US Federal Reserve bans officials from trading shares in wake of scandal

New rules come after two regional bank presidents resigned following questionable dealings

James Politi in Washington 

Jay Powell, chair of the US central bank, said the rules would underpin the ‘single-minded focus on the public mission of the Federal Reserve’ © Financial Times

The Federal Reserve has adopted new rules banning its policymakers and senior staff from buying individual shares and a string of other investments, as the US central bank tries to stamp out a growing furore over trading by top officials.

In a statement on Thursday, the Fed said that as a result of the new policies, its senior officials would be limited to “purchasing diversified investment vehicles, like mutual funds”.

As well as banning the acquisition of individual stocks, they would not be allowed to hold “investments in individual bonds, holding investments in agency securities (directly or indirectly), or entering into derivatives”, the Fed said.

The new rules are being introduced after questionable financial trades last year — which came to light in recent disclosures — led to the resignations in September of Eric Rosengren, the president of the Federal Reserve Bank of Boston, and Robert Kaplan, the president of Dallas Fed.

The furore over those trades caused Powell to call for a review of the rules around investments by the Fed’s top officials, which led to the tightening of the restrictions and disclosures announced on Thursday.

“These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,” said Jay Powell, the central bank’s chair.

Karine Jean-Pierre, principal deputy White House press secretary, told reporters on Thursday that the Biden administration respected the Fed’s independence. 

She wouldn’t comment on the central bank’s new trading rules, but added: “President Biden believes that all government agencies and officials, including independent agencies, should be held to the highest ethical standards, including the avoidance of any suggestions of conflicts of interest.”

The Fed said policymakers and senior staff would have to provide 45 days’ notice for any purchases or sales of securities, obtain approval for those transactions, and hold any investments for at least a year.

“Further, no purchases or sales will be allowed during periods of heightened financial market stress,” it said. 

Fed officials said that a trading blackout period would be declared during such times of turmoil which would work similarly to the trading blackout that already exists in the days surrounding meetings of the FOMC, the Fed’s policy-setting committee.

The trading scandal has come at an especially challenging time for the Fed, as it moves to shift monetary policy to slow its support for the recovery amid uncertainty over its leadership.

Powell’s term as chair of the central bank ends in February, and President Joe Biden has not said whether he would reappoint him to the post. 

The White House said on Thursday that the Biden continued to have “confidence” in Powell, however.

Fed officials said on Thursday that the new rules would lead to some divestitures by senior officials to comply with the tighter restrictions, which they would have some time to complete. 

They also include a requirement to disclose any transactions within 30 days.

Despite the urgency of Powell’s review, the new rules are not taking effect immediately: they will only be implemented once they are formally written and adopted by the US central bank, and when the Fed’s electronic systems are updated to process the disclosures and transactions.

viernes, octubre 22, 2021



Free exchange

Just how Dickensian is China?

Inequality is better than it was. But it doesn’t feel that way

With its fast trains, super-apps, digital payments and techno-surveillance, China can seem like a vision of the future. 

But for some scholars, such as Yuen Yuen Ang of the University of Michigan, it is also reminiscent of the past. 

Its buccaneering accumulation of wealth and elaborate choreography of corruption recall America’s Gilded Age at the end of the 19th century, an era that takes its name from a novel by Mark Twain and Charles Warner.

China, including Hong Kong and Macau, now has 698 billionaires, according to Forbes, almost as many as America (724). 

The habits of the new rich could fill a novel in the spirit of Twain. 

Even the non-fiction accounts are outlandish. 

One billionaire, according to the book “Red Roulette” by Desmond Shum, offered the author’s well-connected wife a $1m ring as a gift. 

When she refused, he bought two anyway. 

One businessman remarked to Ms Ang that his neighbour’s dog will only drink Evian. 

Meanwhile, over 28% of China’s 286m migrant workers lack a toilet of their own. 

And in parts of rural China, 16-27% of pupils suffer from anaemia, according to a 2016 study, because they lack vitamins and iron.

None of this makes Xi Jinping, China’s ruler, happy. 

According to a leaked account by a professor who grew up with him, he is “repulsed by the all-encompassing commercialisation of Chinese society, with its attendant nouveau riche”. 

Mr Xi has begun to talk more frequently about “common prosperity”. 

In January, he declared that “we cannot allow the gap between the rich and the poor to continue growing…We cannot permit the wealth gap to become an unbridgeable gulf.”

Measuring China’s gaps and gulfs is tricky. 

The most common gauge of income inequality is the Gini coefficient, which has become popular despite being hard to interpret. 

One way to make sense of it is with a thought experiment. 

Suppose two people in a country are to meet at random. 

What will be the expected income gap between the two? 

If you know the income of everyone in the country, you can guess by calculating the average gap from every possible pairing. 

