No one will lend at a negative interest rate; potential creditors will simply choose to hold cash, which pays zero nominal interest.”– Ben Bernanke, 2009

“I think negative rates are something the Fed will and probably should consider if the situation arises.”-– Ben Bernanke, December 2015

“In theory there is no difference between theory and practice. In practice there is.”– Yogi Berra

John Mauldin writes: Economists used to think below-zero interest rates were impossible. Necessity (as central banks see it) is the mother of invention, though; and multiple central banks now think negative rates are a necessary step to restore growth.

Are they right? Will negative rates pull the global economy out of its funk? Probably not; but for better or worse, several central banks are already below zero. The Federal Reserve just sent its clearest signal yet that it is headed that way, too. The Fed has warned banks to get ready. We had all better do the same.

This week’s letter has two parts. The first deals with some of the practical aspects of negative rates and what the Fed is really signaling. The second part, which is somewhat philosophical, deals with why the Fed will institute negative rates during the next recession. This letter is longer than usual, but I think it’s important to understand why we will see negative rates in the world’s reserve currency (and the currency in which most global trade is conducted). This policy trend is truly a foray into unexplored territory.

The idea of negative rates isn’t new; what’s new is the willingness to try them out. The Ben Bernanke quote above comes from a November 2, 2009, Foreign Policy article in which the Fed chairman wrestled with how to keep inflation at the “right” level in a weak economy.

Set aside the question of whether there is any “right” level of inflation. As of six years ago, the head of the world’s most important central bank thought no one would ever lend at a negative interest rate. We now know he was wrong, at least with regard to Japan and most of Europe. Central banks there have instituted negative rate policies, and people are still borrowing and lending.

The Fed staff has also speculated on the possibility. Earlier this month my good friend David Kotok sent around links to several academic and central bank negative-rate studies. One was a 2012 article by Kenneth Garbade and Jamie McAndrews of the Federal Reserve Bank of New York. Their title tells you what they thought at the time:

Former Minneapolis Fed President Narayana Kocherlakota, who was for years the FOMC uber-dove, says going negative would be “daring but appropriate.” He has a number of reasons for this stance. In a note last week, he said the federal government is missing a chance to borrow gobs of money at super-attractive interest rates.

Kocherlakota would like to see the Treasury issue as much paper as it takes to drive real rates back above zero. He would use the borrowed money to repair our rickety infrastructure and to stimulate the economy.

It is an appealing idea – in theory. In reality, I have no faith that our political class would spend the cash wisely. More likely, Washington politicians would collude to distribute the money to their cronies, who would build useless highways and bridges to nowhere. The taxpayers would end up stuck with more debt, and our infrastructure would be little better than it is now.

The fact that this is a “monumentally” bad idea doesn’t mean it will never happen. There’s an excellent chance it will happen. Yellen and the Fed are clearly looking in that direction.

Yellen might face one small problem on the road to NIRP: no one is completely sure if the Fed has legal authority to enact such a policy. An Aug. 5, 2010, staff memo says that the law authorizing the Fed to pay interest on excess reserves may not give it authority to charge interest.

Despite the impression that the smartwatch hype has died down a bit since reaching its apex in Apple’s introduction of the Apple Watch in early 2015, the industry just passed a notable milestone.

According to a new report by Strategy Analytics, global smartwatch shipments surpassed Swiss watch shipments for the first time. Worldwide smartphone shipments amounted to 8.1 million, just beating the  Swiss watch industry total of 7.9 million.

While most of the world’s watches may come from China these days, Swiss watches are still the gold standard in terms of quality and consumer appeal. The Swiss watch industry has been hesitant to jump on the smartwatch bandwagon, accounting for just 1 percent of smartwatch shipments worldwide.

This chart compares worldwide smartwatch shipments to Swiss watch shipments in Q4 2015.

Many species of bees, butterflies and other creatures that are vital to agricultural pollination are threatened with extinction, posing risks to major world crops and global biodiversity..

