June 28, 2017

High & Low Finance: Big Banks Grumbling About Planned Capital Rules

One result is that the American banks appear to have a competitive advantage. Being relatively well capitalized, they can afford to lend. That is less true in Europe.

Keep that fact in mind as the debate goes on about the new capital rules that United States regulators proposed this week for the largest American banks, the ones with more than $700 billion in assets. Some of those banks will need to have a lot more capital in a few years than they have now if the proposed rules are not watered down.

The banks were relatively restrained in their reactions this week, leaving it to trade groups to voice their complaints, which have a familiar ring to them.

“Ever-higher capital rules,” warned Robert S. Nichols, the president of the Financial Services Forum, which includes 19 large financial companies, “while a critically important element of safety and soundness, can become prohibitive and actually lead to reduced capability to lend to our nation’s families and businesses at a time when the economic recovery remains fragile.”

That there are bank capital rules at all stems from the issues a country faces when it provides deposit insurance. Depositors have no reason to care whether the bank is healthy, so a risky bank is not at a competitive disadvantage. The problem gets worse when those who buy bonds issued by banks conclude that their investments are effectively guaranteed by the government.

“Banks have creditors who are not worried about risks,” says Anat Admati, a Stanford finance professor and co-author of a book, “The Bankers’ New Clothes,” that calls for tougher capital rules. “If they were normal corporations, the creditors would not stand for it.”

It was never easy for regulators to determine how much capital was needed, but it became more difficult as financial innovations spread. That led to the 1988 adoption of model rules by a group of central banks and regulators that was based in Basel, Switzerland. That accord, later called Basel I, set up risk weightings for various types of assets, allowing for less capital for less risky assets. As the inadequacies of such a fixed system became clear, the regulators moved to one that allowed more fine-tuning, called Basel II. That allowed banks to use their own models — or credit ratings from Moody’s, Fitch and Standard Poor’s — to determine just how risky an asset was, and therefore how much capital was needed.

“Risk weighting is based on a very arcane, very complicated series of ratios and formulas that are immediately gamed and makes the system more fragile,” Thomas M. Hoenig, the vice chairman of the Federal Deposit Insurance Corporation, said this week after the F.D.I.C. voted to propose the new rules, along with other regulators. He said that the average risk weighting of bank assets fell, year after year, as the banks became better at coping with the rule.

Those risk-weighted assets form the basis of the capital figures banks cite. If a bank has 5 percent capital, it means capital equals 5 percent of the assets after risk adjustments. Until recently, government bonds from European countries were zero weighted, meaning that they did not count at all. Collateralized debt obligations — many of which turned out to be extremely risky — had only a 7 percent weighting, Mr. Hoenig said.

The result was that banks tended to load up on the highest-yielding assets with a given risk weighting. Because many mortgage securities had AAA ratings, that led banks as far away as Germany to lose a lot of money when the subprime mortgage market in the United States collapsed.

Under the latest, post-crisis rules — Basel III — there is supposed to be a leverage test as a supplemental measure. That measurement counts capital as a percentage of all assets — Treasury bills or junk bonds. The United States has long had such a test, though it was relatively lenient, but many other countries did not.

Floyd Norris comments on finance and economics in his new blog at norris.blogs.nytimes.com.

Article source: http://www.nytimes.com/2013/07/12/business/economy/big-banks-grumbling-about-planned-capital-rules.html?partner=rss&emc=rss

High & Low Finance: Grumbles Follow Plan to Raise Bank Capital

One result is that the American banks appear to have a competitive advantage. Being relatively well capitalized, they can afford to lend. That is less true in Europe.

Keep that fact in mind as the debate goes on about the new capital rules that United States regulators proposed this week for the largest American banks, the ones with more than $700 billion in assets. Some of those banks will need to have a lot more capital in a few years than they have now if the proposed rules are not watered down.

The banks were relatively restrained in their reactions this week, leaving it to trade groups to voice their complaints, which have a familiar ring to them.

