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Steven Mnuchin begins reforming America’s giant mortgage-guarantee firms

Thu, 09/12/2019 - 14:59

“THE LAST unfinished business of the financial crisis”: that is the rallying cry of those seeking to reform Fannie Mae and Freddie Mac, the two giant government-sponsored enterprises (GSEs) that back much of America’s mortgage industry. In 2008, amid the wreckage of the housing market, they were bailed out by the federal government to the tune of $188bn and placed in “conservatorship”, a form of government control. On September 5th Steven Mnuchin, the treasury secretary, published a long-awaited plan to reprivatise them. “We want to make sure they are not in conservatorship on a permanent basis,” he told the Senate on September 10th.

Mr Mnuchin set out two alternatives. The first, more sweeping, would need congressional approval. The second could be carried out by the Treasury and the Federal Housing Finance Agency (FHFA). Mr Mnuchin says passing reform through Congress is his preferred option. A senior Treasury official says administrative actions will start promptly, in part to lay the groundwork for legislation. But the administration will proceed whether or not Congress acts. The Trump administration is presenting America’s housing-finance industry with a “fork in the road”, says Jim Parrott of the Urban Institute, a think-tank.

The two GSEs have been central to America’s housing market for decades. Fannie was...

How rock-bottom bond yields spread from Japan to the rest of the world

Thu, 09/12/2019 - 14:59

IT WOULD BE hard to think of a business that is on the face of it quite as dull as Norinchukin Bank. A co-operative, it was founded almost a century ago to take deposits from and lend to Japanese farmers. Yet Norinchukin came blinking into the spotlight earlier this year when it emerged that it had been a voracious buyer of collateralised loan obligations (CLOs)—pools of risky business loans used to finance buy-outs by private-equity firms. At the last count, in June, Norinchukin owned $75bn-worth.

The escapades of Norinchukin offer a parable. One part of its lesson is that when interest rates are stuck near zero for a long time, as they have been in Japan, banks’ normal source of profits comes under pressure. The other part is the lengths to which they must go to boost those profits, in this case by buying exotic foreign securities with attractive yields. Norinchukin is not alone. Japanese banks and insurance companies have been big buyers of the triple-A-rated tranches of CLOs, as well as other sorts of investment-grade corporate debt.

For this, blame negative bond yields. When the Bank of Japan’s board meets on September 19th, it is not expected to reduce its main interest rate, currently -0.1%. But any increase in interest rates seems a long way off. And as long as rates are at rock-bottom in Japan, it is hard for...

The alternatives to privatisation and nationalisation

Thu, 09/12/2019 - 14:59

IT SOUNDS VAGUELY elvish, like something from the pages of Tolkien. In fact, the Charter of the Forest is one of Britain’s founding political documents, dating from the same period as Magna Carta, the “Great Charter”, as the Charter of Liberties was known to distinguish it from its sylvan partner. Whereas Magna Carta concerned the interests of a few privileged barons, the Charter of the Forest was intended to safeguard those of commoners—in particular, their time-honoured right to make a living from the bounty of the great wild commons. As an economic institution, the commons now seems as old-fashioned as constitutional documents sealed by noblemen in meadows. To many economists, the spread of private property rights was essential to the creation of the modern world. But the shortcomings of commons can be overstated. They could usefully be granted a place in public policy today.

An ecologist, Garrett Hardin, coined the phrase “the tragedy of the commons” in a (shockingly eugenicist) essay in Science in 1968. But the free-rider problem that afflicts public goods has been well-known to economists for a century. Consider a pasture on which every herdsman may graze his cattle. Each has an incentive to use it as intensively as possible: since it is open to all, restraint exercised by one herdsman simply frees up...

Were Mauricio Macri’s mainstream policies doomed from the start?

Thu, 09/12/2019 - 14:59

“WHENEVER I VISIT a country they always say…here it is different,” Rudiger Dornbusch, a legendary economist, once told his students at the Massachusetts Institute of Technology (MIT). “Well, it never is.” For most countries, his words are a warning. For Argentina, they are a comfort. The country has lurched from one economic crisis to another, culminating in the recent reimposition of currency controls and rescheduling of debts. Its voters, who also lurch from populists to liberals and back, look poised to oust Mauricio Macri’s liberal government in October in favour of a populist duo, Alberto Fernández and Cristina Fernández de Kirchner, the former president. It is therefore easy to believe that Argentina is different. Just not in a good way.

Dornbusch’s words provide the epigraph for a new paper* by Federico Sturzenegger, a former MIT student and Mr Macri’s central-bank governor from when he took office in 2015 to mid-2018. It makes a contrarian defence of Mr Macri’s fiscal gradualism and inflation targeting. These policies worked elsewhere and could have worked in Argentina, he argues, had they been faithfully followed.

