Another Victory for Finance?

C.P. Chandrasekhar

Days after the July 22 deal on a second bail-out package for debt-strapped Greece, the full import of the package is still being unravelled. There are two basic messages that seem to be emerging. First, the banks, which were initially seen as having been forced to take a well-deserved hit for their lack of diligence as lenders,  have gotten away with a good deal. Second, as a result, while European governments have staked a lot of their money in the hope of saving the eurozone and preventing another crisis, and so have governments elsewhere through the involvement of the IMF, the crisis has not been even partially addressed, but merely postponed.

The second bail-out package is worth 109 billion Euros, just a billion euros short of the 110 billion provided in the first bail-out more than a year ago. According to observers much of this money will come from eurozone governments in the form of new 15 to 30-year loans carrying an interest rate of 3.5 percent. The IMF, which provided €30 billion in the course of the first bail-out, is expected to provide around that much this time too, if Christine Lagarde, its new European head, has her way. And private creditors will swap or roll over 135 billion euros of existing loans into new, longer-term instruments.

This split, it is now estimated, lets the banks off very lightly.  This should have been expected when the Institute of International Finance, the Washington-headquartered association of leading international banks, emerged an important player in the negotiations. According to the IIF, as a result of the deal the banks are set to lose a possibly overestimated €54 billion. But that is far short of the more than €200 billion they would have lost if Greece was allowed to spiral into total default.

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GOP bad faith on debt ceiling

Kevin P. Gallagher

President Obama has the economic and moral high ground on the debt ceiling debate – but won’t take it. With an eye next year’s elections, the Republicans are putting Obama on the defensive by using the debate to paint Obama as a big spending Democrat.

Let’s get the facts straight on a few things: the Republicans are largely responsible for the debt problem because they spent too much and taxed too little during the Bush years; and austerity economics doesn’t bring economic growth.

Why don’t we hear that from the White House?

John Maynard Keynes taught us that the future is uncertain and so governments need to prepare for economic downturns, because private markets won’t. He said, “The boom, not the slump, is the right time for austerity.” That means reducing spending and increasing taxes during growth spurts, and lowering taxes and increasing spending during recessions.

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The scariest thing about the world economy

Jayati Ghosh

We are definitely in uncharted territory now.

The global economy is looking more fragile and vulnerable than it has at any time since the collapse of Lehmann Brothers nearly three years ago.

In fact, the concerns about its future trajectory should be even greater than they were at that time if the underlying and persistent problems are taken account of.

Two big issues have dominated headlines in the past week: sovereign debt problems in the two biggest economic groupings, the United States and the European Union.

To a dispassionate observer, it can be a source of wonder that what began as a crisis generated by the irresponsible excesses of financial markets has ended up as a problem of debt sustainability for the very governments that were forced to step in and clear up the mess.

But this is an old story, for in history almost every financial crisis has been followed by a crisis of public debt: because the crisis itself causes governments to spend more in bailouts as well as in reviving the economy during the subsequent recession.

The difference is that this time the outcry against public “profligacy” and the attacks by bond markets against what are pronounced to be “unsustainable” levels of government debt have begun well before the global economy is out of the woods.

As a result, everywhere the clarion cry is for fiscal austerity and reductions in government expenditure.

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Spotlight G20: Identifying the Drivers of Price Volatility

Timothy A. Wise

Sophia Murphy and her colleagues have produced an excellent report as part of the Commission on Food Security’s coordinated effort to respond to recent food price increases. The report, “Price Volatility and Food Security,” is one of several from the so-called High Level Panel of Experts (HLPE) to help inform the CFS’s fall meetings on the crisis. As Sophia points out in a recent post on the IATP blog, their report offers a strong challenge to the G20, which recently convened its agriculture ministers for a lackluster effort to take strong action to address volatility and food security. (See recent posts in our Spotlight G20 series.)

