Archive for the ‘Editorials / Leaders’ Category
The European Central Bank should learn from the success of unconventional policies in America and Britain
In America and Britain, output and employment have surpassed their pre-crisis peaks and are growing solidly. But the picture in the rich world’s other two big economies is darker. In the second quarter Japanese output shrank sharply, largely because consumers had accelerated purchases in the first quarter in order to avoid a consumption-tax rise. The euro zone’s woes are harder to dismiss: second-quarter output was flat, and it remains no higher than it was in 2011. Read the rest of this entry »
Restricting companies from moving abroad is no substitute for corporate-tax reform
Jul 26th 2014 | From the print edition
ECONOMIC refugees have traditionally lined up to get into America. Lately, they have been lining up to leave. In the past few months, half a dozen biggish companies have announced plans to merge with foreign partners and in the process move their corporate homes abroad. The motive is simple: corporate taxes are lower in Ireland, Britain and, for that matter, almost everywhere else than they are in America.
In Washington, DC, policymakers have reacted with indignation. Jack Lew, the treasury secretary, has questioned the companies’ patriotism and called on Congress to outlaw such transactions. His fellow Democrats are eager to oblige, and some Republicans are willing to listen.
The proposals are misguided. Tightening the rules on corporate “inversions”, as these moves are called, does nothing to deal with the reason why so many firms want to leave: America has the rich world’s most dysfunctional corporate-tax system. It needs fundamental reform, not new complications. Read the rest of this entry »
In both Britain and America financial excesses are best countered with rules, not with interest rates
INVESTORS lulled into believing that low interest rates would last for ever got a cold dose of reality this month. First, Mark Carney, the governor of the Bank of England, told an audience in the City that rates could rise “sooner than markets currently expect”. Now America’s Federal Reserve, which like the bank has kept rates near zero for more than five years, has signalled its intention to keep them there at least until next year; but it too faces ever louder calls, including some from its own officials, to abandon that pledge (see article).
Advocates of fast action worry that rates left near zero for too long will cause inflation to accelerate in both countries. And they fear that even if prices stay quiescent, too much cheap money for too long is inflating asset bubbles: their eventual popping will create another financial crisis. These worries are not unfounded. But they are exaggerated.
Start with inflation. At 1.5% in Britain (the lowest rate in four and a half years) and 1.6% in America, it is below the 2% target of both countries’ central banks. Of course, central bankers should fret not about today’s inflation but tomorrow’s, and the vigour of Britain’s recent growth means the country’s spare capacity is disappearing: unemployment has dropped to 6.6% from 7.8% a year ago. But there is no pressure on wages. In America, the price picture is even more benign: the slack is greater, and inflation has been below target for two years. As in Britain, meagre pay rises give no hint of a wage-price spiral.
What about financial instability? Froth is certainly evident. In Britain the main exhibit is house prices, which have surged by 10% in the past year, overtaking pre-crisis levels. Household debt is also on the rise. In America the appetite for risk is most obvious in the fixed-income market: loans to highly leveraged companies this year are on track to match last year’s record-breaking $1.1 trillion. A third of these loans lack the usual covenants that ensure borrowers can repay the money.
Give surgery a try
These excesses are worrying, especially given the wretched history of the 2000s, when the Fed stood by as an enormous housing bubble inflated. Yet higher rates now are the wrong response to the latest signs of excess, for three reasons.
First, the excesses are still small, compared with those that brought down the global economy in 2007. Britain’s housing bubble is largely limited to London. And in both Britain and America banks sit on thicker cushions of capital and liquidity, making them less vulnerable to any downturn in asset prices.
Second, central bankers and their fellow regulators can treat financial excess far more surgically today by using “macroprudential” tools rather than the blunt instrument of interest rates. The starting-point with mortgages is usually limiting loan-to-value and debt-to-income ratios, but, importantly, allowing some flexibility for the riskiness of various borrowers. (Canada, for instance, is stricter with buy-to-rent investors than with homeowners.) Banks can also be compelled to hold more capital and liquidity against risky loans. And to the extent that macroprudential measures slow down the growth of assets, debt and wealth, they delay the need to raise interest rates, so safer loans remain cheaper for longer.
Third, the danger of raising interest rates to dampen down asset prices is much bigger now than it was ten years ago, because rates are near zero. Premature monetary tightening could push the economy back into recession and turn inflation to deflation. The result would be to send interest rates back to zero for even longer.
To be sure, macroprudential controls are untested. Applied too roughly, without allowing for the creditworthiness of borrowers, they too could be fairly blunt. But they are a better first line of defence against bubbles than just raising interest rates. Central banks would end up creating far more financial instability if, in their zeal to deflate bubbles, they kill the recoveries they have so carefully nurtured. Better, for the moment, to leave interest rates alone.
The original article is linked here.
The world should welcome the monetary assertiveness of Japan and America
Feb 16th 2013 |From the print edition
OFFICIALS from the world’s biggest economies meet on February 15th-16th in Moscow on a mission to avert war. Not one with bombs and bullets, but a “currency war”. Finance ministers and central bankers worry that their peers in the G20 will devalue their currencies to boost exports and grow their economies at their neighbours’ expense.
Emerging economies, led by Brazil, first accused America of instigating a currency war in 2010 when the Federal Reserve bought heaps of bonds with newly created money. That “quantitative easing” (QE) made investors flood into emerging markets in search of better returns, lifting their exchange rates. Now those charges are being levelled at Japan. Shinzo Abe, the new prime minister, has promised bold stimulus to restart growth and vanquish deflation. He has also called for a weaker yen to bolster exports; it has duly fallen by 16% against the dollar and 19% against the euro since the end of September (when it was clear that Mr Abe was heading for power).
Read the rest of this entry »
The debt ceiling in America serves no useful purpose and should be abolished
Jan 12th 2013 | from the print edition
Setting a cap on deductions is a better starting point than raising tax rates
Nov 17th 2012 | from the print edition
Ben Bernanke has done his bit to help the American economy. Now the politicians must do theirs
Sep 22nd 2012 | from the print edition
EVEN by the standards of a weak recovery, America’s economy has looked frail lately. Growth has sunk below 2%. Unemployment is stuck above 8%. Factory activity seems to be shrinking. Yet there is no mistaking the green shoots of optimism, in particular on Wall Street: the stockmarket has hit its highest level since 2007. Consumer confidence is edging up, and along with it approval of Barack Obama, raising his odds of re-election even before Mitt Romney’s gaffes (see article).
Give credit to central bankers and their printing presses for the improving mood. Read the rest of this entry »