NEWS,25.01.2013

Eurozone tensions fade

New evidence suggested Friday that the eurozone might finally be emerging from its crisis with a European Central Bank announcement that banks were starting to repay some emergency loans ahead of time.In an unprecedented move a year ago, the ECB pumped more than €1.0 trillion ($1.3 trillion) into the banking sector to avert a looming credit crunch in the 17 countries that share the single currency.At the time, the ultra-cheap three-year loans, known as long-term refinancing operations (LTROs), were credited with marking a turning point in market sentiment towards the embattled euro. The LTROs were launched in two batches, in December 2011 and February 2012 and both included provisions to allow early repayment after one year, with the first repayment window opening on January 30, and the second on February 27.After that, repayments can continue on a weekly basis, depending on demand.In a widely-watched announcement on Friday, the ECB said that 278 banks would repay €137.16bn of the first €489bn LTRO on January 30.That is much more than the €100bn euros expected by analysts.Some experts believe the magnitude of the repayments is a sign of the improved health of the financial markets as it suggests banks are enjoying better access to funding.The euro certainly spiked higher on the news, rising to $1.3436.Nevertheless, other observers warn of possible problems further down the line if it emerges that only banks in the stronger core countries such as Germany repay the loans, while banks in still vulnerable, peripheral countries, such as Spain and Italy, become "stigmatised" for not being able to repay.The ECB did not provide details as to the nationality of the 278 banks which have decided to repay the cash, but some banks have made their intentions known via press statements.Berenberg Bank chief economist Holger Schmieding said it was "no wonder that the euro exchange rate is going up. We see the voluntary return of excess liquidity to the ECB as a strong vote of confidence in the euro.""Most of the funds will be returned because banks no longer need them," Schmieding argued.Private funding markets had reopened since the ECB unveiled its other anti-crisis weapon, a bond purchase programme, last August, the expert said."The large repayment shows how the ECB's intervention is successfully healing the eurozone financial system," he concluded.But Annalisa Piazza at Newedge Strategy was more cautious, suggesting that "markets might start to price in risks of tighter liquidity conditions in the future, should the repayment continue at the same pace."Nevertheless, the eurozone has seen other positive news this week, with private business activity across the eurozone as measured by the widely watched Purchasing Managers' Index or PMI hitting a 10-month high in January.And in Germany, the region's top economy, both business and investor confidence is also rising sharply."With business confidence recovering faster, at least in Germany, and the financial system healing, the resilience of the eurozone to future shocks is slowly growing," said Berenberg Bank's Schmieding."Serious risks remain... but they should be more manageable than in the last two years," he said.Speaking to the world's top business and political leaders at the World Economic Forum in Davos, ECB chief Mario Draghi hailed what he called "relative tranquility" on the financial markets and said: "All the indices point to a substantial improvement of financial conditions." But Draghi also warned that it was too early to declare the battle over."Are we satisfied...? I think to say the least, the jury is still out. Because all in all, we haven't seen an equal momentum on the real side of the economy and that's where we will have to do much more," he said.

