Financial Panic

Narayana Kocherlakota addressed three financial panic triggers:

"[…] First, the financial system meltdown of 2007-09 was caused by the unexpectedly large decline in U.S. residential land prices. Second, higher amounts of household and financial institution leverage leave the financial system more vulnerable to these shocks. Finally, the U.S. tax system encourages leverage by providing incentives for households to take one more mortgage debt and financial institutions to finance through debt."

See Re-thinking leverage subsidies

"Greed is good"

Gordon Gekko Reborn by Nouriel Roubini

"[G]reed cannot be controlled by any appeal to morality and values. Greed has to be controlled by fear of loss, which derives from knowledge that the reckless institutions and agents will not be bailed out."

Now comes the rescue of the rescuers

Our global debt mechanics are looking increasingly like a Ponzi scheme

"Crises are the inevitable result of a build-up of macroeconomic, financial, and policy risks and vulnerabilities: assets bubbles, excessive risk-taking and leverage, credit booms, loose money, lack of proper supervision and regulation of the financial system, greed, and risky investments by banks and other financial institutions."

"[Additionally] a practical definition of a financial crisis is an event that forces policy officials to spend a long weekend trying desperately to announce a new bailout package in order to avoid national and global panic before the markets open on Monday. In the past years, such weekend all-nighters dealt with the needed bailouts of private firms – Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, AIG, bank rescues, etc."

According to Eichengreen:

The last few weeks have been the most amazing – and important – period of the euro’s 11-year existence. First came the Greek crisis, followed by the Greek bailout. When the crisis spread to Portugal and Spain, there was the $1 trillion rescue. Finally, there were unprecedented purchases of Spanish, Portuguese, Greek, and Irish bonds by the European Central Bank. All of this was unimaginable a month ago.

"Too big to manage" & "too big to fail"

Accordingly with Howard Davies

"[...] The overriding conclusion that emerges from any analysis of these unhappy events is that nothing will ever be the same again: the relationship between the state and the markets needs to be rethought. A new “social contract” between finance and the people, through their governments, is required."

"That is easy to say, but governments, individually and collectively, are still struggling to redefine the terms of that contract. Progress has been painfully slow, partly because officials have been fire-fighting, and partly because urgent domestic political imperatives compete with the desire to establish new, globally applicable mechanisms that would provide a stable underpinning for the international financial system and prevent regulatory arbitrage and the de-globalization of finance."

"Es que soy bajo de pecho"

A propósito de las declaraciones de la semana pasada. Comparto un interesante artículo sobre "el fin" de la recesión en México.

De acuerdo con Arturo Herrera:

"¿[C]ómo se determina cuándo finaliza una recesión? Ésta es una pregunta que ha acompañado a la macroeconomía casi desde su inicio, las metodologías usualmente aceptadas son las desarrolladas por el National Bureau of Economic Research (NBER) en Estados Unidos. El criterio que por mucho tiempo utilizó esta organización (y que por cierto se sigue manteniendo en muchos países) es que un periodo de expansión termina cuando hay dos caídas consecutivas en términos reales en la serie desestacionalizada (es decir la que ajusta asuntos estacionales como navidad, vacaciones de semana santa, etc.) del Producto Interno Bruto (PIB) trimestral. Dos trimestres, no uno. De manera simétrica, una recesión terminaría cuando el PIB crece durante dos trimestres consecutivos."

"Esto del sobreoptimismo y la aversión a la pérdida me hacen recordar a Obelix, el robusto personaje del cómic francés Asterix y Obelix. Cuando sus amigos en son de broma le recuerdan que está gordito, Obelix responde indignado que eso es falso, lo que pasa dice, 'es que soy bajo de pecho'."

Fuente: El País

"Green Shoots" vs. 10.2%

Source: The Economist

RBS & Lloyds get 31.3 billion pounds in second Bank Bailout

"Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc will receive 31.3 billion pounds ($51 billion) in a second bailout from the U.K. taxpayer as the two banks agreed to cap bonuses."

"Today’s bailout for RBS and Lloyds follows the 37 billion pounds the two lenders received last year and will bring the government’s stake in RBS to more than 84 percent from 70 percent. Barclays Plc, the U.K.’s second-biggest bank, and HSBC Holdings Plc, Europe’s largest, haven’t taken state aid."

See Bloomberg for the full article

Risky asset prices have risen too much, too soon

De acuerdo con Nouriel Roubini:

"Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable."

"Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble."

Agrega:

"But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments."

Source: FT.com

US Economic Growth

Algunas reacciones a la cifra de crecimiento económico de EEUU correspondiente al tercer trimestre de 2009 - GDP’s 3.5% rise; y un cuadro comparativo de episodios de recuperación - Comparing Expansions (Interactive Graphics).

Our distrust is very expensive

It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence. Kenneth Arrow

Accoringly with Davies:

"That fall in confidence affected banks, the stock market, and the government and its regulators. Furthermore, the survey [Financial Trust Index] showed that declining trust was strongly correlated with financial behavior. In other words, if your trust in the market and in the way it is regulated fell sharply, you were less likely to deposit money in banks or invest in stocks. So falling trust had real economic consequences."

