IMF’S FORECAST MISTAKES ARE NOT TRIVIAL

The storm that threatens the global economy has been raging ever since the toxic assets crisis started five long years ago. That crisis has not ended, or receded, but transformed into multiple crises: from fiscal deficit and sovereign debt to poverty, unemployment and the rise in food and fuel prices. Nevertheless, the International Monetary Fund (IMF) had to get its face wet to take note of the storm and rain.

And now it is radically changing its previous forecasts, of just three months ago, with an incredible levity as if it were advising on a cooking recipe – and this without offering the slightest apology. It barely attempts as rationale that the data are now clearer and partly blames the earthquake in Japan.

Let it be borne in mind that the Fund is an international public organization, and that up to the last penny it spends, lends or squanders is taxpayers’ money, from rich and poor countries, which end up paying millions as wages to its officials to deal justly with promoting worldwide financial stability and to alert about possible unbalances.

Among its most recent forecasts, in July, the then brand-new Managing Director, Christine Lagarde, said:

Greece has made ‘some progress’ regarding its economic reforms and the IMF foresees the country will return to a positive economic growth by next year.

The IMF told Greece in 2010 that it would solve its situation if it followed the Fund’s advice, and imposed a severe adjustment program in exchange of €110.000 million, which would go straight to debt payment and not to recovery plans.

Presently, a second similar bailout is being studied to avoid a Greek default, and the country has just announced a second adjustment plan to convince its European partners to release a share of the funds agreed upon last year, because by October it will not even be able to pay salaries. A general strike is taking place and hundreds of thousands of unemployed wander through the streets of Athens.

No less surprising are the successive declarations of Olivier Blanchard, Economic Advisor and Director of the Studies Department of the IMF, who wrote in a blog titled Global Recovery Strengthens, Tensions Heighten[i], posted on April 11, 2011:

The world economic recovery[ii] is gaining strength, but it remains unbalanced.

Three numbers tell the story. We expect the world economy to grow at about 4.5 percent a year in both 2011 and 2012, but with advanced economies growing at only 2.5 percent, while emerging and developing economies grow at a much higher 6.5 percent.

On the good news side. Earlier fears of a double dip – which we did not share – have not materialized.The main worry was that, in advanced economies, after an initial recovery driven by the inventory cycle and fiscal stimulus, growth would fizzle.

Fears have turned to commodity prices. Commodity prices have increased more than expected, reflecting a combination of strong demand growth and a number of supply shocks. These increases conjure the specter of 1970s style stagflation, but they appear unlikely to derail the recovery.”

The IMF publication World Economic Outlook, posted on the web on April 11, said[iii]:

The global economic recovery is gaining strength, with world growth projected at about 4½ percent in both 2011 and 2012, but unemployment remains high, and risks of overheating are building in emerging market economies, the International Monetary Fund (IMF) said in its latest forecast.”

“Given the improvement in financial markets, buoyant activity in many emerging and developing economies, and growing confidence in advanced economies, economic prospects for 2011–12 are good,” Blanchard wrote what the IMF had said in its April 2011 World Economic Outlook.

“For both 2011 and 2012, we expect the growth rate to be 4.5 percent, fairly high growth rate,” added IMF Chief Economist Blanchard.

Two months later, on June 17, he wrote under the headline Global Growth Hits a Soft Patch[iv], in IMF’s global economy forum online:

Despite a mild slowdown, the global economic recovery continues but the road to health will be a long one. Downside risks, both old and new, are increasing.

In other words, the global recovery continues. But the road to health is still a long one. And surely there is no time to relax.”

On September 20, at the World Economic Outlook presentation press conference[v], Blanchard said the global economy was entering the danger zone, and admitted forecast mistakes:

“As the Managing Director said . . . , the global economy has entered a dangerous new phase. The recovery has weakened considerably, and downside risks have increased sharply. Strong policies are needed both to improve the outlook and to reduce the risks.”

In Foreword to the World Economic Outlook, Blanchard writes[vi]:

“Relative to our previous World Economic Outlook last April, the economic recovery has become much more uncertain. The world economy suffers from the confluence of two adverse developments. The first is a much slower recovery in advanced economies since the beginning of the year, a development we largely failed to perceive as it was happening.

“Growth, which had been strong in 2010, decreased in 2011. This slowdown did not initially cause too much worry. We had forecast some slowdown, due to the end of the inventory cycle and fiscal consolidation. One-time events, from the Earthquake and tsunami in Japan to shocks to the supply of oil, offered plausible explanations for a further slowdown. And the initial U.S. data understated the size of the slowdown itself. Now that the numbers are in, it is clear that more was going on.”

