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from MacroScope:

Fed’s Tarullo not making any promises

We're pretty sure that Daniel Tarullo, the Federal Reserve's point person on regulation, expects the United States will finally understand exactly what financial reforms are coming "some time next year." But the Fed governor made doubly sure to qualify that statement lest anyone - especially any press "in the back" - take it as gospel.

At a conference in New York Wednesday morning, Tarullo was asked how long it would take for the various regulatory agencies to give final details on the raft of financial crisis-inspired reforms, everything from Basel III capital standards to the Volcker ban on proprietary trading. Here's what he said:

"I know it's frustrating for people not to have the proposed rules out. On the other hand, doing them simultaneously does allow us to see whether something in one of the proposed capital rules will affect something in another proposed capital rule, so that we end up, when we publish the final rules, with fewer anomalies, questions and the like, which will undermine the ability of a firm or academic or just anyone in the public to see and understand how these things are going to function. I hesitate to give a time line on exactly when we'll get there. But I think...it seems to be reasonable to expect that some time next year the basic outlines - and I don't just mean the ideas, I mean the details associated with the major reform elements - should be reasonably clear to people even though questions will inevitably rise in implementation. (You) don't want to take that as a promise. But as I think about these various streams, that is my expectation... To have gotten it done this year would have meant the sheer magnitude of the task would have lead to a lot of inconsistencies or open questions, which then would have just produced another round of change. So you've got me on the record saying some time next year, but I tried to qualify it as much as possible - that's for all you people in the back..."

from Photographers Blog:

Resumes on the corner of hope

By Mario Anzuoni

I met Kelly Edwards on a street corner. He was not the average person you see at traffic lights; he was nicely dressed, freshly shaven with a professional demeanor, holding a sign that stated he was looking for work. I handed him my business card and kindly asked him to get in touch with me.

Given the job situation and the U.S. economy struggling to create new jobs, I was interested in knowing more. Two days later Kelly called. We spent an hour on the phone where he started to tell me his story. At that point I asked if I could spend a day with him to show an average day of job seeking; he agreed. About a week later, I arrived at Kelly's home in West Covina where he greeted me with freshly brewed coffee.

Kelly Edwards is 54 years old, and has been unemployed since 2008. He put three kids through college and now lives with his wife Lynne and their 13-year-old son Kal-El. He has been a full time and part time employee, but never without a job. With two decades of experience in the food and beverage industry Kelly thought it would be a good idea to move from Portland to Los Angeles four years ago, but he is still without a full time position with the exception of a few handyman jobs.

from India Insight:

Budget in a bunker

The leather briefcase that the finance minister holds up for the cameras before he delivers the budget in parliament is one of the most curious hangovers from British colonial times.

But one tradition that gets little attention is the intense secrecy that surrounds the preparation of the budget.

Weeks before the finance bill is presented, finance ministry officials clam up, and refuse to speak in detail about the economy to the media. The basement of the Finance Ministry in the North Block of India's central government secretariat, which has its own press to print the entire set of budget papers, is declared off limits to people not involved in the exercise a month before the big day.

The employees of the press and other staff and officers are locked in the bowels of North Block for the last seven days so that nothing is leaked. All contact with the outside world is cut off, their mobile phones are taken away and Internet connections shut down. Food is brought to them from outside, they sleep in bunk beds and the only people that are allowed to enter are doctors if someone falls sick.

"This is a part of the security measure put in place to ensure foolproof secrecy for the budget papers, and is part of a practice started in the pre-independence era," the government’s manual on the budget process says.

One senior official told Reuters that the tradition of secrecy around a document that laid down taxes and spending for the year ahead, has now outlived the purpose it served in a rigidly planned economy.

from Breakingviews:

Say hello to 100 years of financial repression

By Edward Hadas

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

It’s just a symbol. The UK government is borrowing like there’s no tomorrow, so issuing a few billion pounds of 100-year or perpetual debt would be a drop in its trillion-pound net debt ocean. In comparison to the Bank of England’s holdings, which are on their way to 325 billion pounds, the sale of uneconomic investments to the private sector looks paltry.

Still, symbols matter, and the issue of century debt in an era of financial repression would certainly be a potent one. Forget about the fate of those who bought perpetual bonds with a 2.5 percent coupon in 1946. Their real principal value has declined by 97 percent, and counting. Think about the present. At a plausible nominal yield of about 4 percent, the current real yield would be slightly negative – in line with the government’s inflation-linked debt.

