Raghuram Rajan. Governor of the Reserve Bank of India, writes: Our world is facing an increasingly dangerous situation. Both advanced and emerging economies need to grow in order to ease domestic political tensions. And yet few are. If governments respond by enacting policies that divert growth from other countries, this “beggar my neighbor” tactic will simply foster instability elsewhere. What we need, therefore, are new rules of the game.

Why is it proving to be so hard to restore pre-Great Recession growth rates? The boom preceding the global financial crisis of 2008 left advanced economies with an overhang of growth-inhibiting debt.  Structural factors like population aging and low productivity growth – which were previously masked by debt-fueled demand – may be hampering the recovery.

Politicians know that structural reforms – to increase competition, foster innovation, and drive institutional change – are the way to tackle structural impediments to growth. But they know that, while the pain from reform is immediate, gains are typically delayed and their beneficiaries uncertain.

Central bankers face a different problem: inflation that is flirting with the lower bound of their mandate. With interest rates already very low, advanced economies’ central bankers know that they must go beyond ordinary monetary policy – or lose credibility on inflation. They feel that they cannot claim to be out of tools. If all else fails, a ‘helicopter drop, where  the central bank prints money and sprays it on the streets to create inflation.

Monetary policy works by influencing public expectations. If an ever more aggressive policy convinces the public that calamity is around the corner, households may save rather than spend. Conversely, if people were convinced that policies would never change, they might splurge again on assets and take on excessive debt, helping the central bank achieve its objectives in the short run. But policy inevitably changes, and the shifts in asset prices would create enormous dislocation.

Beyond the domestic impacts, all monetary policies have external “spillover” effects. If a country reduces domestic interest rates to boost domestic consumption and investment, its exchange rate depreciates, too, helping exports.

Central banks in developed countries find all sorts of ways to justify their policies, without acknowledging the unmentionable – that the exchange rate may be the primary channel of transmission.

If a policy has positive effects on both home and foreign countries, it would definitely be green. A policy could also be green if it jump-starts the home economy with only temporary negative spillovers for the foreign economy (the policy will still be good for the foreign economy by eventually boosting the home economy’s demand for imports).

An example of a red policy would be when unconventional monetary policies do little to boost a country’s domestic demand – but lead to large capital outflows that provoke asset-price bubbles in emerging markets.

There will be plenty of gray areas (or orange, to stick to the analogy). A policy that has large positive effects for a big economy might have small negative effects for the rest of the world and yet still be positive overall for global welfare. Such a policy would be permissible for some time, but not on a sustained basis.

Can we reach a new international agreement along the lines of Bretton Woods, and some reinterpretation of the mandates of internationally influential central banks.

The international community has a choice. We can pretend all is well with the global monetary non-system and hope that nothing goes spectacularly wrong. Or we can start building a system fit for the integrated world of the twenty-first century.

Costs of health care in the US  are higher than they are in most countries of the world.  And the US does not deliver better care.

In the current election cycle, Mrs. Hillary Clinton has received more money from Big Pharma than any other candidate.  This does not bode well for health care costs if she achieves the Presidency.  People don’t contribute to campaign coffers with no expectations. While the US Supreme Court is trying to limit corruption’s definition to quid pro quo, Zephyr Teachout, a law professor, has shown in her profound book published by the Harvard University Press, that corruption should be conceived more broadly as the breach of the trust between citizen and elected official.

Writing in the Wall Street Journal, jeanne Whalen says that the drug industry has unusual clout in the US.  She reports: The state-run health systems in Norway and many other developed countries drive hard bargains with drug companies: setting price caps, demanding proof of new drugs’ value in comparison to existing ones and sometimes refusing to cover medicines they doubt are worth the cost.

The government systems also are the only large drug buyers in most Scandanavian countries, giving them substantial negotiating power. The U.S. market, by contrast, is highly fragmented, with bill payers ranging from employers to insurance companies to federal and state governments.