The question arises: What data was being evaluated? Europe has been suffering an almost irresolvable crisis for months, but Blanchard and his cohorts apparently did not even “perceive” that something was amiss – until a few days ago when they realized that reality was going against all of their predictions.

The forecast mistakes would be forgiven if they came from a teacher, a lawyer or a surgeon, but no pardon for well-paid “experts”, whose job is to supervise the world economy and alert when things are going wrong.

What makes things worse is that those experts are not inclined to admit their mistakes and apologize – not to speak of offering their resignation – as if their blunders were inconsequential, and just a minor oversight in a cooking recipe.

By Raul de Sagastizabal

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IMF chief tells Europe: you must bail out the banks again

Some things never change 

IMF Director Manager, Christine Lagarde[i], says debt crisis has cost institutions €300bn as bank shares plummet on new market fears for global economy

Bailout the banks? Again? Not the countries, or the people?

Some things never change. The IMF, for example…

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Greece – The collapse is just around the corner

Fresh round of reform it is not enough 

According to The Guardian[i], in Greece the government announced a fresh round of austerity measures on Tuesday, including pension cuts and tax rises for low earners, in an attempt to persuade its creditors, including the IMF, to release the latest €8bn tranche of rescue funds. But many investors now believe default for the debt-burdened state is inevitable, and they are still fretting about the potentially devastating impact of a default on the region’s banks.

The Greek debt needed restructuring last year, when it was known to be impossible to meet, and the country and the entire euro area were in a better position to renegotiate with banks and investors[ii].  Now it seems too late; the collapse is just around the corner.

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European crisis – David Cameron tells eurozone leaders to stop kicking the can down the road

According to The Guardian, the UK Prime Minister David Cameron told the Canadian Parliament in Ottawa[i] :

“The recovery out of the recession for the advanced economies will be difficult. Growth in Europe has stalled, growth inAmerica has stalled. The effect of the Japanese earthquake, high oil and fuel prices is creating a drag on growth. But fundamentally we are still facing the aftermath of the world financial bust and economic collapse in 2008.”

The prime minister identified one of the main problems as the failure of eurozone leaders to agree a “lasting solution” to stabilise the single currency.

The problems in the eurozone are now so big that they have begun to threaten the stability of the world economy,” Cameron said. “Eurozone countries must act swiftly to resolve the crisis. They must implement what they have agreed and they must demonstrate they have the political will to do what is necessary to ensure the stability of the system. One way or another, they have to find a fundamental and lasting solution to the heart of the problem – the high level of indebtedness in many euro countries.”

As PoliticaPress posted before, the problem is not Greece, the problem is Europe[ii]. And If Europe is unable to find a solution for its problems, the global economy is in serious risk.

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UK Banks Brace for Radical Overhaul

The United Kingdom proposes to overhaul the country’s banking system to diminish risks to taxpayers and public finances in future financial turmoil, by acting upon recommendations of the Independent Commission on Banking (ICB)[i], which presented its report onSeptember 12, 2011.

Chancellor of the Exchequer (Finance Minister) George Osborne praised the report as an “impressive piece of work”, and said the Government would look to implement all of the Commission’s recommendations by 2019 – the date suggested by the ICB.

The ICB was created by the British Government in June 2010 with the task of considering possible structural and non-structural reforms of the country’s banking sector to promote stability and competition, to reduce risks to taxpayers and public finances, and to make recommendations to the UK Government by the end of September 2011.

The Commission is headed by Sir John Vickers; the 363-page report is therefore also known as the Vickers Report.

According to the ICB report, the uncertainty about the banking system requires the adoption of swift reform measures. Nonetheless, given the scale of the reforms it proposes and the sums needed to implement them, it expects the deadline for their full application to be extended into 2019. At the same time, the Commission pleads for immediate introduction of operative changes.

A number ofUKbanks combine domestic retail services with global wholesale and investment banking operations. “Both sets of activities are economically valuable while both also entail risks – for example, relating to residential property values in the case of retail banking. Their unstructured combination does, however, give rise to public policy concerns, which structural reform proposals – notably forms of separation between retail banking and wholesale/investment banking – seek to address,” explains the Commission.

