I someone runs afoul of the law, and does not suffer consequences, what do you expect is going to happen?
Well, I guess it depends.
But if the law violation was VERY profitable, the chance of re-offending is high.
I thought we were done with BBB: Banks Behaving Badly. But they are not done behaving badly.
A lengthy New York Times article reports that big banks, which got away with limited penalties and were supposed to improve, went back to their bad ways.
What is happening is actually hard to believe.
1. Standard Chartered, a British bank, transferred money to countries blacklisted by the U.S. government (including Iran, which is under various sanctions related to its alleged nuclear program).
It is now accused of not disclosing the details of its wrongdoing, as it was required under the terms of the settlement.
Sanction busting is illegal under the U.S. law.
For an individual an equivalent crime would be laundering money for drug dealers of for the mafia.
2. Bank of Tokyo-Mitsubishi - same thing. Dealt with Iran, accused of under-reporting the scale of wrongdoing.
3. Barclays, UBS. They manipulated interest rates (LIBOR) - see posting 2014-20. They promised not to manipulate any more, but broke the promise by allegedly manipulating exchange rates - see postings 2014-20 and 2014-28.
For an individual an equivalent crime may be to steal from Joe, promise to give up stealing in exchange for not being sentenced and then stealing from Jane.
Do not trust my word only: here is what the New York Times writes:
"Typically, when banks have repeatedly run afoul of the law, they have returned to business as usual with little or no additional penalty — a stark contrast to how prosecutors mete out justice for the average criminal."
4. PricewaterhouseCoopers. Hey, bankers are not the only ones. Here is what happened. To assess what went wrong at Bank of Tokyo, the bank hired PricewaterhouseCoopers and paid it to write a report. But e-mails were discovered "indicating that the consultant, PricewaterhouseCoopers, watered down the report under pressure from the bank".
For an individual an equivalent arrangement would be as follows. I am found laundering money for the mafia. I hire and pay for an accountant who writes a report for the judge. Hm, what could go wrong?
Note that, in all those cases, banks are treated as single entities. But banks do not launder money for Iran or manipulate LIBOR and exchange rates - bank employees do. There is no talk about individual responsibility. In other words, if a banker does something wrong, the employer pays a fine and that is it.
This is, of course, serious since various problems with banks and bankers contributed to the Great Recession and were supposed to be eliminated.
Now comes the 64 000 dollar question: can the financial crisis happen again?
Wednesday 29 October 2014
2014-41 The exchange rate of the dollar and investment
A recent Statistics Canada study, summarized in this article, discussed Canadian investment over the last 20 years. Here are the main points:
1. Investment in structures is higher in Canada than in the US, but lower in information and telecommunication technology. Why? Canada is a resource rich country, hence high investment in structures. In the US, data - intensive sectors, in particular finance, are more important.
2. Investment in Canada grew slower than in the US when the dollar was weak (it reached its lowest value in 2002) and faster when the dollar was appreciating. Why? We import a large portion of investment goods. When the Canadian dollar depreciates, the relative price of investment goods increases, reducing investment.
3. As the dollar has been depreciating recently, this may lead to lower investment.
1. Investment in structures is higher in Canada than in the US, but lower in information and telecommunication technology. Why? Canada is a resource rich country, hence high investment in structures. In the US, data - intensive sectors, in particular finance, are more important.
2. Investment in Canada grew slower than in the US when the dollar was weak (it reached its lowest value in 2002) and faster when the dollar was appreciating. Why? We import a large portion of investment goods. When the Canadian dollar depreciates, the relative price of investment goods increases, reducing investment.
3. As the dollar has been depreciating recently, this may lead to lower investment.
2014-40 End of QE3
The Federal Reserve is today likely to announce the end of the program of buying long-term securities - the so called quantitative easing 3 (QE3 - it was done twice before). QE3 started in September 2012, with monthly purchases by the FED of $85 billion (or about $1 trillion a year). The goal was to stimulate the economy and lower unemployment to 6.5%. Unemployment did fall and, after over one year, the FED started tapering (reducing) the purchases over time; the last month it was only $15 billion.
