What’s a trillion?

 

The IMF now estimates that the losses from the credit crisis to add up to $1 trillion, which has now become the standard estimate. Here is a very useful table, taken from the IMF’s stability report, and reprinted in Econbrowser, giving the breakdown of those $1 trillion in terms of loans and securities, and then again in terms of provenance and institutions. It is interesting to note that subprime losses are not the biggest in the loan category, but corporate loans. It is also interesting to note that in the securities category, high yield debt and CLO losses have been estimated at a relatively low rate. So this table may need some updating as we go through this recession.

The FT said in an editorial, entitled the IMF’s Instability Report, that it remains to be seen whether the coming economic slowdown might lead to further financial instability. If not, the worst of the crisis is behind us.

 

 

German fiscal policy at a turning point

The time of fiscal policy co-ordination appears to near its end in Germany. FT Deutschland reports on estimates according to which the tax take could be €10bn less this year than estimated, putting into question the government’s intention to produce a balanced budget by 2011.

FT Deutschland also has an editorial saying that the situation is not dramatic, but it will become more difficult as the economy turns down. The present finance minister Peer Steinbruck might end up just like his predecessor – once celebrated as a consolidator, he is now remember for running excessive deficits.

 

 

Zapatero’s economic plan

Jose Luis Zapatero, faced with a massive construction downturn, yesterday outlined his economic programme in parliament. He said he would speed up infrastructure projects, according to the FT, including projects such as high-speed trains, promote more state-subsidised housing and extend government guarantees for some mortgage securitisations. Property developers with unsold stock would be able to place their empty homes with a state rental agency, and there would be retraining schemes for tens of thousands of unemployed construction workers. He also promised a €400 tax rebate for all contributors this year “to help families and boost the economy”.

 

 

Paul Volcker attacks the Fed

We expected Paul Volcker at some point to come out strong against current Fed policy, but so far he was relatively subdue. That must have recently. Here are some quotes. “The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices… What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return.'' When asked whether there is a risk of a dollar crisis, he answered: “You don’t have to predict it, you’re in it.”

The Big Picture blog has a video of Paul Volcker’s speech to the Economic Club of New York where he made those comments.

 

 

 

Sarko wants to get rid of enlargement referenda

Nicholas Sarkozy wants to undo Chirac’s constitional change, which would required a referendum to be held for any EU enlargement beyond Croatia. Le Monde said in a stinging editorial that this referendum encapsulated the French confusion on Europe, arguing forcefully that it has to go.

 

 

 

 

Munchau on KfW

In his FT Deutschland column, Wolfgang Munchau says the real question is not who succeed the hapless Ingrid Matthaus Maier as head of the state-owned KfW investment and development bank, but whether Germany still needs this post-war institution. He argues that it is time to rethink the future of this institution, not only because Germany is now so highly developed, but because the bank’s procedures are not subject to democrat controls.

 

 


 

 

Don’t blame Greenspan

Martin Wolf rushes to the defence of Alan Greenspan saying that much of the criticism against the Maestro is unfair. Wolf refers to the latest IMF World Economic Outlook, chapter on housing, which has a table show the extent of the house price increases not accounted for by the fundamental drivers – in other words the extent of the house price increase that is due to a bubble. In this table, Ireland and the Netherlands occupy top positions, while the US is in the middle. Wolf says four factors might explain this bubble: low long term interest rates; low nominal interest rates, due to low inflation; a long period of economic stability, and the liberalisation of mortgage finance.

 

 

 

Do blame Greenspan

Willem Buiter arrives at exactly the opposite conclusion in his blog. The Greenspan Fed’s, he writes in Maverecon, was a tragedy of errors. Buiters say that monetary policy was excessively accommodating 2003-2006; the Greenspan-Bernanke put affected behaviour; The Fed was wrong to focus on core inflation; The Fed misjudged the dynamics of securitisation; the Fed encouraged moral hazard. Buiter’s conclusion on Greenspan’s legacy is among the most devasting we have read.

 

 

 

Kenneth Rogoff on the dollar

Kenneth Rogoff has written a very gloomy article on the US dollar. He says that if the euro were ready to take on the dollar now, it would, as there is no justification for the US currency as the global reserve currency.  He said over time he would expect exactly this to happen. He said global finance ministers and central bankers continue to remain obsessed with supporting the dollar. He should ask themselves instead when it is time to pull the plug.

 

 

Eurozone representation at IMF
http://www.ft.com/cms/s/0/51f3ac48-0573-11dd-a9e0-0000779fd2ac.html

Domenico Lombardi and Jim O’Neill write in the FT that the eurozone is badly represented at the IMF. It has eight chairs, and it would be much better to consolidate the representation, which would make for a voting block of 23% against 17% for the US. They argue that this should be a project for the French EU presidency in the second half of this year.

 

Why house prices really have to fall by a lot

We at Eurointelligence have been estimating, conservatively, that house prices in some overhyped markets would have to fall between 30-50%. If you look at Paul Krugman’s chart on Los Angeles, showing the inflation-adjusted Case-Shiller house price index for that city (together with a chart for the 20 largest cities), you see that we in the wildly optimistic camp. LA can look forward to the mother of all crashes.

 

 

Why Iceland is much stronger than it appears

Thorvaldur Gylfason from the University of Iceland has a detailed analysis about Iceland’s economic history and its current problems. Writing in Vox, he concludes that the country’s fundamental are strong despite the need for a number of reforms. EU membership would be one of those.

 

 

 

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