The ICB recommends retail banks to hold in reserve at least 10 per cent of their high quality domestic retail assets as stocks or retained profits, in order to absorb the impact of potential losses or face future financial crises. Large banks, it says, should maintain safety buffers between 17 per cent and 20 per cent of their highest quality assets, which can be easily turned into capital.

Also, the Commission advises on establishing a ring-fence[ii] for retail banks on British land, on the following terms:

The Commission’s view, in sum, is that domestic retail banking services should be inside the ring-fence, global wholesale/investment banking should be outside, and the provision of straightforward banking services to large domestic non-financial companies can be in or out.

Nowadays many banks, especially large banks, supply services in retail banking as well as wholesale/investment banking. 

‘Separate Retail Banking Businesses’

Retail banking services mainly comprise deposit-taking, payment and lending services to households and small/medium businesses. Investment banks; on the other hand, they deal among others with high risk operations, with complex derivatives (mortgage-backed or asset-backed securities), investment and hedge funds, short selling and naked short selling.

When these banks face problems, as they did during the 2008 crisis and the ongoing one, all of their services become affected and support the bank losses, and in case of a public bailout, the country’s taxpayers bear the costs of maintaining a complex and risky banking system.

British banks and Europeans in general face serious risks today, including huge liabilities and large jeopardized sovereign bond holdings. United States recently manifested its concern about the solvency of European banks located on the American territory, though as a matter of fact those banks do not get funding in the US.

With the proposed separation, retail banking businesses, of much lesser risk and with deposit protection systems, would become isolated from the consequences of the high risk operations of investment banks.

In order to do that, banks must separate into two different entities: one for retail services and the other for the investment bank. Retail banks would then operate as independent legal entities and under a different system of regulations. 

Global Centre for Banking and Finance

Chancellor Osborne said the report would meanUKbanks could remain competitive.

“The government wantsBritainand the City ofLondonto be the pre-eminent global centre for banking and finance. We want universal banks headquartered here with all the advantages that brings,” he told the Parliament.

“The global investment banking operations ofUKbanks can continue to be as competitive as any in the world,” he added.

The banking sector has opposed these reforms in particular since the ICB began its working, although it is more appropriate to say that the bank opposes any reform which limits its operations or its profits.

The Commission recommends many other changes, even if it is difficult to predict if any or all will come into effect. As the European crisis persists, no one can ensure whether immediate or very short-term measures will not have to be applied to the financial sector. In any case, 2019 is rather far away and many things along the way may be modified by the bank lobbying.

Notwithstanding such a possibility, we are once again confronted with unilateral regulation measures, which protect or regulate certain internal jurisdictions, but promote financial centers which export high risk operations to other more open or unregulated markets. 

Protection or Protectionist

In this case, while the proposed reform protects Britain’s taxpayers – in fact it is by itself a protectionist measure inside the borders of the United Kingdom, it does not modify British banks’ global operation practices, among which are those that provoked the implosion of toxic activities in 2008, or the recent speculation against sovereign Greek, Spanish or Italian bonds, to mention a few.

Whether the proposed reform is implemented or not, the very fact that the United Kingdom, which harbours the world’s oldest and one of the most powerful financial centres, begins to consider an overhaul of the banking system, indicates that the crisis has profoundly shaken the very foundation of the banking and financial sector – and this to an extent that cannot be gauged from available information; in particular the figures on liabilities and activities exposed to risks.

Until now, even after a reiterated call in the G-20 summits which took place during the toxic assets crisis, no initiatives for an arranged financial regulation on a global scale have been undertaken. And it is doubtful that they will come up in the midst of the crisis of the developed world. In fact the scale of this crisis is the main reason for the long eight-year term proposed by the ICB.

However, the British initiative, in spite of the 2019 deadline, speaks volumes and should serve as an early warning, so that the authorities of other countries – especially emergent and developing – adopt national and/or regional measures to safeguard their taxpayers and their economies on time.

By Raúl de Sagastizabal


[ii] Retail ring-fence/ring-fence: The isolation of certain retail banking services in an independently capitalized entity.

Ring-fenced bank: ‘Ring-fenced banks’ are independently capitalized banks that are exclusively permitted to provide certain services. Safeguards limit their exposure to other activities.


Translated by Daniel Cisneros

 

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United States – Income, Poverty and Health Insurance Coverage

The U.S. Census Bureau announced today (13 September 2011) that in 2010, median household income declined, the poverty rate increased and the percentage without health insurance coverage was not statistically different from the previous year.

