Focusing on the EU’s survival:

Although they disagree on solutions, experts broadly agree on the list of things that needed to be fixed. These include:

• Completing the Banking Union;
• Breaking the ‘doom loop’ between banks and their sovereigns;
• Ensuring EZ-wide risk sharing for Europe-wide shocks;
• Cleaning up the legacy debt problem;
• Coordinating EZ-level fiscal policy while tightening national-level discipline;
• Advancing structural reforms for a better functioning monetary union.

Each chapter presents solutions to one or more of these challenges, and several of the chapters view solutions to one problem as inexorably linked with the solution to one or more of the other problems.

Lessons learned and progress to date on fixing the Eurozone

At the outset, we must acknowledge that there is nothing novel about the notion that the Eurozone needs completing. The basic shortcomings have been known and discussed by economists since the euro was launched. This may be seen as reassuring in the sense that the realisation that the Eurozone has shortcomings does not depend on elaborate new theories, empirical findings, or controversial interpretations of the EZ Crisis. Based on nothing more than simple economic logic and basic economic facts, many flaws were obvious from the start.

For example, a CEPR report wrote:

“The ECB suffers serious faults in its design that sooner or later will surface. This is likely to happen when large shocks [Editors’ note: the Report refers to the 1997 Asian Crisis], hit euroland. … The lack of centralized banking supervision, together with the absence of clear responsibilities in crisis management, risk making the financial system in euroland fragile. No secure mechanism exists for creating liquidity in a crisis, and there remain flaws in proposals for dealing with insolvency during a large banking collapse.” (Begg et al 1998).

These problems were swept under the rug during the halcyon days of the Eurozone’s first decade.

Fixing the Eurozone is a job half done. Nobel Prize winner Chris Pissarides, writes:

“There are certain conditions needed to make a common currency across diverse economies a success and the Eurozone is clearly not satisfying them.”

Given the wide range of shocks arising from the current situation in Europe and beyond, now is not the time to relax. The job of fixing the Eurozone must be completed sooner rather than later. At their summit next week, EU leaders should find the time to restart the process of repairing Europe’s monetary union.

New Fed regional Governor discusses the need to reduce the threat of banks still ‘too big to fail.’  Kashkari on Ending TBTF.  Kashkari on Ending TBTF

Kashkari, who has worked for Goldman Sachs and in the Treasury Department during the administration of George W. Bush, is newly appointed to the US Federal Reserve in Minneapolis.  He finds big banks a significant threat to the US economy.

It is well to remember that banks are an unusual business.  They use other people’s money to store deposits, grant loans and earn interest on the monies they hold. These monies are always other peoples’ monies, and for this reason the business needs to be highly regulated.  It has not been.

For everyone but the top 1 percent of earners, the American economy is broken. Since the 1980s, there has been a widening disconnect between the lives lived by ordinary Americans and the statistics that say our prosperity is growing. Despite the setback of the Great Recession, the U.S. economy more than doubled in size during the last three decades while middle-class incomes and buying power have stagnated. Great fortunes were made while many baby boomers lost their retirement savings. Corporate profits reached record highs while social mobility reached record lows, lagging behind other developed countries. For too many families, the American Dream is becoming more a historical memory than an achievable reality. New Economics

For the past five years, Christine Lagarde’s face has been splashed across the media above headlines pertaining to the International Monetary Fund (IMF). Lagarde has been one of the most visible leaders of an international economic organization in recent history, and the leadership of the IMF has noticed. As a result, Lagarde has been nominated to serve a second five-year term as the head of the International Monetary Fund.

The IMF is a made up of 188 member countries, and carries the mandate of ensuring the stability of the world’s monetary system. It does this via a system of exchange rates, loans, and international payments. These systems allow countries around the world to smoothly transact business with one another. To be sure, this is not an easy task.

Lagarde’s illustrious background includes serving as the French Finance Minister before becoming the first female director of the IMF in 2011. She was the only person nominated for the role of IMF chief this term. Observers have pointed out that Lagarde’s charisma, strong leadership, and intelligent choices, both politically and as a matter of policy, meant that there were no other obvious choices to fill the position.

