Category Archives: Big Banks

A Court to Manage International Corruption

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Criminals use Bitcoin to Launder Dirty Money

Laws are on the books in many countries of the world.  They are often not enforced.  Here is a proposition for an International Anti-Corruption Court

Mark L. Wolf, a Senior United States District Judge and Chair of Integrity Initiatives International (“III”), writes: Integrity Initiatives International (“III” was formed in 2016 to focus on strengthening the enforcement of criminal laws to combat “grand corruption” — the abuse of public office for private gain by a nation’s leaders, who are coming to be known as “kleptocrats.”

Grand corruption is endemic in many countries and has devastating consequences. It does not flourish because of a lack of laws. 186 nations are parties to the United Nations Convention Against Corruption (“UNCAC”). They all have criminal laws prohibiting extortion, bribery, and money laundering. They also have international obligations to enforce those laws against their nations’ leaders. However, kleptocrats enjoy impunity in their own countries because they control the administration of justice, including the courts.

In 2016, leaders from more than forty countries met in London for the Anti-Corruption Summit. They endorsed a Global Declaration Against Corruption, committing each represented nation to the proposition that “the corrupt should be pursued and punished.” The Declaration emphasized the “centrality” of the UNCAC. Implicitly recognizing that existing institutions and efforts have not been adequate, the participating governments committed themselves to “exploring innovative solutions” to combat corruption. An International Anti-Corruption Court (“IACC”) would be an invaluable innovation.

The IACC is an evolving concept. In III’s current conception, it would employ: expert investigators, such as those at the International Anti-Corruption Coordination Centre, whose head is Rupert Broad.

The IACC would have jurisdiction over corrupt leaders and those who conspire with them, including those who pay them bribes or assist in laundering their illicit assets. The IACC would, therefore, provide for the prosecution of public officials who demand or accept bribes, which is not permitted under the United States Foreign Corrupt Practices Act or its counterparts in other countries.

The IACC would not necessarily require the enactment of any new criminal statutes. It could enforce each nation’s domestic anti-corruption laws that are required by the UNCAC. Alternatively, a uniform statute adopted by members of the IACC could be enacted.

The IACC could be made part of the existing International Criminal Court (“ICC”). However, for principled and pragmatic reasons, III believes a separate court would be preferable.

Like the ICC, the IACC would operate on the principle of complementarity. This means that only leaders of countries that are unwilling or unable to prosecute them for corruption would be subject to prosecution in the IACC.

The principle of complementarity would give countries an incentive to strengthen their national institutions and efforts to combat corruption, which will remain of primary importance. For example, the threat of prosecution in the ICC prompted all parties to support strengthening the sanctions in the agreement to end Colombia’s lengthy civil war.

An IACC would not be too costly. The IACC would impose fines that could be used to pay for its operations, as fines partially fund the United States courts.

Sentences of kleptocrats would also include orders of restitution to the countries they robbed. Therefore, prosecution could be a much more efficient and effective means of recovering assets than civil suits, which often last for decades and are frequently inconclusive.

An IACC is urgently needed. As the then United States High Commissioner for Human Rights said in 2013: “Corruption kills …. The money stolen through corruption every year is enough to feed the world’s hungry 80 times over.” The current refugee crises are largely caused by migrants fleeing corrupt failed states. Climate change is exacerbated by kleptocrats who profit from illegal destruction of forests. It is foreseeable that much of the money the international community is contributing to combat climate change in developing countries will be lost to corruption if the impunity of their leaders is not ended.

Finally, the IACC is achievable. The IACC has the support of: countries including Colombia and Peru, and the strong interest of others such as Nigeria and Malaysia, as we have heard at this conference; NGOs, including Global Witness, Human Rights Watch, and many chapters of Transparency International; and courageous young people, such as the leaders of the 2014 Ukrainian Revolution of Dignity.

The proposal to create the IACC will be addressed and adopted by the United Nations at its 2021 Special Session on Corruption.

