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What We Read Today 04 February 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number accepted.

As Walter Shewhart noted, 88 years ago, management consultants most often fail because they are hired BY executives, to help executives succeed, not BY aggregates, to make aggregates succeed.

[The] debt can be financed at any rate the government desires without losing control over interest rates as a tool of monetary policy. The problem of financing the debt is not the issue. The question is whether the size of the deficit to be financed is compatible with the stable expansion of the economy.

Click on page image below to read the paper at levyinstitute.org.

debt-limit-kregel-levy-policy-note-2014-2

Having chosen to embrace financial globalization, emerging market countries then proceeded to follow economic policies that were bound to create volatility. The fragile five [Brazil, India, Indonesia, South Africa and Turkey] ran up large current account deficits; some of them also had high inflation and large fiscal deficits. These countries lapped up foreign funds instead of tightening lending regulations and imposing prudential controls.

China's crackdown on risky lending has driven borrowers into an even darker place in their search for capital - underground banking.

The domain of loan sharks, underground lending is the least regulated area of China's shadow banking, or non-banking, sector and for some it is seen as the biggest risk to China's financial stability.

  • In defence of China’s shadow banks (David Keohane, FT Alphaville) Keohane reports that JP Morgan has calculated the size of China's shadow banking system and it doesn't look very large.

shadow-banking-size-global

home-ownership-rate-600x400

"I'm now convinced that capitalism as we know it is torpedoing our prosperity, killing our economies, threatening our children with an unliveable world. It needs to be re-engineered root and branch."

From the interview:

[T]he form of capitalism that's evolved in the last few decades is basically suicidally dysfunctional and we have to turn our backs on it and introduce an alternative set of systems.
  • A Window Into the 1% (Justin Lahart, The Wall Street Journal) An NBER paper indicates that the top 1% have income cyclicity not much different from the bottom 99%. (How Risky Are Recessions for Top Earners? by Fatih Guvennen, Grag Kaplan and Jae Song) Then why do the top earners save so much . And why do they save so much in highly volatile vehicles like stocks?

earnings-cyclicity-nber


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