Amid the turmoil of the 2008 financial crisis a myriad of events unfolded that the general public knew nothing about, writes New York Times reporter Andrew Ross Sorkin in a new book titled “Too Big to Fail.”

Wall Street fell from the dizzying heights of good fortune to calamity in a matter of months. To a large degree it’s still to early to tell whether financiers and politicians involved made the right choices.

“At its core ‘Too Big to Fail’ is a chronicle of failure — a failure that brought the world to its knees and raised questions about the very nature of capitalism,” writes Sorkin in his behind-the-scenes account.

He spoke with Reuters before giving a lecture at the London School of Economics on Thursday.

When the Bank of England decided to expand its quantitative easing policy by 25 billion pounds to 200 billion on Thursday, it was essentially hedging its bets.

After Britain’s economy shrank unexpectedly in the third quarter, and with two thirds of the City expecting an expansion to the QE programme, simply shutting off the tap of government bond purchases would risk being more of a shock than the economy could bear.

On the other hand, the Bank clearly believes that the worst is over for the economy and that recovery will come soon — even if it’s going to be weak.

Thursday’s decision means the central bank will keep buying government debt until February, but at only half the pace of before. This still amounts to around 2 billion pounds a week, not including the much smaller sums of corporate debt that the Bank is buying.

What the decision means for a typical household is harder to calculate. The Bank says that its quantitative easing programme has raised the price of government and corporate
bonds, making borrowing cheaper.

But for average firms and consumers looking for a loan, the benefit is harder to spot.

There is little clear evidence that banks are much more willing to lend than a few months ago — though the Bank would argue that quantitative easing has been instrumental in avoiding the recession turning into a depression.

In the longer term, the big unknown is the impact that quantitative easing will have on inflation. Sterling’s weakness against the dollar and the euro will push inflation up in the short term, and going forward the Bank of England said it faced a balancing act.

While rising unemployment and half-full shops and factories will keep a lid on prices, policymakers know that quantitative easing could exert upward pressure on demand and prices for months if not years after it has stopped.

That’s why they took the decision today which could mark the gradual phasing out of this unprecedented policy of asset purchases.

Recent U.S.  gross domestic product data show the world’s biggest economy emerged from recession in the third quarter, while in the UK data show that in the same period Britain’s economy contracted.

British economist and author John Kay theorizes that Britain is mired in its worst recession on record in part because government support has not been evenly distributed across sectors.

“We’ve poured money into the financial sector — by and large the financial sector in Britain is doing OK,” he said.  “But very little of that is getting through to small and medium-size businesses out there in the rest of the economy.”

Even if a deal is reached among political delegates at the upcoming United Nations Climate Conference in Copenhagen, it is unlikely to set out specific emission targets, says Mike Hulme, author of “Why We Disagree About Climate Change” and a professor at the University of East Anglia in Norwich.

“What we’ve done with climate change is to attach so many pressing environmental concerns to the climate change agenda that trying to secure a negotiated multilateral agreement between 190 nations is actually beyond the reach of what we can achieve,” he argues.

Hulme, who will take part in a debate hosted by the Institute of Economic Affairs in November about carbon emission policies and economic activity before he heads to the Copenhagen conference, discussed his views with Reuters.

-Kurt Karl is chief U.S. economist for Swiss Re. The opinions expressed are his own.-

Ongoing job losses pose a severe threat to the nascent U.S. recovery because they weaken consumers confidence and their ability to spend.

In September, another 263,000 jobs were lost in the U.S., worse than August’s 201,000 job drop, though much better than the 741,000 jobs lost in January of this year – the worst month is this cycle.

Employment is down 4.2 percent compared to a year ago. Hours worked for nonfarm productive workers were down 1.8 percent, while their average hourly earnings were up only 2.5 percent.

Thus, it is no surprise that overall wage and salary income is down by 5.2 percent compared to a year earlier. This huge downdraft on wage and salary income has lowered consumer confidence, as measured by the Conference Board, to its lowest levels since the inception of the survey in 1967.

Not surprisingly – with declining income and low confidence – U.S. consumers have become more frugal, pushing the savings rate up to nearly 6 percent in May, up from 0.8 percent in April 2008.

To get a full income picture, it is necessary to review income after-taxes and after-inflation, or real disposable income. This income measure has been bolstered by tax cuts and transfer payments, such as unemployment insurance, social security and welfare.