Returning to an Appropriate Industrial Banking System

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Michael Hudson writes about the meaning of banks and what they are meant to be.  iThe inherently symbiotic relationship between banks and governments recently has been reversed. In medieval times, wealthy bankers lent to kings and princes as their major customers. But now it is the banks that are needy, relying on governments for funding – capped by the post-2008 bailouts to save them from going bankrupt from their bad private-sector loans and gambles.

Yet the banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. The process has gone furthest in the United States. Joseph Stiglitz characterizes the Obama administration’s vast transfer of money and pubic debt to the banks as a “privatizing of gains and the socializing of losses. It is a ‘partnership’ in which one partner robs the other.” Prof. Bill Black describes banks as becoming criminogenic and innovating”control fraud“.

High finance has corrupted regulatory agencies, falsified account-keeping by “mark to model” trickery, and financed the campaigns of its supporters to disable public oversight. The effect is to leave banks in control of how the economy’s allocates its credit and resources.

If there is any silver lining to today’s debt crisis, it is that the present situation and trends cannot continue. So this is not only an opportunity to restructure banking; we have little choice. The urgent issue is who will control the economy: governments,or the financial sector and monopolies with which it has made an alliance.

Fortunately, it is not necessary to re-invent the wheel. Already a century ago the outlines of a productive industrial banking system were well understood. But recent bank lobbying has been remarkably successful in distracting attention away from classical analyses of how to shape the financial and tax system to best promote economic growth – by public checks on bank privileges.   The model for ending casino banks

 Tentacles of the Big Banks

 

Bank Liquidity Crucial?

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Taking the risk out of banking: Liquidity requirements versus equity requirements

Richmond Federal Reserve writes:  The financial crisis of 2007 – 08 revealed the dangers of banks’ underinvestment in liquid assets or overreliance on high-risk funding sources. At some level, however, liquidity risk is part of a core function performed by banks: maturity transformation. In traditional banking, this means accepting deposits and making loans.

This leads to “maturity mismatch” between banks’ liabilities and assets – many of a bank’s liabilities are short-term and payable on demand to depositors and other creditors, while many of its assets are long-term and illiquid. A bank without enough liquid assets to meet a sudden increase in demand on its liability side may be forced to sell assets quickly at reduced prices or suspend operations. And since some banks act as sources of funding for other banks or financial firms, strain at one institution could cause broader disruptions to the financial system.

While large nonbank financial institutions rely on funding sources other than deposits, the maturity mismatch principle is still the same. Shortterm funding sources, such as commercial paper and repurchase agreement (repos), are rolled over very frequently – sometimes even daily. But if creditors suspect weakness on the part of the bank or the securities underlying a repo, they may choose not to roll over the debt in favor of extending that credit to another institution. This sudden loss of funding could create a scenario similar to a classic bank run.  Report

Bank Liquidity

The Economics of Responsible Global Citizenship

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Raghuram Rajan writes:  As 2015 ended, the world boasted few areas of robust growth. At a time when both developed and emerging-market countries need rapid growth to maintain domestic stability, this is a dangerous situation.

So how does one offset weak demand? In theory, low interest rates should boost investment and create jobs. In practice, if the debt overhang means continuing weak consumer demand, the real return on new investment may collapse.

Another tempting way to stimulate demand is to increase government infrastructure spending. In developed countries, however, most of the obvious investments have already been made. And while everyone can see the need to repair or replace existing infrastructure (bridges in the United States are a good example), badly allocated spending would heighten public anxiety about the prospect of tax hikes, possibly increase household savings, and reduce corporate investment.

Structural reasons for slow growth suggest the need for structural reforms: measures that would increase growth potential by spurring greater competition, participation, and innovation. But structural reforms run up against vested interests. As Jean-Claude Juncker, then Luxembourg’s prime minister, said at the height of the euro crisis, “We all know what to do; we just don’t know how to get re-elected after we’ve done it!”

If growth is so hard to achieve in developed countries, why not settle for lower growth? After all, per capita income already is high.

One reason to press on is to fulfill past commitments. In the 1960s, industrial economies made enormous promises of social security to the wider public.   Technological change and globalization mean fewer good middle-class jobs for a certain level of growth, more growth is needed to keep inequality from widening.