Lagarde, now 60, has done a supreme job of unifying otherwise contentious factions behind her work and her vision for the IMF. Her nomination for a second term was supported by a broad cross-section of the world’s various economies, including the UK, Germany, China, and France.

According to Aleksei Mozhin, Dean of the IMF’s executive board, “The period for submitting nominations for the position of the next Managing Director of the International Monetary Fund closed on Wednesday, February 10 … One candidate, current managing director Christine Lagarde, has been nominated.” He went on to explain that the board’s goal is to complete the selection process as soon as possible to ensure the IMF’s business continues smoothly and without interruption.

Lagarde’s current term as Managing Director ends July 5, 2016. She had already announced her intention to seek a second term in January of this year, but few expected her to receive the nomination completely unopposed.

Despite the IMF’s approval, Lagarde still faces criticism in her home nation. Lagarde was recently asked to stand trial in her native country of France for alleged acts of negligence pertaining to a 2008 payment made to businessman, Bernard Tapie. Lagarde’s attorney called the decision to make her stand trial “incomprehensible” and noted that she would appeal.

Jjuerg Zeltner writes:  Philanthropy’s Storming of the Bastille began in November, when a group of nearly 30 billionaires, including Amazon’s Jeff Bezos, Virgin’s Richard Branson, and Alibaba’s Jack Ma, announced the formation of the Breakthrough Energy Coalition. The BEC promised a “new model” that would leverage public-private partnerships to mobilize investment “in truly transformative energy solutions for the future.”

The announcement was closely followed by Mark Zuckerberg and Priscilla Chan’s commitment to give 99% of their Facebook shares (currently valued at some $45 billion) to improving the lives of newborns across the world. They, too, stressed the importance of “partnering with governments, non-profits, and companies.”

The game-changing development is the recognition of a funding gap – a “collective failure” of government, traditional philanthropy, and commercial investors, in the words of the BEC – that creates “a nearly impassable valley of death between promising concept and viable product.”

That is why the Chan Zuckerberg Initiative was designed for maximum flexibility, allowing funds to be channeled into non-profits, directed into private investments, or used to help influence policy debates. Similarly, the BEC has pledged to boost the work of others by taking “a flexible approach to early stage, providing seed, angel and Series A investments, with the expectation that once these investments are de-risked, traditional commercial capital will invest in the later stages.”

Of course, not even billionaires can solve the world’s problems on their own. Other stakeholders will need to play a part in the revolution as well. Traditional philanthropies should revisit their mandates. And governments must do more to facilitate a greater flow of private funds into more sustainable infrastructure assets. Policymakers could look at tax incentives, including credits in key areas.

There is an opportunity for the finance industry to participate, too, through so-called impact investing, which aims to achieve both social progress and financial returns high enough to attract mainstream private investors.

This, of course, is more easily said than done. As Bill Gates, who has given away more money than anyone in the history of the world, put it: “So many things have a social return, but not a financial return. You really have to be careful thinking you can have your cake and eat it.”

That is especially true for those who design financial instruments for impact investing. Among the most innovative are development impact bonds, in which investors provide financing for development projects, in exchange for returns provided by donors, NGOs, or government agencies if, and only if, the agreed-upon outcomes are achieved.

For example, one such bond is funding an effort to enroll and keep girls in school in Rajasthan, India. Depending on the program’s attendance rates and success at imparting numeracy and language skills, the Children’s Investment Fund Foundation will pay a return to bondholders. Programs like this, it is hoped, will provide a model that can be replicated and scaled up elsewhere.

Another promising opportunity are investments in the riskiest stage of the development process for new drugs: the phase between basic research and human clinical trials, which has traditionally struggled to attract funding. Indeed, for every $1 million dollars spent on this part of the process, some $8 million is spent on basic research and another $20 million on clinical trials.

Quarterly earnings cycles, real-time pricing, and constant scrutiny by shareholders have pushed pharmaceutical companies toward projects with clear, immediate payoffs – at the expense of more speculative, but potentially transformational research. With interest rates at record lows in much of the developed world, major players in the financial system have an opportunity – and, I would add, a responsibility – to help bridge this gap. In addition to providing a robust social impact, a patient investment strategy in this area would also offer high long-term financial returns.