Medicare, the largest single U.S. payer for prescription drugs, is by law unable to negotiate pricing. For Medicare Part B, companies report the average price at which they sell medicines to doctors’ offices or to distributors that sell to doctors. By law, Medicare adds 6% to these prices before reimbursing the doctors. Beneficiaries are responsible for 20% of the cost.

The arrangement means Medicare is essentially forfeiting its buying power, leaving bargaining to doctors’ offices that have little negotiating heft, said Sean Sullivan, dean of the School of Pharmacy at the University of Washington.

Asked to comment on the higher prices Medicare pays compared with foreign countries, the Centers for Medicare & Medicaid Services said: “The payment rate for Medicare Part B drugs is specified in statute.”  Medicare Part B, for example, typically covers drugs and services deemed “reasonable and necessary.”

Big Pharma argues that higher U.S. prices also help drug makers afford hefty marketing budgets that in the U.S. include consumer advertising—something Europe doesn’t allow. Pharmaceutical and biotechnology companies in the S&P 1500 earn an average net profit margin of 16%, compared with an average of about 7% for all companies in the index, according to S&P Capital IQ.

No question that the US is currently a captive of Big Pharma.

Stephen Ganden writes: The Federal Reserve decided to keep rates where they were for another month, and indicated that it was only likely to raise rates twice in the next year and four times in 2017.

The Fed has a history of tricking it self into believing the economy is stronger than it really is.

The problem is it’s hard to see why the Fed is so confident, not only that the economy will continue to improve, and to do so enough to whether more rate increases, especially when the first rate increase went pretty terribly.

Despite the falling unemployment rate, there has been little sign of wage increases. Although she said anecdotally there seems to be signs of a pick up in wages. Yellen also sidestepped a question about why consumers haven’t increased spending more given the steep drop in gas prices.

Does this signal that consumers are still worried about the economy? Yellen said it was really hard to say why consumers were doing what they were doing.

Also, it’s been 81 months since the end of the last recession, meaning the current economic expansion is due for a downturn. Perhaps, that’s why default rates on a wide rate of debt from auto loans to high-yield corporate debt is rising faster than it has in years.

Add the risks ahead, which are sure to raise volatility in the market and the economy, including the possibility of England’s “Brexit” from the euro, as well as a contentious election here and it’s hard to see how the Fed will be able to meet its interest rate goals.

The biggest problem though is overseas.  Sales of big international companies. will decease because the dollar is likely to strengthen, causing sales of U.S. multinationals to fall further.

Fed and interest rate hawks will counter that exports only make up a small portion of the overall economy, which is generally still driven by U.S. consumers — and that the Fed would be better off raising rates now so it has room to lower rates later.

The international economy means a lot to the largest stocks in the country, and the stocks that make up the S&P 500; more than it used to.

That’s key because even more than jobs or wages or inflation, perception has the power to drive the economy. As the economy continues to improve, exit polls from the primaries say that the economy remains most voters’ top concern. As long as that remains the case, the Fed’s determination to raise rates is going to remain out of whack with reality.

After all the shouting, are we any closer to knowing whether free trade agreements are good or bad for the country – and for your wallet?

The attempts to provide answers to those questions have been thrust into the spotlight by President Barack Obama’s futile last-minute efforts to salvage his power to freely negotiate what would be the world’s largest free trade pact, the Trans-Pacific Partnership.

In the eyes of those within his own party, including the House minority leader, Nancy Pelosi, free trade agreements have been disastrous for ordinary Americans, hurting their wages, eroding the health of entire manufacturing sectors and putting the United States at a disadvantage against countries that engage in underhand trade practices. Their success last week managed to strip Obama of fast-track negotiating authority, pushing him into an unusual partnership with congressional Republicans in an effort to find a way to rescue the package of legislation by restructuring it. If you thought the political battle over Obamacare was high drama, just wait until Obamatrade really gets going.

Negotiating a free trade agreement is always going to involve a leap of faith – a leap of faith in the future. There are simply far too many variables involved, and too many “unknown unknowns”.

