NY Fed: Short selling bans do not work

In September 2008, at a time of intense market stress, the United States and a number of other countries banned the short-selling of financial stocks. The bans were imposed because regulators
feared that short-selling could drive the prices of those stocks to artificially low levels. Yet much remains to be understood about the effectiveness of such bans in stabilizing equity market prices.
And reexamination of this issue is particularly important in light of the latest wave of bans in Europe, including the restrictions imposed by Spain and Italy in July.
Recent research on the 2008 bans allows us to assess the costs and benefits of short-selling restrictions. The preponderance of evidence suggests that the bans did little to slow the decline in the prices of financial stocks. In addition, the bans produced adverse side effects: Trading costs in equity and options markets increased, and stock and options prices uncoupled.
No blanket short-selling ban was in effect during August 2011, when Standard and Poor’s announced its downgrade of the U.S. bond rating. Our look at the sharp fall in U.S. equity prices following the announcement uncovers no evidence that the price decline was the result of short-selling. Indeed, stocks with large increases in short interest earned higher, not lower, returns during the first half of August 2011. Moreover, stocks that had triggered circuit-breaker restrictions and therefore could not be shorted on the day the downgrade was announced actually had lower returns than the stocks that were eligible for shorting.
Taken as a whole, our research challenges the notion that banning short sales during market downturns limits share price declines. If anything, the bans seem to have the unwanted effects of raising trading costs, lowering market liquidity, and preventing short-sellers from rooting out cases of fraud and earnings manipulation. Thus, while short-sellers may bear bad news about companies’ prospects, they do not appear to be driving price declines in markets.

Source: NYFed

Zur zukünftigen Rolle der EZB in puncto Bankenaufsicht

Die Europäische Zentralbank fordert in der entstehenden europäischen Bankenaufsicht eine starke Rolle für sich. Die EZB müsse alle Instrumente erhalten, die notwendig seien, um die Aufgaben einer Bankenaufsicht effektiv auszuführen, sagte der deutsche EZB-Direktor Jörg Asmussen laut Redetext am Montag in Hamburg. Dafür seien der Zugang zu allen notwendigen Informationen, Eingriffsrechte sowie das Recht erforderlich, nicht lebensfähige Banken zu schließen. Ohne diese Mindestausstattung werde die EZB keine Verantwortung übernehmen, da das Risiko für ihren Ruf zu groß wäre.
Damit beschreibt die EZB erstmals öffentlich ihre künftige Rolle in der Bankenaufsicht. Zugleich zeichnet sich nun ein Konflikt mit der Bundesbank ab, die eine geringere Rolle empfiehlt. Die Bundesbank warnt vor Zielkonflikten zwischen der Bankenaufsicht und der Sicherung der Preisniveaustabilität. Die EZB solle zwar an der Bankenaufsicht beteiligt werden, sagte Bundesbankvorstand Andreas Dombret, dabei aber keine „finale Verantwortung tragen“. Aufsichtsbefugnisse implizierten Interventionsrechte, die wiederum der direkten demokratischen Legitimation bedürften, fügte Dombret hinzu. Hätte die Zentralbank die hoheitliche finale Verantwortung, müsse ihre Unabhängigkeit eingeschränkt werden. Deshalb solle die finale Verantwortung nicht der EZB, sondern einer anderen Behörde übertragen werden.

Quelle: FAZ

Congressional Budget Office: Full US recovery in 2018

On the subject of eventual full recovery, the CBO regularly estimates the "potential GDP" of the U.S. economy: that is, what the U.S. economy would produce if unemployment was down to a steady-state level of about 5.5% and steady growth was occurring. During recessions, of course, the economy produces below its potential GDP. During booms (like the end of the dot-com period in the early 2000s and the top of the housing price bubble in about 2005-2006), it's possible for an economy to produce more than its potential GDP, but only for a short-term and unsustainable period. Here's the CBO graph comparing actual and potential GDP since 2000. The shallowness of how much the recession in 2001 caused actual GDP to fall below potential, compared to the depth and length of how much actual GDP has fallen below potential in the aftermath of the Great Recession, is especially striking.  