“Many wild bees and butterflies have been declining in abundance, occurrence and diversity at local and regional scales in Northwest Europe and North America,” said an assessment by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES).

It said declines in pollinators – which also include a vast range of other insects, bats, birds and other animals – had also been detected elsewhere in the world.

The problem facing policymakers is that scientists remain unsure exactly which factors are the biggest drivers.

The world’s first assessment of its kind said possible causes include habitat loss, pesticides, pollution, invasive species, pathogens, climate change and the spread of vast farms dedicated to a single product, which suppresses biodiversity.

The IPBES was established under UN auspices in 2012 to assess the state of global biodiversity.

It said healthy populations of the creatures are critical to ensuring stable fruit and vegetable output, as concerns rise over the challenge of feeding the world’s people in coming decades.

Among its findings, IPBES said animal pollination is directly responsible for between 5 and 8 per cent of global agricultural production by volume, amounting to between $235 billion (Dh863 billion) and $577 billion worth of annual output. Pollination is the transfer of pollen between the male and female parts of flowers to enable reproduction.

But more than three-quarters of the “leading types of global food crops” also rely to some extent on animal pollination for yield and quality.

“Pollinator-dependent species encompass many fruit, vegetable, seed, nut and oil crops, which supply major proportions of micronutrients, vitamins, and minerals in the human diet,” the IPBES said.

The assessment is the work of nearly 80 scientists from around the world and was released at an IPBES meeting in Kuala Lumpur.

In Europe, 9 per cent of bee and butterfly species are threatened with extinction and populations are declining for 37 per cent of bee species and 31 per cent of butterfly species for which sufficient data is available, the IPBES said.

In some places in Europe more than 40 per cent of bee species may be threatened.

Some of the most important world food staples such as rice, wheat and other grains do not rely on animal pollination.

But vulnerable crops could include everything from apples and mangoes, to chocolate and almonds, and many other commonly consumed foods, said Simon Potts, co-chair of the assessment.

Policy options could be as simple as planting more flowers, the group said.

But it also mentioned overall better protection of natural environments and ecosystems, limiting the scope of intensive agriculture, encouraging sustainable farming, and finding alternatives to pesticides.

Black money saved India

There is no question that India has the most positive economic story on the planet.

Buoyed by increased manufacturing output, India’s economy grew by 7.4% in the third quarter of 2015, the fastest growth of any major country in the world.

But there is a dark side to India’s success, says one of the country’s most eminent economists.

Kaushik Basu, the chief economist of the World Bank and former chief economic adviser to the Indian government, says the nation’s tradition of petty corruption helped India avoid the worst of the banking crisis that has crippled most other large economies in the last few years.

His argument is that the pervasive use of “black money” – illegal cash, hidden from the tax authorities – created a bulwark against a crisis in the banking sector.

India’s economy was looking just as frothy as the rest of the world, growing at an astounding 9% a year for the three years to 2008.

What’s more, India’s growth had been fuelled, at least in part, by a dramatic housing boom.

Between 2002 and 2006 average property prices increased by 16% a year, way ahead of average incomes, and faster even than in the US.

The difference in India is that all this “irrational exuberance” did not end in disaster.

There was no subprime loans crisis to precipitate a wider crisis throughout the banking sector.

So the big question is why not.

There were some shrewd precautionary moves by India’s central bank, but he one important answer is all that dirty money.

In most of the world the price you pay for a property is pretty much the price listed in the window of the local realtor or estate agent. Not in India.

Here a significant part of almost all house purchases are made in cash.

And because the highest denomination note in India is 1,000 rupees, ($15; £10) it isn’t unusual for a buyer to turn up with – literally – a suitcase full of used notes.

Let’s say you like the look of a house that is for sale. You judge it is worth – for argument’s sake – 100 rupees.

The chances are the seller will tell you he will only take, say, 50 rupees as a formal payment and demand the rest in cash.