Consider the US-South Korea free trade agreement, completed in 2010 and in effect from 2012. Far from helping US exports to South Korea to climb, they have fallen as imports from South Korea have risen, causing the trade deficit to widen.

The problem with those who try to draw conclusions about free trade agreements in general from this example, however, is twofold. Firstly, it covers the experience of only about two years: an absurdly short time frame. Secondly, economic growth rates in South Korea peaked in 2010, the year the free trade pact was negotiated and all those rosy forecasts about US exports were drawn up. Right now, however, the economic picture looks bleak, and it’s probably fair to say that few expected that would happen.

The picture gets even more muddled if you try to look at the grandaddy of all free trade agreements, the North American Free Trade Agreement, or Nafta. Signed by Canada, the US and Mexico in 1992, Nafta was a model for many of the large trade agreements that followed, including TPP; it also was one of the first free trade pacts between economies with varying standards of living, labor standards and other business and environmental rules.

Critics argue that by 2010, a total of 682,900 jobs had been lost to Mexico, on a net basis. Of these, 415,000 were manufacturing jobs, many of which paid healthy living wages. Meanwhile, a small trade surplus with Mexico had become a deficit by 2000.

Had those jobs not gone to Mexico, would they have stayed in the United States? Not necessarily, suggested Mauro Guillén, a management professor at the Wharton School of Business; they might well have ended up in China. Meanwhile, some of the products made in Mexico are still being designed in the United States, he has noted.

In 1995, the year after Nafta took effect, Mexico had its own financial crisis, causing the value of the peso to nosedive and triggering a recession. As is the case with South Korea today, events that had nothing to do with the free trade agreement itself ended up causing a big drop in Mexican imports from the United States. The timing, however, made it appear as if the trade deficit was tied to free trade – but correlation isn’t causation. More recently, US demand for crude oil produced by Mexico, and the high prices for crude, sent that trade deficit higher again. Once again, that imbalance had nothing to do with free trade and everything to do with a supply/demand imbalance for crude oil within the United States.

American incomes have continued to stagnate in the period since Nafta kicked off the negotiation of free trade agreements. Again, however, correlation isn’t causation. The biggest culprits may include technology that has made it easier for workers in low-wage countries like China to do jobs that were once done here in the United States – or the policies of companies with respect to how they treat their work force. Apple already can choose to make its products in China, Vietnam or the United States. Their choice is clear. David Autor, an economist at MIT, argues that it is the spike in global trade, not free trade agreements, that has led to this result; he calculates that imports from China (not party to any free trade agreement with the United States) are responsible for 21% of the plunge in American manufacturing.

None of this means that the TPP is certain to be a great idea – or a bad one. Folks like the president and David Autor may argue all they like in favor of the pact, suggesting that it will give us an edge against China and, by protecting our intellectual property, help us expand our exports of computer services. Critics can charge that it will be a disaster, costing millions of jobs, accelerating climate change and doing untold damage to everything from our access to healthcare to worker’s rights.

It’s a roll of the dice.

Challenges of security in financial instituions

Bangladesh’s central bank governor resigned over the theft of $81 million from the bank’s U.S. account, as details emerged in the Philippines that $30 million of the money was delivered in cash to a casino junket operator in Manila.

The rest of the money hackers stole from the Bangladesh Bank’s account at the New York Federal Reserve, one of the largest cyber heists in history, went to two casinos.

They said a mix of dollars and Philippine pesos was sent by a foreign exchange broker to the ethnic Chinese junket operator over several days, a haul that would have been made up of at least 780,000 banknotes.

Bangladesh Bank officials have said there is little hope of apprehending the perpetrators and recovering the money would be difficult and could take months.

Under the former development economics professor, the country’s foreign exchange reserves have increased four-fold to $28 billion and he also sought to ensure farmers and women entrepreneurs had better access to banking services and credit.