Finally, there is the fear of deflation, the canonical example being Japan, where policymakers supposedly allowed a vicious cycle of falling prices, depressed demand, and stagnant growth to take hold.

In fact, this conventional wisdom may be mistaken. After Japan’s asset bubble burst in the early 1990s, the authorities prolonged the slowdown by not cleaning up the banking system or restructuring over-indebted corporations. But once Japan took decisive action in the late 1990s and early 2000s, per capita growth was comparable to that in other industrial countries. Moreover, the unemployment rate averaged 4.5% from 2000 to 2014, compared with 6.4% in the US and 9.4% in the eurozone.

If debt is excessive, a targeted restructuring is better than inflating it away across the board.

The specter of deflation haunts governments and central bankers. Hence the dilemma in industrial economies: how to reconcile the political imperative for growth with the reality that stimulus measures have proved ineffective, debt write-offs are politically unacceptable, and structural reforms frontload too much pain for governments to adopt them easily.

Developed countries have just one other channel for growth: boosting exports by depreciating the exchange rate through aggressive monetary policy. Ideally, emerging-market countries, funded by the developed economies, would absorb these exports while investing for their future, thereby bolstering global aggregate demand. But these countries’ lesson from the emerging-market crises of the 1990s was that reliance on foreign capital to fund the imports needed for investment is dangerous. I

By 2005, Ben Bernanke, then a governor at the Federal Reserve, coined the term “global savings glut” to describe the external surpluses, especially in emerging markets, that were finding their way into the US. Bernanke pointed to their adverse consequences, notably the misallocation of resources that led to the US housing bubble.

In other words, before the 2008 global financial crisis, emerging and developed countries were locked in a dangerous symbiosis of capital flows and demand that reversed the equally dangerous pattern set before the emerging-market crises of the late 1990s.

In an ideal world, the political imperative for growth would not outstrip an economy’s potential. In the real world, where social-security commitments, over-indebtedness, and poverty will not disappear, we need ways to achieve sustainable growth.

The bottom line is that multilateral institutions like the International Monetary Fund should exercise their responsibility for maintaining the stability of the global system by analyzing and passing careful judgment on each unconventional monetary policy (including sustained exchange-rate intervention). The current non-system is pushing the world toward competitive monetary easing, to no one’s ultimate benefit. Developing a consensus for free trade and responsible global citizenship – and thus resisting parochial pressures – would set the stage for the sustainable growth the world desperately needs.

Hands Holding Up Globe

Sovereign Debt: Nothing New Under the Sun

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Carmen Reinhart writes:  When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt. indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution.

Like so many other features of the global economy, debt accumulation and default tends to occur in cycles.

The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors.

Such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts.

Global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises. Peaks and troughs in the international capital-flow cycle are especially dangerous.

For some sovereigns, the main problem stems from internal debt dynamics.

Greece’s situation is all too familiar.  Greece defaulted on its obligations to the IMF. That makes Greece the first – and, so far, the only – advanced economy ever to do so.

But, as is so often the case, what happened was not a complete default so much as a step toward a new deal. Greece’s European partners eventually agreed to provide additional financial support, in exchange for a pledge from Greek Prime Minister Alexis Tsipras’s government to implement difficult structural reforms and deep budget cuts. Unfortunately, it seems that these measures did not so much resolve the Greek debt crisis as delay it.

Another economy in serious danger is the Commonwealth of Puerto Rico, which urgently needs a comprehensive restructuring of its $73 billion in sovereign debt. Recent agreements to restructure some debt are just the beginning; in fact, they are not even adequate to rule out an outright default.

Some of the biggest risks lie in the emerging economies, which are suffering primarily from a sea change in the global economic environment. During China’s infrastructure boom, it was importing huge volumes of commodities, pushing up their prices and, in turn, growth in the world’s commodity exporters, including large emerging economies like Brazil. Add to that increased lending from China and huge capital inflows propelled by low US interest rates, and the emerging economies were thriving. The global economic crisis of 2008-2009 disrupted, but did not derail, this rapid growth, and emerging economies enjoyed an unusually crisis-free decade until early 2013.