“Ever-higher capital rules,” warned Robert S. Nichols, the president of the Financial Services Forum, which includes 19 large financial companies, “while a critically important element of safety and soundness, can become prohibitive and actually lead to reduced capability to lend to our nation’s families and businesses at a time when the economic recovery remains fragile.”

That there are bank capital rules at all stems from the issues a country faces when it provides deposit insurance. Depositors have no reason to care whether the bank is healthy, so a risky bank is not at a competitive disadvantage. The problem gets worse when those who buy bonds issued by banks conclude that their investments are effectively guaranteed by the government.

“Banks have creditors who are not worried about risks,” says Anat Admati, a Stanford finance professor and co-author of a book, “The Bankers’ New Clothes,” that calls for tougher capital rules. “If they were normal corporations, the creditors would not stand for it.”

It was never easy for regulators to determine how much capital was needed, but it became more difficult as financial innovations spread. That led to the 1988 adoption of model rules by a group of central banks and regulators that was based in Basel, Switzerland. That accord, later called Basel I, set up risk weightings for various types of assets, allowing for less capital for less risky assets. As the inadequacies of such a fixed system became clear, the regulators moved to one that allowed more fine-tuning, called Basel II. That allowed banks to use their own models — or credit ratings from Moody’s, Fitch and Standard Poor’s — to determine just how risky an asset was, and therefore how much capital was needed.

“Risk weighting is based on a very arcane, very complicated series of ratios and formulas that are immediately gamed and makes the system more fragile,” Thomas M. Hoenig, the vice chairman of the Federal Deposit Insurance Corporation, said this week after the F.D.I.C. voted to propose the new rules, along with other regulators. He said that the average risk weighting of bank assets fell, year after year, as the banks became better at coping with the rule.

Those risk-weighted assets form the basis of the capital figures banks cite. If a bank has 5 percent capital, it means capital equals 5 percent of the assets after risk adjustments. Until recently, government bonds from European countries were zero weighted, meaning that they did not count at all. Collateralized debt obligations — many of which turned out to be extremely risky — had only a 7 percent weighting, Mr. Hoenig said.

The result was that banks tended to load up on the highest-yielding assets with a given risk weighting. Because many mortgage securities had AAA ratings, that led banks as far away as Germany to lose a lot of money when the subprime mortgage market in the United States collapsed.

Under the latest, post-crisis rules — Basel III — there is supposed to be a leverage test as a supplemental measure. That measurement counts capital as a percentage of all assets — Treasury bills or junk bonds. The United States has long had such a test, though it was relatively lenient, but many other countries did not.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/07/12/business/economy/big-banks-grumbling-about-planned-capital-rules.html?partner=rss&emc=rss

Wall Street Gaining

Stocks advanced for a second straight day on Wednesday as a broad measure of economic growth was revised down, easing investors’ concerns that the Federal Reserve would begin to withdraw its stimulus early.

In afternoon trading the Standard Poor’s 500-stock index and the Dow Jones industrial average were both 1 percent higher, and the Nasdaq composite was 0.9 percent higher.

The Commerce Department reported that United States economic growth was more tepid than previously estimated in the first quarter, held back by a moderate pace of consumer spending, weak business investment and declining exports. The report provided reassurance to investors fearful that the Fed is about to give up on its stimulus.

The effect of the GDP report “is that despite all the rhetoric and fear about tapering, this will keep the Fed firmly planted in stimulus, which is a positive for the market,” said Michael Mullaney, chief investment officer at Fiduciary Trust Co. in Boston.

Global stocks and bonds had a second day of strong gains, as healthy data out of the United States, moves by China to calm bank fears and supportive signs from Europe’s central banks extended the rebound from last week’s global sell-off.

All combined to soothe nerves about plans for a reduction in Federal Reserve stimulus and recent worries about a credit squeeze in China, after a day of sustained buying in European and Asian markets.

Gold and silver, however, both slumped to near three-year lows. Gold fell over 2 percent to $1,230 an ounce and silver dropped 4 percent to leave both at their lowest levels since September 2010 and gold facing its biggest quarterly drop on record. After almost nine years of near unbroken gains, signs that the worst of the global financial turmoil may be over and that central banks might begin reducing stimulus, has sparked a major shift in investor attitude toward bullion.