Britain on brink of triple dip recession

Britain's economy shrank more than expected at the end of 2012 with a North Sea oil production slump, lower factory output and a hangover from London's Olympics pushing it perilously close to a "triple-dip" recession.The country's gross domestic product fell 0.3% in the fourth quarter, the Office for National Statistics said on Friday, sharper than a 0.1% decline forecast by analysts.The news is a blow for Britain's Conservative-led government, which a day earlier defended its austerity programme against criticism from the International Monetary Fund. It needs solid growth to meet its budget targets, keep a triple-A debt rating and bolster its chances of winning a 2015 election. Sterling fell to its lowest in 13-1/2 months against the euro and hit a five-month low against the dollar in response to the data. The euro was also buoyed by a stronger-than-expected German Ifo sentiment survey. "There are no positive takeaways from today's first (GDP)estimate," said Lee Hopley, chief economist for the EEF manufacturers' association. "Even assuming some unwinding of activity from the Olympics boost in the previous quarter, this still leaves no real signs of underlying growth in the economy."Britain's economy is now 3.3% smaller than its peak in Q1 2008, having recovered only about half the output lost during the financial crisis a worse performance than most other major economies.The country slipped back into recession in the last three months of 2011, and only emerged from it in the third quarter of 2012, after a boost from the London Olympics.After a bout of snowy weather in January - which is likely to have hit spending and output the risk is that the economy will continue to shrink in the first three months of this year, technically pushing it into a rare "triple dip" recession.Britain's biggest department store group, John Lewis , said earlier on Friday that snow was responsible for its sales growth stalling in the latest week. Political IncendiaryIn economic terms, the picture remains one of stagnation over the past year. But politically, the latest dip in national output is more incendiary."Stagnation is going to be the theme for the next couple of quarters or so. This obviously brings Osborne's strategy into sharp relief and also the (Bank of England) strategy of maintaining or not sanctioning further monetary policy action," said Rob Wood at Berenberg Bank. "The Bank of England were forecasting a return to some growth in Q1 and that is likely to be disappointed." Finance minister George Osborne stuck fast to his austerity plan on Thursday, rejecting suggestions from the International Monetary Fund's chief economist that he should consider slowing his deficit reduction plan.Prime Minister David Cameron this week staked his political future on offering a referendum on Britain's place in the European Union. But it is Osborne's gamble that austerity will deliver strong growth before a 2015 election that will be crucial for his Conservative party's chance of winning.After the figures were released, the Osborne conceded that Britain was still in a "very difficult economic situation"."We face problems at home with the debts built up over many years and problems abroad, with the euro zone - where we export many of our products deep in recession," he added.Osborne's coalition partner, Liberal Democrat leader Nick Clegg, has said the government of which he is part had cut investment spending too rapidly.Opposition Labour Party' finance spokesperon Ed Balls responded to the data by saying the government was complacent."David Cameron and George Osborne have been asleep at the wheel. They've spent the last six months obsessing about a referendum in five years time, not focusing on the problems in our economy today," Balls said.Britain's chief central banker Mervyn King expects no more than a "gentle recovery" this year, while this week the IMF cut its 2013 forecast for British economic growth to 1.0% from 1.1% predicted in October.However, economists and business groups warn that even such lacklustre growth could be derailed by a hit to firms' and consumers' confidence from talk of a triple-dip recession.The biggest driver for the fourth-quarter fall in GDP was a 10.2% drop in mining and quarrying output, the biggest since records began in 1997, driven by disruption from extended maintenance affecting North Sea oil and gas fields.This knocked 0.18% off GDP, while slightly smaller amounts of damage were done by falls in factory output and in the 'government and other services' category, where the Olympics had boosted sports and recreation services in the third quarter.Friday's figures showed output in the service sector which makes up more than three quarters of GDP was flat in the fourth quarter. Industrial output was 1.8% lower.

Britain on brink of new recession

Britain's economy shrank 0.3% in the final quarter of 2012, a year in which it recorded zero growth, official data revealed on Friday, placing the country on the brink of yet another recession.British finance minister George Osborne said he was "determined to confront" the economic problems facing the country, which he claimed had been hit hard by the high debt inherited by the government and owing to eurozone strains."After growth of 0.9% in third quarter, the economy contracted by 0.3% in the fourth quarter of 2012," the Office for National Statistics said in a statement, adding that gross domestic product growth was flat over the year."GDP is estimated to have been flat between 2011 and 2012," the ONS said.Should Britain's economy shrink also in the current first quarter, then the country will enter its third recession since the 2008 global financial crisis."Given that a technical recession requires two consecutive quarters of falling output, this is arguably not a true 'triple-dip' yet," noted Vicky Redwood, chief UK economist at the Capital Economics research group."But there are no hard and fast definitions, and another contraction in Q1 is quite possible anyway, especially given the snow disruption."Chancellor of the Exchequer Osborne said the latest data was "a reminder today that Britain faces a very difficult economic situation."He added: "A reminder that last year was particularly difficult, that we face problems at home because of the debts built up over many years and problems abroad with the eurozone, where we export most of our products, in recession."Now, we can either run away from those problems or we can confront them and I am determined to confront them so that we can go on creating jobs for the people of this country," Osborne added in a statement.Britain is not a member of the eurozone but has been affected by the neighbouring bloc's ongoing financial crisis. Activity has been hit hard also by deficit-slashing austerity measures from the nation's Conservative-Liberal Democrat coalition government.In recent weeks, major British retailers have either been forced to close completely or seek outside help to remain operational. DVD rental chain Blockbuster UK and music retailer HMV became the latest casualties last week, entering administration in a bid to stay alive.Camera chain Jessops shut in early January after electrical firm Comet closed its 235 stores just before Christmas.The IMF's chief economist, Olivier Blanchard, urged Britain on Thursday to lessen the pace of its austerity programme because of the risk it may fall back into recession this year.Blanchard said Britain's annual budget statement due in March would be a good time for finance minister George Osborne to "take stock" of his programme of deep spending cuts and tax hikes.As Britain suffers, Europe's top economy Germany appears to have put the worst of the region's debt crisis behind it, separate data showed on Friday, with business confidence rising to its highest level in seven months.Britain's economy contracted in the fourth quarter after expanding by 0.9% in the third quarter of last year, when the country also exited a double-dip recession.However the third-quarter growth was boosted by one-off factors, including the London 2012 Olympic Games and rebounding activity after an extra public holiday for Queen Elizabeth II's Diamond Jubilee.Britain sank into the first phase of a double-dip recession in 2008 as a result of the devastating global financial crisis that sparked a number of vast banking bailouts.The economy rebounded in late 2009 but struggled to stage a convincing recovery and fell back into a second downturn in late 2011, which lasted for three quarters, as the eurozone crisis loomed large.

