1 ECB chief sees economic weakness continuing (Graeme Wearden in The Guardian) ECB president Mario Draghi began his appearance at the European Parliament by warning that the economic conditions in Europe are tricky and will remain so for some time. Draghi also echoed Herman Van Rompuy’s support for the deal on eurozone banking supervision agreed last week, saying it will help rebuild confidence in the European banking sector.
“It will revive interbank lending and cross-border credit flows, with tangible effects for the real economy.” In other words, other banks will be less wary of lending to a European rival, à la the credit crunch. Draghi went on to rebut criticism of his recent actions — in particular the claim that the eurozone’s central bank has abandoned its mandate of controlling inflation in favour of providing fiscal support to weaker countries.
He also denied that the ECB would be compromised when it takes over the supervision of the eurozone’s banks (a concern within Germany). He insisted it would have “no bearing whatsoever” on monetary policy.
2 Some banks too big to jail? (Robert Peston on BBC) How could and should the justice system deal with miscreant banks when there are likely to be “collateral consequences” for the innocent – including you and me – from the more severe punishments? Tomorrow there should be another chance to assess the practice of punishing banks that do wrong, while trying to spare innocent customers and bystanders, when the fines and sanctions against the enormous Swiss bank UBS for its role in the Libor-rigging scandal may well be confirmed and explained.
That issue of the “collateral consequences” from bank spanking was cited by US Assistant Attorney General Lanny Breuer when explaining why the Department of Justice had chosen not to “fully prosecute” HSBC for its money laundering and sanctions breaching offences – and had instead put the bank on probation with a deferred prosecution agreement.
The boss of one of the world’s biggest banks told me over the weekend that the greatest threat to the recovery of his bank and of the British economy is the ever rising burden of fines and compensation faced by all banks for their sloppy, reckless and rule-breaking ways in the boom years.
Even for HSBC, there may be painful ramifications for many years yet of the money-laundering settlement. First, because HSBC’s former chairman, Lord Green, is a minister in David Cameron’s government, the opposition Labour party has a powerful interest in shouting loudly and often about what Mr Breuer called the laundering by HSBC of billions of dollars accrued by narcotics’ traffickers and others.
Second, for HSBC the most important region in the world for it in a commercial sense is Asia, and that happens to be where governments take a particularly dim view of any kind of trade in illegal drugs. Or to put it another way, it will be months before it is clear whether HSBC will lose important custom because of the taint that it did huge business with Mexican drugs bosses.
3 America’s terrible trillion (Paul Krugman in The New York Times) We do indeed have a one trillion dollar deficit, or at least we did. In fiscal 2012, which ended in September, the deficit was actually $1.089 trillion. (It will be lower this year.) The question is what lesson we should take from that figure. What the Dr. Evil types think is that the big current deficit is a sign that our fiscal position is completely unsustainable. Ofen they use the deficit to argue that we can’t afford to maintain programs like Social Security, Medicare and Medicaid. So it’s important to understand that this is completely wrong.
Now, America does have a long-run budget problem, thanks to our aging population and the rising cost of health care. However, the current deficit has nothing to do with that problem, and says nothing at all about the sustainability of our social insurance programs. Instead, it mainly reflects the depressed state of the economy — a depression that would be made even worse by attempts to shrink the deficit rapidly. So, let’s talk about the numbers.
The first thing we need to ask is what a sustainable budget would look like. The answer is that in a growing economy, budgets don’t have to be balanced to be sustainable. Right now, given reasonable estimates of likely future growth and inflation, we would have a stable or declining ratio of debt to GDP even if we had a $400 billion deficit. You can argue that we should do better; but if the question is whether current deficits are sustainable, you should take $400 billion off the table right away. That still leaves $600 billion or so. What’s that about? It’s the depressed economy — full stop.
It turns out that the trillion-dollar deficit isn’t a sign of unsustainable finances. Some of the deficit is in fact sustainable; just about all of the rest would go away if we had an economic recovery. And you should recognize all the hyped-up talk about the deficit for what it is: yet another disingenuous attempt to scare and bully the body politic into abandoning programs that shield both poor and middle-class Americans from harm.
4 India slashes growth forecast (The Wall Street Journal) India has forecast its economic growth to drop to its slowest pace in a decade this fiscal year, but said a likely softening in inflation would provide conditions for relaxing monetary policy and reviving growth next year. The local economy is expected to expand 5.7%-5.9% in the fiscal year through March, the government said in its mid-year economic analysis. The projection is far short of the 7.6% forecast New Delhi had given in its annual budget in March and below last year’s 6.5% expansion.
The outlook underscores the sharp slowdown that the Indian economy has undergone since early 2011, when it was expanding at more than 9.0%. It also adds to the urgency for the government to ensure some of its recently announced reform measures do not face political roadblocks and are implemented quickly, while at the same time, mounting pressure on the Reserve Bank of India to lower interest rates and support growth.
High inflation has forced the central bank to keep monetary policy tight over the past few years–it increased interest rates 13 times since early 2010, but cut them only once, in April this year. The RBI hasn’t changed rates since April despite pressure from the government and industry to support economic growth by lowering borrowing costs. Industry lobby groups argue that the RBI’s high-rate regime has sapped local consumption and dried out investments for capacity expansion, exacerbating the problems of the economy which is struggling also due to the turmoil in western markets.