Germany’s wise man call for stimulus
FT Deutschand leads with the story that the so-called wise men group, the council of economic advisers, are demanding a stimulus programme in the order of 0.5-1% of GDP, mostly in new investments, which translates to a figure of some €12-24bn in 2009, as opposed to the government’s puny €5bn programme, which they also criticised as lacking coherence. They said the two-year reprieve from car tax was far too long. For this to be a stimulus, it would be better to limit the tax exemption to six months. The paper makes the point the council’s endorsement is remarkable, and constitutes a departure from their previous more stimulus-sceptical position.
This came as part of their annual autumn forecast, which is relatively optimistic – at least a lot more optimistic than the EU’s and the IMF’s – with a projection of zero growth in 2009. (But this is in our view not a real forecast, more a result of the habit of some forecasters not to forecast recessions. So this is case of the scared forecasters’ zero bound problem)
A really pessimistic banker
Most comparisons are of the “worst since the 1930s” kind. According to the FT, John Thain, chairman of Merrill Lynch – which will soon become a branch of Bank of America these days – the situation is actually compared to the post 1929 era. He said his is not like 1987, 1998 or 2001, more like 1929. He said there remains huge dislocation in credit markets, with a recovery taking a very long time.
European Corporate Debt - a time bomb
This is really scary. The FT’s Lex column reports on S&P’s calculations that between now and 2011 about $2.1 trillion in European corporate debt will mature, including $800bn in 2009. Never before was there a need to refinance debt in such horrible conditions. While banks have secured government guarantees for the issue of new debt, companies, especially SMEs, will be confronted much worse financing conditions than in the past.
What the G20 should and should not do
Leaders travel to Washington with lots of policy advice. Here is a selection:
The Eichengreen/Baldwin edited book is out on Vox now, and continues a string of essay from leading economists on what the G20 should, and should not do. Lot’s of good stuff. Among the many contributions we liked is that from Guillermo Calvo, who called for the establishment of regional currency blocks, plus an end of free-floating exchange rates. Taken together, Eichengreen and Baldwin identify four broad areas of agreement. 1. enact emergency measures to stop the bleeding (including a stimulus in the real economy). 2. strengthen the IMF. 3. Think outside the box in terms of financial and monetary reform. 4. do no harm.
Writing in Vox, Richard Portes warns against excessive expectations, and the tendency to produce n-point lists. What is needed instead is a political agreement to fix this crisis, combined with a sense that politicians truly grasp the nature of the crisis (which many doubt). Portes lists his own set of priorities. “They should take a stand against financial repression and repression of finance. They should explicitly recognize the macroeconomic roots of the crisis in global imbalances. They should acknowledge that the international institutions are unrepresentative and therefore lack legitimacy.”
In his column in Financial Times Deutschland, Wolfgang Munchau lists his three priorities for the G20 (not without criticised the EU’s five-point list as based on a misjudgement of the nature of the financial crisis). They are a globally co-ordinated stimulus package – focusing on public investments for the US, and a €100bn stimulus for Germany, in the form of tax cuts; strengthening of the IMF, with the euro area pooling its representation, which allows greater vote shares for China, India, and others; and third a recognition that free trade, and free capital flows require some control of exchange rates. He does not favour a Bretton-Woods style approach, but a new version of 1980s-style currency management, based on an enlarged group.
Morris Goldstein, writing in the Financial Times, advocates stronger use of the IMF’s compensatory finance facility (CFF), created in 1963 to help country that suffer from temporary illiquidity. Goldstein says we do not need new facility, since the CFF is ready. In 2009, many emerging countries are likely to suffer large temporary shortfalls in export earnings, both relative to previous and future years. This would be an almost ideal scenario for the use of this facility.
Harvard foundation fund warns of losses
US universities were among the most successful investors during the boom times, which many observers explained in terms of the superior investment strategies (our explanation is that there were that they too excessive risks, a strategy that was rewarded during the bubble). The fund, which got used to report double digit annual returns, yesterday warned of unusual losses, according to FT Deutschland, which might lead to savings measures. The losses appear to have come recently, as the published returns for the year to June was still decent.
How to fix the money markets
Writing in the FT, Jon Danielsson and Casper de Vries propose a system of information exchange as a cure for the continued stress in the money market. They argue that recapitalisation has not the trick, but that we could learn from the procedures companies and banks use during mergers and takeover negotiations, when the target company opens its books for due diligence. “A similar process of information exchange could help break the information asymmetry currently preventing interbank lending. If the central banks and governments pressured the largest banks to open their books to their counterparts, in a manner similar to bank mergers, banks would be able to confidently lend to each other, or refuse lending with good reason.”
Spanish stock of unsold homes is soaring
El Pais has a good report on the stock of unsold homes, which says about 500,000 homes were on sales at the end of June, 20% increase compared with the end of last year, and the forecasts are troubling. The government says it will go up to 650,000, and various other experts put the number as high as 900,000. During the boom years, more properties were sold in Spain than in Germany, France and the UK combined. Most of those empty properties are in the border regions of Madrid and the coast. (This looks like Spanish property price will continue to decline very sharply.)
Joschka Fischer: Barroso is incompetent
Joschka Fischer accused the Commission president of incompetence in an article in Le Figaro (aka Jean Quatremer). Fischer said that under Barroso’s leadership the Commission has shows its total inaptitude in terms of economic and financial policies. As the time for Barroso’s reappointment approaches, there are an increasing number of voice, especially in France, that Barroso may not be the right candidate. Quatremer also quotes Jean-Pierre Jouyet, the French European minister, who wrote on his blog that the commission was lacking audacity in the way it tackled the financial crisis. Pervanche Beres, the chairwoman of the European Parliament’s economic and monetary affairs committee, said we should not accept another choice of mediocrity, clearly referring to Barroso.
The return of political primacy in France
Francois Ewald in Les Echos argues that Nicolas Sarkozy marked a fundamental change in French economic policy with his response to the financial crisis. By claiming the political primacy over economics, Sarkozy went back to the fundamentals of Gaullism. His rescue programme marks the end of the liberal distinction between the state on the one hand and the civil society on the other. Economic - institutions now have a political meaning. The state is back in the economy with the primary objective to re-establish trust thereby assuming the role of a guarantor for its ‘moral foundations’ and ‘democratic values’.
Russia devalues ruble
The Russian central bank has devalued the ruble by shifting the trading band downward by 1% against a basket of dollars and euros (with a weight of 55% and 45% each), according to Frankfurter Allgemeine. The move became necessary after record money outflows in October. The paper quotes experts as predicting devaluations in the order of 20%, to take account of the dramatic fall in the price of oil.
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