Real median household income in the United States in 2010 was $49,445, a 2.3 percent decline from the 2009 median.

The nation’s official poverty rate in 2010 was 15.1 percent, up from 14.3 percent in 2009 ─ the third consecutive annual increase in the poverty rate. There were 46.2 million people in poverty in 2010, up from 43.6 million in 2009 ─ the fourth consecutive annual increase and the largest number in the 52 years for which poverty estimates have been published.

The number of people without health insurance coverage rose from 49.0 million in 2009 to 49.9 million in 2010, while the percentage without coverage −16.3 percent – was not statistically different from the rate in 2009.

This information covers the first full calendar year after the December 2007-June 2009 recession.

These findings are contained in the report Income, Poverty, and Health Insurance Coverage in the United States[i]: 2010.

The Office also posted on his website results for the nation compiled from information collected in the 2011 Current Population Survey (CPS) Annual Social and Economic Supplement (ASEC).

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  1. Much appreciated for the information and share!
    Nancy

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OECD – Economic growth in the G7 economies: less than 1% in the second half of 2011

Economic growth perspectives weakening as recovery slows.

Economic recovery appears to have come close to a halt in the major industrialized economies, with falling household and business confidence affecting both world trade and employment, said OECD. Growth remains strong in most emerging economies, albeit at a more moderate pace.

“Growth is turning out to be much slower than we thought three months ago, and the risk of hitting patches of negative growth going forward has gone up,” OECD Chief Economist Pier Carlo Padoan said during a presentation of the OECD’s latest Interim Economic Assessment[i].

Economic growth in the G7 economies excluding Japan will remain at an annualized rate of less than 1% in the second half of 2011.

The United States is set to grow in the range of ½-1%, growth in Japan is expected to be buoyed by reconstruction, though its effect on growth is expected to fade in the final quarter, and Germany and Italy are projected to post one quarter of negative growth.

The risk of more negative growth going forward has become higher in some major OECD economies, but a downturn of the magnitude of 2008/09 is not foreseen.

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United Kingdom / Switzerland – Historic agreement against tax evasion

The Governments of United Kingdom and Switzerland signed in principle[i] an historic agreement[ii] to tackle offshore tax evasion and to resolve the long-standing abuse of Swiss banking secrecy by those who seek to conceal the proceeds of tax evasion. It is  expected to recover billions of pounds of unpaid tax from 2013.

Under the agreement, existing funds held by UK taxpayers in Switzerland will be subject to a significant one-off deduction of between 19% and 34% to settle past tax liabilities (not on who have already paid their taxes). As a gesture of good faith Swiss banks will make an up-front payment from Switzerland to Britain of CHF 500m.

From 2013, a new withholding tax of 48% on investment income and 27% on gains will ensure the effective future taxation of UK residents with funds in Swiss bank accounts, along with a new information sharing system which will facilitate to find out about Swiss accounts held by UK taxpayers.

George Osborne, Chancellor of the Exchequer, said that tax evasion is wrong at the best of times, but is worst in economic circumstances like this, so is a Coalition Government priority to go after those who don’t pay, in particular the richest who evade tax and those who cheat on benefits. “The days when it was easy to stash the profits of tax evasion in Switzerland are over.”

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[i] The agreement was already ratified in principle, and is expected to come into force in 2013, following scrutiny by Parliament and after ratification procedures in Switzerland are complete.

[ii] http://www.hm-treasury.gov.uk/press_98_11.htm, 98/11, Agreement with Switzerland to secure billions in unpaid tax.

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Euro area on the brink of the abyss – Trichet vs. Delors

Interview with Jean-Claude Trichet, President of the European Central Bank (ECB)[i], conducted by Beda Romano (Il Sole 24 Ore), on 31 August 2011, published 2 September 2011. 

1. A compatriot of yours, Jacques Delors[ii], the former president of the European Commission, has said in recent days that the euro area is “on the brink of the abyss”. It’s a very pessimistic view, undoubtedly coloured by a sense of disappointment. Do you share it?

I have great admiration for Jacques Delors. But let me sum up some of my present observations. First, we have a credible single currency which over the last 12 years has kept its value in terms of price stability in a remarkable way in comparison with the previous national currencies in the last 50 years. The solidity of the currency itself is not disputed and our fellow citizens all over Europe are calling on us to continue preserving price stability. Second, the euro area, taken as a whole, is in a better position from a fiscal standpoint than other economies. In 2011, the public finance deficit of the euro area should be around 4.5% of GDP, while in the United States or Japan it will be about 10% of GDP. But we had a very serious weakness in terms of economic and fiscal governance inside the euro area which has been revealed by the global crisis. 

2. Well-informed politicians are not hesitating to talk about a possible break-up of the euro area. The weaknesses cannot be denied.

The weaknesses have to be corrected. Loose fiscal policies and insufficient attention to competitive indicators have not been surveyed rigorously and corrected in time. Individually and collectively the European countries have to correct the present situation. Individually by adjusting their domestic policies – as all the advanced economies, including the US and Japan are called on to do – and collectively by considerably reinforcing their mutual surveillance and their governance.

Mr. Trichet is not pessimistic, like Mr. Delors; however, his diplomatic and prudent views are closely linked to reforms measures. He emphasizes that the euro zone needs to implement significant reforms, and adds that “even in normal times all our decisions are very difficult”, so nobody knows if  this time, in exceptional circumstances, the euro zone will be able to take the relevant measures in time.

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[ii] Jacques Delors was finance minister under the François Mitterrand government from 1981 to 1984 and was president of the European Commission from 1985 to 1994. Le Figaro described him as “the father of modern Europe”.

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  1. Youre so cool! I dont suppose Ive read anything like this before. So nice to find somebody with some original thoughts on this subject. realy thank you for starting this up. this website is something that is needed on the web, someone with a little originality. useful job for bringing something new to the internet!

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The first time since 1945 that the US economy added no new jobs in a month

The following are quotes of the US Secretary of Labor Hilda L. Solis statement[i] on the August 2011 Employment Situation report released today:

The private sector added 17,000 jobs in August, but those gains were offset by the loss of 17,000 government jobs. Total non-farm unemployment, therefore, was unchanged last month. The unemployment rate also remained unchanged at 9.1 percent.

Consumer confidence dropped sharply last month as Congress took the nation to the brink of default. We knew that this legislative gridlock was going to have repercussions, and the hiring slowdown reflected in today’s report shows the real-life consequences that political gamesmanship has on business decisions and workers’ lives.

Next Thursday, President Obama will outline a bipartisan plan to create jobs and generate growth that pulls the best ideas from both political parties. If Congress is serious about job creation, the package will pass.

The time for partisan bickering is over.

For example, there are more than a million construction workers actively looking for employment opportunities … We know … that there are tremendous infrastructure needs in cities and towns across the country. Infrastructure investments would create jobs immediately and be a catalyst for broader investment and growth that are critical to our recovery.

This country’s elected leaders owe it to our unemployed workers to end the partisan point-scoring and unite behind a set of common-sense strategies to put Americans back to work.

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[i] http://www.dol.gov/opa/media/press/opa/OPA20111312.htm, News Release, 2 September 2011.

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  1. Excellent post. I used to be checking constantly this website and I’m impressed! Very helpful info particularly the remaining phase :) I take care of such info a lot. I used to be looking for this particular information for a very lengthy time. Thanks and good luck.

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Short selling bans will be extended in certain European markets

Bans in France, Italy and Spain were imposed on August 11 as temporary, for 15 days, but now, market regulators extended the terms. In Spain and Italy bans could remain until September 30 and in France until November 11.

In Belgium bans are indefinite, but regulators are willing to lift if the market conditions change.

Some observers say that the effectiveness of these measures in figures is irrelevant. Others argue that effectiveness is not measured in securities but in the calm of the markets and they are quieter since the bans were implemented, so it is better to keep them.

The latter view responds to reality: the unrestrained run against the sovereign bonds and bank stocks has slowed since the bans were implemented.

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Standard & Poor’s could rate as AAA subprime mortgage backed securities

Standard & Poor’s would assign ratings higher subprime securities than U.S. Treasury bonds.

According to Bloomberg, the credit rating agency Standard & Poor’s  (S&P) could rate AAA subprime securities of Springleaf Mortgage Loan Trust, meaning those securities are safer than the US Treasury bonds, to which less than a month ago the same S&P downgraded from AAA to AA+.

There are the same kind of securities which collapsed in 2008 and ignited the global financial crisis, values that had been rated AAA by the three major U.S. ratings agencies (S&P, Moddy’s and Fitch) therefore there are several ongoing inquiries in the United States (Financial Crisis Inquiry Commission, Senate Permanent Subcommittee on Investigations, SEC, etc.).

There are those who wonder how reliable are these new grades.

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