As for more distant decades or centuries, it would take a monetary revolution for the UK to become a land of durably low inflation. The country has hugely indebted public and household sectors and a giant fiscal deficit. The central bank is clearly more interested in promoting GDP growth and reducing the strains of leverage than in keeping inflation low. That’s why it will soon own a third of the government’s outstanding net debt.

Those purchases undercut the normal explanation of ultra-low yields on ultra-long paper: that the market has given its objective judgment. With the Bank of England buying and regulators simultaneously requiring banks and other institutions to load up on supposedly safe gilts – ultra-long is especially recommended for pension funds – the market is so far from free that its verdict is gibberish.

Any unconstrained investor who takes up the 100-year bet would look ultra-foolish. But there are likely to be enough constrained investors to make the issue a success. That is financial repression at its most potent. The government pushes investors to accept low or negative returns, but so subtly that the dupes do not fully realise what’s happening. If the issue comes off, it will be a fine symbolic victory of the government over savers.

from Edward Hadas:

Finding a way to make finance less sacred

Has finance become a “false divinity in the world”? Pope Benedict XVI thinks so. “We see that the world of finance can dominate the human being,” he has said.  “[It is] no longer an instrument to foster well-being... [it] becomes a power that oppresses, that almost demands worship.”

As well as warming the hearts of banker-haters everywhere, the Pope’s criticism is well aimed. Not only did the finance industry’s arrogance help spur crisis and recession, but there’s something dangerous at the core of finance. The human good can all too easily be lost when people’s past work and future hopes are expressed in purely monetary terms.

In the Old Testament, the ancient Israelites were warned that too rigid a view of financial obligations is cruel and socially divisive. Aristotle added another essential objection. The ancient Greek philosopher pointed out that monetary wealth can keep on increasing forever -- unlike our appetite for the things that money can buy. Yet while the worldly infinity of finance is alluring, it is ultimately false. Money has no human meaning on its own, but only when it serves a meaningful purpose.

The risks of inhumane finance may be eternal, but the Pope is also alluding to a more modern problem – the treatment of finance as a sort of god, and financiers as its priests. Consider four manifestations of the quasi-religious approach.

First, the magical expectations of finance. Too many people, and too many governments, imagine that some arrangement of the financial system -- this monetary and fiscal policy mix, that sort of mortgage, this stock market, that collection of derivatives -- will generate durable wealth or economic justice.

Second, think of the awe which surrounds the industry. The economic forecasts of financial professional are rarely right, but they receive the sort of respect once given to (equally inaccurate) oracles of divinity. The pronouncements of leading financiers, from George Soros to Warren Buffett, are taken seriously simply because these people have made lots of money in the financial markets.  Political leaders tremble at the judgements of financial markets.

Third, consider the treatment of central banking as an activity beyond normal human understanding. A few decades ago, these financial practitioners were considered too elevated to be politically accountable. More recently, faith in central bank independence has been shaken: but it has not been destroyed by their abysmal record before the financial crisis. Indeed, Ben Bernanke and his peers have been given more power -- and only a little more supervision from the mere mortals who have won elections.

from Global Investing:

A scar on Bahrain’s financial marketplace

Bahrain's civil unrest -- which had a one-year anniversary this week -- has taken a toll on the local economy and left a deep scar on the Gulf state's aspiration to become an international financial hub.

A new paper from the Sovereign Wealth Fund Initiative, a research programme at Center for Emerging Market Enterprises (CEME) at the Fletcher School at Tufts University, examines how the political instability of 2011 is threatening Bahrain's efforts in the past 30 years to diversify its economy and develop the financial centre.

Asim Ali from University of Western Ontario and Shatha Al-Aswad, assistant vice president at State Street, argue in the paper that even before the revolt, Bahrain lagged in building the foundations of a truly international hub in the face of competition from Dubai and Qatar.

Unlike DIFC (Dubai International Financial  Centre) and QFC (Qatar Financial Centre), Bahrain insists upon local labor; currently 70% of employees in its banking and financial services industry are Bahrainis.  Bahrain’s reluctance to hire non-resident  talent  has made  Dubai...an alternative for those investors looking for a centre with more flexible labor practices such as DIFC provide...  The constraints  – a lack of formalized institutional and regulatory structure, along with an ad hoc business environment, underdeveloped infrastructure, and under-supplied skilled workforce – have negatively affected its growth and  potential to become the financial gateway in the Middle East.