What is uncertain is whether the FED is prepared to raise interest rates. Unemployment is below 6% and the US economy is in good shape. But while unemployment is low, employment is low as well. As a result of the recession a lot of people dropped out of the labour force.
What is uncertain is whether the FED is prepared to raise interest rates. Unemployment is below 6% and the US economy is in good shape. But while unemployment is low, employment is low as well. As a result of the recession a lot of people dropped out of the labour force.
Tuesday 28 October 2014
2014-39 Interest free money
You can get money at zero interest in Sweden
Prices have been falling so the Swedish central bank lowered the interest rates as much as it could.
Everyone is worried about deflation. The Swedish central bank's target is 2% inflation.
These worries are perhaps overblown. One reason inflation is low is that oil prices have been falling. Unless you are Saudi Arabia, Russia or Iran etc, low oil prices are a good thing.
The former senior deputy governor of the Bank of Canada, Tiff Macklem, divided disinflation into a "good disinflation" and a "bad disinflation".
A good disinflation is one that is caused by positive developments in the economy. He talked about greater competition among retailers; the drop in the price of oil is another example of a good disinflation.
Bad disinflation is caused by economic weakness and lack of demand.
There is another important difference: a "good disinflation" is more likely to be temporary as it is less likely to affect expectations. When the price of oil falls, people know that they will not continue to fall forever. Once the price of oil stops falling, its effect to lower inflation will end. Since firms and households know this, they rare less likely to change their expectations of inflation.
But in case of inflation caused by economic weakness, it is not clear how long it may last. So inflation expectations are more likely to fall and the drop in inflation is more likely to be permanent.
Prices have been falling so the Swedish central bank lowered the interest rates as much as it could.
Everyone is worried about deflation. The Swedish central bank's target is 2% inflation.
These worries are perhaps overblown. One reason inflation is low is that oil prices have been falling. Unless you are Saudi Arabia, Russia or Iran etc, low oil prices are a good thing.
The former senior deputy governor of the Bank of Canada, Tiff Macklem, divided disinflation into a "good disinflation" and a "bad disinflation".
A good disinflation is one that is caused by positive developments in the economy. He talked about greater competition among retailers; the drop in the price of oil is another example of a good disinflation.
Bad disinflation is caused by economic weakness and lack of demand.
There is another important difference: a "good disinflation" is more likely to be temporary as it is less likely to affect expectations. When the price of oil falls, people know that they will not continue to fall forever. Once the price of oil stops falling, its effect to lower inflation will end. Since firms and households know this, they rare less likely to change their expectations of inflation.
But in case of inflation caused by economic weakness, it is not clear how long it may last. So inflation expectations are more likely to fall and the drop in inflation is more likely to be permanent.
Monday 27 October 2014
2014-38 Regulating interchange fees
Interchange fees are the fees that merchants pay to credit card issuers whenever credit cards are used. The Canadian government sees the fees as too high and would like to have them reduced
Here is what the Globe is writing: "If fees are lowered, the banks and credit card companies could raise the interest rates they charge on these cards, jack up annual fees or make it harder for Canadians to earn loyalty points."
Looks like a no-brainer to me. Fees are incorporated into prices. This means customers who use cash bear the cost not only of profits earned by banks and by credit-card companies, but also of credit-card users' benefits.
Who uses cash? Poor people. So the scheme is reverse Robin Hood.
Note that the credit card market is not very competitive: two companies, Mastercard and Visa, have almost all the market. By the way, most of the interchange fee is earned by issuing banks; Mastercard and Visa get a small portion only. But they divide the market among themselves; I am not sure if there is a bank that issues both Visa and Mastercard, but that is unlikely.
Here is what the Globe is writing: "If fees are lowered, the banks and credit card companies could raise the interest rates they charge on these cards, jack up annual fees or make it harder for Canadians to earn loyalty points."