There is a strong desire on the part of many in the finance industry to make investments that improve the world. The revolution in philanthropy will be truly successful only when we realize that we do not have to be billionaires to make a difference.

Keyu Jin writes:  Pessimism about China has become pervasive in recent months, with fear of a “China meltdown” sending shock waves through stock markets worldwide since the beginning of the year. And practically everyone, it seems, is going short on the country.

There is certainly plenty of reason for concern. GDP growth has slowed sharply; corporate-debt ratios are unprecedentedly high; the currency is sliding; equity markets are exceptionally volatile; and capital is flowing out of the country at an alarming pace. The question is why this is happening, and whether China’s authorities can fix it, before it is too late.

The popular – and official – view is that China is undergoing a transition to a “new normal” of slower GDP growth, underpinned by domestic consumption, rather than exports. And, as usual, a handful of economic studies have been found to justify the concept. But this interpretation, while convenient, can provide only false comfort.

China’s problem is not that it is “in transition.” It is that the state sector is choking the private sector. Cheap land, cheap capital, and preferential treatment for state-owned enterprises weakens the competitiveness of private firms, which face high borrowing costs and often must rely on family and friends for financing. As a result, many private firms have turned away from their core business to speculate in the equities and property markets.

Chinese households are also squeezed. In just 15 years, household income has fallen from 70% of GDP to 60%.

China has proved its capacity to implement radical reforms that eliminate major distortions, thereby boosting growth and absorbing excess debt.

The Chinese government launched a raft of radical reforms, including large-scale privatization of industry and elimination of price controls and protectionist policies and regulations.

This time around, however, the task facing China’s government is complicated by political and social constraints. The economic reforms China needs now presuppose political reform; but those reforms are hampered by fears of the social repercussions.

The good news is that China has a promising track record on this front.

A similar ideological shift is needed today, only this time the focus must be on institutional development. S

With a concerted effort to create a level playing field that gives more people a bigger piece of the economic pie, not to mention more transparent governance and a stronger social safety net, China’s government could reinforce its legitimacy and credibility.

China’s experience in the 1990s suggests that the country can bounce back from its current struggles.

If economic conditions worsen, as seems plausible, action will become unavoidable. Good times may breed crises in the West; in China, it is crises that bring better times.

Zhang Jun writes  At a forum in Canberra last year, Andrew Sheng quipped, “China is transparent, but only in the Chinese sense.” The statement provoked laughter among those who view China’s decision-making processes as opaque; but it was laughter born of the recognition that Sheng was right. In the run-up to a major policy decision in China, editorials by high-ranking authorities in major publications, as well as reports and communiqués from official forums and meetings, almost always provide clues about what will happen. You just have to know how to read them.

Many interpreted last August as a last ditch effort by the People’s Bank of China (PBOC) to stave off an economic crash.  But China is not really on the verge of a currency crisis at all. Given that all of this activity is taking place in the offshore renminbi market, which is small in scale and has only limited connections to mainland China’s financial system – the result of China’s hesitancy about financial-market liberalization and capital-account convertibility – the situation remains controllable. Add to that China’s other strengths – annual GDP of over $10 trillion, a growth rate at least four percentage points higher than the global average, $3 trillion in foreign-exchange reserves, a savings rate of 40% of GDP, and a massive trade surplus – and an exchange-rate crisis seems highly unlikely.

But that does not mean that there are no risks. On the contrary, China has a strong interest in curbing the volatility – and, given China’s centrality to the global economy, so does the rest of the world. The key will be to get markets and policymakers on the same page.

Chinese policymakers have shown a clear commitment to minimizing government intervention and promoting a market-oriented approach for setting interest and exchange rates. And the authorities have made significant progress toward this end.

In fact, the devaluation last August was accompanied by the announcement of a more market-oriented mechanism for setting the renminbi’s exchange rate in the interbank market, with the daily fixing rate based on the previous day’s closing price. That move, was a prerequisite for the addition of the renminbi to the basket of currencies that determine the value of the International Monetary Fund’s reserve asset, the Special Drawing Right.