Sweden’s Financial Crisis Synthesis

Bäckstrom sintetiza los efectos de la crisis financiera que sufrió Suecia a principios de la década de los noventa.

a) Most of the banking system fell into deep crisis. One bank went into liquidation, while the rest of the system required extensive governmental emergency aid.

b) Property values fell by approximately 35% over four years. Equities fell by 55% over a three-year period.

c) Despite the central bank’s 500% interest rate, it was impossible to defend the Swedish krona, which was pegged to the euro’s forerunner, the European Currency Unit or Ecu. The krona depreciated by around 25% in the autumn of 1992, a year after the crisis began.

d) The crisis triggered a sharp economic downturn. GDP fell by 7% over three years, and unemployment rose by 7% over five years.

e) During a three-year period, government debt increased by about 50%, with the public deficit reaching 12% of GDP. Falling GDP led to declining tax revenues, while rising unemployment led to an automatic increase in public expenditure.

Current financial crisis stylized facts (Export-Led vs. Dollar Crisis)

These stylized facts follow Kenneth Rogoff’s article

1. Global Imbalances – euphemism for the huge US trade deficit and the corresponding trade surpluses elsewhere, not least China (70% of the excess funds saved by China, Japan, Germany, Russia and Saudi Arabia).

2. Cheap money from abroad juiced an already fragile financial regulatory and supervisory structure that needed discipline more than cash.

3. America’s current-account deficit has now shrunk to just 3% of its annual income, compared to nearly 7% a few years ago.

4. Reinhart & Rogoff find that if financial crises hold one lesson, it is that their aftereffects have a very long tail.

5. Any real change in the near term must come from China [This economy] needs to strengthen its social safety net and to deepen domestic capital markets before consumption take off - consumption represents 35% of national income.

Source: Project-Syndicate.org

Europe Financial Regulation

Overall, financial integration has greatly contributed to economic growth in Eastern Europe. Industries that depend heavily on external finance grew faster in countries with large capital inflows than in countries with more modest inflows. BUT the rapid expansion of credit brought about by foreign financial intermediaries using various channels (including direct lending, lending via banking subsidiaries, and lending via leasing subsidiaries) has fueled asset booms and heightened exposure to foreign-exchange risk. In the absence of effective regulation, financial integration has made the region vulnerable to a sudden and massive contraction of capital inflows.

Proposal
[W]hen the effects of a financial institution’s activities are sufficiently large, the country affected should be allowed to assume regulatory power, irrespective of the institution’s domicile.

The authors believe
[…] that an effect-based approach, based on an agreed threshold, would minimize the negative consequences of more host-country intervention in regulation and supervision.

Project-Syndicate, Berglof & Pistor

Markets have gone up too much, too soon, too fast

Accordingly with Bloomberg Nouriel Roubini said:

I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year.

In the short run we need monetary and fiscal stimulus to avoid another tipping point and to avoid deflation, but now this easy money has already started to create asset bubbles in equities, commodities, credit and emerging markets

S&P 5000 (from Oct08 to date)

Dow Jones (from Oct08 to date)

We are facing many crises

The 64th opening of the General Assembly asks us to rise to an exceptional moment. We are facing many crises – food, energy, recession, and pandemic flu – occurring all at once. If ever there were a time to act in a spirit of renewed multilateralism, a time to put the “united” back into the United Nations, it is now.

[…] And that is what we are doing, as action on three issues of historic consequence demonstrates. […] the threat of catastrophic climate change, […] nuclear disarmament, [and] turning the corner to recovery (from financial Recession).

Project-Syndicate, Ban Ki-moon

Confidence, Confidence and Trust

On a fundamental level, all crises share causes and cures but they also have many differences. The cure is made up of two ingredients: 1) regain confidence to resolve a crisis; and 2) preserve confidence to prevent a crisis from repeating itself. Given the international dimension of this crisis and the proliferation of cross-border banking, the cure for this crisis also involves a third component – trust between authorities to enhance cross-border crisis management.

Stefan Ingves at the Eurofi Forum

At the Mortgage Broker's...

Una síntesis del inicio de la crisis actual (Selección Adversa y Daño Moral)

RSG Investment Bank, "Trust the 'Really Smart Guys' for all your investment needs"

Home Prices Increase

"U.S. home prices rose in July from a month earlier, according to the S&P Case-Shiller home-price indexes, with just two of the metropolitan areas showing declines. Meanwhile, the rate of annual declines continues to accelerate"

WSJ.com

The full S&P / Case-Schiller report

Emerging Markets and Global Financial Reform

The home country must put a cap on leverage, limit acceptable liquidity and funding practices, and have a resolution regime for winding up complex financial institutions. Otherwise, emerging markets should be able to say that banks from that country will not be allowed to enter.

[E]merging markets need to redouble their efforts to build bond markets, but on a local basis. Countries with more developed bond markets experienced less negative fallout from the crisis, since their large firms retained access to non-bank sources of finance.

Encouraging participation by foreign investors is a quick way to jump-start local bond market activity. But recent experience suggests that quickest is not best. Regulations limiting foreign participation to prudent levels should be part of the new international regime.

Project Syndicate, Eichengreen

Los Desafíos de la Competitividad

Inauguración: Dr. Cabrero, Sen. Navarrete, Mtro. Romero Hicks, Dr. Rodrick (El Futuro del Capitalismo, A partir del minuto 33), Dr. Esquivel