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Author Archives: Andi Howe
India Flexing Economic Muscles
Steven Hansen thinks the Indian economy looks strong. The election of Narendra Modi as Prime Minister in May 2014 has been what many believe a water shed election sweeping in a majority government for the first time since 1984. Narrow cast and religion voting patterns were set aside and the electorate opted to vote for promise of clean and effective governance. Modi is known for achieving results in his past elected positions – but not known as a great master planner.
The appointment of Indian-American economist Arvind Panagariya to the key post in economic planning for India. Panagariya is a heavyweight on the stage of international economists.
Modi administration’s performance since May 2014 has been mixed one. Politically reigning in what is called the “Saffron Family” has been tough who have at times worked at odds with Modi administration. Economically the country has stabilized. Inflation is down and India’s manufacturing PMI rose to 54.5 in December, 2014, while in the corresponding period a year ago it stood at 50.7, just above the crucial 50 mark which separates growth from contraction. Many in industry blame the super Hawkish Raghuram Rajan for throttling industrial growth. Modi has put together a heavy weight team which believes free market economy tempered by social spending to create inclusive growth for the third of the world’s most extremely poor who live in India.
From May 2014 when Modi got elected , the Super Hawk Raghuram Rajan has been running circles round Modi’s administration by keeping tight leash on money. Many believe that the Central Bank single handedly has almost frozen industry by crying wolf on inflation, completely ignoring the generally deflationary trend worldwide. In an ironic twist he has been now circled by the heavyweight Pangariya and his crack team who may have better handle on what needs to be done for the Indian Economy. Hopefully we should see the Indian Economy being unfrozen.
Here are the positives:
- Reform in Indian banking sector
- Government will not find larger fiscal deficit to quicken the infrastructure spending
- A Hawkish Central Bank led by Raghuram Rajan will have to “bow” to equally heavy weights led by Panariya who are not hawkis
- Taxation Reforms which will be friendly to both domestic and international business
- Manufacturing sector should get a boost
Downside scenarios are sabotaging Modi’s administration good work by The Saffron (Hindu zealots) and the continuous tension on Indo-Pakistan border. We do not make much about the Indo-China rivalry and have on the contrary argued that both will work together.
Bio-Fueling Up in the US
America is the largest biofuels producer in the world — accounting for 48 percent of global output. To remain the global industry leader, the US Energy Department is investing in projects that address critical barriers to continued growth. This includes a key focus on improving feedstock logistics — the processes we use to collect grasses, plants and other organic material prior to converting them into clean, renewable fuel.
Collecting feedstock to convert into biofuels — from harvesting and packaging, to loading and transporting — can be complex and costly. To better streamline the process, the Energy Department has given contracts to five companies aimed at overhauling the feedstock logistics process. Among the grant recipients selected to improve processes to sustainably grow and harvest feedstock was Ohio-based FDC Enterprises.
For its project, FDC enlisted a number of industry partners to design, build and test innovative harvesting equipment that integrates many different components of the feedstock collection process into one system. To test the new system, FDC harvested large acre crops of homegrown feedstocks — including switchgrass, prairie grass and corn stover. After significant testing, FDC’s innovative approach enabled a faster, more streamlined solution to the feedstock logistics process — all while cutting operating costs. This new equipment will reduce the cost of harvesting and delivering large square bales of homegrown feedstocks by more than $13 per delivered ton.
FDC’s efforts — along with their collaborating partners — support the Energy Department’s sustained commitment to making biofuels an affordable, reliable, domestic alternative to fossil fuels.
To learn more about biomass feedstocks and how a domestic biofuels industry can help create jobs in rural America, generate clean, renewable fuels and reduce our dependence on imported oil, watch the Energy Department’s
Further Sadness in Paris
Inadvertent Money Laundering in Iraq?
Amina al-Dahabi writes: A prominent economic official in the Iraqi government said that out of the 33 private Iraqi banks operating in the country, 29 were under investigation on charges of corruption and money laundering.
The economic adviser to the prime minister, Mazhar Mohammad Saleh,considers this phenomenon to be a major loss in the private financial sector, on which the recovery of Iraq’s economy was based. Saleh said the high number of banks under investigation was due to the government’s absence in private financial administration, and to the weakness of cash credit, pushing banks to look for profit-making operations that are often nonfinancial. He said the audit policy of the Central Bank changed after 2003 from compliance auditing to preventive auditing.
