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Finance and economics
Updated: 28 min 46 sec ago

Investors in America’s housing-finance giants lose in court

Thu, 02/23/2017 - 15:44

ONE unresolved issue from the financial crisis is the future of Fannie Mae and Freddie Mac, the two firms that stand behind much of America’s housing market. Fannie and Freddie purchase mortgages, bundle them into securities and sell them on to investors with a guarantee. When America’s housing market collapsed a decade ago, the government had to bail them out. Its treatment of the firms since then has created a titanic legal struggle. Shareholders have cried foul. On February 21st, a federal appeals court upheld a ruling in the government’s favour.

At issue is the Obama administration’s decision in 2012 to hoover up all of Fannie and Freddie’s profits. Until then, it had received a fixed dividend on its investment. The timing of the shift was striking—just before a surge in the firms’ profitability. Since 2008 the Treasury has sucked in about $250bn from the firms, 30% more than the cost of the bail-out.

The change enraged hedge funds who had bought Fannie and Freddie’s shares and found themselves expropriated. The investors’ lawsuit held that the government overstepped its authority by seizing all profits. A...

Europe’s securitisation market remains stunted

Thu, 02/23/2017 - 15:44

SECURITISATION, the bundling and repackaging of income streams as tradable securities, goes in and out of fashion. America is still dealing with the fallout from the disaster in one part of the market—sub-prime mortgages—in 2008-09 (see article). In Europe, the swings in popularity have been just as marked. During the crisis, European securitised assets were hit by only small losses but the market suffered from guilt by association. It has since enjoyed a limited renaissance.

Leading the revival, oddly, are European regulators. They have sought not just to rehabilitate, but indeed actively to promote such “structured” finance. As early as 2013 the European Central Bank (ECB) was effusive not only about securitisation’s ability to spread risks, but also about its ability to channel funding to the economy, including small and medium-sized enterprises (SMEs). The ECB and the Bank of England even published a rare joint paper in 2014 making the case for a “better-functioning...

The sanctity of trade statistics

Thu, 02/23/2017 - 15:44

MIGHT Donald Trump’s promise to shake up America’s trade policy extend to its statistics? According to a report in the Wall Street Journal, discussions are afoot on changing the way trade figures are tallied. The Bureau of Economic Analysis, the country’s main statistical body, calls this “completely inaccurate”. But in trade as elsewhere, the new administration seems prone to using statistics as a drunk uses a lamppost—for support rather than illumination.

The proposal reportedly involves stripping out some of America’s exports from the gross numbers. America sold $1.5trn of goods abroad in 2016, but of that $0.2trn were re-exports that left the country much as they had arrived. This type of trade has been growing, reflecting America’s role as a hub for North American trade. As a share of its combined exports to Mexico and Canada, re-exports rose from 12% to 20% between 2002 and 2016. Truckers and shippers benefit from this kind of trade. But critics see it as “padding”, obscuring gloomier trends in “made in America” exports.

Stripping out re-exports makes no sense when thinking about the...

Why national budgets need to take gender into account

Thu, 02/23/2017 - 15:44

A good investment

LIKE many rich-country governments, Britain’s prides itself on pursuing policies that promote sexual equality. However, it fails to live up to its word, argues the Women’s Budget Group, a feminist think-tank that has been scrutinising Britain’s economic policy since 1989. A report in 2016 from the House of Commons Library, an impartial research service, suggests that in 2010-15 women bore the cost of 85% of savings to the Treasury worth £23bn ($29bn) from austerity measures, specifically cuts in welfare benefits and in direct taxes. Because women earn less, rely more on benefits, and are much more likely than men to be single parents, the cuts affected them disproportionately.

The government does not set out to discriminate, says Diane Elson, the budget group’s former chair. Rather, it overlooks its own bias because it does not take the trouble to assess how policies affect women. Government budgets are supposed to be “gender-neutral”; in fact they are gender-ignorant. Ms Elson is one of the originators of a technique called “gender budgeting”—in which governments analyse fiscal policy in terms of its...