Source: conversable economist

Samaras and Merkel in Berlin

Merkel said at a press conference that

“(Germany) expect(s) Greece to deliver all that has been promised,” Merkel declared. In remarks that were unusually sharp for a joint news conference, she stressed that Berlin has heard words in the past but now expects deeds.
The tough talk contrasted sharply with the head of state honours and diplomatic smiles with which Samaras was received on his first official visit, complete with red carpet and band.
Merkel said that Samaras’ visit is a sign of the “very close ties” between the two countries, only to add later that each side had lost credibility in the eyes of the other and that trust must be regained.
“Our aim is for Greece to remain in the eurozone, despite all the problems that exist,” Merkel said, noting that the euro is more than a currency, that it is the embodiment of European unification.
Moreover, Merkel noted the tremendous sacrifices that the Greek people have made over the last years, underlining that the weaker classes have borne the brunt of austerity and that those who profited during previous years of prosperity have not done their part.
The remark was a thinly veiled barb against the handling of austerity measures by successive Greek governments, which have done nothing to combat rampant tax evasion among the higher income brackets, opting instead for repeated horizontal wage and pension cuts....For his part, Samaras pledged that his government will pursue reforms on a strict timetable and that he is determined to “bring results”.
“I am certain that the troika report will signal that the new coalition government will deliver,” he said.
“We are eliminating two deficits at once – the country’s budget deficit and the credibility deficit,” he said.
But the prime minister underlined that “a revival of the economy and growth is of crucial importance to meet our obligations soon”.

Source: Athennews

Republikaner ziehen Rückkehr zum Goldstandard in Erwägung

Die Republikaner debattieren eine Rückkehr der Vereinigten Staaten zum Goldstandard. Sie wollen eine Kommission einsetzten (sic!), die prüft, ob eine Rückkehr zu einer festen Parität des Dollar zum Gold praktikabel ist. Das geht aus dem Entwurf des Wahlprogramms hervor, das kommende Woche auf dem Parteitag in Tampa, Florida, beschlossen werden soll. (...) Die Kommission soll nur Vorschläge unterbreiten. Drei Jahrzehnte nach der Lösung des Dollar vom Gold im Jahr 1971 kehrt damit die Idee des Goldstandards wieder in die breite politische Diskussion zurück. (...)
Die Aufnahme in das Wahlprogramm signalisiert die Besorgnis vieler Republikaner über Inflationsrisiken und den Dollar-Kurs; sie macht sich angesichts der andauernden Nullzinspolitik der Fed und ihrer Ankäufe von Staatsanleihen breit.

Quelle: FAZ

US fiscal tightening expected in 2013

As a follow-up post to yesterday's take on the fiscal cliff in the US, let me quote an article in 'The Economist:

Here's the real threat. Even if the Bush tax cuts are extended and the sequester delayed, a huge amount of fiscal drag remains in place. They include the expiration of the payroll tax cut, the expiration of extended unemployment insurance benefits, imposition of a new 3.8% Medicare investment tax on the wealthy, and the bite to discretionary spending embedded in the Budget Control Act and prior continuing resolutions. ISI Group projects $220 billion of fiscal tightening in 2013, or 1.4% of GDP. JPMorgan, noting that many Recovery Act programmes are rolling off at the same time, puts the hit at a slightly higher $266 billion, or 1.7% of GDP. The IMF reckons fiscal policy will tighten more in America next year than in Spain, Italy or Portugal. Though smaller than the full fiscal cliff, the fiscal clifflet still poses a significant headwind to the economy. If enough other bad stuff is going on, it could push the economy back into recession.