That expected gap can be expressed as a percentage of the society’s average income. 

Cut that percentage in half (to get to a number between 0 and 100) and you have the Gini coefficient. 

China’s official Gini is 46.5%, meaning that the expected gap will be 93% (ie, twice the Gini) of China’s average disposable income. 

Since average disposable income was 30,733 yuan ($4,449) in 2019, the expected gap would be about $4,138.

China’s official Gini is higher than that of many advanced countries, including America and Britain. 

An alternative calculated by the World Bank looks better (38.5% in 2016), because it takes account of cheaper prices in rural areas. 

Another source, the World Inequality Database overseen by Thomas Piketty and his colleagues, reports higher figures, because they look at pre-tax income and because they take extra pains to ferret out the unreported income of the rich. 

But, as Martin Ravallion of Georgetown University points out, the poor may also have unreported resources, which may be large relative to their paltry reported incomes.

Although the level of inequality differs between these measures, they all agree on one striking point. 

Inequality in China today is not as bad as it was about a decade ago. 

Indeed, some scholars have remarked on the “great Chinese inequality turnaround”.

Why then has concern about inequality turned up, even as inequality itself has turned around? 

Twain may offer one answer. One of the protagonists of “The Gilded Age” comforts himself with the thought that although he and his wife have to “eat crusts in toil and poverty”, his children will “live like the princes of the Earth.” 

Similarly, many Chinese may tolerate life on the lower rungs of society, if they think they or their children can climb up the ladder.

But that kind of social mobility seems to be slowing. Yi Fan and Junjian Yi of the National University of Singapore and Junsen Zhang of Zhejiang University have tried to calculate the persistence of income from one generation to the next. 

Chinese born in the 1970s inherited about 39% of any economic advantage enjoyed by their parents. 

Those born in the 1980s inherited over 44%. 

That is, if you knew one set of parents was 1% richer than an otherwise similar set of parents, you would expect their children to earn 0.44% more in their own careers than the other parents’ kids.

Inequality may also be more conspicuous than it was. 

As Mr Ravallion and Shaohua Chen of Xiamen University have pointed out, the decline in Chinese inequality since 2008 does not reflect softer divisions within cities. 

It results instead from a narrower gap between urban and rural China. 

People tend to be more conscious of social fault-lines within a city than they are of disparities between one far-flung place and another.

The guilted age

Mr Ravallion suggests another reason why China’s great inequality turnaround has gone unnoticed: people do not think in Ginis or percentages but in yuan and fen, dollars and cents. 

The expected income gap between two random Chinese may have declined from 98% of average income at inequality’s peak in 2008 to 93% now. 

But because average income has risen in that time, the expected gap in yuan terms is still far larger. 

The income per person of the top fifth of households was 10.7 times that of the bottom fifth in 2014. 

That ratio has since fallen a bit. 

But the gap in yuan has increased from 46,221 yuan in 2014 to 69,021 yuan in 2019.

The professor who grew up with Mr Xi speculated that if he became leader Mr Xi would “aggressively” tackle China’s gilded decadence, even “at the expense of the new monied class”. 

Mr Xi has already browbeaten some billionaires into public acts of philanthropy. 

The gestures will do little to shift the Gini coefficient. 

But they will make redistribution more conspicuous. 

Deng Xiaoping, one of Mr Xi’s predecessors, famously said that he did not care if cats were white or black as long as they caught mice. 

Mr Xi’s main opinion about cats is that he does not like them fat.

A Coup Attempt at the IMF

Kristalina Georgieva, the IMF's Managing Director since 2019, has been a bold leader in confronting the economic fallout of the pandemic, as well as in positioning the Fund as a global pioneer on climate change. The efforts now underway to remove her are not only unjust, but could hamstring the Fund's management for years to come.

Joseph E. Stiglitz

NEW YORK – Moves are afoot to replace or at least greatly weaken Kristalina Georgieva, the International Monetary Fund’s managing director since 2019. 

This is the same Georgieva whose excellent response to the pandemic quickly provided funds to keep countries afloat and to address the health crisis, and who successfully advocated for a $650 billion issuance of IMF “money” (special drawing rights, or SDRs), so essential for low- and middle-income countries’ recovery. 

Moreover, she has positioned the Fund to take a global leadership role in responding to the existential crisis of climate change.

For all of these actions, Georgieva should be applauded. 

So, what is the problem? 

And who is behind the effort to discredit and oust her?

The problem is a report that the World Bank commissioned from the law firm WilmerHale concerning the Bank’s annual Doing Business index, which ranks countries according to the ease of opening and operating commercial firms. 

The report contains allegations – or more accurately “hints” – of improprieties involving China, Saudi Arabia, and Azerbaijan in the 2018 and 2020 indexes.