Why taxing robots is not a good idea

Thu, 02/23/2017 - 15:44

BILL GATES is an unlikely Luddite, however much Microsoft may have provoked people to take a hammer to their computers. Yet in a recent interview with Quartz, an online publication, he expressed scepticism about society’s ability to manage rapid automation. To forestall a social crisis, he mused, governments should consider a tax on robots; if automation slows as a result, so much the better. It is an intriguing if impracticable idea, which reveals a lot about the challenge of automation.

In some distant future robots with their own consciousnesses, nest-eggs and accountants might pay income taxes like the rest of us (presumably with as much enthusiasm). That is not what Mr Gates has in mind. He argues that today’s robots should be taxed—either their installation, or the profits firms enjoy by saving on the costs of the human labour displaced. The money generated could be used to retrain workers, and perhaps to finance an expansion of health care and education, which provide lots of hard-to-automate jobs in teaching or caring for the old and sick.

A robot is a capital investment, like a blast furnace or a...

In fintech, China shows the way

Thu, 02/23/2017 - 15:44

CHINESE banks are not far removed from the age of the abacus. In the 1980s they used these ancient counting boards for much of their business. In the 1990s many bank employees had to pass a basic abacus test. Today the occasional click-clack, click-clack can still be heard in villages as tellers slide their abacus beads up and down the rack.

But these days the abacus is mainly a symbol, more likely to be used in the branding of China’s online-finance companies than as a calculating tool. At least three internet lenders have paid homage to it in their names: Abacus Loans, Small Abacus and Modern Abacus. The prominence, so recently, of the abacus is testament to how backward Chinese banking was a short time ago. The rise of the online lenders shows how quickly change has come.

By just about any measure of size, China is the world’s leader in fintech (short for “financial technology”, and referring here to internet-based banking and investment). It is far and away the biggest market for digital payments, accounting for nearly half of the global total. It is dominant in online lending, occupying three-quarters of the global market. A...

Asia’s exports rebound

Thu, 02/16/2017 - 15:44

IT IS easy to be downcast about the state of global trade. It has faced stiff headwinds in recent years: in 2016, for the first time in 15 years, it grew more slowly than the world economy. Regional and global trade deals are going nowhere, slowly. And America’s new president has promised to protect his country from trade-inflicted “carnage”.

Amid all this gloom, optimism seems foolhardy. But in Asia’s export dynamos, trade is picking up steam. In January, Chinese exports rose year-on-year for the first time in ten months; South Korean shipments have increased for three months in a row. Surveys reveal strong export pipelines in Japan, Singapore and Taiwan. Healthy order books for Asia’s manufacturers normally bode well for global trade and indeed the global economy. It is too soon to declare a definitive upturn in global trade, but it looks like more than a blip (see chart).

The simplest explanation for the rebound is that global demand is itself on solid ground. Global growth is still slower than before the financial crisis of 2008, but is heading in the right direction. Both the IMF and the World Bank think it will...

A bullish case for copper

Thu, 02/16/2017 - 15:44

DURING the commodity “supercycle”, prices largely marched up and down in unison, fuelled by the strength (or weakness) of demand in China. Since last year commodities have again been on a tear, but for more idiosyncratic reasons. In the case of copper, strikes and supply disruptions in two of the world’s largest mines have helped push prices this week to their highest level in 20 months. This fits into a narrative of longer-term potential supply shortages that has investors licking their lips over prospects for the red metal.

A strike that began on February 9th at Escondida in Chile, the world’s largest copper mine, has been compounded by a dispute between operators of Grasberg, another huge copper mine, located in the Indonesian province of Papua, and the government. That led to a halt in copper-concentrate production there, too, on February 10th. The two account for 9% of mined copper supply.

Robert...

