In this interview with Philipp Hildebrand , Draghi talked about how Europe has moved to more stable footing, and addresses the risks ahead (including deflation):
  • Bank of England Governor Mark Carney on Need for Stimulus, And Risks in Stimulus Measures

    Given that he is Canadian, was educated in the U.S., and is now governor of the Bank of England, Mark Carney might be as qualified as anyone to speak to global economic challenges (or at least for English-speaking economies). In an interview with Charlie Rose , Carney spoke to a particular challenge for central banks: to promote additional stimulus while cutting down on the risks that stimulus measures can create. Here is an excerpt from the interview: Here is the full episode:
  • Fitch Warns Lawmakers on Debt Rating

    Fitch Ratings announced yesterday that it is watching the actions (or inaction) of U.S. lawmakers closely. With the Congress struggling to come to a deal that would raise the debt ceiling, the U.S.'s perfect AAA rating is in jeopardy. In the Washington Post , Zachary Goldfarb reports on the possible fallout A critical question is whether the Treasury Department will be able to pay bondholders if Congress fails to raise the debt ceiling on time. Many on Wall Street have suggested that the department would endeavor to do so, given the consequences of missing payments. But Fitch expressed no such confidence Tuesday. “The Treasury may be unable to prioritise debt service, and it is unclear whether it even has the legal authority to do so,” analysts wrote. If the government does in fact miss a payment on the federal debt, Fitch and other credit- rating firms say they will automatically downgrade the United States to a “default” rating — which would force numerous funds that hold Treasury bonds to sell. Fitch said it could still downgrade even if the debt ceiling is resolved, saying that a short-term solution might not be enough to shore up investor confidence. That is what Standard & Poor’s did in 2011 after a similar impasse. A second downgrade would be important because many firms can hold only investments rated AAA by at least two of three major rating firms. Obama administration officials cited the Fitch action to underscore that Congress needs to move quickly to raise the $16.7 trillion debt ceiling. A senior Treasury Department official who was not authorized to speak on the record said that “the announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy.” If investors start to panic, the Treasury Department could have trouble as soon as Thursday, when it must refinance more than $100 billion in debt. If it gets past that benchmark, the situation becomes gloomier. Read As U.S. faces potential downgrade, markets flash alarm over debt-ceiling impasse here .
  • Planet Money Graph: Break Down of U.S. Debt

    Lawmakers are gathering at the White House, ostensibly to try to find a way to reopen the federal government. If negotiations fail to lead to some sort of resolution, the government won't be able to pay some of its debts. This has led NPR 's special forces econ unit--the Planet Money team--to put together a helpful graph. Here is the breakdown of the U.S. Debt: Click here for more coverage from Planet Money.
  • IMF Global Financial Stability Report and 'New Risks to Financial Stability'

    The latest Global Financial Stability Report is out from the IMF . The good news cited in the report is that most markets are changing for the (long-term) better, as the global financial system "under[goes] a series of transitions along the path toward greater financial stability." The bad news is that periods of transition can also be periods of vulnerability. And so the report focuses a bit on what will happen globally when (and we now know this is not happening in the next few months) the U.S. pulls back from its accommodative monetary policy. IMF Financial Counsellor José Viñals shares the good news/bad news thinking: Here's more from the report. Financial stability challenges are also prevalent in many emerging market economies. Bond markets are now more sensitive to changes in accommodative monetary policies in advanced economies because foreign investors have crowded into local markets and may withdraw. Emerging market fundamentals have weakened in recent years, after a protracted interval of credit expansion and rising corporate leverage. Managing the risks of the transition to a more balanced and sustainable financial sector, while maintaining robust growth and financial stability, will be a key undertaking confronting policymakers. As central banks elsewhere consider strategies for eventual exit from unconventional monetary policies, Japan is scaling up monetary stimulus under the Abenomics framework, aiming to pull the economy out of its deflationary rut. Successful implementation of a complete policy package that features fiscal and structural reforms would reinforce domestic financial stability, while likely boosting capital outflows. But substantial risks to financial stability could accompany the program if planned fiscal and structural reforms are not fully implemented. Failure to enact these reforms could lead to a return of deflation and increased bank holdings of government debt, further increasing the already-high sovereign-bank nexus. In a more disorderly scenario, with higher inflation and elevated risk premiums, the risks to both domestic and global financial stability could be greater still, including rapid rises in bond yields and volatility, and sharp increases in outflows. In the euro area, reforms implemented at the national level and important steps taken toward improving the architecture of the monetary union have helped reduce funding pressures on banks and sovereigns. However, in the stressed economies of Italy, Portugal, and Spain, heavy corporate sector debt loads and financial fragmentation remain challenging. Even if financial fragmentation is reversed over the medium term, this report estimates that a persistent debt overhang would remain, amounting to almost one-fifth of the combined corporate debt of Italy, Portugal, and Spain. Assuming no further improvement in economic and financial conditions which would correspond to a more adverse outcome than the cyclical improvement built into the October 2013 World Economic Outlook baseline scenario, some banks in these economies might need to further increase provisioning to address the potential deterioration in asset quality of corporate loan books. This could absorb a large portion of future bank profits. Recent efforts to assess asset quality and boost provisions and capital have helped to increase the loss-absorption capacity of banks, but further efforts to cleanse bank balance sheets and to move to full banking union are vital. These steps should be complemented by a comprehensive assessment and strategy to address the debt overhang in nonfinancial companies. Read the full report here .
  • Kenneth Rogoff on Potential Economic Cost of Incivility in Washington

