Analysis of the global economy
Shipping rates for container vessels remain at depressed levels, close to the lows of 2009, according to the The Harper Petersen Index from ship brokers Harper Petersen & Co. This reflects the depressed level of global trade in manufactured goods. Major exporters like China are the most severely affected.
Hillary Rosner describes how the inflow of savings from China contributed to the US sub-prime crisis:
“The foreign reserve holdings of U.S. Dollars,” the researchers write, “which had been at less than 11% of U.S. GDP prior to 2000, grew rapidly after 2002; in fact they almost doubled over the 5-year period from 2002 to 2007.”
Read more at How urban Chinese workers helped cause the great recession – Quartz.
Michael Pettis argues that China cannot stimulate its economy out of trouble:
There are still bulls out there who insist that China is out of the woods and making a strong recovery, for example former Deputy Governor of the Reserve Bank of Australia, Stephen Grenville, who argues in his article strangely titled China doomsayers run out of arguments:
“The missing element from the low growth narrative is that unemployment would rise, provoking a stimulatory policy response. China would extend the transition and put up with low-return investment recall that when unemployment was the issue, Keynes was prepared to put people to work digging holes and filling them in rather than have unemployment rise sharply. To be convincing, the low-growth scenario needs to explain why this policy response will not be effective.”
It seems to me that the reason why simply “provoking a stimulatory policy response” won’t help China has been explained many times, even recently by former China bulls. Of course more stimulus will indeed cause GDP growth to pick up, as Grenville notes, but it will do so by exacerbating the gap between the growth in debt and the growth in debt-servicing capacity. Because too much debt and a huge amount of overvalued assets is precisely the problem facing China, it is hard to believe that spending more borrowed money on increasing already excessive capacity can possibly be a useful resolution of slower Chinese growth.
Read more at EconoMonitor : EconoMonitor » Beijing’s New Leaders Are Right to Hold Back.
Leith van Onselen posts this chart comparing housing wealth to disposable income. Australia and New Zealand are the worst offenders, with ratios close to 5:1, while the US never reached 3:1 even at its sub-prime peak.
Jesse Eisinger observes US bank reactions to efforts to raise their minimum capital requirements. Many argue that the new rules will harm their competiveness.
Jamie Dimon, the chief executive of JPMorgan, raised the ominous specter that global rules are out of “harmonization” and that United States banks are now held to a higher standard.
“We have one part of the world at two times what the other part of the world is talking about,” he said. “And I don’t think there’s any industry out there that would be comfortable with something like that in a long run.”
To rebut that, I bring in a banking expert: Jamie Dimon. This side of Mr. Dimon’s mouth has repeatedly boasted about what a competitive advantage JPMorgan’s “fortress balance sheet” is, how the bank was a port in the 2008 storm…….
By raising capital standards and installing tougher derivatives rules, regulators are helping banks that are too foolish (or rather, the top executives who are too narrowly self-interested in increasing their own compensation in the short term) to recognize their own interests.
Increasing bank capital requirements would lower their perceived risk and decrease their cost of capital, giving them an advantage over international rivals with less stringent standards.
Read more at Finally, Bank Regulators Have Had Enough – ProPublica.
Adam Peterson writes the Canadian housing bubble is headed for a “slow-motion” crash:
My gravest concern is that Canada is fast approaching a 5:1 home-price-to-income ratio, a benchmark achieved by the U.S. at the peak in 2006. Since the correction, the U.S. ratio now hovers at approximately 3:1.
To compound the problem, household debt in Canada has breached 150 per cent of income and continues in the wrong direction; households are not cushioned against a blow.
Australian household debt is also hovering around 150% of disposable income.
While the price-to-income ratio varies between 4 and more than 6 depending on whether you use national averages or median data.
Read more at Canadian housing bubble looks ripe for popping | Toronto Star.
Yalman Onaran and Jesse Hamilton at Bloomberg report on a new joint proposal by the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency:
The biggest U.S. banks, after years of building equity, may continue hoarding profits instead of boosting dividends as they face stricter capital rules than foreign competitors.
The eight largest firms, including JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS), would need to retain capital equal to at least 5 percent of assets, while their banking units would have to hold a minimum of 6 percent, U.S. regulators proposed yesterday. The international equivalent, ignoring the riskiness of assets, is 3 percent. The banks have until 2018 to fully comply.
The U.S. plan goes beyond rules approved by the Basel Committee on Banking Supervision to prevent a repeat of the 2008 crisis, which almost destroyed the financial system. The changes would make lenders fund more assets with capital that can absorb losses instead of using borrowed money. Bankers say this could trigger asset sales and hurt their ability to lend, hamstringing the nation’s economic recovery.
While the authors term the new regulations “harsh” on bankers and likely to freeze bank lending, existing lax capital requirements give bankers a free ride at the expense of the taxpayer. Their claims are baseless:
So why are bankers squealing so loudly? In a nutshell: bonuses. Higher capital requirements and no free ride at taxpayers’ expense would mean that shareholders claim a bigger slice of the pie, with less left over for management bonuses.
For a detailed rebuttal of bankers’ claims see Anat Admati and Martin Hellwig.
The big four Australian banks should take note. They currently maintain between 4.1% (CBA) and 4.5% (WBC) of capital against lending exposure. Raising the ratio to 6.0% would require 33% to 50% new capital.
Read more at U.S. Banks Seen Freezing Payouts Under Harsh Leverage Rule – Bloomberg.
Brooke Masters reports:
The Basel Committee on Banking Supervision said in a discussion paper released on Monday that it shares the concern of critics who believe the main measure of bank safety – the core tier one capital ratio – is too complicated and makes it difficult to compare banks.
Its own research shows banks are using wildly different models to calculate the risk-weighted assets that make up the denominator of the ratio, resulting in some institutions holding 40 per cent less capital against the same kinds of banking assets as their peers.
Read more at Basel committee willing to rethink complex bank rules – FT.com.
Mark Gongloff quotes Anat Admati and Martin Hellwig of the Max Planck Institute, authors of the recent book The Bankers’ New Clothes: What’s Wrong With Banking And What To Do About It, from their point-by-point rebuttal of bankers arguments that they should not be required to hold more capital:
“Many banks, including most of the large banks in the United States, are not even using all the funding they obtain from depositors to make loans,” Admati and Hellwig write. “If banks do not make loans, therefore, the problem is not a lack of funds nor an inability to raise more funds for profitable loans, but rather the banks’ choices to focus on other investments instead.”
Read more at No, Making Banks Hold More Capital Is Not Going To Wreck Lending Or The Economy | Huffington Post.
Libor, the scandal-tarred benchmark that underpins interest rates on trillions of dollars in financial contracts, is being sold to NYSE Euronext, NYX -0.78% the U.S.-based company that runs the New York Stock Exchange. The deal, designed to restore Libor’s international credibility, was announced Tuesday by a British government commission and the NYSE.
From DAVID ENRICH and CASSELL BRYAN-LOW.
Read more at NYSE Euronext to Take Over Libor – WSJ.com.