Looks like a no-brainer to me. Fees are incorporated into prices. This means customers who use cash bear the cost not only of profits earned by banks and by credit-card companies, but also of credit-card users' benefits.
Who uses cash? Poor people. So the scheme is reverse Robin Hood.
Note that the credit card market is not very competitive: two companies, Mastercard and Visa, have almost all the market. By the way, most of the interchange fee is earned by issuing banks; Mastercard and Visa get a small portion only. But they divide the market among themselves; I am not sure if there is a bank that issues both Visa and Mastercard, but that is unlikely.
2014-37 Results of the stress test in Europe
Turns out that several banks failed the test.
Recall that a stress test involves assuming very unfavourable conditions and checking if the bank has sufficient capital to survive.
Among them Monte dei Paschi di Siena. The first bank I ever went to in Italy. But I was not the first client - I am not that old.
Out of the 123 banks checked, 24 failed the test (in the sense that their capital was inadequate). The tests take a long time and, in the meantime, 10 brought up their capital to the required level, leaving 14 banks which need to raise capital within the next 9 months or be shut down.
Monte dei Paschi's problems have been known for a long time. It was listed on the stock exchange in 2000 (after over 500 years of being a private bank) and underwent rapid expansion. Then it had losses, hid them with a derivative contract and has been in trouble since they were made public in 2012.
So what else is new?
According to Eric Reguly in the Globe and Mail, the capital shortfall is not a huge problem. While more banks failed the test than a few years ago, the capital shortfall has not increased.
Recall that a stress test involves assuming very unfavourable conditions and checking if the bank has sufficient capital to survive.
Among them Monte dei Paschi di Siena. The first bank I ever went to in Italy. But I was not the first client - I am not that old.
Out of the 123 banks checked, 24 failed the test (in the sense that their capital was inadequate). The tests take a long time and, in the meantime, 10 brought up their capital to the required level, leaving 14 banks which need to raise capital within the next 9 months or be shut down.
Monte dei Paschi's problems have been known for a long time. It was listed on the stock exchange in 2000 (after over 500 years of being a private bank) and underwent rapid expansion. Then it had losses, hid them with a derivative contract and has been in trouble since they were made public in 2012.
So what else is new?
According to Eric Reguly in the Globe and Mail, the capital shortfall is not a huge problem. While more banks failed the test than a few years ago, the capital shortfall has not increased.
Thursday 23 October 2014
Wednesday 22 October 2014
2014-35 Bank of Canada did not change the interest rate
Today the Bank of Canada issued its Monetary Policy Report (go here and click on the summary) and made the interest rate decision. The decision: keep interest rates unchanged. They have not been changed for 4 years - the longest since 1950s.
The Bank would raise interest rates if it expects inflation to increase, and lower them if it expects inflation to decrease, in the next year or so. Factors that lead to an increase of inflation are
- economy operating beyond potential
- booming exports
- raising raw material or food prices, in particular a raising price of oil.
The current situation is mixed:
- economy is considered to operate below potential
- US economy is growing fast, which points to raising exports to the US. Other economies are weak, but 3/4 of our exports go to the US
- oil prices have been falling, leading to lower inflation.
So - a mixed bag.
Here are the monetary policy report highlights:
Highlights
Inflation in Canada is close to the 2 per cent target. Underlying inflationary
pressures are muted, given the persistent slack in the economy and the
continued effects of competition in the retail sector.
The outlook is for stronger momentum in the global economy. However, the
profile is weaker than in July and is diverging across regions. Growth remains
reliant on exceptional monetary policy stimulus.
Canada’s real GDP growth is projected to average close to 2 1/2 per cent over the
next year before slowing gradually to 2 per cent by the end of 2016.
As the economy reaches full capacity in the second half of 2016, inflation is
projected to be about 2 per cent on a sustained basis.