Bond markets in Europe and benchmark United States Treasuries also continued to claw back ground, although investors remained wary the rebound could give way with markets likely to need more time to acclimatize to new environment.

“At this point in time, having seen an incredibly violent sell-off in the Treasury markets that took everything with it, there is a certain amount of settling back going on,” said Kit Juckes, a market strategist at Société Générale in London.

“I’m not sure we are done with position adjustment yet, though,” he added. “So I wouldn’t declare this as anything more than things are looking a little bit quieter.”

Data on Tuesday showed United States consumer confidence jumped in June to its highest level in more than five years, supporting the view that the Fed will press ahead with plans to reduce its $85 billion a month support program later this year.

Mario Draghi, the president of the European Central Bank, reiterated that the bank remained ready to cut rates again if needed, adding that he and his colleagues would look “with great attention to the potential volatility consequences.”

Mr. Draghi’s comments helped pushed the euro to a three-week low of $1.3035 against a broadly stronger dollar and helped trim yields on the bonds of peripheral euro zone economies which have jumped by more than half a percent over recent weeks.

Article source: http://www.nytimes.com/2013/06/27/business/daily-stock-market-activity.html?partner=rss&emc=rss

Dow Falls Below 15,000; Retailers Add to Slump

Video game shops, restaurants and retailers led the stock market lower Wednesday.

Without any good news to drive the market up, investors grappled with the question hanging over financial markets: When will the Federal Reserve and other central banks pull back their economic stimulus programs?

Markets have turned turbulent as traders start preparing for a time when the Fed and central banks in Europe and Japan are not pumping as much money into the financial system.

“There’s nothing concrete out there to turn us around today,” said Russell Croft, portfolio manager at the Croft-Leominster Value Fund in Baltimore. “So naturally enough, people are back to thinking about the Fed.”

The Dow Jones industrial average fell 126.79 points, or 0.8 percent, to close at 14,995.23. The Dow had its first three-day stretch of losses this year and is down 1.7 percent for the week.

A rout in global markets helped pull the Dow down 116 points on Tuesday. The selling started after the Bank of Japan decided not to make any new attempt to spur growth in its nation’s economy, which is the world’s third largest.

In other trading on Wednesday, the Standard Poor’s 500-stock index fell 13.61 points, or 0.8 percent, to 1,612.52. All 10 industry groups in the index dropped, led by consumer discretionary and utility companies. The Nasdaq composite fell 36.52 points, or 1 percent, to 3,400.43. Two of the top-performing stocks in the S. P. 500 this year, Netflix and Best Buy, led consumer discretionary companies down. Netflix lost $6.82, or 3 percent, to $207.64. Best Buy dropped $1.01, or 4 percent, to $26.88. GameStop fell $1.13, or 3 percent, to $36.59.

The S. P. 500, the stock-market benchmark for most investment funds, has lost 3.4 percent since reaching a record high on May 21. The next day, the Fed chairman, Ben S. Bernanke, said the central bank could decide to scale down its bond-buying program in the coming months if the economy looked strong enough.

Many on Wall Street think the Fed could signal that it is ready to start cutting back on its $85 billion in bond purchases at the end of its two-day meeting on Wednesday. That’s a reason bond traders have been selling Treasury notes, sending the 10-year yield from a low of 1.63 percent last month to as high as 2.29 percent this week. On Wednesday, the yield on the 10-year Treasury note edged up to 2.23 percent from 2.19 percent Tuesday, as the note fell 10/32, to 95 25/32.

Despite the losses, there were a few bright spots. Cooper Tire and Rubber jumped 41 percent after Apollo Tyres of India announced plans to buy the tire maker for $2.5 billion.

In commodities trading, crude oil rose 50 cents, to $96.10 a barrel, in New York. Gold rose $15, to $1,392 an ounce.