World's biggest nuclear plant may shut

The largest nuclear power plant in the world may be forced to shut down under tightened rules proposed by Japan's new nuclear watchdog aimed at safeguarding against earthquakes, a report said on Friday.Fukushima operator Tokyo Electric Power's vast Kashiwazaki-Kariwa plant in central Japan could be on the chopping block if the Nuclear Regulation Authority expands the definition of an active fault.The movement of a fault a crack in the earth's crust can generate massive earthquakes like the one that sparked a tsunami that slammed into the Fukushima Daiichi plant in March 2011, setting off the worst atomic crisis in a generation.The watchdog is planning to define an active fault as one that moved any time within the past 400 000 years, rather than the current 120 000 to 130 000-year limit, an official said, which could spell the end of the Tepco plant."The new guidelines will be put into effect in July, and then we will re-evaluate the safety of each of Japan's nuclear plants," said the NRA official, adding no decisions would be made until the new rules were in place.At least two "non-active" faults underneath the site's reactors could be ensnared by the new definition, forcing its closure, according to a report in the mass-circulation Yomiuri Shimbun newspaper on Friday.Other Japanese media have carried similar reports.A company spokesman said Tepco was conducting more tests on the faults underneath the Kashiwazaki-Kariwa plant, the world's biggest by generating capacity.The NRA is conducting or planning to conduct investigations into six other nuclear plants in Japan.At present only two of the country's 50 reactors are operational, after the entire stable was shuttered over several months for scheduled safety checks. Public resistance has meant the government has been reluctant to give the go-ahead for their re-starting.The two reactors that are working are both being investigated by seismologists.In 2007, the government ordered the temporary closure of the Kashiwazaki-Kariwa plant after a 6.8-magnitude earthquake destroyed hundreds of homes in the area and jolted the sprawling plant, which was close to the quake's epicentre, leading to a small radiation leak.The 9.0-magnitude earthquake that struck off Japan's northeastern coast in 2011 triggered the tsunami that left about 19 000 dead and set off the emergency at Fukushima.No one is officially recorded as having died as a direct result of the nuclear catastrophe, but radiation leaks forced tens of thousands of people from their homes and left swathes of agricultural land unfarmable.

NEWS,07.12.2012

Ensuring Scotish Sovereignty: Exploring the Public Bank Option

 