Georgieva has come under attack for the 2018 index, in which China was ranked 78th, the same position as the previous year. 

But there is an insinuation that it should have been lower and was left as part of a deal to secure Chinese support for the capital increase that the Bank was then seeking. 

Georgieva was the World Bank’s chief executive officer at the time.

The one positive outcome of the episode may be the termination of the index. 

A quarter-century ago, when I was chief economist of the World Bank and Doing Business was published by a separate division, the International Finance Corporation, I thought it was a terrible product. 

Countries received good ratings for low corporate taxes and weak labor regulations. 

The numbers were always squishy, with small changes in the data having potentially large effects on the rankings. 

Countries were inevitably upset when seemingly arbitrary decisions caused them to slide in the rankings.

Having read the WilmerHale report, having talked directly to key people involved, and knowing the whole process, the investigation appears to me to be a hatchet job. 

Throughout, Georgieva acted in an entirely professional way, doing exactly what I would have done (and occasionally had to do when I was chief economist): urge those working for me to be sure their numbers were right, or as accurate as possible, given the inherent limitations on data.

Shanta Devarajan, the head of the unit overseeing Doing Business who reported directly to Georgieva in 2018, insists that he never was pressured to change the data or results. 

The Bank’s staff did exactly as Georgieva instructed and rechecked the numbers, making miniscule changes that led to a slight upward revision.

The WilmerHale report itself is curious in many ways. 

It leaves the impression that there was a quid pro quo: the Bank was attempting to raise capital and offered improved rankings to help get it. 

But China was the most enthusiastic backer of the capital increase; it was the United States under President Donald Trump that was dragging its feet. 

If the objective had been to ensure the capital increase, the best way of doing so would have been to lower China’s ranking.

The report also fails to explain why it doesn’t include the full testimony of the one person – Devarajan – with firsthand knowledge of what Georgieva said. 

“I spent hours telling my side of the story to the World Bank’s lawyers, who included only half of what I told them,” Devarajan has said. 

Instead, the report proceeds largely on the basis of innuendo.

The real scandal is the WilmerHale report itself, including how David Malpass, the World Bank president, escapes unscathed. The report notes another episode – an attempt to upgrade Saudi Arabia in the 2020 Doing Business index – but concludes that the Bank’s leadership had nothing to do with what happened. 

Malpass would go to Saudi Arabia touting its reforms on the basis of Doing Business just a year after Saudi security officials murdered and dismembered the journalist Jamal Khashoggi.

He who pays the piper, it seems, calls the tune. 

Fortunately, investigative journalism has uncovered far worse behavior, including an unvarnished attempt by Malpass to change the methodology of Doing Business to move China down in the rankings.

If the WilmerHale report is best characterized as a hatchet job, what’s the motive?

There are, not surprisingly, some who are unhappy at the direction the IMF has taken under Georgieva’s leadership. 

Some think it should stick to its knitting and not concern itself with climate change. 

Some dislike the progressive shift, with less emphasis on austerity, more on poverty and development, and greater awareness of the limits of markets.

Many financial market players are unhappy that the IMF seems not to be acting as forcefully as a credit collector – a central part of my critique of the Fund in my book Globalization and Its Discontents. 

In the Argentine debt restructuring that began in 2020, the Fund showed clearly the limits on what the country could pay, that is, how much debt was sustainable. 

Because many private creditors wanted the country to pay more than was sustainable, this simple act changed the bargaining framework.

Then, too, there are longstanding institutional rivalries between the IMF and the World Bank, heightened now by the debate about who should manage a proposed new fund for “recycling” the newly issued SDRs from the advanced economies to poorer countries.

One can add to this mix the isolationist strand of American politics – embodied by Malpass, a Trump appointee – combined with a desire to undermine President Joe Biden by creating one more problem for an administration facing so many other challenges. 

And then there are the normal personality conflicts.

But political intrigue and bureaucratic rivalry are the last things the world needs at a time when the pandemic and its economic fallout have left many countries facing debt crises. Now more than ever, the world needs Georgieva’s steady hand at the IMF.

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is a former chief economist of the World Bank (1997-2000), chair of the US President’s Council of Economic Advisers, and co-chair of the High-Level Commission on Carbon Prices. He is a member of the Independent Commission for the Reform of International Corporate Taxation and was lead author of the 1995 IPCC Climate Assessment.

Capitalism—A New Idea

by Jeff Thomas 


Capitalism, whether praised or derided, is an economic system and ideology based on private ownership of the means of production and operation for profit.

Classical economics recognises capitalism as the most effective means by which an economy can thrive. 

Certainly, in 1776, Adam Smith made one of the best cases for capitalism in his book, An Inquiry Into the Nature and Causes of the Wealth of Nations (known more commonly as The Wealth of Nations). 