But the US Federal Reserve’s move to increase interest rates, together with slowing growth (and, in turn, investment) in China and collapsing oil and commodity prices, has brought the capital inflow bonanza to a halt.

From a historical perspective, the emerging economies seem to be headed toward a major crisis. Of course, they may prove more resilient than their predecessors. But we shouldn’t count on it.

Sovereign Debt

Economics’ Books of the Year

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Noah Smith’s Economics Books of the Year:  Anyone’s list of best books of the year is going to be incomplete and biased. Mine, for example, is weighted toward books about economic theory and the financial industry. That means that 2015 is the perfect year for me to list my recommendations, since this was a particularly epic time for books about the discipline of economics. In no particular order, here is a short list of good ones:

“The Courage to Act: A Memoir of a Crisis and Its Aftermath” by Ben S. Bernanke.  The story of the housing crash, the Lehman shock and the global financial crisis is by now common knowledge. What’s less known is how modern economic theory guided the thinking of the elites charged with halting the crisis. “Courage to Act” tells this story.

Ben Bernanke was the right man in the right place at the right time. He was by training an expert on the Great Depression who just happened to be chairman of the Federal Reserve during the onset of a new and similar crash. He was one of the only mainstream economic theorists who had thought deeply about the connections between finance and the macroeconomy. No person was more suited to the job than Bernanke. Very few would have had the “Courage to Act” as he did.

Bernanke is too modest to say this. It is only by reading his memoir that one gets a clear sense of his thoughtfulness, intellectual humility and powerful intelligence. This stands in strong contrast to the confused, ad-hoc decision-making apparatus of the Treasury Department, regulators, the large financial institutions and Congress. “Courage to Act” is a reminder of why an independent Fed, staffed with our most thoughtful and humble macroeconomists, is an important institution.

“Economics Rules: The Rights and Wrongs of the Dismal Science” by Dani Rodrik.  As mainstream economists go, Dani Rodrik is a reformer. He is one of the only top scholars in the field to have questioned the hallowed pro-free-trade consensus, and to have explored the taboo idea of government industrial policy that targets industries and infrastructure to promote growth. So Rodrik is in a unique position to write a book about the economics  profession and its discontents.

The central tenet of Rodrik’s book is that economic models are basically just fables. For any phenomenon — for example, the housing market — there are many alternative models. Each one represents a different way of thinking about this market — a different simple, imaginary world that hopefully sheds light on one thing that could be affecting housing. Economics, Rodrik asserts, is a craft, not a science — the key to being a good economist isn’t to find the right model, but to wisely pick from among the menu of available alternative models in each situation.

This vision of what economists do is familiar to anyone who has worked in the profession, but will be startling and — I predict — a little off-putting to outsiders who are used to getting more concrete results from science. In my opinion, it underrates the importance of the empirical revolution taking place in economics, which promises to help us choose between economic models not based on plausibility, but on evidence. “Economics Rules” is a must-read for critics and defenders of econ alike.

“Misbehaving: The Making of Behavioral Economics” by Richard Thaler.  Richard Thaler is another rebel economist. In the 1970s and 1980s, the profession began discarding its long-cherished assumptions of perfectly rational consumers and producers, and toying with ideas from psychology. Thaler was one of the people at the forefront of this effort, and in “Misbehaving,” he narrates the history of the behavioral mini-revolution.

This story is engaging because it shows how scientific fields change direction. If you’ve ever read the philosopher of science Thomas Kuhn, you’re familiar with the idea that anomalies accumulate and slowly poke holes in the dominant theory until a crisis is reached. Thaler’s memoir recounts the process of anomalies piling up. It is fundamentally a story about how the economics discipline collectively realized that it was wrong about some things. It isn’t the story of how a new paradigm arose to replace the old one — in fact, that hasn’t happened yet. Eventually, we will get a more complete understanding of how economic agents make decisions, but these things take time.