The Royal Bank of Scotland (RBS) and the Bank of Scotland have been pillars of Scotland's economy and culture for over three centuries. So when the RBS was nationalized by the London-based UK government following the 2008 banking crisis, and the Bank of Scotland was acquired by the London-based Lloyds Bank, it came as a shock to the Scots. They no longer owned their oldest and most venerable banks.Another surprise turn of events was the triumph of the Scottish National Party (SNP) in the 2011 Scottish parliamentary election. Scotland is still part of the United Kingdom, but it has had its own parliament since 1999, similar to U.S. states. The SNP has rallied around the call for independence from the UK since its founding in 1934, but it was a minority party until the 2011 victory, which gave it an overall majority in the Scottish Parliament. Scottish independence is now on the table. A bill has been introduced to the Scottish Parliament with the intention of holding a referendum on the issue in 2014.Arguments in favor of independence include that it will allow the Scottish people to make decisions for Scotland themselves, on such contentious issues as having nuclear weapons in their seas and being part of NATO. They can also directly access the profits from the North Sea oil off Scotland's coast.Arguments against independence include that Scotland's levels of public spending (which are higher than in the rest of the UK) would be difficult to sustain without raising taxes. North Sea oil revenues will eventually decline.One way budgetary problems might be relieved would be for Scotland to have its own publicly-owned bank, one that served the interests of the Scottish people.  True economic sovereignty means having control over the national currency, credit and debt.It was in that context that I was asked to give a presentation on public banking at RSA Scotland (the Royal Society of Arts) in Edinburgh on Nov. 22.  Among other attendees were a special adviser and a civil servant from the Scottish government.  The presentation was followed by one by public sector consultant Ralph Leishman, director of 4-consulting, who made the public bank option concrete with specific proposals fitting the Scottish context.  He suggested that the Scottish Investment Bank (SIB) be licensed as a depository bank, on the model of the state-owned Bank of North Dakota. Lively debate followed. The SIB is a division of Scottish Enterprise (SE), a government economic development body. SE encourages economic development, enterprise, innovation and investment in business, which is achieved by the SIB through the Scottish Loan Fund. As noted in a September 2011 government report titled "Government Economic Strategy": Securing affordable finance remains a considerable challenge... Evidence shows that while many large companies have significant cash holdings or can access capital markets directly, for most Small and Medium-sized companies bank lending remains the key source of finance. Unblocking this is key to helping the recovery gain traction." The limitation of a public loan fund is that the money can be lent only to one borrower at a time.  Invested as capital in a bank, on the other hand, public funds can be leveraged into nearly ten times that sum in loans. Liquidity to cover the loans is provided by deposits, which remain in the bank available to the depositors. Any shortage in liquidity can be covered by borrowing at low interest from other banks or the money market.  As observed by Kurt von Mettenheim, et al., in a 2008 report  titled "Government Banking: New Perspectives on Sustainable Development and Social Inclusion from Europe and South America" (at page 196): "In terms of public policy, government banks can do more for less: Almost ten times more if one compares cash used as capital reserves by banks to other policies that require budgetary outflows."Leishman stated that the SIB now has investment funds of 23.2 million pounds from the Scottish government. Rounding this to 25 million pounds, a public depository bank could have sufficient capital to back 250 million pounds in loans.  For deposits to cover the loans, the Scottish Government has 125 million pounds on deposit with private banks, currently earning little or no interest. Adding just 14 percent of the General Fund cash and cash equivalent reserves held by Scotland's local governments would provide another 125 million pounds, reaching the needed 250 million pounds, with six times that sum in local government revenues to spare.My assignment was to show what the government could do with its own bank, following the model of the Bank of North Dakota (BND).  n the Saturday following the RSA event, The Scotsman published and article Alf Young that summarized the issues and possibilities so well that I'm taking the liberty of abstracting from it here.North Dakota is currently the only U.S. state to own its own depository bank. The BND was founded in 1919 by Norwegian and other immigrants, determined, through their Non-Partisan League, to stop rapacious Wall Street money men foreclosing on their farms.All state revenues must be deposited with the BND by law. The bank pays no bonuses, fees or commissions; does no advertising; and maintains no branches beyond the main office in Bismarck. The bank offers cheap credit lines to state and local government agencies. There are low-interest loans for designated project finance. The BND underwrites municipal bonds, funds disaster relief and supports student loans. It partners with local commercial banks to increase lending across the state and pays competitive interest rates on state deposits. For the past ten years, it has been paying a dividend to the state, with a quite small population of about 680,000, of some $30 million (18.7 million pounds) a year.Young writes:"Intriguingly, North Dakota has not suffered the way much of the rest of the U.S. -indeed much of the western industrialized world -- has, from the banking crash and credit crunch of 2008; the subsequent economic slump; and the sovereign debt crisis that has afflicted so many. With an economy based on farming and oil, it has one of the lowest unemployment rates in the U.S., a rising population and a state budget surplus that is expected to hit $1.6 billion by next July. By then North Dakota's legacy fund is forecast to have swollen to around $1.2 billion. With that kind of resilience, it's little wonder that twenty American states, some of them close to bankruptcy, are at various stages of legislating to form their own state-owned banks on the North Dakota model. There's a long-standing tradition of such institutions elsewhere too. Australia had a publicly-owned bank offering credit for infrastructure as early as 1912. New Zealand had one operating in the housing field in the 1930s. Up until 1974, the federal government in Canada borrowed from the Bank of Canada, effectively interest-free.From our western perspective, we tend to forget that, globally, around 40 per cent of banks are already publicly owned, many of them concentrated in the BRIC economies, Brazil, Russia, India and China. "Banking is not just a market good or service.  It is a vital part of societal infrastructure, which properly belongs in the public sector. By taking banking back, local governments could regain control of that very large slice (up to 40 percent) of every public budget that currently goes to interest charged to finance investment programs through the private sector. Recent academic studies by von Mettenheim et al., and Andrianova et al show that countries with high degrees of government ownership of banking have grown much faster in the last decade than countries where banking is historically concentrated in the private sector.  Government banks are also less corrupt and, surprisingly, have been more profitable in recent years than private banks.Young concluded his article: "As we left Thursday's seminar, I asked another member of the audience, someone with more than thirty years' experience as a corporate financier, whether the concept of a publicly-owned bank has any chance of getting off the ground here.'I've no doubt it will happen,' came the surprise response. 'When I look at the way our collective addiction to debt has ballooned in my lifetime, I'd even say it's inevitable.'"The Scots are full of surprises, and independence is in their blood. Recall the heroic battles of William Wallace and Robert the Bruce memorialized by Hollywood in the Academy Award-winning movie Braveheart.  Perhaps the Scots will blaze a trail for economic sovereignty in the EU, just as the North Dakotans did in the U.S.  A publicly-owned bank could help Scotland take control of its own economic destiny, by avoiding unnecessary debt to a private banking system that has become a burden to the economy rather than a pillar in its support.