Mr Macri inherited a troublesome budget deficit. To avoid the austerity associated with previous right-leaning governments, he proposed to balance the books at a politically palatable pace. The...

Hong Kong’s bourse seeks to snap up the London Stock Exchange

Wed, 09/11/2019 - 20:41

RECENT MONTHS have been eventful for bosses in Hong Kong, including Charles Li, the head of the island’s stock exchange. Last month, just days after a huge deal in his industry was announced—an agreement by the London Stock Exchange Group (LSE) to buy Refinitiv, a data provider, for $27bn—the Chinese People’s Liberation Army released a video of troops performing anti-riot drills, a scenario that Mr Li had warned Beijing against. The protests continue, but Hong Kong Exchanges and Clearing (HKEX) is keeping calm and carrying on. On September 11th it made an audacious bid to scupper the Refinitiv-LSE deal and buy the British exchange for £31.6bn ($39bn) itself.

In normal times pundits might have hailed the proposal as visionary. Hong Kong is the world’s fourth-largest financial centre. Combined with London, it could rival New York. It is well positioned to benefit from the strength of Asian emerging markets. In its proposal HKEX dangled the prospect of Britain capturing growth as China’s currency, the yuan, internationalises—for example, with more Chinese firms listing in London.

And under Mr Li HKEX has proved an adept buyer of foreign assets. Its acquisition of the London Metal Exchange in 2012 for $2.2bn has gone well. As other exchanges have done, HKEX has diversified beyond...

Kristalina Georgieva is the sole contender to be the IMF’s next boss

Tue, 09/10/2019 - 15:08

KRISTALINA GEORGIEVA has been mentioned in connection with every leadership role going at international organisations, from secretary-general of the UN to the head of the European Commission. Were the presidency of the World Bank decided on merit alone, with no consideration of nationality, Ms Georgieva, its chief executive, might have been a shoo-in. She briefly stood in as president after Jim Yong Kim resigned in January, but in April the job went to David Malpass, an American.

Now the Bulgarian seems at last to have nabbed one of the top jobs on a permanent basis. A transatlantic understanding dating back to the Bretton Woods conference in 1944 means that an American leads the World Bank while a European leads the IMF. In August Ms Georgieva became Europe’s nominee to replace Christine Lagarde at the fund’s helm. Despite noises from the British that they would put forward their own candidate, the deadline for submitting nominees passed on September 6th with Ms Georgieva the sole contender. Her official appointment by early October seems assured.

Since 2017 she has been responsible for much of the running of the World Bank, where, before a stint at the European Commission, she also spent many years as a staffer. As chief executive she is credited with smoothing over differences between Mr Kim and...

Soaring pork prices hog headlines and sow discontent in China

Tue, 09/10/2019 - 13:24

ECONOMISTS RARELY think about the average gestation period of pigs (115 days) or the length of time a sow needs to reach sexual maturity (roughly six months). But in China, a basic knowledge of hog-breeding cycles is part of the job. Pigs are so central to the Chinese diet that the ups and downs of pork prices have an outsized impact on inflation. Once again, porcine expertise is in demand: African swine fever has devastated China’s pigs, complicating its economic outlook.

New data show that pork prices leapt by 23% in August from July, the highest monthly jump on record. On an annual basis they were up by 47%. The feed-through to broader inflation has been modest so far. But pork is certain to become more costly in the coming months, pushing consumer prices up further (see chart).

In the past, when pork prices soared farmers quickly produced more pigs. That is harder now because the population of breeding sows has collapsed. The central...

Why Americans pay more for lunch than Britons do

Thu, 09/05/2019 - 14:46

THIS SUMMER Pret A Manger, purveyor of sandwiches to desk-workers in the white-collar cities of the West, added lobster rolls to its menu. In Britain they cost £5.99 ($7.31); in America $9.99. In both countries they are filled with lobster from Maine, along with cucumber, mayonnaise and more. Rent and labour cost about the same in London as in downtown New York or Boston. Neither sticker price includes sales tax. Yet a Pret lobster roll in America is a third pricier than in Britain, even though the lobster comes from nearer by.

This Pret price gap is not limited to lobster rolls. According to data gathered by The Economist on the dozen Pret sandwiches that are most similar in the two countries, the American ones cost on average 74% more (see chart). An egg sandwich in New York costs $4.99 to London’s £1.79, more than double. A tuna baguette costs two-thirds more. The price mismatch is intriguing—the more so for The Economist, which publishes the Big Mac index, a cross-country comparison of burger prices, which shows a 43% transatlantic disparity.