Article source: http://www.nytimes.com/2013/06/13/business/daily-stock-market-activity.html?partner=rss&emc=rss

S.&P. 500 Hits Record in Quiet Trading

The stock market showed little change in quiet trading as the Standard Poor’s 500-stock index reached another nominal record high.

The financial sector rallied after Bank of America and MBIA, the troubled bond insurer, reached a settlement of their long legal dispute over mortgage-backed securities.

A jump in Apple’s shares helped lift the S. P. 500 and the Nasdaq composite index modestly. But the Dow Jones industrial average bucked the trend, ending marginally lower.

The day’s slight gains followed a strong run in stocks this year. The market has been lifted by the Federal Reserve’s monetary stimulus policy, which has kept interest rates low, and solid earnings. The S. P. 500 has gained 13.4 percent this year.

“As long as you continue to have decent earnings reports and the support from central banks around the world providing liquidity, it’s going to be hard to derail this market, at least in the short term,” said Michael James, managing director of equity trading at Wedbush Securities.

On Monday, Bank of America said it would settle claims with MBIA for $1.7 billion, lifting shares of both companies and the S. P. financial sector index, which gained 1 percent. MBIA shares jumped 45.4 percent to $14.29 and Bank of America shares rose 5.2 percent to $12.88.

Apple was among the top gainers after Barclays raised its price target on the stock. Apple’s shares shot up 2.4 percent to $460.71.

The Dow industrials dipped 5.07 points, to close at 14,968.89. The S. P. 500 inched up 3.08 points, or 0.19 percent, to 1,617.50. The Nasdaq gained 14.34 points, or 0.42 percent, to close at 3,392.97.

Although weak economic data from the euro zone and China has caused concerns about the outlook for global growth, the stronger-than-expected April employment report fueled gains that sent the Dow and the S. P. 500 to new nominal record levels last Friday.

The multibillionaire investor Warren E. Buffett said on Monday that stocks were “reasonably priced,” although the Dow and the S. P. 500 had hit nominal highs. But he also said low interest rates had made bonds “terrible” investments because their prices would fall when rates eventually rise.

But some analysts say they suspect the stock rally has little strength to continue.

The market “is discounting a tremendous amount of good news now, which I don’t think is going to be substantiated, and I don’t think it’s allowing for any possibility of bad news,” said Uri Landesman, president of Platinum Partners.

Earnings have been mostly higher than expected, with 68.5 percent of companies surpassing estimates. At the same time, second-quarter estimates have fallen as outlooks remain more negative than positive.

On Monday, shares of Tyson Foods dropped 3.3 percent to $24.10 after the company posted a weaker-than-expected quarterly profit and cut its full-year sales forecast.

In contrast, Humana jumped 2.1 percent to $75.49, making it one of the S. P. 500’s biggest percentage gainers. JPMorgan Chase upgraded the stock to overweight.

But Johnson Johnson’s shares slid 1.3 percent to $84.68. General Motors’ stock also declined, falling 0.9 percent, to $31.82, after the Treasury said it would begin another round of sales of G.M. stock acquired during the government’s bailout of the auto industry.

In the bond market, interest rates rose again on Monday after their surge last Friday following the strong April employment report. The price of the Treasury’s 10-year note fell 22/32, to 102 4/32, while its yield rose to 1.76 percent, from 1.74 percent on Friday.

Article source: http://www.nytimes.com/2013/05/07/business/daily-stock-market-activity.html?partner=rss&emc=rss

Stocks Turn Higher

Wall Street turned positive Monday after the worst weekly decline of the year, even as investors face the prospect of a lackluster corporate earnings season.

The Standard Poor’s 500-stock index was 0.3 percent higher in afternoon trading, while the Dow Jones industrial average rose 0.1 percent and the Nasdaq composite index added 0.3 percent.

Earnings forecasts have been scaled back heading into first-quarter reports. Earnings from companies in the S.P. 500 are expected to have risen just 1.6 percent from a year ago, according to Thomson Reuters data, down from a 4.3 percent forecast in January.

A weaker-than-expected jobs report on Friday prompted concern that the American economy is in a slow patch.