Among the intriguing findings in the HLPE report is the analysis of the evolution of demand for agricultural products and the dominant role that biofuels is playing in that demand.  The authors rightly point out that while there remains some debate about the role of financial speculation in driving up food prices, there is near-consensus that biofuel policies, primarily in the United States and the European Union, are contributing significantly to price increases and that current policies to encourage biofuels use should be ended. The G20, of course, is only a reluctant part of that consensus.

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China's European Shopping Spree?

Triple Crisis blogger Mark Blyth originally published this article in Foreign Affairs Magazine.

Last week’s EU agreement to refinance Greece’s debt seems to have calmed markets concerned with the possible default of Greece and subsequent contagion in the eurozone. But EU refinancing was not the only solution on offer: in June, an entirely different solution was hinted at from an unlikely source.

When Chinese Premier Wen Jiabao was on a tour of European capitals last month, he stressed two things at each stop: that a stable eurozone is vital to China and that China is Europe’s friend. Indeed, from Beijing’s perspective, when it comes to Europe, self-interest and altruism neatly coincide. If China were to buy only half of all outstanding Greek sovereign debt (a bargain at around $220 billion, a fraction of China’s dollar assets), it would not only resolve the eurozone crisis and add to Chinese prestige but it would help give Beijing the sort of reserve asset that it needs to diversify its holdings out of dollars. Currently, 70 percent of China’s reserves are in dollars, and China does not even make the list of the top 40 holders of Greek debt. But why would China not take such an opportunity?

For one, China probably has as little faith in the EU’s ability to solve its debt crisis over the long run as do the rest of the world’s financial markets, more bailouts notwithstanding. But another answer is possible — one that links the 2008 financial crisis and the 2011 European bond market crisis to a possible Chinese end run around the 2007 Foreign Investment and National Security Act. This U.S. law makes it hard for China to diversify out of its $3 trillion-plus holdings of U.S. dollars and buy sensitive U.S. assets such as aerospace, technology, and defense-related companies.

As a result of the unintended consequences of U.S. and European actions in financial markets, there is now the possibility that, even with this latest bailout, China could buy such sensitive assets from Europe, at fire-sale prices.

Read the full post at Foreign Affairs Magazine.

China’s European Shopping Spree?

Triple Crisis blogger Mark Blyth originally published this article in Foreign Affairs Magazine.

Last week’s EU agreement to refinance Greece’s debt seems to have calmed markets concerned with the possible default of Greece and subsequent contagion in the eurozone. But EU refinancing was not the only solution on offer: in June, an entirely different solution was hinted at from an unlikely source.

When Chinese Premier Wen Jiabao was on a tour of European capitals last month, he stressed two things at each stop: that a stable eurozone is vital to China and that China is Europe’s friend. Indeed, from Beijing’s perspective, when it comes to Europe, self-interest and altruism neatly coincide. If China were to buy only half of all outstanding Greek sovereign debt (a bargain at around $220 billion, a fraction of China’s dollar assets), it would not only resolve the eurozone crisis and add to Chinese prestige but it would help give Beijing the sort of reserve asset that it needs to diversify its holdings out of dollars. Currently, 70 percent of China’s reserves are in dollars, and China does not even make the list of the top 40 holders of Greek debt. But why would China not take such an opportunity?

For one, China probably has as little faith in the EU’s ability to solve its debt crisis over the long run as do the rest of the world’s financial markets, more bailouts notwithstanding. But another answer is possible — one that links the 2008 financial crisis and the 2011 European bond market crisis to a possible Chinese end run around the 2007 Foreign Investment and National Security Act. This U.S. law makes it hard for China to diversify out of its $3 trillion-plus holdings of U.S. dollars and buy sensitive U.S. assets such as aerospace, technology, and defense-related companies.

As a result of the unintended consequences of U.S. and European actions in financial markets, there is now the possibility that, even with this latest bailout, China could buy such sensitive assets from Europe, at fire-sale prices.

Read the full post at Foreign Affairs Magazine.

US debt impasse worries the world

Triple Crisis blogger Martin Khor originally published this article with the Third World Network.

The political deadlock in Washington on whether and how to increase the United States’ debt limit is causing anxiety over a possible default and over a new global economic downturn.