Source: The Economist

Deutschsprachige Ökonomen wollen sich einem Ethikkodex unterwerfen

Die führenden Ökonomen im deutschsprachigen Raum wollen einen Ethikkodex beschließen, um durch Transparenzregeln mögliche Interessenkonflikte aufzudecken und die Objektivität der Wissenschaft zu sichern. Das ist eine Kernforderung eines neuen „Kodex des guten wissenschaftlichen Verhaltens für Ökonomen", über den die rund 3800 Mitglieder des Vereins für Socialpolitik (VfS) bis zum 5. September vor ihrer Jahrestagung in Göttingen abstimmen. Künftig sollen Wirtschaftswissenschaftler, wenn sie Studien veröffentlichen, „alle in Anspruch genommenen Finanzierungsquellen, Infrastruktureinrichtungen und sonstigen externen Unterstützungen in Form einer Fußnote oder einer ausführlichen Dokumentation auf der Webseite des Autors" angeben, heißt es im Kodex-Entwurf, der dieser Zeitung vorliegt. (...)
Die deutschsprachige Ökonomenzunft folgt damit dem Beispiel der American Economic Association, die sich Anfang des Jahres einen Ethikkodex gegeben hat . Hintergrund waren schwere Vorwürfe - etwa in dem Film „Inside Job" über die Finanzkrise -, dass namhafte Professoren sehr hohe Honorare von Banken, Unternehmen oder Wirtschaftsverbänden erhalten hatten und zugleich die Gesetzgeber in Regulierungsfragen beraten oder sich öffentlich dazu geäußert hatten.

Quelle: FAZ

The US economy and the 'fiscal cliff'

The U.S. economy will probably tip into recession next year if lawmakers can’t break an impasse over the federal budget, according to a report.
The nonpartisan Congressional Budget Office said today that scheduled tax increases and spending cuts in 2013 would reverse the modest economic recovery. Economic output would shrink next year by 0.5 percent, joblessness would climb to about 9 percent with “economic conditions in 2013 that will probably be considered a recession,” the agency said in a biannual report on the budget and economic outlook.

Source: Bloomberg

The problem of capital flight out of China

Rich folks in China simply want to leave the country. 

That is not even news, to be perfectly clear.  A survey did point out that more than a year ago, and survey after survey is pointing to the same conclusion. 

(...) In case you are not already familiar with Prof. Victor Shih’s theory about capital flight from China, enough capital outflow from China (US$1 trillion or more) would cause huge liquidity problem in Chinese banking system, and the wealthiest 1% of Chinese households would be enough to cause that shift of capital should they decided to leave the country, move the money away, or whatever.  And that shift might be happening already (albeit rather slowly), as manifested in the slow but consistent money outflow away from China since late last year, which, as we said, is already tightening liquidity in the banking system whichnecessitates multiple rounds of liquidity injection in China.

Source: alsosprachanalyst


Why are rich Chinese people moving abroad? 1. They do not really trust the Communist government which could take away their wealth. 2. They are looking for safer, cleaner places where their children can get better education than in China. 3. Many experts and forecasters expect the Chinese economy to experience a 'hard landing': If economic growth plunged, impoverished and furious Chinese people could decide to riot. Better run before all hell is gonna break loose!

The bigger the bank, the higher the probability of a bailout

A new working paper by the Bank of England suggests that

(...) the size of a bank is an important determinant of key public British banking interventions: capital injections, nationalisations, and government funding or central bank liquidity insurance schemes.  In particular, the size of a bank relative to that of the entire banking system increases the probability of an intervention, suggesting that large banks are more likely to receive public sector assistance.

via FTAlphaville

Die Zentralbank, die es niemandem Recht machen kann

Die EZB steht unter Dauerbeschuss: Die geldpolitischen Maßnahmen sind für das eine Lager der Kritiker unzureichend, das andere Lager findet sie überbordend und nicht gerechtfertigt. Spanien, Italien und Frankreich üben auf Draghi und Co. massiven Druck aus; sie wollen, dass die EZB in unbegrenztem Ausmaß Staatsanleihen ihrer Länder aufkauft. 'Monetäre Staatsfinanzierung' schreien da die deutschen Spielverderber! Teufelszeug! Es dürfe nicht angehen, dass fiskalpolitische Probleme mit der Druckerpresse gelöst werden sollen. Sehnlich wünscht sich die Deutsche Bundesbank jene Zeiten zurück, als das 'No Bailout-Prinzip' in Kraft war und die EZB sich gemäß ihrer Statuten primär um die Erhaltung der Preisstabilität im Euroraum kümmerte.