Carbon tariffs and the EU’s steel industry

Thu, 02/16/2017 - 15:44

Fuel for a dirty war

THE European Union wants to slash greenhouse-gas emissions to 80% below 1990 levels by 2050. It is on course to cut just half that amount. To get back on track, on February 15th, the European Parliament voted for a plan to raise the cost for firms to produce carbon. It has prompted growing calls for the bloc to tax the carbon emissions embodied in the EU’s imports. At best, such a levy will barely curb emissions. At worst, it could cause a trade war.

The EU’s latest reforms try to put up the price of carbon by cutting the emissions allowances firms are granted. They include the EU’s first border tax on carbon, levied on cement imports. Steel firms, also heavy users of carbon, say their exclusion from this scheme is unfair. This week Lakshmi Mittal, the CEO of ArcelorMittal, the world’s biggest steelmaker, offered his support for the tax. Similar proposals in America are also gaining support. This month a group including two Republican former treasury secretaries, James Baker and George Shultz, proposed a similar carbon tax on all imports at the border.

Boosters say such proposals remove...

A new paper finds China more unequal than France but less so than America

Thu, 02/16/2017 - 15:44

JUST as China’s GDP has converged towards America’s, levels of inequality have also been catching up. That is one of the conclusions of research* from five authors, including Thomas Piketty, a French economist famous for his work on wealth and inequality. Their new paper compares the evolution of inequality in China, America and France over four decades.

Inequality has soared since China opened the door to private enterprise and growth took off. In 1978 the highest-earning tenth in China received just over a quarter of overall income before tax, significantly below the proportion in America and France at the time. By 2015, however, those top 10% of Chinese earners were paid two-fifths of total income—above the share in France, but still just below that in America (47%). Wealth, too, is concentrated in fewer hands: the richest 10% own nearly 70% of private wealth in China, up from 40% in 1995 (and not far below the American level of nearly 80%).

Rises at the top mean that the share of pre-tax income going to the poorest half of the Chinese population has shrunk dramatically and is now, at 15%, not much higher than...

Sovereign-bond issuers shrug off downgrades

Thu, 02/16/2017 - 15:44

ONCE upon a time, countries jealously guarded their credit ratings. Before the 2010 British election, George Osborne, soon to be the chancellor of the exchequer, emphasised the importance of cutting the budget deficit in order to maintain the country’s top AAA rating.

But despite the spending cuts and the tax increases he imposed, Britain was downgraded in 2013. There are only 11 countries with AAA status, according to Fitch, a rating agency, down from 16 in 2009. By value, only 40% of global sovereign debt has the highest rating, down from 48% a decade ago.

There has been an even more dramatic downward trend in corporate debt ratings. There were 99 AAA-rated American corporations in 1992, according to S&P Global, another ratings group; now there are just two. That trend is linked to the tax deductibility of interest: in terms of tax efficiency, it has made sense to increase the amount of debt, and reduce the equity, on the balance-sheet.

Clearly, at the sovereign level, the deterioration has been driven by the global financial crisis, which dented both economic growth and tax revenue. But with bond...

Sovereign-bond issuers shrug off downgrades

Thu, 02/16/2017 - 15:44

ONCE upon a time, countries jealously guarded their credit ratings. Before the 2010 British election, George Osborne, soon to be the chancellor of the exchequer, emphasised the importance of cutting the budget deficit in order to maintain the country’s top AAA rating.

But despite the spending cuts and the tax increases he imposed, Britain was downgraded in 2013. There are only 11 countries with AAA status, according to Fitch, a rating agency, down from 16 in 2009. By value, only 40% of global sovereign debt has the highest rating, down from 48% a decade ago.

There has been an even more dramatic downward trend in corporate debt ratings. There were 99 AAA-rated American corporations in 1992, according to S&P Global, another ratings group; now there are just two. That trend is linked to the tax deductibility of interest: in terms of tax efficiency, it has made sense to increase the amount of debt, and reduce the equity, on the balance-sheet.

Clearly, at the sovereign level, the deterioration has been driven by the global financial crisis, which dented both economic growth and tax revenue. But with bond...

