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from Anatole Kaletsky:

Time to stop following defunct economic policies

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Can economists contribute anything useful to our understanding of politics, business and finance in the real world?

I raise this question having spent last weekend in Toronto at the annual conference of the Institute for New Economic Thinking, a foundation created in 2009 in response to the failure of modern economics in the global financial crisis (whose board I currently chair). Unfortunately, the question raised above is as troubling today as it was in November 2008, when Britain’s Queen Elizabeth famously stunned the head of the London School of Economics by asking faux naively, “But why did nobody foresee this [economic collapse]?”

As John Maynard Keynes observed in 1936, when he challenged the economic orthodoxies that were aggravating the Great Depression: “The ideas of economists, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

This remark is as relevant today as in 1936. Joseph E. Stiglitz, the Nobel laureate, asked rhetorically in Toronto: “Why are central banks and governments still trying to predict the effects of their policies with an economic model that is manifestly absurd?”

from Breakingviews:

Time to bust China’s “omniscient regulator” myth

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By John Foley 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

China’s clever bureaucrats can no more guarantee the health of the country’s financial system than they can see through walls. It is time to bust the myth of the “omniscient regulator”.

from Global Investing:

Buying back into emerging markets

After almost a year of selling emerging markets, investors seem to be returning in force. The latest to turn positive on the asset class is asset and wealth manager Pictet Group (AUM: 265 billion pounds) which said on Tuesday its asset management division (clarifies division of Pictet) was starting to build positions on emerging equities and local currency debt. It has an overweight position on the latter for the first time since it went underweight last July.

Local emerging debt has been out of favour with investors because of how volatile currencies have been since last May, For an investor who is funding an emerging market investments from dollars or euros, a fast-falling rand can wipe out any gains he makes on a South African bond. But the rand and its peers such as the Turkish lira, Indian rupee, Indonesian rupiah and Brazilan real -- at the forefront of last year's selloff --  have stabilised from the lows hit in recent months.  According to Pictet Asset Management:

from Breakingviews:

Central bankers live in silent fear

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s scary to think what higher policy interest rates might do to a financial system habituated to virtually free money. Central bankers, though, profess not to be too worried about this risk. They are either overconfident - or living in silent fear.

from MacroScope:

Is it time for the ECB to do more?

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From financial forecasters to the International Monetary Fund, calls for the European Central Bank to do more to support the euro zone recovery are growing louder.

With inflation well below the ECB’s 2 percent target ceiling and continuing to fall, 20 of 53 economists in a Reuters Poll conducted last week said the bank was wrong to leave policy unchanged at recent meetings and should do more when it meets on Thursday.

from Breakingviews:

Companies risk changing euro view at wrong time

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By Swaha Pattanaik

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

A rising single currency has confounded and hurt European exporters. An increasing number are becoming euro bulls, but their conversion could be ill-timed. While the currency’s rally may not be over, the ECB seems too unhappy with euro strength for it to last past autumn.

from Felix Salmon:

Janet Yellen didn’t gaffe

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It’s become received opinion that Janet Yellen made a “rookie gaffe” in her first press conference as Fed chair, thereby “rattling markets”. She didn’t.

According to Peter Coy, Yellen made a “substantial blunder”. John Cassidy says she “got into trouble” when she told Reuters’ Ann Saphir that the Fed would wait “something on the order of around six months” after QE ends before starting to raise rates. Clive Crook was so perturbed by the presser that he is beginning to doubt the wisdom of the Fed having any kind of forward guidance at all. Mohamed El-Erian seems inclined to agree: the markets aren’t mature enough, he says, to internalize new information without over-extrapolating (i.e., freaking out).

from Felix Salmon:

Annals of captured regulators, NY Fed edition

Peter Eavis has a worrying story today: the chairman of the New York Fed, William Dudley, has effectively, behind the scenes, managed to delay the implementation of an important new piece of bank regulation.

The first thing to remember here is that delaying regulations is an extremely profitable game for the financial industry. If a new regulation will cost a bank $100 million per year, and the bank gets that new regulation delayed by a year, then it’s just made $100 million in excess profit. What’s more, the further away you get from the crisis, the harder it becomes for new rules to grow teeth. So when the banking lobby doesn't like a certain piece of regulation, its tool of choice is to bog it down and delay it to the point at which no one but the banking lobby cares any more. And then allow it to be implemented with so many loopholes and carve-outs that it’s effectively toothless.

from Counterparties:

MORNING BID – Hi Janet, Here’s a Selloff.

Welcome Madame Chair, here's a market selloff for you.

Fed Chair Janet Yellen made some news that she didn't expect yesterday. She perhaps thought she was offering some clarity when she answered the question from Reuters' Ann Saphir as to when the Fed might start raising interest rates. That's not how it worked, although at least in this case she didn't mouth off to Maria Bartiromo the way Ben Bernanke did eight years ago.

What we didn't see in her answer on the distance between the end of QE3 and the first rate hikes of "six months" (or something like that), is whether we will start to see any kind of reaction from the primary dealers surveyed by Reuters yesterday.

from Global Investing:

Liquidity needs to pick up in EM

Emerging markets have seen heavy selling in the past few months, with political and economic crises hitting the region's currencies and asset markets.

The obvious question now is: Is all the bad news in the price?

London-based CrossBorder Capital, who publishes monthly liquidity and risk appetite data for developed and emerging economies, thinks not.

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