Die EZB kann es im Moment jedenfalls kaum jemanden Recht machen; sie ist einem Dauerfeuer gegensätzlicher politischer Interessen ausgesetzt. Da liegt die Lösung nahe: 40 neue Mitarbeiter sollen kommen. 'Ein Tropfen auf den heißen Stein?' Wie gesagt: Die EZB kann es ohnehin niemandem Recht machen:

Die Europäische Zentralbank bekommt nach einem Bericht der Tageszeitung "Die Welt" zusätzliche Mitarbeiter für ihren Kampf gegen die Euro-Krise. Der Zentralbankrat habe 40 zusätzliche Stellen für das Jahr 2013 genehmigt. Entsprechende Informationen der "Welt"aus Notenbankkreisen wurden von der EZB bestätigt.
EZB-Präsident Mario Draghi habe damit eine Zusage von Anfang Juli eingelöst, die Kapazitäten der Notenbank auszubauen. Zuvor hatten sich die Mitarbeiter der Zentralbank über eine zu hohe Arbeitsbelastung beklagt. In Belegschaftskreisen sei nun allerdings von einem "Tropfen auf den heißen Stein" die Rede.

Quelle: Der Standard 

Is the Euro already dead?

(The euro) (...) no longer meets most of the criteria of a working form of money. There is an important point in that for investors. It is right now — while the currency no longer lives but still staggers on like a zombie — that the euro is wreaking most havoc on the countries of Europe.Of course the euro still looks like a currency. There are notes and coins, and you can still go into a shop in Hamburg, or a café in Naples, and get stuff in return, even if there might be a certain amount of grumbling. There is a central bank, although it doesn’t appear to have much idea what its job is. And there are payment systems and foreign exchange markets that work as if the euro were a viable part of the global capital markets.  

And yet if you think about it a little harder, the euro is not a currency in every sense of the word. A currency is only partly about notes and coins. It is also about being a universally accepted medium of exchange, a store of value over time, and a way of facilitating trade over long distances. That was why money evolved. And the euro doesn’t really meet those criteria any more.

Read the whole piece here: Marketwatch

Global growth forecasts revised downwards

According to FTAlphaville, the economics team of Morgan Stanley has recently downgraded its global growth forecasts - again:

(click to enlarge)

Source: FTAlphaville

One thing is for sure: It's not only Morgan Stanley economists who expect global growth to remain below long-term average.

Europe and the US: Key dates in September and October

Which meetings by decision makers will be watched carefully? Calculated Risk put in the effort of creating a list:

• September 6th, Governing Council meeting of the European Central Bank in Frankfurt with a press conference to follow. ECB President Mario Draghi is expected to discuss how the ECB will help lower Spanish and Italian borrowing costs. 

• September 12th, Germany's Constitutional Court is expected to rule on the new eurozone bailout fund and fiscal treaty. 

• Mid-September: Euro-zone finance ministers' informal meetings in Nicosia 

• October 8th, Finance Ministers meeting in Luxembourg 

• European Council meeting, October 18th and 19th in Brussels. 

And in the US: 

• (Not key) Political conventions: Republicans August 27–30 in Tampa, and Democrats September 3–6 in Charlotte. The election is on November 6th. 

• September 12th and 13th: the Federal Open Market Committee (FOMC) meets. After this meeting the FOMC will release updated Summary of Economic Projections, and Fed Chairman Ben Bernanke will hold a press conference. Major economic releases before the FOMC meeting: August 29th, second estimate of Q2 GDP, and September 7th, the August employment report.

Source: http://www.calculatedriskblog.com/2012/08/europe-and-us-few-misc-dates-in.html#sXiGBSJZLGlWhsBC.99