The deepening of the Eurozone debt crisis last week through contagion spreading to Italy was more than matched by the growing chance that the United States government would not be able to pay its bills or service its debts starting 2 August.

Week-long negotiations took place between the US President, and the Democrat and Republican party leaders to avert a partial closing down of the federal government.

The US presently has a limit to its federal debt of $14.29 trillion. This limit will be reached by 2 August. Congress has to approve raising this limit before then, or else the Administration will have to postpone meeting some of its financial commitments.

The Federal Reserve chairman Ben Bernanke warned that default would send shockwaves throughout the global economy.

The alarm bells rang even louder when two rating agencies, Moody’s and Standard and Poor, warned they might downgrade US debt from its AAA status if the political impasse continues.

There are several reasons why the world, and especially the developing countries, should be alarmed at this situation.

Read the full article at the Third World Network.

Interview with Jayati Ghosh: Speculation Drove Wheat Prices up While Supply Expanded

Triple Crisis blogger Jayati Ghosh was recently interviewed by the Real News Network on how the lack of regulation of speculation in commodities trading has increased food prices.  You can read more of her work on commodities markets in her post, Riding the Commodities Roller Coaster, and on the food crisis, Frenzy in Food Markets.

Read more Triple Crisis blog posts on  financial speculation in commodities markets.

View more interviews with Triple Crisis bloggers.

July 22, 2011 | Posted in: Videos | Comments Closed

Facing up to the real cost of carbon

Frank Ackerman and Elizabeth A. Stanton*

Your house might not burn down next year. So you could probably save money by cancelling your fire insurance.

That’s a “bargain” that few homeowners would accept.

But it’s the same deal that politicians have accepted for us, when it comes to insurance against climate change. They have rejected sensible investments in efficiency and clean energy, which would reduce carbon emissions, create green jobs, and jumpstart new technologies – because they are too expensive.

While your house might not burn down, your planet is starting to smolder. Extreme weather events are becoming more common, and more expensive: in the first half of 2011, Mississippi River floods cost us between $2 and $4 billion, while the ongoing Texas drought has cost us between $1.5 and $3 billion, according to the National Climatic Data Center. And there’s much worse to come: climate-related extremes are already forcing millions of people from their homes worldwide; ice sheets and glaciers are melting much faster than expected; the latest research shows we are rapidly heading for summer temperatures at which crop yields in America will start to plummet.

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Did Fannie Mae Really Do It?

Triple Crisis blogger Jeff Madrick originally published this article on the Schwartz Center for Economic Policy Analysis (SCEPA) blog, a Triple Crisis partner.

An old debate has been resurrected by the publication of Reckless Endangerment by respected journalist Gretchen Morgenson and financial analyst Josh Rosner. While sadly misleading, this book has energized another round of blame-it-on-the government posturing in Washington. Two politically conservative columnists, David Brooks of The New York Times and George Will of The Washington Post, use the book to tell us in recent columns that Fannie did it. Anti-government forces are lining up with even more vigor against Dodd-Frank rules. Here we go again.

The accusation that Government-Sponsored Enterprises (GSE’s) Fannie Mae and Freddie Mac are the major causes of the financial crisis is palpably wrong. However, while the Morgenson-Rosner book is being used to make a case against government housing policy in general, at this time I want to introduce another perspective about government’s role in housing. As usual, history provides us with much-needed perspective. If government caused the mortgage distress of the 2000s, why was there even more instability and excess in residential housing and commercial real estate in the 1920s – a time without similar federal interventions?

Few know this history, but it bears significantly on the depth and duration of the Great Depression that followed in the 1930s. There was a huge run-up in housing prices in the 1920s fed by privately placed mortgages. In fact, mortgages tripled in value from $9 billion to $30 billion, according to Census Bureau Data. Additionally, a private economist in the 1950s estimated that debt as a ratio of housing prices doubled from 14 percent to 30 percent. The resulting crash depressed incomes and resulted in multitudes of financial institutions going bankrupt.

Read the full article at the SCEPA Blog.