    Nobody is arguing that the shutdown of the U.S. federal government is not hurting the dollar and U.S. business, but it has yet to spell economic disaster. "At least for now," Kenneth Rogoff writes at Project Syndicate , "the rest of the world seemingly has unbounded confidence." But that is unlikely to last, Rogoff notes. Consider what happened when the Federal Reserve misplayed its hand with premature talk of “tapering” its long-term asset purchases. After months of market volatility, combined with a reassessment of the politics and the economic fundamentals, the Fed backed down. But serious damage was done, especially in emerging economies. If the mere suggestion of monetary tightening roils international markets to such an extent, what would a US debt default do to the global economy? Much of the press coverage has focused on various short-term dislocations from counterproductive sequestration measures, but the real risk is more profound. Yes, the dollar would remain the world’s main reserve currency even after a gratuitous bout of default; there is simply no good alternative yet – certainly not today’s euro. But even if the US keeps its reserve-currency franchise, its value could be deeply compromised. The privilege of issuing the global reserve currency confers enormous advantages on the US, lowering not just the interest rates that the US government pays, but reducing all interest rates that Americans pay. Most calculations show that the advantage to the US is in excess of $100 billion per year. There was a time, during the 1800’s, when the United Kingdom enjoyed this “exorbitant privilege” (as Valéry Giscard d’Estaing once famously called it when he served as French President Charles de Gaulle’s finance minister). But, as foreign capital markets developed, much of the UK’s advantage faded, and had almost disappeared entirely by the start of World War I. CommentsView/Create comment on this paragraphThe same, of course, will ultimately happen to the dollar, especially as Asian capital markets grow and deepen. Even if the dollar long remains king, it will not always be such a powerful monarch. But an unforced debt default now could dramatically accelerate the process, costing Americans hundreds of billions of dollars in higher interest payments on public and private debt over the coming decades. Read America's Endless Budget Battle here .
  • Andrew Ross Sorkin Looks Back at the Response to the Global Financial Crisis

    In this short video at the New York Times , DealBook columnist Andrew Ross Sorkin gives his take on what we've learned five years on from the near-meltdown of the global financial system. His conclusion: that if (when?) the next giant financial crisis hits, the same response options will not be on the table.
  • Glenn Hubbard: Avoiding Next Great Financial Crisis Requires Clear Policy Framework

    Writing at The Atlantic , Glenn Hubbard gives his assessment of efforts to fix the financial sector and avoid a crisis like the one that peaked five years ago. Hubbard, now dean of the Columbia Business School, was chairman of the Council of Economic Advisers for President George W. Bush. He points to monetary policy during the Bush presidency as the primary cause for the crisis. In fixing the crisis, he argues for a response that is not simply technical, but rather provides a "policy framework." Hubbard: Five years ago, a massive failure on the part of financiers and financial regulators precipitated the fall of Lehman Brothers and nearly crashed the global economy. Today, investors, taxpayers, and elected officials are entitled to ask: Are we safer now? At one level, yes. We are both healthier and smarter. We are healthier because both banks and households have repaired their balance sheets, improving the economy’s ability to withstand future shocks. We are smarter, because we have discarded the myth that the Federal Reserve can easily clean up the fallout from financial excesses and replaced it with an attitude of vigilance and caution about financial excesses. This raises another question: have we created public policies that make us safer? It is hard to say. We know more today about how Washington can inflate bubbles. Government-sponsored enterprises encouraged excessive risk-taking in housing finance. Easy monetary policy in the early 2000s not only kept mortgage interest rates low, but also encouraged investors to reach for yield and amplify that reach with leverage. If investors perceive low rates to be lasting, the incentive for leverage is particularly great. Fed officials focused on low rates as coming from a global savings glut, without emphasizing large flows in to the United States from global banks, particularly European banks. The Fed did not restrain the housing bubble, and it was not alone. The European Central Bank stood back as credit surged in peripheral European economies. And, of course, tax policy encouraged leverage. Since the crisis, the Dodd-Frank Act increased transparency in many derivatives – a good thing. But it also made a complex system of bank and nonbank regulators more complex and created a class of systemically important banks (and even non-banks), codifying “too big to fail.” It did not – nor did other legislation – seriously address reform of housing finance or direct the central bank to focus more on financial stability. Writing the Act’s web of rules will take years. Globally, an emphasis on higher capital requirements leaves open questions of how one measures the risks taken against that capital – recall the sovereign bonds were deemed “riskless” for that purpose before the crisis – or how to limit the incentive for “shadow banking” forms of intermediation to grow outside more heavily regulated sectors. Read How to Stop the Next Financial Crisis: The Fed Might Be Our Last Great Hope here .
  • The Predictability of Bubbles Popping and Financial Crises Ensuing