“Chicagonomics: The Evolution of Chicago Free Market Economics” by Lanny Ebenstein

The so-called Chicago School of economics was the last great political-economic school of thought to emerge in the U.S. It blended libertarian political ideas with simple mathematical modeling, all organized around one central principle — that markets work. Many influential ideas and schools have emerged since the Chicago School, but all of them have been either limited in scope or have avoided mixing political ideology with assessment of the facts. Chicago was grandiose, sweeping and uncompromising. It attracted some of the nation’s brightest minds, and had a huge and lasting impact on our economic policies. In “Chicagonomics,” Lanny Ebenstein, a historian of economics, tells the tale of how this intellectual movement came together and found its destiny.

“Superforecasting: The Art and Science of Prediction” by Philip E. Tetlock and Dan Gardner.  The books in the list so far have been all about theory — about how economists and policy makers hunt around in the dark for something that seems to make sense. But it’s nice to know that sometimes, social scientists can actually predict the future. Phil Tetlock and Dan Gardner have written an excellent book about the times that forecasting has worked. Drawing on lessons gleaned from observing individuals who have been remarkably successful at predicting political and economic events, Tetlock and Gardner offer their scholarly insight into how forecasting should best be done.

Books

 

Whistleblowers Worldwide

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Forty-two percent of corporate fraud is detected by tips.  Insiders know better than anyone what is going on at Volkswagen, for instance.  Since the 2007-8 financial crisis, whistleblowing is on the increase.  How it is treated by the governments of countries varies enormously worldwide.

Some countries like Canada have weak laws protecting whistleblowers. Turkey has strong ones.  Yet whistleblowers have more protection in Canada.  The laws do not always indicate the degree to which it’s safe to suggest corruption.

After a whistleblower in Britain revealed corruption at HBOS, he suffered severe emotional consequences.  As a result, British regulatory authorities have insisted that companies they oversee have provisions for employees to safely report transgressions directly to the regulators and that companies have a post for a “whistleblower’s champion.”

Germany and Switzerland are particularly tough on whistleblowers.  Germany is now covered by the best practice guidelines from the Council of Europe, a group of 47 countries in Western and Eastern Europe.

The US, with strong protections, has a very uneven record.  The strength of the banking lobby in the US makes whistleblowing risky if you want to keep your job.

Whistleblowers

 

Banks’ Performance in Emerging Countries

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More than a third of the world’s largest banks have their headquarters in emerging markets.

Emerging market banks have little trouble funding themselves.  Many emerging countries, especially i Asia, have high savings rates.  This leaves lenders with more deposits than loans.

Unlike their Western counterparts, emerging-country banks o not have risky investment banking arms.  Yet profits can be wiped out by bad loans, which are increasingly being extended by “extend and pretend”, which gives companies which have little prospect of re-paying a loan years of forebearance.

Chinese banks report non-performing loans at 1.6% of assets, but share prices in these banks suggest that the market thinks dud loans represent closer to 8% of assets   How quickly these banks admit their failings will determine their future health.

Non-Performing Loans.

 

Incremental Interest Rate Hikes?

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Steve Matthews writes:  Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank’s commitment to a “gradual” tightening suggests interest rates could be raised at every other meeting of the policy-setting Federal Open Market Committee, though the actual pace will depend on incoming economic data.

The Fed said it expected the pace of future tightening to be gradual. Lockhart voted in favor of the statement that announced the quarter percentage point increase in the target range for its benchmark federal funds rate to 0.25 percent to 0.5 percent.

Policy makers separately forecast an appropriate rate of 1.375 percent for the rate at the end of 2016, implying four quarter-point increases in the target range next year, based on the median projection from 17 officials.

The ”important point” is the pace will depend on “how the economy performs,” Lockhart said. “It will be gradually, but data dependent.”

‘Solid’ Economy

The rate hike reflects a ”solid” outlook for the economy, with inflation likely to move toward the Fed’s 2 percent goal after the temporary drags from lower oil prices and a stronger dollar end, Lockhart said.

Last week’s move ended a seven-year era of ultra-easy Fed monetary policy after officials reduced rates to nearly zero in December 2008 to help the economy recover from the worst recession since the Great Depression.

Manufacturing could benefit as global conditions improve, he said, adding that growth in China has stabilized and Europe seems to be picking up.
US Fed Interest Rate Hikes?