Then came the crackdown of protesters.

Its ruling Al-Khalifa family unleashed  a ferocious extra-judicial crackdown against the opposition. It appeared the standard axiom of Gulf ruling families – securing legitimacy and counter-acting political opposition through redistribution of oil wealth – was sorely insufficient to address  citizens’ grievances.  These led not only to international opprobrium of  the  Bahrain government but also made foreign businesses reconsider Bahrain as a financial center – with many foreign business shifting  workers and operations to Dubai... Indeed, confidence in Bahrain as a financial hub took a major blow along with its image as a stable, tolerant and liberal state.

It remains to be seen what impact last year’s pro-democracy uprising will have on the state of Bahrain and its  ambition as a regional financial gateway– especially at a time when Dubai (DIFC) and Qatar (QFC) remain serious contenders to become dominant financial centers in the Middle East.

Bahrain had shown perseverance and strength in building its financial center, but democracy efforts and human right violations were able to  threaten the hard work of more than 30 years.

Bahrain's sovereign wealth fund Mumtalakat, which is leading the country's efforts to diversify its economy away from the hydrocarbon sector, suffered a series of ratings downgrades last year as a result of sovereign downgrades. Mumtalakat is rated triple-B.

from Breakingviews:

A Van Winkle return to Davos and to real problems

By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.It was well past midnight in late January 2000 when an investment banking contact called my Davos hotel room to share the latest details on Vodafone’s hostile bid for Mannesmann. That was news, but the huge hostile takeover was no longer the largest deal in history. It had been displaced a few weeks earlier by the agreed merger of AOL and Time Warner. Such was the talk of the World Economic Forum. The great and the powerful had gathered together to celebrate the success of business and, especially, of finance.

Exuberance over technology and venture capital was almost limitless back in 2000, thanks to the seemingly limitless rise of the tech stocks. Dotcom startups were all the rage. When Japanese Internet mogul Masayoshi Son finished one panel, he was assailed by a gaggle of entrepreneurs waving business plans for him to peruse. In full disclosure, this columnist two weeks later signed up to establish the online financial commentary business that eventually became Reuters Breakingviews.

Coming back to this gathering 12 years later is a Rip Van Winklerian experience. The old world and its little worries look positively quaint. Back then, at what in retrospect proved to be the height of the Great Moderation, business was booming, the Nasdaq still had another 20 percent or so to climb, companies were merging like mad; everything looked rosy. President Bill Clinton parachuted in to give a victory lap. Even the demonstrations that took place against neoliberalism and world trade now look quaint. Defacing a McDonald’s is a far cry from overthrowing governments.

The economic moderation turned out to be built on financial excess. That AOL deal – hailed as visionary by all the delegates of 2000 – has become the poster child for foolish corporate finance. The Nasdaq is a third lower than 12 years ago (before adjusting for inflation). And the banks – what can I say? From triumph to tribulation.

The political world also looks much more treacherous. Geopolitics has not yielded to the irresistible forward march of free market capitalism, and peace no longer looks like something to be taken for granted. The 9/11 attacks spawned wars in Afghanistan and Iraq – the kinds of conflicts that in 2000 were supposed to be a thing of the past.

The World Economic Forum has changed with the times. The rise of the BRICs has brought greater diversity to the audience, which is a good thing. It has also brought many more people – so many, in fact, the organizers have expanded their caste system. There is now a dizzying number of different badges, each offering differing levels of access and status. It’s much easier to be here and still be excluded from the elite – much like the feeling of many of the world’s dispossessed.

The most striking difference, though, is in the increased complexity and severity of the questions confronting the collection of top business people, politicians, investors and academics. Europe’s sovereign debt crisis keeps trundling forward, bringing to the fore thorny challenges to sovereignty, the role of central banks and the solvency of nations. Instead of Clinton smiling from the podium, this year’s keynote address came from the troubled German Chancellor Angela Merkel, the leader with the most cards at the debt crisis table.

from Breakingviews:

De-globalisation of finance looks here to stay

By Peter Thal Larsen

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

The global financial system is becoming more national. Three years after Western taxpayers were forced into a mass bailout of banks, Western lenders are in full retreat, encouraged by regulators and governments.