Rahman defended his record at the central bank, saying he was proud of his achievements there.

He described the heist as an “earthquake” and said the bank had promptly informed intelligence agencies in Bangladesh and abroad and also brought in international experts to investigate.

CCTV cameras at the branch were not functioning when the money was withdrawn.

Salud Bautista said that her firm was instructed by the bank branch to transfer the funds to a man named Weikang Xu and two casinos.

She said that $30 million went to Xu in cash. Guingona has said Xu was ethnic Chinese and a foreigner, but he was not sure if he was a Chinese national.

A tranche of $29 million ended up in an account of Solaire, a casino resort owned and operated by Bloomberry Resorts Corp. Bloomberry is controlled by Enrique Razon, the Philippines’ fifth-richest man in 2015, according to Forbes.

Silverio Benny Tan, corporate secretary of Bloomberry Resorts, told the hearing that the $29 million was transferred into a casino account under Xu’s name in exchange for ‘dead chips’ that can only be cashed in from winnings.

Casinos are not covered by the country’s anti-money laundering laws so it was not clear if the stolen funds could ever be recovered.

“The paper trail ends there. That is the problem,” he said. “Right now we are at a dead end.”

Conclusion of the US Financial Crisis Inquiry:  We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding. The large investment banks and bank holding companies focused their activities increasingly on risky trading activities that produced hefty profits. They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun. Many of these institutions grew aggressively through poorly executed acquisition and integration strategies that made effective management more challenging.

Too big to fail meant too big to manage. Financial institutions and credit rating agencies embraced mathematical models as reliable predictors of risks, replacing judgment in too many instances. Too often, risk management became risk justification. Compensation systems—designed in an environment of cheap money, intense competition, and light regulation—too often rewarded the quick deal, the short-term gain—without proper consideration of long-term consequences. Often, those systems encouraged the big bet—where the payoff on the upside could be huge and the downside limited. This was the case up and down the line—from the corporate boardroom to the mortgage broker on the street.

Our examination revealed stunning instances of governance breakdowns and irresponsibility. Five major investment banks—Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley—were operating with extraordinarily thin capital.

Too many of them were thinking alike. And the leverage was often hidden—in derivatives positions, in off-balance-sheet entities, and through “window dressing” of financial reports available to the investing public. The kings of leverage were Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs)..

Recently we permitted the growth of a shadow banking system—opaque and laden with shortterm debt—that rivaled the size of the traditional banking system. Key components of the market—for example, the multitrillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives—were hidden from view, without the protections we had constructed to prevent financial meltdowns.  When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans, and the risky assets all came home to roost. What resulted was panic. We had reaped what we had sown.

German savings banks warn ECB on monetary ‘activism’

Hortense Goulard writes: Two days ahead of a key meeting of the European Central Bank, the chief economists of the German Savings Banks Association warned Tuesday that more expansionary monetary policy from the ECB “would barely have a positive impact on the economy” but could create problems in the long run.

“With hasty monetary policy, the ECB mainly achieves a crisis atmosphere and fosters a lack of trust in the eurozone,” economists from the association (Deutscher Sparkassen und Giroverband) stated in a press release. Most analysts expect Mario Draghi and the ECB board to take the Bank’s interest rates deeper into negative territory on Thursday.

Further lowering of key interest rates would harm financial stability, because of new risks and “huge side effects for the banks and the financial markets,” said Gertrud Traud, chief economist at the Landesbank Hessen-Thüringen.

The ECB instead should drop its goal of achieving an inflation rate close to 2 percent, according to the association’s economists.

“In a time of marked economic weakness as today, this goal is difficult to reach anyway,” said Michael Wolgast, chief economist of the DSGV, adding that the credibility of the central bank could be damaged if it kept missing its inflation goal in spite of its monetary measures.

Contrary to the ECB, the DSGV chief economists see little danger of deflation in the eurozone. They believe the inflation rates “should be near the goal of 2 percent in 2018 at the latest” without any additional monetary measures.