Saleh said the lack of credit ratings in banks led to the decrease of trust in the credit-worthiness of private banks. A third party, a specialized international company, usually conducts such operations, which would later be adopted by the Central Bank.
Former staff members of banks who were trained in both Rafidain and Rasheed banks and who were still working in the private banking sector until recently were laid off from private banks. The new CEOs that took over started meeting the demands of major shareholders leading illegal operations. Inexperiened CEOS contributed to the charges.
The Banking Act issued by the Central Bank in March 2004 prevents private banks from entering or participating in investment operations and even owning more property than they need.
Banks used capital from unknown sources and thus laundered money that was not subject to taxes. Funds from abroad and others from local unknown sources began entering private banks. The owners of that money even dominated certain departments in banks and controlled the auction sales of US dollars practiced by the Central Bank, while they exploited that money for personal benefits.
Banks also falsified the documents of the money’s destination, in cooperation with influential figures inside and outside Iraq.
Finding out about financial corruption and illegal trading comes too late, as the banks’ audits are received by the Central Bank a month after the initial operations are conducted, and starts auditing these previous operations for another month. This means that two months will have passed since the start of the audit operations and by then, the funds will have probably reached their final destination, which could be anywhere in the world.
To solve this major issue, Souri urges the Central Bank to adopt a comprehensive, technological banking system, which guarantees real-time control of funds and simultaneous access to information, in both the public and private banking sector.
Nobelist Stiglitz Blocked from SEC
Dave Michaels reports: The Nobel laureate economist Joseph Stiglitz who called for a tax on high-frequency trading, has been blocked from a government panel that will advise regulators on issues facing U.S. equity markets.
Democratic Commissioner Luis Aguilar had pushed for Stiglitz, who has said high-frequency trading isn’t good for financial markets and should be curbed, possibly through a tax.
“I think they may not have felt comfortable with somebody who was not in one way or another owned by the industry,” Stiglitz said in a phone interview.
White said Jan. 3 that she will announce the members of the advisory market-structure committee in the coming days — six months after she first proposed the idea together with a blueprint for renewed market oversight. Each of the five commissioners — two Democrats, two Republicans and White, an independent — was allowed to nominate one person to the panel. The commission then had to come to agreement on the final list, which is expected to have more than 15 members.
Stiglitz, 71, wasn’t the only nominee that sparked wrangling. Earlier in the process, SEC Commissioner Michael Piwowar, a Republican, opposed the involvement of TIAA-CREF Chief Executive Officer Roger Ferguson. Ferguson, whose firm manages hundreds of billions of dollars in retirement savings, is a former Federal Reserve vice chairman. He is married to former SEC Commissioner Annette Nazareth, who now advises some of Wall Street’s biggest banks on regulatory issues.
The panel is expected to include representatives of Wall Street brokerage firms and academic researchers. IEX Corp. Chief Executive Officer Brad Katsuyama and former Senator Ted Kaufman of Delaware are expected to be named to the panel, two people with knowledge of the matter said.
Katsuyama started the IEX trading platform with the aim of leveling the playing field for investors by curbing the pace of buying and selling — eliminating opportunities for the fastest firms to trade in front of slower ones. He has said the government should consider forcing greater transparency of trading venues’ operations.
High-frequency trading, which uses computer algorithms to buy and sell large numbers of shares in fractions of a second, accounts for more than 50 percent of U.S. trading volume.
The dust-up over Stiglitz is emblematic of the frequent conflict among commissioners that has slowed progress on regulatory policy and enforcement matters under White. A recent case against Bank of America Corp. was stalled for three months as commissioners, divided along political lines, fought over additional penalties that could have expelled the bank from the profitable business of raising money for private companies.
A former chief economist of the World Bank Stiglitz argued in an April speech that high-frequency trading can make markets less efficient while driving other investors to cloak their orders by placing them away from exchanges using dark pools, leading to less transparency.
US Budget Under Magnifying Glass of Macroeconomics?
The US House of Representatives on Tuesday adopted a controversial rule to require macroeconomic scoring on major legislation in the new Congress, which opponents say will politicize impartial budget analyses.
The provision, part of the rules package that the House considers at the start of every new Congress, passed largely along party lines by a vote of 234-172. Rep. Mick Mulvaney (R-S.C.) voted “present.” So-called “dynamic scoring” typically offers a more favorable view of cutting taxes, which is part of why Republicans support the method.