In the two decades leading up to the financial crisis, national borders became steadily less important in finance. The crisis made it clear that nationality does matter, because domestic taxpayers ended up supporting banks, including their far-flung operations. The crisis also showed that banks had too much leverage.

European banks are now leading a backwards charge. According to Barclays Capital, euro zone lenders had $1.2 trillion of assets in emerging markets in mid-2011 – double the amount just seven years earlier. A significant chunk of those assets are supported by the parent bank’s capital and funding. With capital scarce and funding costs high, retreat is the only option.

Europe’s banks are also pulling back on the business of lending in dollars, which were often borrowed from U.S. money market funds. After U.S. investors fled from Europe last year, that business looks too risky. Though the funds may be returning to the euro zone, banks are likely to remain wary.

Post-crisis regulation is contributing to de-globalisation. Capital-short banks in Europe and elsewhere have sold foreign businesses. And the UK government has accepted the recommendation of its Independent Commission on Banking to ringfence domestic retail banking operations, making foreign and investment banking units less appealing. The U.S. Federal Reserve’s latest stress tests effectively punished big U.S. lenders with extensive European operations by requiring them to be able to withstand a euro zone meltdown. And Canada and Japan fear the U.S. Volcker rule, which bans proprietary trading, will force lenders out of foreign sovereign debt markets.

from MacroScope:

European rescue: Who benefits?

The words "European bailout" normally conjure up images of inefficient public sectors, bloated pensions, corrupt governments. But market analyst John Hussman, in a recent research note cited here by Barry Ritholtz, says the reality is a bit more complicated:

The attempt to rescue distressed European debt by imposing heavy austerity on European people is largely driven by the desire to rescue bank bondholders from losses. Had banks not taken on spectacular amounts of leverage (encouraged by a misguided regulatory environment that required zero capital to be held against sovereign debt), European budget imbalances would have bit far sooner, and would have provoked corrective action years ago.

In other words, even if state actors mishandled government finances, Wall Street was, at the very least, an all-too-willing enabler.

from MacroScope:

Two cheers for financial innovation

Protests against Wall Street and the U.S. financial system are hanging over an annual gathering of economists and social scientists in Chicago. Yale economist Robert Shiller offered two cheers for capitalist finance, saying that while the U.S. free market system has contributed to higher living standards, the vehemence of the recent public outcry points to a need for greater democratization. This is how he put it in a speech:

Occupy Wall Street … was something that in some sense you could see coming. I think we have increasing concerns about inequality, which is getting worse, about the distribution of power.

But rather than throw the financial system out, Shiller called for tinkering. Financial institutions and structures such as insurance or mortgage securitization have a role in improving social and human welfare, Shiller argued. U.S. economic success is due to a financial system that has evolved over centuries and helped improve the quality of life, he added.  A shortcoming of the Occupy Wall Street movement is that it doesn’t accept those contributions, he said.

Changes in financial structures could make the financial system more responsive to people’s needs, said Shiller. For example, a new type of corporate entity that is allowed in six U.S. states – the “benefit corporation” -- could provide incentives for firms to link success more closely to improvements in social welfare. This charter allows the for-profit companies to explicitly pursue a social purpose as well as its business goal. By law, regular corporations have a fiduciary responsibility to their shareholders to be profitable, while a benefit corporation also has some accountability, overseen by a third party, to perform a public good.

Shiller also wonders why there can’t be a mortgage that has automatic work-out provisions built in. Such a mortgage could require changes to terms and conditions if the borrower experienced job loss or other financial strains. The lender would price in the possibility of such losses at the beginning and cautious borrowers might be willing to pay a higher price for the insurance, Shiller said. In effect, a 30-year fixed rate mortgage is a similar instrument, since it allows lenders to pay a higher interest rate for a long-term loan that that they can refinance.

To contain income disparity, there could be a tax indexed to inequality, the Yale professor suggested. When the income of the top 1 percent of U.S. wage earners exceeds a certain multiple of the nation's median income, the tax would kick in. In 2006, that multiple was 36, up from 12.5 in 1980, he said.

Shiller was not subject to the “mic check” interruption that the Occupy movement uses to disrupt some public officials’ speeches. But some thought he was taking too rosy a view of the benefits of the financial system and the public’s willingness to view financial executives sympathetically. Reynold Nesiba, an economics professor at Augustana College in Sioux Falls, South Dakota, said: