Opinion

Edward Hadas

Mr. Fine Suit visits Europe

Edward Hadas
Nov 30, 2011 06:00 UTC

Once upon a time there were 11 prosperous merchants who lived in a land of peace and plenty. They decided to form a league that would work together for everyone’s greater good. But then a charming man in a fine suit came around with a tempting speech: “I love your project and trust your businesses. I will lend you money at a very attractive interest rate”. How nice, thought the merchants. Our customers will love us if we use the money we borrow to give them better deals.

All went so well that six other merchants were proud to join the league. Mr. Fine Suit seemed pleased. He reduced the already low interest rate on the loans. The merchants all planned to repay, but today was never quite right. Today, in fact, was always a good day to borrow more, while tomorrow always looked like a better day to raise prices.

Then one day Mr. Fine Suit changed his tune. “You know, you have a mighty nice little enterprise going here. But business is business, my friends. Interest rates are going to rise for some of you.” The merchants were angry, but what could they do? They promised to be more frugal, but still had to pay up. As the months went by, Mr. Fine Suit became more hostile. Just last week he came to the G-store, the most prosperous and prudent of all the merchants, with a really nasty threat. “You know, between us, I’ve never liked your stupid league. You’re much smarter than the rest. Leave the league and I’ll keep on lending you money at a low rate. If not, well, here’s a little reminder of what I can do.” He increased the interest rate by two notches before leaving the room with a menacing smirk.

The story is a parable of the euro zone debt crisis. The merchants are the member governments, the customers are the taxpayers and Mr. Fine Suit represents the banks, fund managers and individuals who lend to governments. These investors in government debt tend to think and act alike; just about two years ago their message to the euro zone changed from “We’re behind you all the way” to “Nice little monetary system you have here. It would really be a shame if something happened to it”.

The euro zone’s weaker members and the EU as a whole have responded to the threat with tougher budgets than were ever contemplated while investors were still friendly. But the investors have started to behave like an extortionist, demanding ever higher interest rates and threatening to withdraw funding totally. Even fiscally healthy Germany (the G-store) is now under threat. Of course, investors do not think of themselves as extortionists or even as malicious. They think of themselves as merely law-abiding professionals trying to protect the value of their investments, either by making sure the governments will be able to pay up or by selling before the governments default. But many sensible individual fears — “I don’t want to be caught out” — can add up to group menace– “You must meet our ever harsher demands – or else”.

The two sides of inequality

Edward Hadas
Nov 23, 2011 15:30 UTC

Around 100 BC, a Roman nobleman calculated that it took about 100,000 sesterces a year to live comfortably. That was roughly 200 times the amount of money a poor city dweller needed to eke out a living. If an American needed the same multiple of the subsistence income to join the upper middle class today, the threshold would be $3.5 million. The United States economy has become less equal lately, but it remains much more egalitarian than the ancient Roman Republic.

The modern news on economic inequality is much more good than bad. The good news is very good. The greatest moral problem caused by inequality – the unequal access to the most basic economic goods, those which support life – has become less severe. The portion of the total population that suffers from this bottom-inequality is probably the lowest ever in history.

True, we do not know how many ancient Romans were on the wrong side of the bottom-inequality, but statistics for the most recent decades are encouraging. In 1970, 26 percent of the world’s population suffered from hunger, according to the UN’s Food and Agriculture Organisation. The proportion is now 13 percent – still scandalously high, but the gain in food-equality is clear. Nor is food an isolated example. Electricity is a relative new development, but the Soviet dream of universal electrification has already nearly become a reality; more than 80 percent of the world’s population can plug in, according to the International Energy Agency. Health care and sanitary living conditions are now considered basic goods – and access to them has become more equal. The average life expectancy at birth is 65 or above in countries accounting for roughly 80 percent of the world’s population.

Is the euro history?