It has also fallen a great deal during the downturn (see figure), but by a lot less than wage and salary income. In fact, it was up just slightly, year-over-year, in August, when measured on a three-month moving average, partially due to the income factors mentioned but also to lower energy prices compared to last year.

American consumers are remarkably resilient – consumer spending has been rising month-on-month — up 0.2 percent, 0.2 percent and 0.9 percent for the three months ending in August. Unfortunately, the large jump in August was mostly due to the expired “cash-for-clunkers” program, which was intended to provide economic stimulus by increasing car sales and promote the use of fuel efficient cars.

Thus, real consumer spending will be anemic in the fourth quarter.

The clunkers program boost sales from a 9.6 million annual rate in second quarter to 11.2 million in July and 14.1 million in August, before falling back to 9.2 in September. The good news is that the September rate is near the pace of the Q2 rate, despite the clunkers program ending in August.

To achieve sustainable consumer spending growth, employment must stabilize quickly. Employment growth always lags output growth and the bottom of the cycle. However, in deep recessions the lag can be very short. After the severe 1981-82 recession, employment growth resumed quite quickly so the trough for employment was only one month after the bottom for the economy.

On the other hand, the low point for employment after the mild 2001 recession came 21 months after the recession trough. For the current cycle, the nadir for employment is likely to be earlier than after the last cycle – within 10 months – given the pattern of improvement that has transpired since January.

Assuming the trough of this cycle was June – since industrial production has been rising since July – then employment will be growing before April 2010, thus assuring the sustainability of the consumer spending turn-around begun last quarter.

-David Kuo, Director at the financial website The Motley Fool. The opinions expressed are his own.-

Go on. Admit it. You didn’t see it coming, did you? You never thought a member of the G20 nations would dare to break ranks and raise interest rates this soon.

But Australia has done just that. The Central Bank of Australia has increased the cost of borrowing by 0.25 percent to 3.25 percent. It is doing what it thinks is right for the country regardless of what the rest may think. Now, Asian countries, keen to avert another bubble, may follow Australia’s lead and ratchet up interest rates before long.

Of course, Australia’s economy is vastly different to the UK’s. It has huge deposits of iron, aluminium and nickel that are in demand by mineral-hungry China. That said, Australia did briefly flirt with a downturn, which it successfully corrected with 21 billion pounds of fiscal stimulus.

But the UK is not Australia. We do not have huge deposits of mineral, and we are not near fasting-growing Asian countries either. What we do have are consumers saddled with over a trillion pounds of debt following a decade of binge borrowing, and a national debt burden of similar magnitude.
Therefore, it is unlikely that we will experience demand-led inflation. In fact, consumers are saving more of their household income than they have done for eight years.

The most recent Office for National Statistics report shows that between March and June British households saved 5.60 pounds out of every 100 pounds of household income. That is very different from the first three months of 2008 when we not only failed to save any money, but we even borrowed 50 pence for every 100 pounds of household income.

That said, we are still some way off getting our overstretched household finances back on an even keel. So, the savings ratio could go higher. In fact, it is still some way short of the long-run savings-ratio average of 8 percent of household income.

And herein lies the problem for the Bank of England.

According to the paradox of thrift, high levels of savings in a recession can prolong the economic downturn. That is because two-thirds of economic growth comes from consumer spending. So the less we spend, the longer it will take the UK economy to recover from the slump.
So what is the Monetary Policy Committee to do?

It has already slashed interest rates to historic lows. But that has failed to stimulate consumer spending. It has pumped 158 billion pounds of fresh money into the coffers of lenders through quantitative easing. But the money has, as yet, failed to invigorate the ailing economy.

However, both those measures will, in time, achieve their goals. The risk is not whether they will work, but instead, whether they will work too well and stoke inflation. Just as no one expected Australia to hike rates this soon, our days of enjoying low interest rates may end just as abruptly, and without warning. So save and invest what you can now.

Prosecute over bribes allegedly paid in far-flung lands years before you banned such practices?

That’s the bluff from Britain’s Serious Fraud Office and its biggest defence firm, BAE Systems, is having none of it.

The Lockheed scandal of the 1970s forced the United States to toughen its anti-bribery laws but the British quietly left their laws wide open for decades.

It worked a treat.

UK firms enjoyed a competitive advantage over U.S. rivals and were able to do battle in arms exports versus freewheeling rivals from France, Germany, Russia and beyond.

BAE is now Europe’s biggest defence company and has even cracked the Top 10 in sales to the Pentagon.