GOP lawmakers argued that emphasizing macroeconomic scoring, which factors in economy-wide impacts like the rates of inflation and employment, simply provided a more comprehensive assessment of a bill’s impact on the federal budget.
“It doesn’t game the system at all. All we’re trying to do is make certain that members of Congress have more information upon which to be able to make decisions,” said incoming House Budget Committee Chairman Tom Price (R-Ga.)
But Democrats suggested that the scoring method would exaggerate the impact of tax cuts and politicize the nonpartisan Congressional Budget Office.
“Republicans today are extending their embrace of voodoo economics by wrapping their arms around voodoo scorekeeping. Again, it’s not about more information, but it’s able to cook the books to implement their long-held discredited notion that tax cuts pay for themselves,” said Rep. Sandy Levin (D-Mich.), the top Democrat on the tax-writing House Ways and Means Committee.
Price dismissed Democrats’ claims that the macroeconomic analyses would be too speculative.
“This is craziness,” Price said. “All economic projections, all, static, dynamic, all of them, have a level of uncertainty.”
Democrats also objected to a provision in the rules package that doesn’t allow the chamber’s six non-voting delegates to cast floor votes in certain circumstances. Delegates have been allowed to cast votes on amendments when the House is in a state known as the Committee of the Whole under Democratic majorities.
Goldman Hints JPMorgan Chase Breakup
JP Morgan Chase’s parts are probably worth more to investors than the whole after regulators proposed tougher rules penalizing firms for size and complexity, according to Goldman Sachs Group Inc.
JPMorgan could unlock value by splitting its four main businesses or dividing into consumer and institutional companies, Goldman Sachs analysts led by Richard Ramsden wrote today in a research note. Units of New York-based JPMorgan trade at a discount of 20 percent or more to stand-alone peers, they wrote.
“Our analysis suggests that a breakup into two or four parts could unlock value in most scenarios, although the range of outcomes we assessed is wide, at 5 percent to 25 percent potential upside,” the analysts wrote.
The move would reverse much of Chief Executive Officer Jamie Dimon’s work since taking over JPMorgan in 2006. Under Dimon, 58, the firm grew to become the largest U.S. lender by assets and the world’s biggest investment bank after acquiring ailing firms during the 2008 financial crisis.
Dimon has said the firm’s size creates opportunities to cross-sell products and better serve clients.
“Each of our four major businesses operates at good economies of scale and gets significant additional advantages from the other businesses,” Dimon wrote in a letter to shareholders last year. “This is one of the key reasons we have maintained good financial performance.”
The logic of a breakup would rely on the consumer business, commercial bank, investment bank and asset management unit being valued closer to so-called pure-play financial companies, the Goldman Sachs analysts wrote. The parts probably could operate with lower capital levels as stand-alone firms, resulting in higher returns on equity, they wrote.
The maneuver would risk some of the $6 billion profit JPMorgan says it makes tied to synergies between businesses, though a split into halves would preserve much of those benefits, the analysts wrote.
The Federal Reserve laid out a plan last month that may require JPMorgan to add more than $20 billion to its capital by 2019. The rules could get even stricter, prompting banks to consider new business models, the Goldman Sachs analysts wrote.
Draghi Calls for Deeper Political Union in EU
Mario Draghi writes: There is a common misconception that the euro area is a monetary union without a political union. But this reflects a deep misunderstanding of what monetary union means. Monetary union is possible only because of the substantial integration already achieved among European Union countries – and sharing a single currency deepens that integration.
If European monetary union has proved more resilient than many thought, it is only because those who doubted it misjudged this political dimension. They underestimated the ties among its members, how much they had collectively invested, and their willingness to come together to solve common problems when it mattered most.
Yet it is also clear that our monetary union is still incomplete. This was the diagnosis offered two years ago by the so-called “Four Presidents” (the European council president in close collaboration with the presidents of the European Commission, the European Central Bank, and the Eurogroup). And, though important progress has been made in some areas, unfinished business remains in others.
But what does it mean to “complete” a monetary union? Most important, it means having conditions in place that make countries more stable and prosperous than they would be if they were not members. They have to be better off inside than they would be outside.
In other political unions, cohesion is maintained through a strong common identity, but often also through permanent fiscal transfers between richer and poorer regions that even out incomes ex post. In the euro area, such one-way transfers between countries are not foreseen (transfers do exist as part of the EU’s cohesion policy, but are limited in size and are primarily designed to support the “catching-up” process in lower income countries or regions). This means that we need a different approach to ensure that each country is permanently better off inside the euro area.
This implies two main things. First, we have to create the conditions for all countries to thrive independently. All members need to be able to exploit comparative advantages within the Single Market, attract capital, and generate jobs. And they need to have enough flexibility to respond quickly to short-term shocks. This comes down to structural reforms that spur competition, reduce unnecessary red tape, and make labor markets more adaptable.
Until now, whether or not to carry out such reforms has largely been a national prerogative. But in a union such as ours they are a clear common interest. Euro area countries depend on one another for growth. And, more fundamentally, if a lack of structural reforms leads to permanent divergence within the monetary union, this raises the specter of exit – from which all members ultimately suffer.
In the euro area, stability and prosperity anywhere depend on countries thriving everywhere. So there is a strong case for sharing more sovereignty in this area – for building a genuine economic union. This means more than beefing up existing procedures. It means governing together: shifting from coordination to common decision-making, and from rules to institutions.
The second implication of the absence of fiscal transfers is that countries need to invest more in other mechanisms to share the cost of shocks. Even with more flexible economies, internal adjustment will always be slower than it would be if countries had their own exchange rate. Risk-sharing is thus essential to prevent recessions from leaving permanent scars and reinforcing economic divergence.
A key part of the solution is to improve private risk-sharing by deepening financial integration. Indeed, the less public risk-sharing we want, the more private risk-sharing we need. A banking union for the euro area should be catalytic in encouraging deeper integration of the banking sector. But risk-sharing is also about deepening capital markets, especially for equity, which is why we also need to advance quickly with a capital markets union.
Still, we have to acknowledge the vital role of fiscal policies in a monetary union. A single monetary policy focused on price stability in the euro area cannot react to shocks that affect only one country or region. So, to avoid prolonged local slumps, it is critical that national fiscal policies can perform their stabilization role.
To allow national fiscal stabilizers to work, governments must be able to borrow at an affordable cost in times of economic stress. A strong fiscal framework is indispensable to achieve this, and protects countries from contagion. But the crisis experience suggests that, in times of extreme market tensions, even a sound initial fiscal position may not offer absolute protection from spillovers.
This is a further reason why we need economic union: markets would be less likely to react negatively to temporarily higher deficits if they were more confident in future growth prospects. By committing governments to structural reforms, economic union provides the credibility that countries can indeed grow out of debt.
Ultimately, economic convergence among countries cannot be only an entry criterion for monetary union, or a condition that is met some of the time. It has to be a condition that is fulfilled all of the time. And for this reason, to complete monetary union we will ultimately have to deepen our political union further: to lay down its rights and obligations in a renewed institutional order.
Goldman Sachs Teams with US Government?
Stan Gilani writes: The truth about crony capitalism, at the highest level, is being laid bare.
The public is finally getting a look inside the black box where the titans of Wall Street and their inside-jobbers in Congress and at the highest levels of the U.S. government make decisions. Star International is suing the US for ripping off American International Group, AIG and its shareholders. Starr is an insurance company controlled by Maurice “Hank” Greenberg, the former CEO of AIG, not long ago the largest insurance company in the world.
Apparently, this closely watched 37-day trial that was supposed to have ended in November is far from over. Greenberg’s lawyers just got more than 30,000 new documents they were denied before. What was covered up when the U.S. government and the Federal Reserve Bank of New York bailed out AIG (as the Fed and the government called it) washow Goldman Sachs inserted one of its directors, Edward Liddy, into the top position at AIG when the government saved it from itself.
Only no one knew how deep the Goldman connection went. No one knew how Liddy, the former CEO of Alllstate Corp. helped push through the bailout with the AIG board – without giving shareholders a chance to vote on it.
The problem for the New York Fed, the U.S. government, and Goldman Sachs was that Greenberg’s stock position was enough to kill the bailout if he had a chance to vote his shares.
He never got the chance…
It wasn’t enough that Goldman’s former CEO was Hank Paulson, the then-Secretary of the U.S. Treasury, and that Goldman got bailed out itself when the Fed and the U.S. government gave it a windfall of profits right out of AIG’s pocketbook for some credit-default swaps that weren’t even worth anywhere near what the government paid Goldman for them. That was theft, plain and simple.
it’s not theft if it’s government-sanctioned. So, we’re finding out now how deep the rabbit hole is in this trial.