That cash payment is what Indians refer to as “black money”.

It means the seller can avoid a hefty capital gains tax bill. Buyers benefit too because the lower the declared value of the property, the lower the property tax they will be obliged to pay.

What it also means is that Indians tend to have much smaller mortgages compared to the real value of their properties than elsewhere in the world.

At the peak of the property boom in the US and the UK it was common for lenders to offer mortgages worth 100% of the value of the property.

Some would even offer 110% mortgages, allowing buyers to roll in the cost of finance and furnishing their new home..

In India, by contrast, mortgage loans can only be raised on the formal house price. So when prices fell in India – and they did fall in 2008 and 2009 – most bank loans were still comfortably within the value of the property.

India did experience a slowdown, but it was collateral damage from the global recession rather than the result of any national problem.

To preserve this advantage, it’s been suggested that bribery be legalized.

It means people who give bribes no longer have a shared interest in keeping their nefarious activity secret.

Freed from the risk of prosecution, bribe-givers would have a powerful incentive to reveal corruption.

Press release from Whistleblowers United in the US

Four prominent Wall Street whistleblowers – who have identified high-level wrongdoing by the nation’s largest financial institutions and the federal government – will announce on Thursday a challenge to the 2016 presidential candidates to pledge specific, common-sense actions to curb the financial sector’s corrupting influence on political campaigns and government regulators. They have proposed a detailed plan that requires no new legislation or rulemaking to restore the rule of law to Wall Street, end too-big-to-fail and restore the best features of the Glass-Steagall law that used to govern bank activities.

The four – William K. Black, Gary J. Aguirre, Richard Bowen and Michael Winston – have formed a new initiative called Bank Whistleblowers United. They will appear together at a news conference at 10 a.m. Thursday, February 25 hosted by the Campaign for America’s Future at its headquarters, 1825 K Street NW, Suite 400.

Bank Whistleblowers United has as its goal “to create urgent, fundamental changes to break Wall Street’s power over our economy and our democracy,” says Black, an associate professor of Economics and Law at the University of Missouri and a central player in exposing the “Keating Five” savings-and-loan scandal in 1989.

With the political power of the banking sector, and questions concerning over which candidates are likely to be beholden to that power, emerging as central issues in the 2016 presidential campaign, Bank Whistleblowers United will on Thursday unveil a pledge that it will ask each of the presidential candidates to sign. The pledge will include a vow to not accept campaign contributions from those banking institutions and executives engaged in fraudulent behavior during the runup to the 2008 financial crisis. They will also answer questions about why that pledge is important in the context of what has happened in the five years since the Dodd-Frank financial reforms were signed into law.

Gary J. Aguirre is best known as the Securities and Exchange Commission attorney who, while heading an insider trading investigation of Pequot Capital Management, formerly the world’s largest hedge fund, resisted his supervisor’s demands to give preferential treatment to a Wall Street titan involved in the case. Fired for his so-called “insubordination,” Aguirre would prove to the satisfaction of two Senate committees, a federal court and three federal agencies that the SEC had acted unlawfully. In private practice, Aguirre represents whistleblowers and victims of securities fraud and market abuse. He has law degrees from U.C. Berkeley and Georgetown Law Center (LL.M.) and a master in Fine Arts (Film) from UCLA.

William K. Black is an associate professor of economics and law at the University of Missouri – Kansas City (UMKC) and the Distinguished Scholar in Residence for Financial Regulation at the University of Minnesota Law School. He is a white-collar criminologist. He rose to national prominence as a key figure exposing the “Keating Five” savings-and-loan scandal in 1989, in which five U.S. senators were found to have been involved in negotiating favors for Charles H. Keating, Jr., chairman of the Lincoln Savings and Loan Association, in exchange for campaign contributions. His subsequent book, “The Best Way to Rob a Bank is to Own One,” is considered a classic analysis of corrupting influence of Wall Street on the federal government.