Britain’s economy has profited too, especially from the Al Yamamah arms-for-oil export pact with Saudi Arabia – at an estimated 43 billion pounds ($69 billion) by far the country’s biggest ever export deal.

Remember it? It’s the one the Serious Fraud Office probed until late 2006 when then Prime Minister Tony Blair, under pressure from the Saudis and citing national security, quashed it.

Turning a blind eye is sometimes hard, but a 43 billion pound eye patch does wonders.

The Serious Fraud Office has been smarting ever since.

So it is back, mounting a stand, hoping to reassert its authority with a case involving BAE and far smaller defence deals done in South Africa, the Czech Republic and Tanzania.

It’s true, regulation is back in vogue, with politicians busy talking the world back out of recession and vowing tougher rules to avert another financial meltdown.

Little about how they all missed this crisis, but a lot on the great ideas they have for spotting it next time.

The Serious Fraud Office’s sleight-of-hand is even more breathtaking.

They want time travel -- to use today’s laws to prosecute yesterday’s crimes.

Can they be serious?

Problems sparked by the financial crisis have not gone away, but have been transferred to the public sector, economist Roger Bootle posits in his new book.

In "The Trouble With Markets: Saving Capitalism from Itself" Bootle argues that in large measure, the underlying cause of the financial crisis was the result of an idea that markets work, and that governments do not.

"Despite the trillions of dollars lost, and despite the worries of millions of people, more than this -- much, much more -- is at stake," Bootle writes. "For this crisis has delivered the killer blow to an idea that has underpinned the structure of society, framed the political debate, and moulded international relations for decades."

Bootle, director of Capital Economics and an economic advisor to business accountancy firm Deloitte, reflects on the pitfalls of the corporate system and puts forth his ideas on the future of capitalism.

He discussed his book and his economic predictions with Reuters at his London office.

-- Wei Gu is a Reuters columnist. The opinions expressed are her own --

If current trends continue, China might swing to a trade deficit in the not-too-distant future. Given that China has enjoyed more than a decade of strong exports, this may sound a bit far-fetched. But even if it happens, this would not necessarily be something for the world to worry about.

Some economists have recently sounded alarm bells about the possibility of a Chinese trade deficit. They argue that if the Chinese current account surplus shrinks, it would leave Beijing with less spare cash to buy U.S. Treasury bonds. Then who would fund the U.S. budget deficit -- and, by implication, U.S. consumers?

Those worries are largely misplaced. First, it is unlikely to happen any time soon. In order for China to have a trade deficit next year, imports would have to outgrow -- or shrink less than -- exports by at least 23 percentage points.

In August, exports fell 23.4 percent while imports fell 17 percent. So while the trade surplus is diminishing, a deficit is not around the corner.

If China's trade surplus shrinks, it will most likely be caused by a contracting U.S. deficit, in which case Americans will be saving more and the U.S. will be less dependent on overseas investors to finance its government debt. That would be a sign that the long-overdue rebalancing of the global economy was beginning to take place.

It would not be so bad for the Chinese economy either, because China is a lot less dependent on exports than many people assume. Although exports have accounted for a whopping 50 percent of the economy in the past few years, the contribution of net exports to economic growth is actually much smaller, because a lot of what China sells abroad is low value-added assembly work.

In the same way, one cannot just look at China's large imports number and jump to the conclusion that China is a big end-user of the world's goods. China's imports accounted for a third of its gross domestic product last year, versus about 17 percent in the U.S. during the same period. But this is because a lot of what China imports, such as computer parts, eventually finds its way abroad.

On average, net exports contributed 1.4 percentage points to annual GDP growth between 1979 and 2007, according to the Statistics Bureau, much less than the contribution from the other two drivers -- consumption and investment.

The transition to a more balanced trade account will take time. In particular, it will need a push from foreign exchange reforms, as the currently undervalued yuan encourages exports and discourages imports. China allowed the yuan to rise gradually for a few years after 2005, but has re-pegged it to the dollar since the start of the credit crisis.

It will take time before Beijing is confident enough to remove some of the export incentives, or at least not pile them up as it has done in response to the crisis. A more equalised trade account will probably not hurt China's overall growth that much, but will help in making the world economy more balanced.

-- At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund --

- Bernard Murphy is investigations editor at Clinica World Medical Technology News. The opinions expressed are his own -

Bernard Murphy has been following the spread of avian and swine flu across the globe and is an expert in medical diagnostics and regulation. He explains how the threat of bird flu is still present and discusses the latest developments in diagnosing and combating the viruses and the threat they pose to the global economy.