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from Hugo Dixon:

Bernanke deserves 6 out of 10

How should the world outside America view Ben Bernanke’s legacy? Should it lambast the U.S. Federal Reserve chairman, who retires later this week after an eight-year stint, for failing to predict the financial crisis and being slow to react when it hit? Or should it laud him for pulling out the stops to save the financial system and pep up the U.S. economy after Lehman Brothers went bust in 2008? Or should non-Americans be worried that the process of unwinding Bernanke’s unprecedented money-printing policy will deliver a bad case of whiplash?

The answers to the last three questions are “yes, yes and yes.”

Bernanke’s culpability for the global financial crisis is not nearly as great as that of his predecessor, Alan Greenspan. It was, after all, Greenspan who ignored the dangers of financial deregulation, while being ever-too-ready to respond to any sign of market trouble by dropping interest rates – a policy that encouraged banks and investors to run up excessive risks with borrowed money.

By the time Bernanke took over in February 2006, the global credit bubble – and, in particular, the U.S. subprime housing bubble – was already well inflated. There was no way of avoiding trouble. However, the new Fed chairman could have mitigated the damage if he had had more foresight – say, by pushing for tighter regulation of the financial system.

The bigger criticism, though, is that once the subprime bubble burst in mid-2007, Bernanke was slow to appreciate the severity of the situation. True, he did cut interest rates. But he didn’t realise how losses were going to cascade through the global financial system, nor did he push hard enough for financial institutions to increase their capital and liquidity buffers.

from MacroScope:

Lew’s comes to Europe airing concerns

U.S. Treasury Secretary Jack Lew moves on to Berlin then Lisbon after spending yesterday in Paris. There, he urged Europe to do more to build up its bank backstops and capital, a fairly clear indication that Washington is underwhelmed by the German model of banking union which has prevailed.

Lew may also press for more German steps to boost domestic demand, after indirectly criticising Berlin for its policies during his last visit in April. If he does, he can expect a robust response from Schaeuble, at least in private.

from MacroScope:

Economic damage from the shutdown? Small to start, say forecasters

The U.S. government shutdown probably won't hit the economy too hard, say economists. Some point to the fact the shutdown has come right at the start of the fourth quarter, meaning there's time before the year's out for the economy to recoup some of  lost output resulting from the downtime. But, the longer it goes on, the worse it will be.

And there is always that debt-ceiling tail risk - the worst-case scenario being that the U.S. Treasury will default on one or more of its obligations. A Reuters poll on Monday put that risk at less than 10 percent.

from MacroScope:

Does less QE from the Fed necessarily mean a stronger dollar?

Based on the latest U.S. Treasury flows data, it may be time to ditch the textbook theory that says less monetary stimulus means a stronger currency - at least for now.

The problem may just be that the theory doesn't fully account for the situation when your largest creditors - and they are very large - are trying to beat you to the market.

from Global Investing:

Guarding against the inflation dog in emerging markets

The dog that didn't bark was how the IMF described inflation. But might the fall in emerging market currencies reverse the current picture of largely benign inflation?

Nick Shearn, a portfolio manager at BlueBay Asset Management, sees the rise in inflation as not an if but a when, which makes inflation-linked bonds (linkers in common parlance) a good idea. These would hedge not only against EM but also G7 inflation -- he calculates the correlation between the two at around 0.8 percent. He says linkers outperform as inflation uncertainty increases, hence:

from Ian Bremmer:

The global vacuum of power is expanding

How do you solve a problem like Korea? Or Syria? Or the euro zone? Or climate change?

Don’t look to Washington. The United States will remain the world’s most powerful nation for years to come, but the Obama administration and U.S. lawmakers are now focused on debt, immigration, guns and growth. A war-weary, under-employed American public wants results at home, leaving U.S. officials to look for allies willing to share costs and risks abroad.

from Ian Bremmer:

Xi dreamed a dream of China’s rise…

China’s new president, Xi Jinping, gave his big inaugural address last week, talking at length about the “Chinese Dream.” He said: “We must make persistent efforts, press ahead with indomitable will, continue to push forward the great cause of socialism with Chinese characteristics, and strive to achieve the Chinese dream of great rejuvenation of the Chinese nation.”

All that talk of ‘great this’ and ‘great that’ should sound familiar to Americans—it’s the same exceptionalism that their leaders espouse during any major national address. Both the American Dream and the Chinese Dream are patriotism without the isolationism—clarion calls for the nation as well as the individual. For America, it’s about holding on (or reasserting) its claim as the world’s foremost nation. For China, it’s about wresting that title away—or at least providing an alternative prototype that other nations can follow.

from David Rohde:

Why intervening in Mali was the right thing to do

The question from a colleague – one whose work I admire – could have come from anyone in the United States.

“So the French,” he asked, “now have their own Afghanistan?”

The answer is yes and no. Western military interventions should be carried out only as a last resort. But Mali today is a legitimate place to act.

from Global Investing:

What’s next? A U.S. downgrade or Spanish bailout?

What will happen first? A U.S. credit rating downgrade or the country's unemployment falling below 7 percent?

Or Spain having no other option but to ask for a bailout?

Bank of America Merrill Lynch asked investors in its monthly fund manager survey what "surprises"  they saw coming up first this year.

from Anatole Kaletsky:

The fiscal cliff deal proves Congress is working

The U.S. fiscal cliff was dodged in pretty much the way that seemed most likely after November’s election: a bipartisan deal in which pragmatic Republicans, no longer focused on ending the presidency of Barack Obama, joined moderate Democrats to prevent economic sabotage by extremists from both ends of the political spectrum. On Wall Street, the immediate reaction was euphoria. But among mainstream economists and political commentators in Washington, it was cynicism.

While stock markets around the world approached their highest levels since the 2008 financial crisis, media headlines emphasized grim forebodings: Fresh stand-off looms after US cliff deal (Financial Times); Budget deal passes, debt ceiling looms (Wall Street Journal); Deal done but threats remain (Washington Post); Bigger showdowns loom after fiscal cliff deal (Reuters); House backs tax deal as next fight looms (Bloomberg).

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