Edward Hadas
Nov 16, 2011 14:24 UTC

“The Owl of Minerva takes flight only as the dusk begins to fall.” Or, to speak more directly than G W F Hegel, we can only become wise about the direction of history late in the day. The aphorism is pertinent to the euro crisis. Is this the twilight hour for the single currency or are the clouds over the euro no more than an early morning mist in pan-European history? The euro’s fate will look inevitable in retrospect (that is Hegel’s point), but for now the balance of historical forces is far from clear.

The technicalities of the euro crisis are bewildering, even to financial professionals. There are rescue funds constructed with baroque techniques of financial engineering, arcane details of labor market reforms and political feuds that have festered for decades. But something much bigger is at stake – whether or not there should be, in the words of Angela Merkel, “more Europe.” If so, the crisis can be resolved relatively simply: lenders would accept the losses caused by their past mistakes and errant governments would promise to play by the fiscal rules henceforth.

But should there be more Europe? Most British politicians think not and most mainstream continental politicians are in favor, if only warily. The reasons on both sides are fundamentally Hegelian. It is a question of which historical forces should prevail.

Can financial greed be contained?

Edward Hadas
Nov 9, 2011 14:08 UTC

“Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.” The words are from a recent speech by Bob Diamond, chief executive of British bank Barclays. In a way, this is just the usual corporate guff. No boss will tell the world about untrustworthy workers who try to harm customers. But Diamond’s aspirations are a particular challenge for the financial industry.

Not that finance itself is an ignoble activity like drug dealing or contract killing. On the contrary, finance has a noble goal, the support of a just and effective economic community. Banks, fund managers and the like collect funds that is surplus to the owners’ current requirements. The funds are then made available to organizations and individuals which can make good use of them. The gains from that good use are justly shared between provider and user, with the intermediary taking a small fee for its valuable services.

That is a pretty picture, but in the pre-crisis finance world, the intermediaries often lost sight of their economic purpose. Customers came third, after employees and shareholders. Bankers, banks and other institutions were misled by a particular form of greed, the belief that finance is more about gaining than sharing.

7 billion reasons why Malthus was wrong

Edward Hadas
Nov 2, 2011 12:35 UTC

By Edward Hadas The opinions expressed are his own.

A child is born. For almost every parent, everywhere and always, the entry of a new person into the world is a welcome wonder. But economists generally have a different outlook on births. They prefer hard numbers to hope. And this week they have a big demographic number to discuss: the world’s population has just reached 7 billion.

When economists talk about demographics, Thomas Malthus usually comes up. The early 19th century British thinker decided (without providing any reasons) that people would always have more children than the physical world could possibly support. Population growth would always be restrained by death from want. At the time he wrote, the world’s population was about 1 billion. By the 1960s, the population had increased to about 3 billion people, and Malthus’s gloom was often cited. Some ecologists then claimed that the combination of industrial production and overpopulation would inevitably lead to environmental catastrophes – and many deaths from want.

And yet up to now, Malthus has been wrong, in two basic ways. First, human resourcefulness has proved much greater than he imagined. The economic story of the last two centuries has been one of increase – of people and production. The most recent years have been particularly impressive. The 135 million births this year will be almost 30 percent more than 50 years ago, according to UN data. Those lives will be longer; this year’s children can look forward to an average 68 years of life, 18 more than newborns a half-century ago. And the current crop will receive much more of the goods of industrial prosperity, from clean water and adequate food to free education and mobile phones.

What is the morality of debt?

Edward Hadas
Oct 26, 2011 14:18 UTC

Debt is a moral matter. While most economic activity is concerned with the “is” of how things are (investment, consumption and so forth), debts are always entwined with an “ought” – to repay. In discussing controversial debts–for example government borrowing in the euro zone and the U.S.–the moral question should be addressed directly: should these debts be paid off in full, or is some forgiveness justified?

Aristotle can help frame the argument. The philosopher condemned all lending at interest because money cannot create wealth by itself; a loan is just a way for the lender to take advantage of the borrower. Some proponents of Islamic finance make a similar argument, but it is not quite right. Capitalism has shown that loans can indeed produce wealth. If the lent funds are invested well, enabling the borrower to improve his lot and the world’s, then interest payments are the lender’s just reward for providing the fruitful funds.

But Aristotle’s moral logic remains relevant; his condemnation is appropriate for loans which do not share wealth justly between borrower and lender. Unfair loans should not be made, and where they have been, full repayment only compounds the original injustice.

Occupy Wall Street and the shallowness of discontent

Edward Hadas
Oct 18, 2011 15:51 UTC

By Edward Hadas
The views expressed are his own.

Occupy Wall Street can claim a tremendous heritage. In almost every generation – from the French Revolution of 1789 to the student revolts of the 1960s – popular movements have rejected a society which, they say, denies some sort of basic freedom. But for a protest to leave a lasting impression, it has to start or mark a significant cultural change. What could OWS signify?

The Occupy movement certainly expresses popular fury at high finance. But that sentiment is far from revolutionary. President Obama and many business dignitaries have expressed sympathy. There also seems to be anger at inequality created by unjust practices. In the words of an October 14 blog entry on Occupywallst.org, the “99 percent” of the population will “no longer tolerate the greed and corruption of the one percent.” Such righteous indignation could perhaps spawn a revolution, but only if it came with a more positive agenda. As it stands, though, the manifestos and soundbites coming out of the leaderless groups are long on complaints and short on both intellectual coherence and suggestions for new arrangements.

Still, this movement must have something going for it. It has spread around the world and attracts much friendly attention from the mainstream media. I see three forces at work.

The dangerous power of negative thinking

Edward Hadas
Oct 12, 2011 16:35 UTC

Another recession could be about to arrive, or even be here already. Some people fear it will be as bad as the last one, which reduced output in the U.S., euro zone and Japan by 5.1, 5.5 and 8.9 percent respectively. Those GDP declines are often described in cataclysmic terms: staggering, disastrous or traumatic. Such words are vast – and dangerous – exaggerations.

Even at the trough of the last recession in 2009, real GDP in most rich countries was as high as it had been five or six years earlier – when economic conditions were not considered particularly bad. And that comparison is too harsh on the 2009 consumer experience, which included iPhones and the Airbus A380 super jumbo jets, both better than the comparably valued goods available in 2003.

Americans and Europeans have little enough reason to moan about their recessions; citizens of the world have much less. For mankind as a whole, the small travails of the wealthy are much less important than the entry of the truly poor into the modern economy. Industrial production in emerging economies, a good measure of that development, has increased at a heartening 6 percent annual rate over the last decade, according to the most recent data from Dutch consultants CPB. The recession reversed two years’ progress, but only briefly.

World moves closer to 2008-style cliff

Edward Hadas
Sep 30, 2011 22:39 UTC

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

By Edward Hadas

LONDON (Reuters Breakingviews) – What turns a financial mess into a deep recession? The answer to that question is crucial right now. There is a mess in the euro zone and signs that GDP has stopped increasing in much of the world, but neither the markets nor any large economies have fallen off a 2008-style cliff. Not yet, anyway.

Most observers were astounded by the speed and scale of the last collapse — in just a year industrial production in developed economies fell 17 percent and global trade fell by 20 percent, according to Dutch consultants CPB. The shock of the September 2008 failure of Lehman Brothers massively amplified the fear and credit tightening which were already slowing the global economy. The authorities responded with strong enough countermeasures to prevent a great global depression, but they were not fast enough to stop the economic decline.

Monetary moves have lost their magic

Edward Hadas
Sep 22, 2011 21:44 UTC

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

Financial markets are tiring of the Federal Reserve’s love offerings. The U.S. central bank has long been able to soothe nervous investors with rate cuts or newly-printed money. But markets spurned Wednesday’s announcement of the Twist, an operation to lengthen the maturity of $400 billion of the Fed’s $1.7 trillion U.S. Treasury.

Stock markets fell sharply and the price of bonds from governments still considered safe rose. Investors were right not to be impressed. The Twist is aimed primarily at the U.S. housing market. But even if the Fed’s rearrangement lowers mortgages costs, house prices will be held back by a weak economy and the massive oversupply left over from the bubble years.

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