Despite those headwinds, the loose monetary policy from central banks around the world continues to attract investors to equities, said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

“It’s all about easy money, and it’s lifting equities around the globe at this time,” Mr. Cardillo said.

The Bank of Japan started its bond purchases after it announced last week that it would inject about $1.4 trillion into the economy in less than two years.

In the United States, the Federal Reserve’s bond-buying program has been a significant catalyst of the recent rally that has sent major indexes to record levels.

Still, markets in the United States could see a technical correction of about 6 to 8 percent in the latter part of the month as the focus turns to corporate results, Mr. Cardillo said.

Alcoa’s earnings will be the first from a Dow component after Monday’s closing bell. JPMorgan Chase and Bed Bath Beyond are among the major companies set to announce results later in the week.

Ben S. Bernanke, chairman of the Federal Reserve, will give a speech after markets close on Monday. Investors have been watching for any insight into the Fed’s thinking on how long the central bank will keep its asset purchase program in place as it tries to bolster the economic recovery.

General Electric said it will buy oil field services provider Lufkin Industries for about $3.3 billion, sending Lufkin shares up 38 percent. G.E. slipped 0.2 percent.

Investors will be keeping an eye on the latest developments out of the euro zone after a constitutional court in Portugal overturned key austerity measures in the government’s latest budget. Portugal’s prime minister said the government would cut spending to meet targets agreed with its lenders. European stock markets ended largely unchanged.

Article source: http://www.nytimes.com/2013/04/09/business/daily-stock-market-activity.html?partner=rss&emc=rss

Stocks Edge Lower in Early Trading

Wall Street slipped lower Monday after the worst weekly decline of the year, as investors face the prospect of a lackluster corporate earnings season.

The Standard Poor’s 500-stock index was 0.2 percent lower, the Dow Jones industrial average fell 0.4 percent and the Nasdaq composite index was 0.1 percent lower in morning trading.

Earnings forecasts have been scaled back heading into first-quarter reports. Earnings from companies in the S.P. 500 are expected to have risen just 1.6 percent from a year ago, according to Thomson Reuters data, down from a 4.3 percent forecast in January.

A weaker-than-expected jobs report on Friday prompted concern that the American economy is in a slow patch.

Despite those headwinds, the loose monetary policy from central banks around the world continues to attract investors to equities, said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

“It’s all about easy money, and it’s lifting equities around the globe at this time,” Mr. Cardillo said.

The Bank of Japan started its bond purchases after it announced last week that it would inject about $1.4 trillion into the economy in less than two years.

In the United States, the Federal Reserve’s bond-buying program has been a significant catalyst of the recent rally that has sent major indexes to record levels.

Still, markets in the United States could see a technical correction of about 6 to 8 percent in the latter part of the month as the focus turns to corporate results, Mr. Cardillo said.

Alcoa’s earnings will be the first from a Dow component after Monday’s closing bell. JPMorgan Chase and Bed Bath Beyond are among the major companies set to announce results later in the week.

Ben S. Bernanke, chairman of the Federal Reserve, will give a speech after markets close on Monday. Investors have been watching for any insight into the Fed’s thinking on how long the central bank will keep its asset purchase program in place as it tries to bolster the economic recovery.

General Electric said it will buy oil field services provider Lufkin Industries for about $3.3 billion, sending Lufkin shares up 38 percent in early trading. G.E. slipped 0.2 percent.

Investors will be keeping an eye on the latest developments out of the euro zone after a constitutional court in Portugal overturned key austerity measures in the government’s latest budget. Portugal’s prime minister said the government would cut spending to meet targets agreed with its lenders. European stock markets were ahead modestly in afternoon trading.

Article source: http://www.nytimes.com/2013/04/09/business/daily-stock-market-activity.html?partner=rss&emc=rss

Draghi Dismisses Any Nation’s Move to Drop the Euro

During the last year, Mario Draghi, president of the bank, has managed to quiet financial markets, cap government borrowing costs and contain the euro zone crisis by making it clear that the bank would not allow the 17-country euro currency union to come apart. But it is not clear what tools he sees at his disposal.