    Didier Sornette tracks financial crises, and his dragon-king just torched our black swan. Sornette wants us to recognize that some events are far more predictable than we have come to believe. Pull up some archival news footage from September 2008 and the prevailing tone is one of shock and surprise. The global financial crisis came, seemingly, out of nowhere. In this T ed Talk , Sornette argues that there are many warning signs for financial crises. We just have to be looking for them, and we have to know what to look for.
  • An Evolving Global Risk Environment

    The designers at Mercer/Think have taken some of the top-line data from the World Economic Forum 's Global Risks 2013 report and put them into this helpful visualization. It serves as a nice entry point to the report, and also a good conversation starter. Take a look: The full size graphic is available here . And don't forget to read the full report, here .
  • World Economic Forum: Global Risk Report 2013

    The World Economic Forum 's annual report on top global risks is out. It is, as usual, an unsettling report. And as with last year's report, the top two risks from the World Economic Survey of business and policy leaders, in terms of likelihood, are severe income disparity and chronic fiscal imbalances . Major systemic financial failure and water supply crises remain the top risks in terms of impact. But it is interesting to look at how the top risks have changed over the last five years. From the report: This video offers a nice summary of the report and its focus on three core cases: You can access the full report here .
  • WSJ: How the Euro Survived

    There are still a few days of 2012 left, but it seems safe to say that reports of the euro's death, to paraphrase Mark Twain, "have been greatly exaggerated." The currency remains in tact, and all members of the Euro Zone are currently sticking with it. Wall Street Journal Brussels bureau chief Stephen Fidler gives credit to ECB president Mario Draghi for staying true to his word and keeping the euro going.
  • A Defense of 'Cuddly Capitalism' and Innovation in Nordic Countries

    At VoxEU , three Finnish economists respond to a recent paper in which the authors assert that "cuddly capitalist" countries like Finland and other Nordic economies, "free ride" off of "cut-throat" capitalist countries like the U.S. Not surprisingly, Niku Määttänen , Mika Maliranta , and Vesa Vihriälä see a different picture. First, they take issue with the idea that the U.S. economy is more innovative: As Acemoglu et al. (2012a, 2012b) stress, innovation requires risk-taking. In a very innovative economy, one would therefore expect to find intensive job creation and job destruction, as firms that are successful in innovative activities expand rapidly while others are forced to exit the market. The available data do not suggest that the US economy is unambiguously more dynamic than the Nordic economies (Bassanini and Marianna 2009, OECD 2004). In Denmark, worker reallocation is more intensive, and in Finland almost as intensive as in the US (Table 1). Moreover, time series from the US indicate a marked decline in job and worker flows since the late 1990s (Davis et al. 2012), whereas – at least in Finland – both flows have stayed intensive (Ilmakunnas and Maliranta 2011). The authors go on to challenge the assumption that there is less dynamism in Nordic countries like Finland, and make the case that these are actually highly innovative economies in which entrepreneurs are encouraged to take risks for some of the same reasons they might be described as "cuddly" countries: One explanation for Nordic good performance might be that they are better in mobilising human resources. While hours per capita are higher in the US, a larger share of the working age population is employed in the Nordics owing to more inclusive educational, social and employment policies. This may imply that talents are harvested better for gainful economic activity. A second explanation could be the rather determined public policies to promote innovation. A third explanation might be that the economic incentives for innovation in the Nordics, while weaker than in the US, are not miserable after all, at least not across the board. For instance, all Nordic countries have introduced dual income taxation, according to which capital incomes are taxed at a flat rate. This helps in motivating entrepreneurs, despite quite progressive taxes on earned income. Sweden has recently encouraged wealth accumulation by abolishing wealth and inheritance taxes altogether. A well-designed safety net may also work to promote risk-taking. In particular, unemployment insurance may help risk-taking entrepreneurs by making it is easier for them to hire workers (see Acemoglu and Shimer 2000). Read Are the Nordic countries really less innovative than the U.S.? here .
  • Why European Policymakers are Paying Close Attention to the 'Fiscal Cliff' in the U.S.

    The OECD's relatively positive economic outlook , released earlier this week, presented Europe's struggles as much more worrying for the potential of the global economy than the fiscal cliff threat in the U.S. But as Dow Jones 's Nick Hastings reports, the two are not totally unrelated. Should policymakers in the U.S. not come to some agreement, then Europe is likely to feel a lot of economic pain: