05/15/2013 10:30 AM

Battling the Crisis

Disunity Plagues EU Banking Union Talks

By Carsten Volkery

European leaders had hoped to quickly finalize plans for an EU banking union to regulate bank bailouts and provide a roadmap for unwinding insolvent financial institutions. But with the German election looming, Berlin is wary of moving forward. The result could be a lengthy delay.

The pledge was made almost a year ago. European leaders announced in the summer of 2012 that they were working on a plan to break the vicious cycle between the need to prevent banks from collapse and the surge in sovereign debt such efforts caused. In the future, they said, insolvent banks would not be saved by last-second, taxpayer-funded bailouts. Rather, troubled financial institutions would be propped up by a European banking union or they would be unwound in an orderly fashion.

Since then, leaders have been discussing what, exactly, such a banking union should look like. On Tuesday, European Union finance ministers met in Brussels for fresh talks in an attempt to reach agreement on the degree to which bank shareholders, creditors and savers should be involved in bailouts.

The European Central Bank (ECB) has demanded a clear hierarchy: Shareholders are to be involved first, followed by creditors and then the savers. But several ministers are opposed to concrete rules, preferring instead to make decisions on a case-by-case basis. Some would like to see some bank customers, such as hospitals and charitable organizations, exempted. Others reject the involvement of bank customers entirely.

Chairman of the Tuesday talks, Irish Finance Minister Michael Noonan, said that the conflicting positions had drawn closer and indicated that a decision would be reached at the next meeting in June. That, though, is an extremely optimistic interpretation. Independent observers said they were unable to identify any progress at all.

Sacrosanct Savings

The lack of movement follows the problematic bailout of Cyprus which clearly demonstrated the urgent need for a banking union of some kind. The flubbed aid package for Cypriot banks, which resulted in the need for capital controls in the island nation, is widely seen as an example of what should be avoided in the future. One lesson, however, would seem to have been learned: Savings of up to €100,000 ($129,000) cannot be touched. Such accounts in Europe are "sacrosanct," said Noonan on Tuesday.

"That's the lesson from Cyprus: It must be clear what will happen," said German Finance Minister Wolfgang Schäuble.

Some of the issues involved in establishing that clarity, however, remain controversial. Deep divisions remain, for example, on the establishment of a bank-funded bailout fund to be used to unwind unsustainable banks. French Finance Minister repeated his demand for a "complete banking union" as rapidly as possible. Spain and Italy also applied pressure, with Madrid this week speaking of a "credibility test" for the EU.

But Schäuble, with his eyes firmly on the German general election this autumn, said even before Tuesday's meeting that a rapid agreement on a bailout fund is unlikely. In an essay published in the Financial Times on Monday, Schäuble wrote that such a plan is impossible without changes to European Union treaties. Instead, he proposed that national authorities take the lead initially before a common fund can be established at a later date. In other words: Berlin is in no hurry to make money available for a European bank bailout fund.


That position puts Schäuble in conflict with both the ECB and the European Commission. The European Central Bank has demanded that all elements of the banking union be completed by the time the new banking oversight authority -- under ECB control -- goes into operation in the first half of 2014.

European Internal Market Commissioner Michel Barnier intends to present his proposal for an authority responsible for unwinding and bailing out banks. "Prevention is always cheaper than the cure," he said on Tuesday. But Schäuble's comments would seem to have ruined Barnier's timeline before he even had a chance to introduce his plan. Berlin argues that the Lisbon Treaty does not provide the EU with the power to unwind banks against the wishes of national governments. Lawyers with the European Commission and the ECB disagree.

French Finance Minister Pierre Moscovici on Tuesday proposed that the legal issues be closely examined. "But that shouldn't prevent us from taking further steps," he said. Should Schäuble get his way, it could be years before the banking union is complete. That, though, is something that the EU cannot afford. Given the ongoing financial difficulties faced by many Southern European countries, European Currency Commissioner Olli Rehn warned on Monday that progress on completing the banking union is "urgent."

May 14, 2013 7:15 pm

Why the world faces climate chaos

By Martin Wolf

We will watch the rise in greenhouse gases until it is too late to do anything about it

Last week the concentration of carbon dioxide in the atmosphere was reported to have passed 400 parts per million for the first time in 4.5m years. It is also continuing to rise at a rate of about 2 parts per million every year. On the present course, it could be 800 parts per million by the end of the century. Thus, all the discussions of mitigating the risks of catastrophic climate change have turned out to be empty words.

Collectively, humanity has yawned and decided to let the dangers mount. Professor Sir Brian Hoskins, director of the Grantham Institute for Climate Change at Imperial College in London, notes that when the concentrations were last this high, “the world was warmer on average by three or four degrees Celsius than it is today. There was no permanent ice sheet on Greenland, sea levels were much higher, and the world was a very different place, although not all of these differences may be directly related to CO2 levels.”

His caveat is proper. Nonetheless, the greenhouse effect is basic science: it is why the earth has a more pleasant climate than the moon. CO2 is a known greenhouse gas. There are positive feedback effects from rising temperatures, via, for example, the quantity of water vapour in the atmosphere. In brief, humanity is conducting a huge, uncontrolled and almost certainly irreversible climate experiment with the only home it is likely to have. Moreover, if one judges by the basic science and the opinions of the vast majority of qualified scientists, risk of calamitous change is large.

What makes the inaction more remarkable is that we have been hearing so much hysteria about the dire consequences of piling up a big burden of public debt on our children and grandchildren. But all that is being bequeathed is financial claims of some people on other people. If the worst comes to the worst, a default will occur. Some people will be unhappy. But life will go on. Bequeathing a planet in climatic chaos is a rather bigger concern. There is nowhere else for people to go and no way to reset the planet’s climate system. If we are to take a prudential view of public finances, we should surely take a prudential view of something irreversible and much costlier.
So why are we behaving like this?

The first and deepest reason is that, as the civilisation of ancient Rome was built on slaves, ours is built on fossil fuels. What happened in the beginning of the 19th century was not an “industrial revolution” but an “energy revolution”. Putting carbon into the atmosphere is what we do. As I have argued in Climate Policy, what used to be the energy-intensive lifestyle of today’s high-income countries has gone global. Economic convergence between emerging and high-income countries is increasing demand for energy faster than improved energy efficiency is reducing it. Not only aggregate CO2 emissions but even emissions per head are rising. The latter is partly driven by China’s reliance on coal-powered electricity generation.

A second reason is opposition to any interventions in the free market. Some of this, no doubt, is driven by narrowly economic interests. But do not underestimate the power of ideas. To admit that a free economy generates a vast global external cost is to admit that the large-scale government regulation so often proposed by hated environmentalists is justified. For many libertarians or classical liberals, the very idea is unsupportable. It is far easier to deny the relevance of the science.

A symptom of this is clutching at straws. It is noted, for example, that average global temperatures have not risen recently, though they are far higher than a century ago. Yet periods of falling temperature within a rising trend have occurred before.

A third reason may be the pressure of responding to immediate crises that has consumed almost all the attention of policy makers in the high-income countries since 2007.

A fourth is a touching confidence that, should the worst comes to the worst, human ingenuity will find some clever ways of managing the worst results of climate change.

A fifth is the complexity of reaching effective and enforceable global agreements on the control of emissions among so many countries. Not surprisingly, the actual agreements reached give more an appearance of action than a reality.
A sixth is indifference to the interests of people to be born in a relatively distant future. As the old line goes: “Why should I care about future generations? What have they ever done for me?”

A final (and related) reason is the need to strike a just balance between poor countries and rich ones and between those who emitted most of the greenhouse gases in the past and those who will emit in the future.
The more one thinks about the challenge, the more impossible it is to envisage effective action. We will, instead, watch the rise in global concentrations of greenhouse gases. If it turns out to lead to a disaster, it will by then be far too late to do anything much about it.

So what might shift such a course? My view is, increasingly, that there is no point in making moral demands. People will not do something on this scale because they care about others, even including their own more remote descendants. They mostly care rather too much about themselves for that.

Most people believe today that a low-carbon economy would be one of universal privation. They will never accept such a situation. This is true both of the people of high-income countries, who want to retain what they have, and the people of the rest of the world, who want to enjoy what the people of high-income countries now have. A necessary, albeit not sufficient condition, then, is a politically sellable vision of a prosperous low-carbon economy. That is not what people now see. Substantial resources must be invested in the technologies that would credibly deliver such a future.

Yet that is not all. If such an opportunity does appear more credible, institutions must also be developed that can deliver it.

Neither the technological nor the institutional conditions exist at present. In their absence, there is no political will to do anything real about the process driving our experiment with the climate. Yes, there is talk and wringing of hands. But there is, predictably, no effective action. If that is to change, we must start by offering humanity a far better future. Fear of distant horror is not enough.

Copyright The Financial Times Limited 2013.

miércoles, mayo 15, 2013



Symptoms Don't Lie

By PETER D. SCHIFF, Contributing Writer, Money Morning

May 15, 2013

A good doctor will not simply make a diagnosis based on measurements. The symptoms and complaints expressed by the patient are at least as important in making a determination as the data provided by diagnostic tools.

When the data says one thing and the symptoms continuously say another, it makes sense to question the reliability of the instruments.

This would be particularly true if the instruments are furnished by a party with a stake in a favorable diagnosis, say an insurance company on the hook for treatment costs.

The same holds true for the U.S. economy. Although our government-supplied data suggests we are experiencing low inflation and modest economic growth, the economy shows symptoms of low growth, rising prices, and diminishing purchasing power

In my latest commentary I discussed how the Big Mac Index (The Economist Magazine's 30 year data set on Big Mac prices) provided strong anecdotal evidence that inflation in the United States is higher than official figures.

More information has come in since then that tells me the same thing: that Americans are downsizing their lives as their incomes fail to keep pace with rising prices. These symptoms are at odds with the widespread belief in an accelerating recovery that has resulted in braggadocio in Washington and euphoria on Wall Street.

Earlier this week Tyson Foods, one of the nation's largest providers of packaged meat products, announced that although their top line sales revenue increased by almost 2% (roughly in line with U.S. GDP growth), operating margins collapsed by almost 50%, leading to a 43% decline in profit. Consumer shifts away from relatively higher priced/higher margin beef and pork products to lower cost/lower margin chicken products were to blame.Tyson also noted that cost conscious consumers shifted away from higher margin packaged chicken products to fresh meat cuts, thereby sacrificing convenience for cost.

According to government statisticians, the Tyson announcement would reveal modest growth and low inflation. After all, revenue at the company grew and spending on their products had increased modestly. But rising prices were obscured by consumers purchasing lower quality products. Not only are consumers avoiding the beef and pork that they otherwise may have preferred, but they are opting out of the convenience of prepared foods. This behavior is symptomatic of diminished consumer purchasing power. This is known as getting poorer.

The trend corresponds with the steady increase in the share of income that Americans devote to food and energy. According to the Bureau of Economic Analysis data, in 2002 Americans spent about 17.8% of income on food and energy. In the first quarter of 2013 the share had risen by a factor of 20% to 21.3% of income. Increased share of spending on necessities like food and energy is consistent with falling living standards. In the poorest countries almost all of income is devoted to such things.

This week we also learned the seemingly positive news that the March trade deficit narrowed to $38.8 billion. But the reduction didn't come from increased exports (which actually declined), but by the sharpest drop in imports since February 2009. Oil imports declined to a seventeen-year low, in part due to rising domestic production, but also due to a record low in 13 years in gasoline consumption.

While some may argue that is a function of greater energy efficiency, I believe it's more likely that usage is down because of high prices and high unemployment. Even more significant is that our trade deficit with China in March dropped by a whopping 23.6%, hitting a three-year low. On a year over year basis, the decline in our deficit with China was 90% attributable to the decline in imports.

In contrast to the declining import figures, the government reported that personal spending rose by .2% in March. If we are buying less stuff from abroad, where are Americans spending the extra money? If the prices are stable, and imports are way down, consumer spending should also be down and savings should be up. But the savings rate in March held steady at a meager 2.7%. The sad truth is that Americans are buying fewer Chinese products because they are spending more money on food, rent, utilities, healthcare, insurance, and other necessities that can't be imported. Again, this is consistent with a falling standard of living, as inflation forces consumers to forgo the things they want in order to buy the things that they need.

It was also announced this week that the big three airlines (United, Delta, and American) will be raising their "change fees" for booked tickets by 33%, from $150 to $200. However, it's unlikely that such a hike will make much of an impact on CPI. According to the CPI, airline fares in the United States increased only .3% from 2011 to 2012. This mild increase came at a time when airlines were rolling out more new fees than most air travelers could have possibly imagined.

But even if the government fully factored in the increase in fees, they would likely ignore the change in behavior that the increase would elicit. With the cost of changing a ticket so dramatically higher than it has been in the past, it is likely that far fewer Americans would be willing to change their travel plans once their tickets have been purchased. So even while the spending increase may be relatively small, the lost convenience is not factored into the equation. A ticket with low price (or no price) change option is a much better product than a ticket with high penalties.

CPI reports that from 2007 to 2012 air travel increased on average 4% per year. But that's only half the story. A new study released by MIT reports that during those five years, U.S. airlines cut the number of domestic flights by 14%,with the cuts falling most heavily on mid-sized regional airports. By 2012, the industry also closed more than 20 smaller airports, began using a higher percentage of larger airplanes, and reported record crowding on remaining flights. In other words, air travel not only became more expensive but less convenient and more crowded.

How much loss in value does this inconvenience and lack of flexibility create? It's hard to say, but we all have experienced it with varying degrees of frustration. But what is sure is that the government isn't interested in such trivialities.

The combination of these symptoms suggests that the extent to which people are being impoverished by accelerating inflation is not reflected in official government measurements. This explains why unemployment remains high even as GDP appears to rise. It is my belief that the unprecedented expansion of the money supply under the current Fed leadership is pushing up prices for stocks, bonds, real estate, and consumer goods. Market indices neatly capture the price increases for all of these categories except for the latter, which has been concealed by an overly adjusted CPI.

If consumer inflation data were reported more accurately, it would be revealed that much of the apparent growth is an illusion. The patient is getting sicker, but the doctors are too distracted to notice.

May 15, 2013 12:01 am

OECD warns of rising inequality as austerity intensifies

By Sarah O’Connor in London

Developed countries face the risk of a sharp rise in inequality and poverty as governments try to repair their finances in the wake of the economic crisis, the OECD has warned.

Income inequality in OECD countries – excluding the mitigating effect of the welfare state – increased more in the first three years of the financial crisis to the end of 2010 than in the previous 12, according to the Paris-based international organisation of mostly rich nations.

Yet the data show governments cushioned the blow fairly effectively in this first stage of the crisis, thanks to higher welfare spending and fiscal stimulus programmes. After taking account of taxes and social transfers, the levels of “take home” income inequality and relative poverty in OECD countries were only slightly higher in 2010 than in 2007.

With many OECD countries now focused on reducing their borrowing and debt levels, the organisation warned there was a “growing risk” that inequality and poverty would increase.

“These worrying findings underline the need to protect the most vulnerable in society, especially as governments pursue the necessary task of bringing public spending under control,” said Angel Gurría, the OECD’s secretary-general.

“Policies to boost jobs and growth must be designed to ensure fairness, efficiency and inclusiveness. Among these policies, reforming tax systems is essential to ensure that everyone pays their fair share and also benefits and receives the support they need.”

The report comes amid rising concern that some economies are reaching the political limits of austerity. José Manuel Barroso, European Commission president, said last month that while he still believed in the need for sweeping structural reforms and sharp budget cuts, such policies needed to have “acceptance, politically and socially”.

The OECD’s data also underline that the fallout from the crisis has fallen disproportionately on the young. Average relative income poverty – the share of people who have less than half the median national income – increased from 12.2 per cent to 13.8 per cent among young people. Meanwhile, the same measure of poverty fell from 15.1 per cent to 12.5 per cent for the elderly.

“This pattern confirms the trends described in previous OECD studies, with youth and children replacing the elderly as the group at greater risk of poverty,” the OECD report said.
Although overall “take home” inequality did not rise sharply between 2007 and 2010, the richest 10 per cent of the population still did better than the poorest 10 per cent over this period in 21 of the 33 countries analysed by the OECD.

The differences were most acute in those countries where household incomes dropped the most. In Spain and Italy, the income of the top 10 per cent was fairly stable while the income of the bottom 10 per cent fell about 14 and six per cent respectively.

In Iceland, the opposite was the case: the 13 per cent fall in income for those at the top was larger than the eight per cent fall for those at the bottom.

Copyright The Financial Times Limited .