Richard Bowen is the Citigroup whistleblower who repeatedly warned Citi executive management, beginning in 2006, about potential losses related to the purchase and sale of mortgage loans. He provided testimony, along with 1,000 pages of documents, to the Securities and Exchange Commission in July 2008, three months before the bank bailouts. He also gave nationally-televised testimony before the Financial Crisis Inquiry Commission in April 2010. A “60 Minutes” story profiling Bowen, “Prosecuting Wall Street,” has been aired multiple times on CBS and CNBC. He is currently a professor of accounting at the University of Texas at Dallas and a popular speaker in the field of business ethics (www.RichardMBowen.com).

Michael Winston was a high-ranking executive at Countrywide Financial who tried to stop the fraud, corruption and deception he observed at the mortgage lender. His warnings were dismissed or ignored by management, and he was eventually fired. He subsequently took Countrywide and Bank of America to court, winning what the trial judge called an “overwhelming” jury verdict. Though the verdict was later thrown out by an appeals court, Winston’s legal fight was favorably chronicled by New York Times columnist Gretchen Morgenson in the article, “How A Whistleblower Conquered Countrywide.” Winston has served as Distinguished Adjunct Professor at Stichting deBaak (The Netherlands) for 16 years.

Is China on the right path?

China is following the right path and is making progress in its bid to rebalance the nation’s economy, according to a World Bank economist.

Franziska Ohnsorge, a lead economist at the World Bank, said Chinese officials had outlined an economic plan at the Third Plenary Session of the 18th Communist Party of China Central Committee in 2013 and were implementing the reforms to enact that plan.

“They are steadily implementing these reforms and these are exactly the reforms that China needs, but they will yield benefits over the long term,” she said.

According to the economist, despite China’s growth will be slower over the long term, “it will be much more resilient, with fewer vulnerabilities, especially in the financial sector.”

The 2013 meeting set a very ambitious agenda and it looks like much of it was reinforced in the most recent Fifth Plenary Session of the 18th CPC Central Committee, according to Ohnsorge.

“These are difficult reforms, many of them are very difficult. They(Chinese policymakers) touch on more than economics, they touch on the social sphere as well,” she noted.

Ohnsorge was speaking at a press conference in London to mark the launch of the World Bank’s 2016 Global Economic Prospects report.

During the press conference, Ohnsorge also talked about the recent volatility in Chinese stock markets.

The year of 2015 was a difficult year for the world and 2016 appeared to be challenging again, she said, adding “financial markets are clearly very sensitive to news, including out of China.”

“The (Chinese) policymakers are obviously carefully monitoring and taking steps as needed. ”

“We expect that the Chinese authorities will step in as needed, as they seem to have done so far, and the impact on the real economy seems to be limited.” said Ohnsorge.

A wider effect of stock market volatility on the Chinese economy would be less pronounced, because the links from the equity market to the real economy in China are not that strong yet, according to Ohnsorge.

The economist also commented on the structural rebalancing of the Chinese economy, away from industry-led growth towards services-led growth.

“It is clear that the rebalancing in China is clearly underway. You can really see the industrial sector is declining, industrial employment is declining, industrial share of GDP is declining and services is increasing. In that sense there is a lot of rebalancing,” she said.

She forecasted a decline in the rate of growth of the Chinese economy, but characterized it as a minor downward revision.

“As expected there is a slowdown in growth and we have revised our forecast downward for China for 2015 to 6.9 percent and 6.7 percent for 2016. Really, these are minor downward revisions; compared to the rest of the world, China is slowing and rebalancing as expected,” said Ohnsorge.

Chinese Premier Li Keqiang (front R) meets with World Bank’s President Jim Yong Kim

How to get good financial advice?  The US Department of Labor and the Securities and Exchange Commission disagree.

Staffers at the U.S. Securities and Exchange Commission and the U.S. Labor Department clashed over a controversial plan to curb potential conflicts of interest among brokers who give retirement advice, Senate panel Republicans said in a report on Wednesday.