The Bank would raise interest rates if it expects inflation to increase, and lower them if it expects inflation to decrease, in the next year or so. Factors that lead to an increase of inflation are
- economy operating beyond potential
- booming exports
- raising raw material or food prices, in particular a raising price of oil.
The current situation is mixed:
- economy is considered to operate below potential
- US economy is growing fast, which points to raising exports to the US. Other economies are weak, but 3/4 of our exports go to the US
- oil prices have been falling, leading to lower inflation.
So - a mixed bag.
Here are the monetary policy report highlights:
Highlights
Inflation in Canada is close to the 2 per cent target. Underlying inflationary
pressures are muted, given the persistent slack in the economy and the
continued effects of competition in the retail sector.
The outlook is for stronger momentum in the global economy. However, the
profile is weaker than in July and is diverging across regions. Growth remains
reliant on exceptional monetary policy stimulus.
Canada’s real GDP growth is projected to average close to 2 1/2 per cent over the
next year before slowing gradually to 2 per cent by the end of 2016.
As the economy reaches full capacity in the second half of 2016, inflation is
projected to be about 2 per cent on a sustained basis.
2014-34 Bank regulation
Today, in money and banking class, we will ask why banks are heavily regulated. This article describes a new approach by regulators to evaluating bank soundness, a stress test
After the financial crisis bank regulators started to use stress tests for banks. A stress test involves checking if the bank would survive an adverse scenario in financial markets. There are many details; the bottom line is that the bank is assessed on the adequacy of its capital and risk management. Banks that come out lacking may be forced to increase their capital by issuing new shares or by merging with another institution; in the worse case scenario their licence may be withdrawn.
What do banks need to do to improve their assessment, and reduce the possibility of failure? Recognize bad loans, write them off and rebuild its capital.
Two points:
- the tests are not perfect: in the past, banks in Portugal and Belgium passed a test and then failed
- the US financial institutions did what they needed to do several years ago. Now the US economy is growing, while Eurozone economies are not.
After the financial crisis bank regulators started to use stress tests for banks. A stress test involves checking if the bank would survive an adverse scenario in financial markets. There are many details; the bottom line is that the bank is assessed on the adequacy of its capital and risk management. Banks that come out lacking may be forced to increase their capital by issuing new shares or by merging with another institution; in the worse case scenario their licence may be withdrawn.
What do banks need to do to improve their assessment, and reduce the possibility of failure? Recognize bad loans, write them off and rebuild its capital.
Two points:
- the tests are not perfect: in the past, banks in Portugal and Belgium passed a test and then failed
- the US financial institutions did what they needed to do several years ago. Now the US economy is growing, while Eurozone economies are not.
Monday 20 October 2014
2014-33 Alternative take on the decline of stock prices
The reason stock prices fell is that the easy money has been made and stocks are down on profit taking. There are more sellers than buyers and a lot of cash on the sidelines. Some analysts are cautiously optimistic about the market, others are constructive about the market but it we may be in a bottoming process. Some think stocks are oversold and it is a stockpicker's market. So what to do? You can take a wait-and-see approach or buy on weakness but remember that this is not the stock market, it is a market of stocks.
In case you do not quite understand it do read this article. One day you may make it to CNBC
In case you do not quite understand it do read this article. One day you may make it to CNBC
2014-32 Stock market as ebola
Stock markets fell last week (Here is TSX, you can compare it with US stock indices by clicking "compare" at the top of the graph).
How to explain this?
In 2013 Nobel prize winner in economics, Robert Schiller, received the prize for "empirical analysis of stock prizes". He explains why shares sometimes fall for no apparent reason in this article
His explanation:
- short-term variations in stock prices are extremely hard to predict
- but we should try because "we live in the present"
In his view stock prices are sometimes moved by "thought viruses" and spread by contagion, just as biological viruses.
The virus this time: well, there are three
How to explain this?