In a news conference, he also gave no indication how the central bank might stimulate the moribund economies of the euro zone. The bank said Thursday that it would leave its benchmark interest rate unchanged. “Cyprus is no turning point in euro policy,” Mr. Draghi said. There is “no Plan B.”

Making sure that “credit will flow to the real economy seems to be the E.C.B.’s No. 1 priority,” Carsten Brzeski, an economist at ING Bank, wrote in a note to investors. “However, judging from today’s news conference, the E.C.B. looks rather clueless on how to tackle the problem.”

The bank left its benchmark interest rate unchanged on Thursday at 0.75 percent, while the Bank of England held its rate steady at 0.5 percent. With both central banks’ rates already at record lows, there might be little room to use interest rates as an economic stimulus. But the euro zone economies, like that of Britain, are stagnant and in need of help wherever they can find it.

Mr. Draghi said the European Central Bank was looking for new ways to stimulate lending in the weak euro zone economy and could move quickly. “We will assess all the data in coming weeks and we stand ready to act,” he said, without offering many clues about what measures he might have in mind.

The global financial crisis in recent years has forced central banks around the world to do much more than simply tweak the official interest rate as they did in the past. On Thursday, Haruhiko Kuroda, the new governor of the Bank of Japan, Japan’s central bank, announced that it would seek to double the amount of money in circulation over two years to try to end years of falling prices.

Mr. Draghi said there was a consensus among the 23 members of the European Central Bank’s governing council not to cut rates even lower “for the time being.” The bank also discussed other, unconventional ways to help countries where credit remained tight, he said.

“The experiences of other countries tell us we have to think deeply before we can come up with something useful and consistent within our mandate,” he said.

Large-scale purchases of corporate debt, which the Federal Reserve has used to stimulate lending in the United States, would be more difficult in Europe because most companies get their credit directly from banks, Mr. Draghi indicated.

With inflation already below the European bank’s target of about 2 percent, some analysts have worried that the euro zone faces a risk of deflation — a broad decline in prices that can be more destructive and difficult to cure than inflation. Mr. Draghi said, however, that risks to price stability were “broadly balanced,” indicating that he did not see a major risk of deflation.

Data from Markit, a research firm, confirmed the continued downturn on Thursday. Its survey of business activity showed a marked drop in France and a stalling of growth in Germany, the largest and most robust economy in the euro zone.

Mr. Draghi predicted that the euro zone would recover, but he sounded slightly less confident than in the past. “Tight credit conditions,” he said, “will continue to weigh on economic activity.”

The Bank of England’s decision to keep the benchmark interest rate unchanged on Thursday was made despite concern that new data might show that the British economy fell back into recession at the start of the year.

Mr. Draghi found himself devoting much of the hourlong news conference to trying to dispel fears that Cyprus represented an ominous new phase of the euro zone crisis.

Mr. Draghi acknowledged that an initial decision by officials from the European Union, the International Monetary Fund and the central bank to impose a tax on small bank deposits was “not smart, to say the least.” But he pointed out that euro zone officials had quickly corrected that error.

At the same time, he defended the decision that did stick: to place much of the burden of bailing out Cyprus banks on large depositors. In a long discourse on the lessons of Cyprus, he said it showed the need for centralized banking supervision that would enable regulators to detect problems before they became a broader threat.

While European leaders have agreed to give the central bank power to oversee euro zone banks, they remain divided on measures to protect depositors and to deal with failed financial institutions.

Mr. Draghi warned that countries where banking risk was several times larger than the economy — as in Cyprus, Britain and Luxembourg — were especially vulnerable. Those countries have to be more conservative, he said, avoiding large budget deficits and ensuring that the banks have ample capital buffers. “If anything, the events on Cyprus have reinforced the governing council’s determination to support the euro while maintaining price stability and acting within our mandate,” he said. The muted market reaction to events in Cyprus, he said, showed that “we are now in a position to cope with serious crises without them becoming existential or systemic.”