The Labor Department, which regulates retirement plan advice, rejected numerous recommendations from the SEC and other agencies.

The Labor Department’s plan has been in play for more than five years. On Jan. 29, the White House’s Office of Management and Budget said it had received the department’s final proposed rule. The White House does not have an exact time frame for implementing the rule.

Under the plan, brokers would have to act in clients’ best interests, or as “fiduciaries,” when advising about IRAs. Brokers now must recommend investments that are “suitable,” based on factors such as investors’ ages.

Many Republicans and some Democrats oppose the plan, saying it would drive up customers’ costs and curb commissions.

Part of the Senate panel’s report focused on July 31, 2012 emails between Labor Department economist Keith Bergstresser and SEC economist Matthew Kozora. They discussed types of improper broker activity that the rule should measure: conflicts of interest or impact on investment returns.

“I hate to break it to you, but you’re wrong,” Bergstresser wrote to Kozora, according to the report. “People do not respond to fees or any other costs, but they do chase returns.”

“You keep circling back to the same statements, many or which are unsupported conjectures on your part,” Bergstresser later wrote to Kozora. “If you have nothing new to bring up, please stop emailing me about this topic,” Bergstresser wrote.

“I am also now utterly confused as to what the purpose of the proposed DOL rule is then, if not to limit advisor conflicts when providing retirement advice,” Kozora later wrote.

Djurdjja Varinec writes:  Women in Serbia are underrepresented in firm ownership and management The United States assists Serbia in implementing critical reforms necessary for the country to complete its economic and democratic transition into the EU and other international institutions. The United States Agency for International Development’s (USAID)1 programs in Serbia focuses on building prosperity and increasing democratic practices, both fundamental to Serbia’s Euro-Atlantic integration goals. Business Enabling Project (BEP) is one of the USAID’s initiatives aimed at helping the Government of Serbia (GoS) increase the competitiveness of the Serbian economy and its private sector by streamlining the business enabling environment, improving public financial management, and strengthening financial markets. The USAID Project conducts an annual survey of enterprises and entrepreneurs in Serbia to assist the government in implementing and monitoring economic reforms. The survey is distinct from all others conducted in Serbia because of the large sample size (1,008 businesses), five year time series, and the breadth of the questionnaire, all of which make it a powerful tool to inform advocacy that influences policy-making. The 2015 survey reveals that women are underrepresented in firm ownership and management. Employment of women in the surveyed firms is close to the national average of 43% of employees: the firms in the USAID BEP survey have 37% female employees in average. In companies registered as entrepreneurs, women make up 51% of employees. But men continue to dominate in firm ownership, as illustrated in Figure below. Numbers are similar for management: only 29% of managers are women, which is almost on the same level of the 27% women managers in 2014 survey.

Greek Prime Minister Alexis Tsipras is using the European Council negotiations on the UK’s draft proposals for EU reform as chance to secure a pledge from other member states that they will keep their borders open.

Using leverage provided by the negotiations, Tsipras is threatening to withdraw support for the British deal if there’s an attempt to seal off Greece over the EU migrant crisis.

Greece wants a pledge by all EU countries that they will keep their borders open for refugees until March, or may not sign any deal on Prime Minister David Cameron’s reform proposals.

“Tsipras will have a global approach towards the summit conclusions. If he is to show support for Cameron, he wants to see support when it comes to migration,” a spokesperson for the Greek government said.

However the spokesperson said this does not equate to a veto on the draft proposals.

The move comes after the EU set Greece a deadline of three months to fix its border controls last week, in a move that could allow other Schengen zone states to maintain border controls.

The Greek Prime Minister’s threat will be another thorn in the side of Cameron, who is trying to persuade eastern European countries to accept his reforms on benefit cuts for migrants.

Austria – with the help of Slovenia – has imposed a daily cap on migrants entering the country at 3,200, while it will also limit the number of asylum claims it receives daily to 80.