European financial centres after Brexit

Thu, 02/16/2017 - 15:44

“WHEN the vote took place,” says Valérie Pécresse, “it was an opportunity for us to promote Île de France”, the region around Paris of which she is the elected head. Two advertising campaigns were prepared, depending on the result of Britain’s referendum last June on leaving the European Union. The unused copy ran: “You made one good decision. Make another. Choose Paris region.”

Brexit has made Paris bolder. Once Britain leaves Europe’s single market, the many international banks and other firms that have made London their EU home will lose the “passports” that allow them to serve clients in the other 27 states. Possibly, mutual recognition by Britain and the EU of each other’s regulatory regimes will persist. But no one can rely on the transition to Brexit being smooth, rather than a feared “cliff edge”. Best to assume the worst.

Britain is expected to start the two-year process of withdrawal next month. Given the time needed to get approval from regulators, find offices and move (or hire) staff, financial firms have long been weighing their options. London will remain Europe’s leading centre, but other cities are keen to take what...

The European Union’s delicate political economy

Thu, 02/16/2017 - 15:44

GREECE’S marathon crisis is at least instructive. Past flare-ups have illustrated a textbook’s worth of economic principles. The latest episode—a dispute over the sustainability of Greece’s mammoth debt—provides a lesson in political economy. The beleaguered economy itself is not at the centre of the disagreement; rather it is the European Commission and the IMF and others that are at loggerheads, squabbling over projections of Greek growth. This sort of institutional wrangling is not incidental to the process of European integration; it has historically been a crucial ingredient, helping defang the continent’s tricky interstate relations. But as Greece’s latest turn in the spotlight demonstrates, the role of Europe’s institutions has changed during the euro-area crisis. Paradoxically, they themselves have become part of the existential threat facing the European project.

Like European identity itself, the role of “institutions” can seem vague, amorphous and of overstated importance. Yet institution-building has been one of the most consequential aspects of European integration. Economists view institutions as the solutions to social problems beyond...

Spain’s banking clean-up

Thu, 02/16/2017 - 15:44

ALMOST five years have passed since the near-collapse of Bankia, one of Spain’s biggest lenders, forced the country into a European banking bail-out. But inquiries into what went wrong continue—and widen. This week, for the first time, the investigations embroiled Spain’s financial regulators, including a former governor of the central bank, the Bank of Spain, Miguel Angel Fernández Ordóñez.

On February 13th the national court indicted Mr Fernández Ordóñez and seven other senior regulators, ordering a criminal investigation but without specifying any charges. The court is questioning why they allowed Bankia to sell shares in an initial public offering in 2011, less than a year before Bankia’s portfolio of bad mortgage loans forced the government to seize control of it. It said there was evidence the regulators had “full and thorough knowledge” of Bankia’s plight. After its nationalisation, it went on to report a €19.2bn ($24.7bn) loss for 2012, the largest in Spanish corporate history.

The investigation comes as several bankers are already awaiting sentencing for mismanagement and fraud. Most prominent is the...

A settlement ends Hank Greenberg’s epic lawsuit

Thu, 02/16/2017 - 15:44

A SETTLEMENT to be signed in front of a New York judge as The Economist went to press on February 16th marked the end of years of attritional legal warfare. It was less clear who had won: the state of New York or Maurice (Hank) Greenberg, the now 91-year-old former chief executive of AIG, once the world’s largest insurer, but saved by a government bail-out in 2008.

Eric Schneiderman, New York’s attorney-general, had seemed in little doubt when he issued a surprise statement on February 10th. Hank Greenberg had admitted “to initiating, participating and approving two fraudulent transactions…that fundamentally misrepresented AIG’s finances.” He had agreed to pay a $9m fine.

Mr Greenberg, however, saw things differently. Within hours of Mr Schneiderman’s statement, his attorney, David Boies, issued a response, accusing the state of being false and misleading and noting that Mr Greenberg’s own carefully negotiated statement had no “reference to any accounting being fraudulent” or suggested that Mr Greenberg was aware of any fraud.

