Summary of business news and analysis

FT>: The world economy has no easy way out of the mire, by Martin Wolf, Feb. 23, 2010

The Economist: Let the Greeks ruin themselves; Germany has Europe’s deepest pockets, but it does not want to pay to save troubled euro-zone economies, Feb. 18, 2010

Fixing the holes might call for intervention after intervention.

Related:

WSJ: Four Biggest Greek Banks Downgraded, Feb. 23, 2010

Greece's financial instability is spreading to its private-sector banks, the latest indication that the country's credit woes are worsening.

Fitch Ratings, citing concerns about Greek banks' funding costs and profitability, downgraded the country's four major banks to triple-B, or two notches above "junk" status. Fitch characterized its outlook for Greek banks as "negative." read more

Bloomberg: Harvard’s Rogoff Sees Sovereign Defaults, ‘Painful’ Austerity, Feb. 24, 2010

Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks.

Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. “I predict we will again.”

The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said.

Global scrutiny of sovereign debt has risen after budget shortfalls of countries including Greece swelled in the wake of the worst global financial meltdown since the 1930s. The U.S. is facing an unprecedented $1.6 trillion budget deficit in the year ending Sept. 30, the government has forecast.

“Most countries have reached a point where it would be much wiser to phase out fiscal stimulus,” said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.” read more

Richard Baldwin and Charles Wyplosz say no:

VOX: How to destroy the Eurozone: Feldstein’s euro-holiday idea, by Richard Baldwin and Charles Wyplosz, Feb. 22, 2010

Martin Feldstein suggested last week that Greece take a “holiday” from the Eurozone, rejoining with a depreciated nominal exchange rate. This column argues that the idea is not just impractical, it’s dangerous for the Eurozone. read more

BusinessWeek: Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs, Feb. 23, 2010

A bail-out procedure which definitely needs further enlightment:

"Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

These were the deals that pushed the insurer to the brink of insolvency -- and were eventually paid in full at taxpayer expense. The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released. That lack of disclosure shows how the government has obstructed a proper accounting of what went wrong in the financial crisis, author and former investment banker William Cohan says. “This secrecy is one more example of how the whole bailout has been done in such a slithering manner,” says Cohan, who wrote “House of Cards” (Doubleday, 2009), about the unraveling of Bear Stearns Cos. “There's been no accountability."

BusinessWeek: Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs, Feb. 23, 2010

A bail-out procedure which definitely needs further enlightment:

"Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

These were the deals that pushed the insurer to the brink of insolvency -- and were eventually paid in full at taxpayer expense. The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released. That lack of disclosure shows how the government has obstructed a proper accounting of what went wrong in the financial crisis, author and former investment banker William Cohan says. “This secrecy is one more example of how the whole bailout has been done in such a slithering manner,” says Cohan, who wrote “House of Cards” (Doubleday, 2009), about the unraveling of Bear Stearns Cos. “There's been no accountability."

Project Syndicate: The Greek Conundrum by George Soros

The euro is a unique and unusual construction whose viability is now being tested. Otmar Issing, one of the fathers of the common currency, correctly stated the principle on which it was founded: the euro was meant to be a monetary union, but not a political one. The participating states established a common central bank, but they explicitly refused to surrender the right to tax their citizens to a common authority. This principle was enshrined in Article 125 of the Maastricht Treaty, which has since been rigorously interpreted by the German constitutional court.

The principle, however, is patently flawed. A fully-fledged currency requires both a central bank and a treasury. The treasury need not be used to tax citizens on an everyday basis, but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a treasury can deal with problems of solvency. This is a well-known fact that should have been clear to everyone involved in the euro’s creation. Issing admits that he was among those who believed that “starting monetary union without having established a political union was putting the cart before the horse.” read here what Soros proposes as a possible solution to the EU Problem

Guardian.co.uk: BMW insures pension fund against rising life expectancy; German carmaker signs £3bn deal with Deutsche Bank and reinsurers to offset risk of pensioners living longer, Feb. 22, 2010

The German carmaker BMW insured its UK final-salary pension fund today against increases in life expectancy of more than 60,000 pensioners in a ground-breaking £3bn deal.

The company, which runs the Mini factory at Cowley near Oxford, said it had in effect offloaded the risks from rising life expectancy on to Deutsche Bank and a group of reinsurers in what pension experts said was the largest-ever insurance transaction with a pension scheme. Most of the pensioners in the BMW scheme are former UK car workers.

The move is expected to herald a series of similar transactions as occupational pension funds seek ways to tackle escalating funding deficits. read more

San Francisco Fed: Diagnosing Recessions, by Òscar Jordà

President Obama in his State of the Union Address announced a program to double U.S. exports in the next five years and by doing so create 2 million new jobs. Is this realistic? Posner and Becker have convincing arguments against:

The Becker Posner Blog: Double Exports in Five Years? Posner, Feb. 21, 2010

The Economist has an interesting article about American Unions trying to get more influence during this economic crisis. It would not be a good development for a sustainable recovery and the competitiveness for union organized firms:

The Economist: Labour pains Barack Obama will never satisfy his union backers. Nor should he try, Feb. 11, 2010

Here is an excerpt from the article:

"For the unions, public cash is a lifeline. The proportion of American workers at private firms who belong to unions tumbled from more than 30% in 1960 to 7% last year. By contrast, a hefty 40% of government workers are unionised and the rate has remained stable for decades. Under Mr Obama, the private sector has haemorrhaged jobs but the number of government workers has fallen only slightly. Last year for the first time more than half of American union members worked for the government.

Market forces place a natural check on unionisation at private firms. In the short term, collective bargaining can raise wages. But if unions demand above-market pay and impose cumbersome work rules, unionised firms will gradually lose market share to non-unionised competitors. The Nobel prize-winning economist Paul Samuelson’s quip—that unions determine “how industries in decline are accelerated towards their extinction”—is not quite right. Within an industry, firms with no unions (or less aggressive ones) tend to displace unionised ones. Capital moves to places where unions are weaker, and job-seekers follow it. Stephen Walters of Loyola University finds that American cities with above-median unionisation rates have grown poorer and less populous. Richard Vedder of Ohio University observes that, between 2000 and 2008, more than one American a minute moved from a closed-shop state to a “right-to-work” state (ie, one where you cannot be forced to join a union as a condition of employment)."

NYT: Agreement Is Near on New Banking Risk Overseer, Feb. 18, 2010

The Senate and the Obama administration are nearing agreement on forming a council of regulators, led by the Treasury secretary, to identify systemic risk to the nation’s financial system, officials said Wednesday, Sewell Chan reports in The New York Times.
read more

Related:

France and Switzerland have biggest as percentage of GDP banking exposure to EU risk countries Greece, Italy, Portugal and Spain