He said no country in the euro zone would be better off leaving the euro, as some commentators have suggested. “What was wrong with Cypriot economy doesn’t stop being wrong if they are outside of the euro,” Mr. Draghi said. “An exit entails many risks — big risks.”

Melissa Eddy reported from Frankfurt and Jack Ewing from London. Julia Werdigier contributed reporting from London.

Article source: http://www.nytimes.com/2013/04/05/business/global/european-central-bank-holds-steady-on-interest-rate.html?partner=rss&emc=rss

Political Economy: Valid Worries About the Cost of Easy Money

The Bundesbank, the German central bank, is not crazy. In a world where it is increasingly fashionable to call for central banks to print money, the Bundesbank is one of the last bastions of orthodoxy. Although its stance is extreme, it is a useful antidote to the theory that easy money is a cost-free cure for economic ills.

The bank is hostile to anything that smacks of monetary financing — printing money to finance governments’ deficits. It is worried that central bank independence is getting chipped away as economic weakness drags on in much of the developed world; it thinks that the European Central Bank should not respond to the recent rise in the euro by loosening monetary policy further; it is always concerned about the potential for inflation; and it thinks that spraying cheap money around can allow governments to shirk their responsibilities.

To many people, these attitudes seem old-fashioned. Surely central banks should bend the rules to get the world economy out of its current rut, they say. A few go even further and advocate “overt monetary financing”, as Lord Turner, chairman of the British Financial Services Authority, did in a seminal speech earlier this month.

Overt monetary financing involves governments’ deliberately running fiscal deficits and openly funding them by borrowing from central banks.

Mr. Turner made it clear that this was a policy that should be reserved for the most intractable deflationary recessions, the ones in which monetary policy cannot work (because businesses and households are already so clogged up with debt that they do not want to borrow more) and fiscal policy cannot do the trick either (because governments are over-indebted, too). While he advocated the medicine for Japan, he was wary about giving it to Britain, the euro zone or the United States.

The European Central Bank, it should be added, is not engaging in overt monetary financing. That is forbidden under the Maastricht Treaty, which led to the euro. But it is arguably engaging in the covert variety. This is the source of most of the friction between Mario Draghi, president of the European Central Bank, and Jens Weidmann, the Bundesbank boss — both of whom are based in Frankfurt.

The biggest clash was over Mr. Draghi’s promise last year to buy potentially unlimited amounts of government bonds from peripheral euro zone countries. Mr. Weidmann unsuccessfully opposed the plan. Mr. Draghi was right. If he had not pledged to do “whatever it takes” to save the euro, the single currency might well have collapsed.

That said, all such operations have a cost. Mr. Draghi’s drug may have taken some of the pressure off governments to make their economies more competitive.

Mr. Weidmann and Mr. Draghi clashed again this month over the Irish “bailout” by its central bank. The extremely complex transaction involved the Irish central bank’s receiving €25 billion, or about $33.5 billion, worth of extremely long-term Irish government bonds after IBRC, a nationalized bank, was liquidated. Dublin did not itself have the cash to fill the hole in IBRC’s balance sheet. It has effectively borrowed the money, equivalent to 15 percent of the Irish gross domestic product, cheaply from its central bank.

Mr. Weidmann would have preferred that euro zone governments lend Dublin the money via their bailout fund, the European Stability Mechanism. But other governments were not rushing to provide the cash and Dublin was not eager to use it either, as the interest rate would have been higher than issuing bonds to its central bank.

Although the Irish bailout was a deal between Dublin and its central bank, the European Central Bank could have blocked it. But to do so, two-thirds of its governing council would have had to vote against the operation — and Mr. Weidmann did not have enough support.

Article source: http://www.nytimes.com/2013/02/18/business/global/18iht-dixon18.html?partner=rss&emc=rss

Global Economy Is Looking Brighter, World Bank Says

WASHINGTON — Some of the darkest clouds threatening the global economy have started to lift, according the World Bank’s periodic update to its economic forecasts.