Menu pricing starts with a simple rule, says John Buchanan of the consulting arm of Lettuce Entertain You Enterprises, a restaurant group: take the cost of ingredients and multiply by three. Then ask yourself how much customers...

Part-time jobs help women stay in paid work

Thu, 09/05/2019 - 14:46

GETTING HOLD of a Dutch woman on a Wednesday can be tricky. For most primary schools it is a half-day, and as three-quarters of working women are part-time, it is a popular day to take off. The Dutch are world champions at part-time work and are often lauded for their healthy work-life balance and happy children. But these come at a price. Among western European countries, the Netherlands has the largest gap between men’s and women’s pension entitlements, and the largest in monthly income. Even though a similar share of Dutch women are in the labour force as elsewhere in western Europe, their contribution to GDP, at 33%, is far lower, largely because they work fewer hours.

In the rich world part-time working took off in the second half of the 20th century, as services replaced manufacturing and women piled into the labour market. It remains essential to helping women work, particularly after giving birth, and in countries with traditional gender norms. But it can prolong—or even worsen—gender inequality and make women less independent by locking them into jobs with worse pay and prospects. Differences in working hours explain a growing part of the gender pay gap. That share could increase as labour markets disproportionately reward those willing and able to work all hours—who are mostly men.

Almost one in five workers...

Why yields are the best guide to future stockmarket returns

Thu, 09/05/2019 - 14:46

IN 2011 JOHN COCHRANE, a professor at the University of Chicago’s Booth School of Business, gave a presidential address on “Discount Rates” to the American Finance Association. It was published as a paper a few months later. In a sweeping take, Mr Cochrane set out how academics’ understanding of the way asset prices are determined has shifted over the past half-century. Many papers are described as “landmark”; this one has a better claim to the label than most.

His opening line (“Asset prices should equal expected discounted cash flows”) indicated that the basic premise has not changed. But plenty has. In the 1970s the focus of academic finance was on the “expected” part of that equation—the efficiency with which markets priced in any new information relevant to future cash flows. The emphasis has shifted. The “discounted” part, or the risk preferences of investors, has become the main organising principle for research, argued Mr Cochrane.

The old-school view was that when stock prices are high relative to earnings or dividends (ie, yields are low), it implies these cash flows are expected to grow quickly in future. The new school says it is changes in risk appetite—the discount rate that investors apply to future earnings—that explains much of the variation in asset prices. If prices are high and yields are low, that...

In its dying days, Mauricio Macri’s government emulates its opponents

Thu, 09/05/2019 - 09:18

ARGENTINA WAS not invited to the Bretton Woods conference in 1944 that created the IMF, and it did not join until 1956. But it has been making its presence felt ever since. At the end of August a team from the IMF visited Buenos Aires to assess the lie of the land before deciding whether to give Argentina’s government, led by Mauricio Macri, any more of the record $57bn loan (worth over 10% of Argentina’s 2018 GDP) agreed last year. But as the team left town, the landscape shifted.

Mr Macri’s government said it would delay $7bn-worth of repayments on short-term bills held by institutional investors and seek a rescheduling of over $50bn of longer-term debt. It would also request new, extended loans from the IMF to help Argentina repay the money it already owes them. As the markets digested the news, the ground moved again. On September 1st the government imposed currency controls, preventing Argentines from buying more than $10,000 a month, forcing exporters to convert their earnings into pesos, and placing new restrictions on companies’ ability to buy foreign exchange.

“This is not a port we imagined we would reach,” said Hernán Lacunza, Mr Macri’s new finance minister. The president had, after all, cast off in precisely the opposite direction after coming to power in December 2015, seeking to remove many of the...

Martin Weitzman died on August 27th

Wed, 09/04/2019 - 18:38

MARTIN WEITZMAN, one of his colleagues observed last year, was not an economist you would expect to encounter on the 7am plane from Boston to Washington. That was not because the retired Harvard University professor, who died on August 27th, lacked influence. On the contrary, his research was cited by policymakers around the world. Nor was it because he objected to flying, although he might have done on the basis of his field, environmental economics. It was because he was a recluse who, according to many who knew him, preferred thinking in his study to being with his friends, let alone with politicians. Making intellectual advances was the most important thing.

But what he made of his time at his desk. He was of a rare breed: a theorist capable of brilliant abstract reasoning whose work was nevertheless squarely relevant to essential—and increasingly pressing—policy choices. In 1974, early in his career, he wrote a paper that became a foundation stone of every course on public economics. It posed the question: how should regulators rein in pollution? Should they issue (tradable) pollution permits to firms, thereby picking a quantity? Or should they tax polluters, thereby picking a price?

Two sides of the same coin, went existing thinking, which assumed perfect knowledge on the part of bureaucrats. But Mr Weitzman...

After three Chinese banks are bailed out, how many more are at risk?

Wed, 09/04/2019 - 16:02

WORKING AT Hengfeng Bank, an embattled Chinese lender, requires a thick skin these days. On August 30th the bank’s Communist Party committee summoned its members, including top executives, for a self-criticism session, of the sort common in the Maoist era. “No one talked about their achievements. They talked only of their shortcomings and problems. They pointed the knife blade at themselves,” the bank reported afterwards. “Blushing and sweating, they expelled their poison.”

The revival of self-criticism under Xi Jinping, China’s president, has raised alarm about the direction in which he is steering the country. Other banks have also conducted similar sessions, a testament to Mr Xi’s assertion of party control over the economy. But in the case of Hengfeng, ravaged by corruption scandals and bailed out last month by the government, the sight of its employees examining their misdeeds was, in a way, reassuring. It suggests that officials are getting a handle on one of the worst actors in the banking system, even if their techniques sometimes owe more to Lenin than to Dodd or Frank.

The question now is how many more Hengfengs there are. It was the third bank to be rescued in the space of three months. In May regulators took over Baoshang Bank in Inner Mongolia. In July Industrial and Commercial Bank of China (ICBC), a state...

A Netflix documentary provokes reflection in China

Thu, 08/29/2019 - 14:45

THE COMMENTS came in thick and fast on Douban, a social network popular with film buffs and bookworms. More appeared on Weibo, a microblogging website, where the hashtag #AmericanFactory has gained more than 16m views. The documentary of that name, by a film-making couple from Ohio, was released on August 21st on Netflix. The American firm’s streaming service is not available in China, but pirated copies of the film have proliferated. Strikingly, it has drawn praise—even as the Sino-American trade war stokes nationalist feelings within China.

That reception is partly a testament to the faultlessly balanced take of “American Factory”, shaped by 1,200 hours of rare footage. Much was shot inside a plant in Dayton, Ohio, which was taken over in 2014 by Fuyao, a Chinese glass-making giant that supplies the global car industry. In 2008 General Motors had closed its complex there, so for jobless local people Fuyao’s arrival was a miracle. Before long, however, Stakhanovite bosses clashed with a restive and outspoken factory floor. The film is a parable of modern manufacturing, showing the strengths and weaknesses of each country. For Chinese viewers, the failings of theirs hit home.

“It was hard to watch,” wrote a user on Douban. “Who does not know that Chinese efficiency is driven by depriving workers living at the bottom of...

The Pfandbrief, a fixture of German finance, turns 250

Thu, 08/29/2019 - 14:45

IN 1769 THE noble landowners of Silesia—then in Prussia, now in Poland—were short of cash. War and plummeting farm output had left their mark. On August 29th the king stepped in. Frederick the Great issued an order establishing a Landschaft, or landowners’ co-operative. That allowed the hard-up nobles to issue, in 1770, the first Pfandbrief: a tradable bond, secured on individual properties and the assets of the whole Landschaft. The first investors, write Fritz Engelhard of Barclays, a bank, and Friederike Sattler of Goethe University in Frankfurt in a book* marking the Pfandbrief’s 250th birthday, included merchants, royal houses and the churches.

The Pfandbrief, or covered bond, became a mainstay of German finance, in particular the mortgage market. Over time the landowners’ individual liability to bondholders ended. They were liable to their Landschaften, which in turn were liable to investors. In the 19th century Pfandbriefe came to be issued by specialised mortgage banks, which backed the bonds with housing loans. In the late 1800s building, banks and bonds boomed. Banks inevitably lent too freely and some investors lost money. A legal overhaul of...

Donald Trump admits to putting the world through a “rough patch”

Thu, 08/29/2019 - 14:45

“I THINK IT was necessary,” said President Donald Trump of the “rough patch” the world economy has been going through as a consequence of his shake-up of the global trade regime. His comments came on August 26th, towards the end of the G7 meeting of rich-world leaders in Biarritz, France, and a particularly bumpy series of trade announcements. There is still plenty of turbulence ahead.

The drama started on August 23rd, when the Chinese government announced its plans for retaliation in response to an earlier tranche of American tariffs. China’s average tariff on imports from America (weighted to match America’s global exports in 2017) will rise from 20.7% to 21.8% on September 1st, and to 25.9% on December 15th (see chart), by which time 69% of America’s exports to China will be affected.

Aircraft, integrated circuits and pharmaceuticals were spared, perhaps in recognition that tariffs on those would hurt China more. But previously announced tariffs on cars and...

Germany debates banning negative interest rates

Thu, 08/29/2019 - 14:45

“SAVE OUR savings, Frau Merkel!” begged Bild, a German tabloid, on August 26th. Articles blaming the European Central Bank (ECB) for keeping interest rates low, and seeking reassurances from banks that thrifty Germans will be spared Strafzinsen, or negative “penalty rates”, are proliferating. One in Die Welt in July feared that ECB stimulus would lead to the “ultimate expropriation” of the German saver.

German hostility to low interest rates is hardly surprising. The value of thrift has deep roots in the national psyche, going back to the Reformation. Households have €2.4trn ($2.6trn) stashed in bank deposits, almost as much as those in France and Italy combined. Last year they squirrelled away a tenth of their disposable income, twice the savings rate of Britons.

With markets pricing in a further cut at the ECB’s policy meeting on September 12th, the opposition in Germany is getting louder. Politicians spy a bandwagon. On August 21st Markus Söder, Bavaria’s premier, said his party would propose legislation to ban negative interest rates on retail deposits of less than €100,000. Olaf Scholz, the federal finance minister, has asked officials to look into the practicalities.

The ECB and its German...

India’s government is scrambling to revive the economy

Thu, 08/29/2019 - 14:45

FOR DECADES Kwality restaurant has served spiced chickpeas and fried flatbreads to traditionalists and tourists amid the colonnades of central Delhi. One prominent fan was Arun Jaitley, a former finance minister and foodie, who would drop in for an impromptu lunch when parliament was disrupted. It is fitting, therefore, that Kwality’s wood-panelled shelves hold bound copies of Excise Law Times, a journal about some of the country’s Byzantine taxes.

When Mr Jaitley died on August 24th after a long period of ill-health, the great and good from across India’s fierce political divides joined in praising his intellect and civility. But the economy he presided over for most of Narendra Modi’s first term as prime minister has shown no such sense of decorum. Figures due on August 30th are expected to show growth of less than 6% year-on-year for the second quarter in a row. India has not had such a poor run since early 2013 (see chart), during a period of policy paralysis that helped destroy the previous government.

...

How a Canadian firm has taken on Wall Street’s private-equity titans

Thu, 08/29/2019 - 14:45

ON THE 67TH floor of One Manhattan West, a new glass tower in the island’s drab south-west, construction managers survey the skyline. They are about to sign off on a feat of engineering. The 303-metre skyscraper is the tallest part of a $5bn office, retail and residential project covering an area the size of 100 football fields. Resting on a huge concrete slab covering active rail tracks, the weight is carried by a column sitting on the sturdiest parts. The first tenants are due to move in within weeks.

One Manhattan West is the culmination of a decades-long bet by Brookfield Asset Management. The Canadian firm bought the land in 1996 as part of its swoop on Olympia and York, a bankrupt builder. The towers are an apt metaphor for its success in alternative asset management, investing in the likes of property, infrastructure and private equity. With $388bn under management (debt included), it rivals Wall Street giants like Blackstone and Carlyle. Insiders reckon it can grow further.

Most buy-out giants were founded in recent decades by investment bankers. Brookfield, by contrast, started with São Paulo’s tramway and power lines in 1899 and spent most of its history operating infrastructure and property projects in the Americas. By 1990 it was a conglomerate of “somewhat disparate assets”, says Neil Downey of RBC Capital...

Narendra Modi’s government dips into central-bank reserves

Thu, 08/29/2019 - 14:45

MOST CENTRAL banks occupy impressive premises in expensive parts of town. Few begrudge them this perk. Nice digs seem only fitting for the guardians of the nation’s currency, giving them a reassuring air of gravitas and permanence. But is grand architecture necessary for central banks to perform their functions? Is there any economic justification for it? The honest answer is no.

What is true of central-bank architecture is also true of central-bank capital. Most such institutions have reassuring balance-sheets. Their assets, which usually comprise safe government securities, comfortably exceed their liabilities, which are chiefly the banknotes they issue and the deposits held with them by commercial banks. The assets of the Reserve Bank of India (RBI), for example, exceed its liabilities by over 9trn rupees ($125bn), of which about 2.7trn rupees is ready to hand.

This balance-sheet is a source of pride, allowing the institution to feel financially independent. Thus when Narendra Modi’s government began to argue that it was too lavishly capitalised, the RBI was displeased. And when the finance ministry concluded last year that it should give some of its excess capital to the government, which was keen to shore up public-sector commercial banks, the RBI resisted. The tussle was one reason why Urjit Patel, then its...

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