American economy and the Rationalization of Inequality

 

Republicans love touting the benefits of trickle-down economics and are still doing it in the big debate over tax cuts for the wealthy. The idea is simple: The more money the people on top make, the more the people below will benefit from the dripping down of that prosperity. The hidden agenda here, of course, is the rationalization of inequality. By linking the welfare of working-class Americans directly to the prosperity of the rich, the Republicans can protect the insulated interests of corporations and the wealthy without the fear of backlash. In reality, however, the only thing that trickles down in the Republican universe is you-know-what. Our economy is actually a trickle "up" economy instead, based on a lopsided pyramid scheme that ensures the rising up of prosperity rather than the dripping down. Consider the example of investment banking, a white-collar profession that raises money for companies and provides advice for mergers, divestitures, and other strategic alternatives. I chose this example because the pyramid structure illustrated by it is magnified a thousand times in blue-collar environments, the retail industry, and other sectors where wage inequality between rank-and-file workers and senior management is even higher, and so it is telling that even in a relatively upscale business like investment banking, the contrasts are so extreme. The investment banking hierarchy is essentially a large bureaucracy. At the bottom (ignoring maintenance staff like janitors and security guards) are the administrative assistants, who support several bankers at one time and make about $35,000 a year. Above them are the analysts, a cadre of college graduates whose life consists of 120-hour work weeks and an endless stream of menial tasks for $65,000 to $90,000 a year. Next up, and supported by the analysts, are the associates freshly minted MBAs with more than a $100,000 in school loans hanging over them who can look forward to taking home between $100,000 and $175,000 a year. If these young men and women, who work 90-hour weeks while trying to juggle a family, survive long enough to become vice presidents, their compensation can rise to $200,000-$300,000 per year. So far so good, but here is where the gravy train takes a sharp turn towards the absurd. Above the vice presidents are the directors, which is a training zone for the next pay grade (or a graveyard for those who don't have what it takes). Directors rely on the workers below them to do all the grunt work, including research, financial analysis, and client presentations, while they mainly babysit clients and occasionally come up with ideas to pitch to them. Their pay for these relatively cushy tasks ranges from $350,000 to $500,000 per year; but even this is meager compared to what their superiors make. Managing directors, who work even less and spend more time golfing instead, can make anywhere from a million to several million dollars a year. Finally you have the really big fish the CEOs, presidents, executive vice presidents, and others who manage the entire circus, think deep thoughts, and schmooze with politicians to get regulations loosened. What makes these gigs so coveted is not just the fact that few ever manage to leapfrog into that echelon but that the pay scale can jump to tens of millions of dollars (and for celebrity executives, even hundreds) per year for work that is only moderately more challenging than that of the managing directors. It may be lonely at the top, but it's pretty lucrative too.It should be clear from the above that the wealth generated in these organizations gathers mainly at the top of the pyramid, while the people at the bottom, who do a lot of the heavy lifting and are instrumental in building that wealth, receive only a fraction of those riches. Sure, the pay scales in investment banking are pretty good by the standards of other industries, but it is the proportional difference between the compensation at the top and the bottom that makes a difference. This large income gap leads to an exponentially faster accumulation of wealth in a few hands, which in turn widens the prosperity gap even more. In other words, prosperity is not really trickling down but trickling up.The problem with this is obvious. The more wealth trickles up in our system, the more it frustrates those at the bottom without whose efforts that wealth could not be created in the first place. Moreover, since money is a finite resource, disproportionately large compensation for senior executives is ultimately paid for not just by other employees, but by customers (whose pockets that money comes from) and shareholders (who receive less benefit from their investment) as well. In a true trickle-down economy, the benefits of productivity and innovation would be shared fairly by all stakeholders, not just the select few with authority to dictate compensation and how the profits of a company are distributed. So while the idea of such a system might be appealing conceptually, it is not the way our economy really works, and if the Republicans really believe in trickle down, they should stop trying to whitewash the exploitative pyramid schemes of their wealthy donors and come up with a real model for equality instead.