But even when China attempted to create a more reliably market-based system, investors’ responses were skewed, with unfounded expectations of a substantial and consistent devaluation fueling speculation in international markets. The subsequent attempt by China’s State Administration of Foreign Exchange to stabilize expectations by declaring that the renminbi would be valued against an undisclosed basket of currencies, instead of just the US dollar, failed to convince them. Short trades continued to rage offshore, putting the renminbi under increasing pressure.

The PBOC has been working vigorously to prevent further misunderstandings by designing policies that will safeguard exchange-rate stability, while taking care not to transmit any signal that monetary easing is in the cards.

The PBOC clearly remains committed to stabilizing the exchange rate, while advancing its market-oriented goals.

China’s leaders have plenty of challenges ahead, and improved communication with markets could help to overcome them. Fortunately, it seems that China’s leaders recognize this imperative, and are working to meet it.

 Between 1970-2014, rural counties with a lot of federal lands did better financially than those without as much federal control. That’s according to a new study by Headwaters Economics, a non-partisan think tank based in Montana.  Economist Megan Lawson led the study which drew averages from around the West. She says federal lands aren’t necessarily the reason why those rural counties were better off, but that having federal land doesn’t automatically spell economic ruin. The graphic does not show median income comparisons which would reflect on whether high concentrations of federal lands correlate with less income inequality or not. 

It was just over a year ago that Greece elected Alexis Tsipras and Syriza amid a flurry of anti-austerity sentiment.

Things didn’t exactly go as planned.

The new PM and his “radical” finance minister Yanis Varoufakis thought they could shake things up in Brussels and wrench Greece from the clutches of Berlin-style fiscal rectitude. As it turns out, Wolfgang Schaeuble is not a man who is easily bested at the bargaining table and after more than six months of negotiations, the imposition of capital controls, a referendum on the euro that Tsipras promptly sold down the river, Greeks ended up facing an outright depression.

In the end, Varoufakis unceremoniously resigned and Tsipras agreed to a third bailout before calling for snap elections that would ultimately see the PM re-elected albeit at the helm of a party that was completely gutted by the arduous bailout talks.

As we and quite a few others warned, the new bailout and the attached terms would do exactly nothing to turn the Greek economy around. We’re all for being responsible with the budget but you can’t very well implement fiscal retrenchment during a depression unless you intend to remain in said depression in perpetuity, but alas, that’s exactly what Brussels forced Greece to do and the country has slipped back into recession.

With opposition mounting to the government’s pension reform plan, the European Union pressuring it to stem the tide of refugees entering the country and the global market rout hastening the sell-off in Greek assets, dark clouds are gathering again.  Ironically, capital controls appear to have helped the economy perform better than expected: “The economy fared less badly than those initial expectations in part due to a 90 percent annualized increase in cashless payments since the introduction of capital controls in June, shifting activity out of the shadow economy.” Another justification for banning cash we suppose.

Earlier this month we noted that Greek bank stocks were cut in half in just a matter of 72 hours while Greek equities as a whole had fallen to their lowest levels since 1989. Yields on the Greek 10Y had spiked back above 10%.

Greece, sources told MNI, “seems unable to deliver” on a number of measures Brussels says Athens needs to implement an effective fiscal consolidation plan. “We agreed to disagree,” one official said. “Judging from (last week’s) talks, the negotiations could drag for months. Anyway, I don’t see any real funding needs for Greece until June,” the official went on to note.

Greek riot police fired tear gas at farmers protesting against pension reform plans on Friday who hurled stones at the agriculture ministry in central Athens ahead of a major demonstration outside parliament scheduled for later in the day,

Greece is not “fixed.” And even as the farmers swear “they won’t make us bend,” something will have to give because Grexit fears to resurface once again [if all sides adopt] a plan built on over-optimistic assumptions.

Throw in a couple of hundred thousand refugees that are lliterally arriving in boats and you’ve got a particularly precarious situation that will likely devolve into the type of chaos shown above on an increasingly frequent basis.