In 2013 Nobel prize winner in economics, Robert Schiller, received the prize for "empirical analysis of stock prizes". He explains why shares sometimes fall for no apparent reason in this article
His explanation:
- short-term variations in stock prices are extremely hard to predict
- but we should try because "we live in the present"
In his view stock prices are sometimes moved by "thought viruses" and spread by contagion, just as biological viruses.
The virus this time: well, there are three
- global slowdown
- deflation
- and the big one: secular stagnation
People are concerned that the world economy entered a new phase of slow growth. In this context secular means "lasting a very long time". So this sounds serious. If there is an economic slowdown which lasts a long time, profit expectations fall, future dividends will be lower and so stocks are overpriced.
Once a lot of people get the thought virus and start selling stocks, the forecast of falling stock prices becomes self-fulfilling. Stock prices fall, people become even more concerned, sell more stocks and stocks fall further.
Wednesday 8 October 2014
2014-31 How to study
And now for something completely different
No, not this one. That one
The article reviews the book How We Learn: The Surprising Truth About When, Where, and Why It Happens which summarizes the results of years of research on how to study effectively (if you want to remember what to study)
- do not cram
- study for short periods
- change the place you study in
- review the material
- sleep on it
For more details - read the article. It is actually pretty good, in my opinion at least.
No, not this one. That one
The article reviews the book How We Learn: The Surprising Truth About When, Where, and Why It Happens which summarizes the results of years of research on how to study effectively (if you want to remember what to study)
- do not cram
- study for short periods
- change the place you study in
- review the material
- sleep on it
For more details - read the article. It is actually pretty good, in my opinion at least.
2014-30 Asset allocation in uncertain times
Even though interest rates have nowhere to go but up, they are going down
What is going on?
Interest rates are near historical lows. But, as the economy becomes shaky, there is flight to quality; Investors sell risky assets (stocks, corporate bonds) and buy less risky assets (government bonds). So prices of government bonds go up, and interest rates fall even further.
Now think about it: if it was really the case that bond returns could only increase, it would have been a sure bet. Of course there are no sure bets. So there is always a risk that the market would turn in the opposite direction. And this is what is now happening.
What is going on?
Interest rates are near historical lows. But, as the economy becomes shaky, there is flight to quality; Investors sell risky assets (stocks, corporate bonds) and buy less risky assets (government bonds). So prices of government bonds go up, and interest rates fall even further.
Now think about it: if it was really the case that bond returns could only increase, it would have been a sure bet. Of course there are no sure bets. So there is always a risk that the market would turn in the opposite direction. And this is what is now happening.
2014-29 How the ruble is managed
The ruble is falling for three reasons
1. sanctions by Western countries related to the aggression in the Ukraine
2. low price of oil
3. strong US dollar.
The exchange rate arrangement in Russia is a dirty float. The exchange rate is allowed to vary within a band relative to a basket of currencies, and the central bank intervenes to keep it within the band. This is not an uncommon arrangement but the details are unusual:
- the band is unusually wide: ± 12.5% (the current band is, according to the article, to keep the ruble exchange rate between 35.65 and 44.65 rubles per basket (the formulation is odd because the exchange rate is calculated against a basket of currencies, not a single currency). A more typical band is ±1% or ±2.5%
- once the exchange rate approaches a limit of the band, the central bank intervenes - this is a standard procedure. Recently the ruble was weak so the bank would intervene to prop up (increase) its value by buying rubles (i.e. increasing demand for them) and selling foreign currencies. Also standard.
- once the daily intervention reaches a limit ($350 million) the band is moved up by 0.05 ruble (5 kopecks). This mechanical rule is also unusual.
What does moving the band mean? That the Russian central bank does not try to prevent appreciation or depreciation but does want to prevent rapid changes in the currency. This is a bit similar to what Bank of Canada was doing before 1998.
The intervention reduces the central bank's foreign exchange reserves by $350 million. This is not a big problem since Russia has over $500 billion in reserves
Interesting factoids:
- there are 169 countries listed on the CIA Factbook comparison of the foreign exchange reserves. The sum of those reserves is almost $13 trillion. The top four countries: China, Japan, Saudi Arabia and Switzerland hold a half of all reserves.