But the term "capitalism" actually was first used to deride the ideology, by Karl Marx and Friedrich Engels, in The Communist Manifesto, in 1848.

Of course, whether Mister Marx was correct in his criticisms or not, he lived in an age when capitalism and a free market were essentially one and the same. 

Today, this is not the case. 

The capitalist system has been under attack for roughly 100 years, particularly in North America and the EU.

A tenet of capitalism is that, if it’s left alone, it will sort itself out and will serve virtually everyone well. 

Conversely, every effort to make the free market less free diminishes the very existence of capitalism, making it less able to function.

Today, we’re continually reminded that we live under a capitalist system and that it hasn’t worked. 

The middle class is disappearing, and the cost of goods has become too high to be affordable. 

There are far more losers than winners, and the greed of big business is destroying the economy.

This is what we repeatedly hear from left-leaning people and, in fact, they are correct. 

They then go on to label these troubles as byproducts of capitalism and use this assumption to argue that capitalism should give way to socialism.

In this, however, they are decidedly wrong. 

These are the byproducts of an increasing level of collectivism and fascism in the economy. 

In actual fact, few, if any, of these people have ever lived in a capitalist (free-market) society, as it has been legislated out of existence in the former "free" world over the last century.

So, let’s have a look at those primary sore spots that are raised by suggesting that collectivism will correct the "evils" of capitalism.

Prices Are Driven From the Top Down

This is unquestionably the case in the aforementioned countries, however, it is not so under capitalism. 

Under capitalism, each producer tries to get as much as he can for his product, but, as others are also creating the same product, those with the lowest price are the ones who will succeed. 

Therefore, the consumers effectively set the prices, based upon what they’re willing to pay.

But in any country where cronyism exists between big business and government, regulations can squeeze out the competition, allowing a monopoly for a given product. 

The definition of this marriage between business and government is "fascism." 

The government makes it increasingly difficult, through regulation, for the small producer to compete with the larger producer (who gives kickbacks to the government).

Capitalism Only Benefits Those at the Top

Capitalism benefits those who produce the most, but it also benefits all others, as they have a free choice to purchase whatever products they wish, at a price they’re prepared to pay. 

If the producer demands too high a price, consumers instead buy his competitor’s product, putting him out of business. 

The consumer is therefore in charge of the price of goods. 

A producer only rises to the top if he produces the most affordable product (as did Henry Ford, 100 years ago, with his Model T. Through the free market, he lowered his price repeatedly and, in so doing, put America on wheels).

Capitalism Impoverishes the Masses

The free market offers more goods to more people at lower prices, which enriches the lives of all consumers, no matter how rich or poor. 

In so doing, it raises up the masses over time, providing them with more and better goods, education, health care, etc., enabling them to rise out of poverty. 

By contrast, overregulation and entitlements enslave those same people to poverty.

The whole idea of the free market is that it’s free from interference by others—most importantly, governments. 

If left alone, the free market will produce the goods the public are most willing to pay for, which results in an ever-self-levelling of products and prices. 

As soon as regulation enters the picture, the free market is compromised. What exists today is not a free market, as Adam Smith would have recognised it, but a bloated, dysfunctional socialist/fascist/capitalist mongrel of a system. 

Of course it doesn’t work.

Fascism is capitalism in decay.

—Vladimir Lenin

Quite so. 

Regulation is a cancer that slowly eats capitalism until it morphs into fascism.

Do not their leaders deprive the rich of their estates and distribute them among the people; at the same time taking care to preserve the larger part for themselves?

 —Socrates to Adeimantus

What was true ca. 400 BC in Athens is true today. Fascism (or corporatist cronyism) results in 99% of the population coming under the diktat of the 1%, which is made up of government leaders and corporate leaders, working in concert, to the exclusion of all others. This is, in fact, the opposite of a free market.

The creation of new wealth is the only functional weapon against poverty.

—Doug Casey

New wealth comes from the bottom up—it’s as simple as someone building a better mousetrap, or building the old one more cheaply. 

In such a market, both the producer and the consumer benefit.

In a fascist system, the wealth gravitates to the top, eventually choking out the middle class and expanding the poorer class, and that’s just what we’re witnessing today. 

The solution is not to go further in this direction, but rather to try something new… or at least new to anyone living under the fascist system. 

Although it still retains some capitalist overtones, it is unquestionably not capitalism.

A last word—capitalism does exist today, but it lives in select countries that have not yet given in to overregulation. 

In those countries, the average person thrives and has opportunities far beyond what’s allowed in the former "free" world. 

Should the reader conclude that his present country is unlikely to go in the direction of capitalism, he may choose to vote with his feet in order to prosper the way his ancestors did 100 years ago.