$1.6 trillion – the estimated costs of the credit crisis are rising by the week

 

The Hedgefond Bridgewater Associates is estimating that the costs of the credit crisis may be a lot higher than previously assume – $1.6 trillion. So far, “only” $400bn have been accounted for. The IMF has estimated a cost of just under $1 trillion, Goldman Sachs at $1.1 trillion, and hedge fund manager John Paulson at $1.3 trillion. The analysis by Bridgewater was dug up by a Swiss newspaper (see this report in FT Deutschland for example).

 

 

Abu Dhabi may drop dollar peg

The FT reports that the United Arab Emirates, one of the world’s main holders of dollar-denominated assets, may break its fixed peg to the US dollar. The department of planning and economy has floated the idea of tracking a basket of currencies, and the FT says that this reflects official thinking in the country. Inflation in the UAE runs at 11%.

 

 

Not a financial crisis, but an economic policy crisis

In his FT column, Wolfgang Munchau asks the question whether or financial crisis is at its core really a financial crisis, or rather a crisis of economic policy. He addresses two particular issues. The first is that one distinguishing feature of our time is that economists have turned into policy makers, and are thus less likely to abandon their almost certain wrong consensus views of the last decade – especially the point that global imbalances do not matter. Second, he questions the capability of the modern DSGE models on which central banks place too heavy reliance, as they ignore money, credit, and financial markets in general. He concludes with a list of recommendations not to impede the asset price adjustment, not to raise the deficit, to stick to inflation targets, and to undertake a number of structural reforms designed to stabilise output growth fluctuations. The worst outcome is not a recession, but an unnecessarily long adjustment process.

 

 

World economy needs a strong slow down

In his Project Syndicates column in Les Echos Kenneth Rogoff observes that the world economy slowed down but not sufficiently to calm down prices for oil, metals and alimentary.  Rogoff warns that current government policies are more likely to prolong the crisis and that central banks are barking up against the wrong tree. Raw materials are at the heart of the problem and without proper policy action the world economy is heading towards a major crisis - financially, politically and economically. He advocates a restrictive fiscal and monetary policy and international coordination before it is too late.  

 

Dullien on Ireland and Spain

Ireland may already be in recession, according Sebastian Dullien, who writes in his blog that the Ireland and Spain both benefited from EMU membership, when low nominal interest rates fuelled housing and asset price booms, and wage increases. The resulting of competitiveness leads to a sharp deterioration in the current account, and recession, which may last for several years, since fiscal policy is constrained (which is true even Ireland were allowed to overshoot the 3% barrier.

 

 

The pain of Spain

El Pais has a nice story about how the real estate slump is affecting the economy. Mortgages that would have been granted without hesitation a year ago, are now being declined. Mortgage credit in April was down 10% from a year ago. 8-Constructors and estate agents are up in arms about the banks’ change in lending policies, and homes are now discounted sharply, with 80% of value deals becoming more common. (This has all the hallmarks are very deep property slump, with very severe economic implications).

 

 

 

 

 

German finance minister on French EU presidency

Peer Steinbruck, Germany’s finance minister, generally not known for his diplomatic skills, told the Financial Times that the French EU presidency will degenerate into pure crisis management. Steinbruck also made clear that Berlin will veto any French attempts to cut or restrict VAT on fuel to alleviate the pressure. Steinbruck said the answer to high oil prices is structural adjustment.

 

 

 

Response to Robert Wade

Fridrik Már Baldursson and Richard Portes give what one could call a robust response to Robert Wade’s recent FT article on Iceland (see here for a short summery on Eurointelligence). Wade argued that Iceland’s economy was heading into ever deeper trouble, and that the country should adopt the Skandinavian model. Baldursson and Portes argue that Iceland’s current economic slowdown is neither severe, nor unwelcome, given the strong period of growth previously. The current account deficit will fall below 10% this (after over 20% in some previous years). Baldursson’s and Portes’ response also includes a discussion on Iceland’s net external investment position, making the point that the official figures ignore portfolio returns, and treats foreign direct investments at book value. The fundamental point is that Iceland’s imbalances are adjusting.

 

 

 

 

Inflation and Zeigeist

Jorg Kramer writes in Frankfurter Allgemeine that Zeitgeist is one unquantifiable factor behind the rise in inflation. He recalls the 1970s, when trade unions negotiated large pay rise to compensate them for any loss in inflation, or when the government introduce large spending programs to help the economy. While we are not yet in the same league, there is marked change in our Zeitgeist as well, which in Germany finds its expression in the loss of confidence in the market economy.

 

 

 

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