- The amounts vary from $32 million in Montserrat to 100 000 as much in China. But, per person, Montserrat's reserves are twice bigger.
Here is the exchange rate of the ruble in terms of the basket of currencies (a very simple basket: US dollar has the weight of 0.55 in the basket, Euro has the weight of 0.45):
Tuesday 7 October 2014
2014-28 Currency fix
In the news: currency fix. The US attorney General is investigating major banks' fixing of currency rates
The banks - about a dozen banks including Deutsche Bank (41, 11) Citigroup (7, 14), JPMorgan Chase (2, 6), Barclays (27, 10) and UBS (21, 25).
The first number is from ranking by market cap, the second from ranking by assets. World largest banks are here.
The banks - about a dozen banks including Deutsche Bank (41, 11) Citigroup (7, 14), JPMorgan Chase (2, 6), Barclays (27, 10) and UBS (21, 25).
The first number is from ranking by market cap, the second from ranking by assets. World largest banks are here.
Monday 6 October 2014
2014-27 The dollar is depreciating
The Canadian dollar has been depreciating recently, and fell below $0.89 (that is, CADUSD=X=0,89) on Friday.
Reasons:
1. Strong US dollar, in part because of the relatively strong US economy
2. Weak oil prices (recall that Canada is a significant oil exporter)
3. Expectation that interest rates in Canada will not be rising soon - in part because theBank of Canada is perceived as trying to maintain expansionary monetary policy.
This is economics in action:
What happens if the US interest rates are expected to increase and Canadian rates do not? By the interest rate parity, the Canadian dollar depreciates.
The article also mentions forward contracts on the Canadian dollar. The US CFTC (Commodity Futures Trading Commission) reported that there is now a net short position in Canadian dollars. A short position means that speculators are counting on the Canadian dollar to fall. They sell the dollars they do not have (hence "short" position) for delivery at a specified date in the future. They hope that, when the contract is due, they will buy the dollars at a lower rate. The excess of short positions means speculators expect the Canadian dollar to fall.
Here is an interesting quote, somewhat difficult to understand because of the obscure language, by Camilla Sutton, chief currency strategist, Bank of Nova Scotia.
"The BoC’s tone remains conflicted, with near-target inflation limiting the ability to provide an accommodative tone and forcing a shift to focus on the potential for BoC-Fed policy divergence"
What it means: the Bank of Canada would like to maintain low interest rates but it is going to be difficult
- inflation is near the BofC target (2%), which so the Bank of Canada cannot explain low interest rates by referring to inflation being too low;
- "accomodative tone" refers to Bank of Canada statements that low interest rates are needed
- focus on potential of BofC-Fed policy divergence - the US is switching to a more restrictive (less accommodating) monetary policy with the end of the latest round of quantitative easing. This pushes the Bank of Canada to also be less accommodating.
Sunday 5 October 2014
2014-26 Tax dodging - updated
A few blog posts were about banksters. This post is about non-financial companies. They manage to manage their finances so that they do not pay too much tax.
For example, there is a lot of pressure on Apple to change its ways.
Here is a neat Apple's trick. The US taxes companies on the basis of where they are incorporated and Ireland taxes companies on the basis of where they are managed. Simple arrangement: Apple Operations International is incorporated in Ireland and managed in the US. So it has not filed tax returns anywhere for the last 5 years. Between 2009 and 2012 its income was $30bln.
Apple Sales International had revenue of $74bln in 2009-2012 and claims not to be a tax resident anywhere. The tax it paid:0.05%.
More details of Apple's tax reduction methods are in this article. According to the article, in 2011 Apple paid "cash taxes" of $3.3 billion on profits of $34.2 billion (9.8%) while Walmart paid $5.9 billion on profits of $24.4 billion(24%).
