All This Inequality Talk Does Nothing for the Poor – Bloomberg 07-31-13

Salient to Investors:

Clive Crook writes:

The crash will recede, confidence will come back and stronger growth will resume. The zeal of Americans to work hard and prosper will prevail over the weary incompetence of the political class.

Inequality is rising, but the theory that the US system is fundamentally flawed is wrong. As is the belief that the rich have rigged the system, middle class incomes stagnate as labor productivity keeps rising, and if you are born poor, you stay poor.

Scott Winship at Brookings said the CBO found that up to the recession, US median household incomes were rising in inflation-adjusted terms, decade by decade, despite the supply of foreign labor growing faster than ever.

Successive generations are better off than their predecessors, and once the crash is behind us, this will continue. The US recovery is much stronger than Europe’s because US macroeconomic policy was better and the US more flexible and resilient, meaning more capitalist.

If technology and globalized markets had not boosted the incomes of superstar entertainers, athletes and business leaders, incomes would be more equal, but the middle class would not be better off.

A child of a poor family in the US is more likely to stay poor as an adult than his counterparts are in many comparable advanced economies. In this respect, the American Dream is a myth.

Miles Corak at the University of Ottawa and other economists argue that high inequality causes low mobility. But while the recent surge in the incomes of the super-rich, the main driver of US inequality, will make it easier for the very richest children to stay very rich, it is hard to believe it will help the poorest to stay poor.

Worsening inequality and the persistence of poverty from generation to generation are solvable problems, not hard-wired features of the system.

Read the full article at  http://www.bloomberg.com/news/2013-07-31/all-this-inequality-talk-does-nothing-for-the-poor.html

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Frantic Rule-Writing Won’t Avert New Banking Crisis – Bloomberg 07-16-13

Salient to Investors:

Clive Crook writes:

The US and advanced economies have not done enough to head off the next financial meltdown.

Gain made in safety is likely to be too small even to offset the danger created since the crash by greater concentration in the finance industry.

The emerging framework of regulation is no great departure from the one that failed in 2008.

Historically, banks judged it necessary to finance as much as 25 percent of their lending with equity, and research finds a leverage ratio of 10 percent is the safe minimum.

The past 5 years have shown that in a crisis of confidence, big financial conglomerates amplify rather than absorb risk, worsen contagion, and narrow down to nothing the choices available to governments.

The benefits of conglomeration for customers are doubtful at best. Regulators should be trying to separate different lines of business.

The distinctive characteristic of the crash of 2008 was the part played by a new kind of run on financial systems. Depositors did not line up to get their money out. Banks et al faced collapse because non-deposit funding dried up – the breakdown was in wholesale not retail.

Daniel Tarullo at the Fed said there is not yet a blueprint for addressing the basic vulnerabilities in short-term wholesale funding markets.

Read the full article at  http://www.bloomberg.com/news/2013-07-16/frantic-rule-writing-won-t-avert-new-banking-crisis.html

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Broken Systems Plus Bad Ideas Equals Lame Recovery – Bloomberg 07-10-13

Salient to Investors:

Clive Crook writes:

  • The global economic recovery is hardly worthy of the name – the IMF again reduced its growth forecasts.
  • Recessions involving financial crashes are harder to recover from than ordinary downturns.
  • The failure of international cooperation is most egregious in the EU, where the EU core inflicted severe fiscal contraction on the periphery and the ECB has let the goal of EU-wide low inflation deflect it from providing monetary stimulus adequate where demand has collapsed.
  • Fears that aggressive QE might cause financial instability when it’s reversed should be taken seriously, even if signs of a risky “reaching for yield” are few right now.

 

Read the full article at  http://www.bloomberg.com/news/2013-07-10/broken-systems-plus-bad-ideas-equals-lame-recovery.html

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Broken Systems Plus Bad Ideas Equals Lame Recovery – Bloomberg 07-10-13

Salient to Investors:

Clive Crook writes:

  • The global economic recovery is hardly worthy of the name. The IMF has again reduced its forecasts for the world economy.
  • Recessions involving financial crashes are harder to recover from.
  • Two great failures of coordination receive scant economic discussion. Precious little effective international cooperation and, at the national level, governments unable or unwilling to carefully co-manage the different policies that a recession that drops interest rates to zero and requires unusual stimuli.
  • The EU has instead actively militated against recovery, and inflicted severe fiscal contraction on the periphery. The ECB has let the goal of EU-wide low inflation deflect it from providing adequate monetary stimulus to countries where demand has collapsed. A genuine banking union is a sine qua non for the EU, which has made scant progress towards it.
  • Global governments should have given the IMF more resources sooner to better help distressed sovereign borrowers, should have revived the Doha Round of global trade talks and upped their ambitions on trade liberalization. Instead, they let it shrivel.
  • At the national level, keeping fiscal policy, monetary policy and financial regulation in separate silos fails in times like these. For maximum stimulus effect, all 3 must work together.
  • Fears that aggressive QE might cause financial instability when it’s reversed should be taken seriously, even if signs of a risky “reaching for yield” are few right now.

Read the full article at http://www.bloomberg.com/news/2013-07-10/broken-systems-plus-bad-ideas-equals-lame-recovery.html

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How Germans Botched the Spanish Bank Bailout – Bloomberg 06-12-12

German insistence that EU support be directly to Spain’s government and not its banks had two fatal consequences. Adding to Spain’s public debt and possible subordinating existing bondholders.  German taxpayers didn’t want the euro in the first place, correctly fearing it would become a transfer system for other countries’ profligacy.

The choice is no longer between bailouts and no bailouts but between bailouts that work and bailouts that fail.

EU’s member nations have different views and traditions on taxes, public services, redistribution, risk-sharing, public borrowing and every other aspect of public finance which put limits on the scope for fiscal cooperation. Political union would not smooth away these differences – far-right nationalism is already resurgent in many EU countries.

Read the full article at http://www.bloomberg.com/news/2012-06-12/how-germans-botched-the-spanish-bank-bailout.html