The latest version of the twice-yearly Global Economic Prospects report is one of the development bank’s least pessimistic in recent years, but hardly an exercise in optimism. It describes a “dramatic” easing of financial conditions around the world, stemming in part from policy changes to soothe the bond markets in Europe. Still, it warns that global growth will continue to be sluggish for years to come.

In the report, the World Bank estimates the world economy grew just 2.3 percent in 2012. It expects growth to pick up only modestly in the coming years, from 2.4 percent in 2013 to 3.3 percent in 2015.

Developing countries were responsible for more than half of global growth in 2012, the report said, and they will continue to be an engine of growth. The report estimates that developing countries grew 5.1 percent in 2012, and that the pace of growth will accelerate to 5.8 percent in 2015.

“Four years after the crisis, high-income countries are still struggling,” Andrew Burns, the report’s lead author, said in an interview. “Developing countries need to respond to that difficult environment not through fiscal and monetary stimulus, but rather by looking to reinforce their underlying growth potential in order to have sustainably stronger growth going forward.”

For the last four years, developing countries have remained in something of a defensive crouch, World Bank experts said. Their central banks and finance ministries have intently focused on managing the volatile financial and economic conditions emanating from the United States and Europe, and their policy making has focused on the short term.

But credit conditions have eased significantly in Europe, particularly since the European Central Bank, led by Mario Draghi, embarked on a major bond-buying program last year. Growth has started to pick up in the United States, after taking a hit in the second half of 2012 because of uncertainty stemming from the presidential election and the so-called fiscal cliff, a series of automatic spending cuts and tax increases that Congress mostly averted this month.

Now, developing economies need to focus more on their domestic economic troubles, bank economists said. That might mean making long-term investments in infrastructure, education, public health or regulation, rather than focusing on short-term stimulus measures to counteract economic fluctuations from elsewhere around the globe.

“They have spent the past four years reacting to what’s going on in high-income countries,” said Mr. Burns, noting that different developing countries faced significantly different development challenges. “As a result, almost necessarily, they’ve been paying less attention to some of these long-term growth-enhancing reforms that are so necessary.”

The report says that significant downside risks to global growth persist, including stalled progress in solving the European debt crisis, fiscal uncertainty in the United States, a decline in investment in China and spiking oil prices. However, the report said, “the likelihood of these risks and their potential impacts has diminished, and the possibility of a stronger-than-anticipated recovery in high-income countries has increased.”

Developing countries may start to reorient away from a crisis mind-set, the bank said. “The whole discussion has been dominated by the global crisis,” said Hans Timmer, the director of the development prospects group at the World Bank. “It’s logical that you are distracted, but there are several problems with that: If you don’t go back to the reform agenda, you don’t have that growth in the future.”

Weakness in large, wealthy countries continues to weigh on growth in the developing world, the report notes, hitting big exporters in South Asia, for instance. Political turmoil continues to rack the Middle East and North Africa, it said. But economic activity in East Asia has rebounded because of increasing regional trade and domestic demand in China.

In contrast, developed countries, like Germany, Japan and the United States, had growth of only 1.3 percent in 2012. The bank expects that growth to pick up starting in 2014, reaching 2.3 percent by 2015. The bank projects that the euro zone will continue to contract in 2013, reaching sluggish growth of 1.4 percent by 2015.

Global trade in goods and services is a bright spot in the report. Over all, such trade grew just 3.5 percent in 2012. The bank expects trade to jump 6 percent in 2013 and 7 percent by 2015, in no small part because of an accelerating demand from new consumers in big developing countries.

“From hopes for a U-shaped recovery, through a W-shaped one, the prognosis for global growth is getting alphabetically challenged,” Kaushik Basu, the World Bank chief economist, said in a statement. “With governments in high-income countries struggling to make fiscal policies more sustainable, developing counties should resist trying to anticipate every fluctuation in developed countries and instead ensure that their fiscal and monetary polices are robust and responsive to domestic conditions.”

Article source: http://www.nytimes.com/2013/01/16/business/global-economy-is-looking-brighter-world-bank-says.html?partner=rss&emc=rss