Why is Apple so different from Walmart? One reason is that a large part of Apple's profits arise from its intellectual property: patents. They can be transferred to another company registered with a place with low taxes.
A commentary by a NYT columnist is here.
Before you criticize Apple's management recall that the duty of the management is maximizing shareholder value. One way to do it is to use legal means to reduce tax obligations. So the problem is not Apple, but tax laws.
For example, there is a lot of pressure on Apple to change its ways.
Here is a neat Apple's trick. The US taxes companies on the basis of where they are incorporated and Ireland taxes companies on the basis of where they are managed. Simple arrangement: Apple Operations International is incorporated in Ireland and managed in the US. So it has not filed tax returns anywhere for the last 5 years. Between 2009 and 2012 its income was $30bln.
Apple Sales International had revenue of $74bln in 2009-2012 and claims not to be a tax resident anywhere. The tax it paid:0.05%.
More details of Apple's tax reduction methods are in this article. According to the article, in 2011 Apple paid "cash taxes" of $3.3 billion on profits of $34.2 billion (9.8%) while Walmart paid $5.9 billion on profits of $24.4 billion(24%).
Why is Apple so different from Walmart? One reason is that a large part of Apple's profits arise from its intellectual property: patents. They can be transferred to another company registered with a place with low taxes.
A commentary by a NYT columnist is here.
Before you criticize Apple's management recall that the duty of the management is maximizing shareholder value. One way to do it is to use legal means to reduce tax obligations. So the problem is not Apple, but tax laws.
2014-25 How the cost of transportation falls
In the last class I mentioned that transport costs are not the most important reasons for the law of one price not to hold. Here is an interesting story about the largest container ship in the world (18 000 of 20 ft long containers). In particular, the article mentions it is twice bigger than another ship but uses only 6% more fuel
Thursday 2 October 2014
2014-24 ECB starts quantitative easing
The ECB held its rate setting meeting and decided to keep its interest rate at 0.05% ($5 per $10 000 for a year). It also announced that it will be buying various bonds to increase liquidity in the markets and spur lending.
All this because the Eurozone economy is in poor shape:
- inflation is 0.3%; the target is "below 2%"
- growth is slow
- the Italian and German economies are shrinking
Here is what the ECB head said:
All this because the Eurozone economy is in poor shape:
- inflation is 0.3%; the target is "below 2%"
- growth is slow
- the Italian and German economies are shrinking
Here is what the ECB head said:
"The recovery is likely to continue to be dampened by high unemployment, sizeable unutilised capacity and continued negative bank loan growth to the private sector.
"In particular, the recent weakening in the euro area's growth momentum, alongside heightened geopolitical risk, could dampen confidence and, in particular, private investment."
Wednesday 1 October 2014
2014-23 It took only 6 years
before it turned out that maybe Lehman Brothers should have been rescued by the FED
It all depended on an assessment of whether the bank was bankrupt. Turns out that there was a group of FED officials who determined it was not. It was just facing a liquidity crisis: its liabilities were more liquid than assets and it could not meet its obligations.
When a bank is solvent but faces a liquidity crisis, the central bank acts as a lender of last resort: it lends money until the bank can sell the illiquid assets and pay back the loan from the central bank.
So some FED officials thought Lehman was bankrupt; others thought it was not. But the information that it was not did not reach the decision makers on time.
That does not look too good for the confidence in the financial system, does it?
It all depended on an assessment of whether the bank was bankrupt. Turns out that there was a group of FED officials who determined it was not. It was just facing a liquidity crisis: its liabilities were more liquid than assets and it could not meet its obligations.
When a bank is solvent but faces a liquidity crisis, the central bank acts as a lender of last resort: it lends money until the bank can sell the illiquid assets and pay back the loan from the central bank.
So some FED officials thought Lehman was bankrupt; others thought it was not. But the information that it was not did not reach the decision makers on time.
That does not look too good for the confidence in the financial system, does it?
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