By February 13th Mr Greenberg was on the offensive. In a press...

How to measure North Korea’s economy

Thu, 02/09/2017 - 15:40

An area of darkness

FACTS about the North Korean economy are not so much alternative as non-existent. The country has never published a statistical yearbook. If it did, no one would believe it. Nicholas Eberstadt of the American Enterprise Institute, a think-tank, calls analysis of its economy “essentially pre-quantitative”.

The most-cited estimate of the size of the economy comes from South Korea’s central bank. Its methodology is opaque but is based, at least in part, on the South Korean intelligence agency’s estimates of the North’s physical output, which is then translated to South Korean prices. But it is hard to estimate market valuations for goods that are not traded on the market, and physical goods make up only a fraction of overall economic output. Another technique is to “mirror” statistics from the country’s trading partners. But most North Korean trade is with China, where statistics are unreliable.

The advent of satellite imaging has helped, providing researchers with better estimates of manufacturing output, coal production and urbanisation. Yet another strategy is to work out national...

Donald Trump and the dollar standard

Thu, 02/09/2017 - 15:40

TRUMPISM is in part an expression of American exhaustion at bearing burdens it first took up 70 years ago. Donald Trump has moaned less about the dollar than about shirking NATO allies or cheating trade partners. Yet the dollar standard is one of the most vulnerable pillars of global stability. And the world is far from ready for America to ditch its global financial role.

Unlike other aspects of American hegemony, the dollar has grown more important as the world has globalised, not less. In the Bretton Woods system devised for the post-war world, Western economies fixed their exchange rates to the dollar, which was in turn pegged to the price of gold. After the fracturing of this system under the inflationary pressures of the 1970s, the dollar became more central than ever. As economies opened their capital markets in the 1980s and 1990s, global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves (see chart). Global reserves have grown from under $1trn in the 1980s to more than $10trn today....

Big data, financial services and privacy

Thu, 02/09/2017 - 15:40

DONALD TRUMP’s health-insurance premiums could soon go up, and not just because of his love of burritos. Data-crunchers have found a link between the negativity of someone’s tweets and his risk of dying of heart disease. The education levels of your Facebook friends or the activity on your phone can help reveal how likely you are to repay a loan. Money-managers are rummaging ever more curiously through customers’ digital lives.

This is all part of an “intensifying data arms-race in finance”, says Magda Ramada Sarasola from Willis Towers Watson, a consultancy, which claims that no industry used more big data last year. Banks and insurers used to rely only on what customers and credit agencies told them, but today websites and mobile-banking apps let them get much more close and personal. Less conventional sources are also popular. Social-media profiles, web-browsing, loyalty cards and phone-location trackers can all help. In a trial, FICO, America’s main credit-scorer, found that the words someone uses in his Facebook status could help predict his creditworthiness (tip: avoid “wasted”). Even facial expressions and tone of voice are being studied for...

Remaking American financial regulation

Thu, 02/09/2017 - 15:40

AT FIRST blush, there is little to be excited about. The eighth executive order of Donald Trump’s infant presidency, signed on February 3rd, lists seven “core principles” for regulating America’s financial system. These include the prevention of bail-outs by taxpayers; advancing the American interest in international negotiations; and tidying the unruly thatch of federal regulation. The treasury secretary and regulators must report by early June on how well existing laws fit the bill. “There is little in the actual executive order that the Obama administration would have disagreed with,” says Doug Elliott of Oliver Wyman, a consulting firm.

And yet. Although the edict does not mention the Dodd-Frank act of 2010, which redefined financial regulation after the crisis of 2008, it is chiefly aimed at that law. (Another presidential memorandum paves the way to aborting a rule tightening financial advisers’ obligations to Americans saving for retirement.) Many banks, especially smaller ones, loathe the 848-page act and its reams of ensuing rules. According to Davis Polk, a law firm, 111 of its 390 “rule-making requirements” have not yet even been...

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