Politicians and the Financial Crisis

The same bad language now criticized the bankers for the reckless financial management of their country in the boom years.

Did you notice who the EU during the crisis came on stage and started confidently and with a dramatic lecture financial markets about how frivolous, short-sighted, and rude, they behaved before the financial crisis? These politicians. They immediately and actively began to develop the proposed method for taming the "bad market practices.

It is quite paradoxical. The political elite in most developed democratic countries can hardly serve as an example of care for long-term goals that go beyond the authority and political cycles. In contrast, the ability to see beyond the political elections, by definition, is suppressed in the normal democratic politics. Elections constantly on the horizon, whether they are party, local, national or pan-European. Long-term thinking is in short supply. The actions of politicians can get into the history books, but in order for this to happen, it is necessary to win a series of elections in a short period of time. Long political way - there is nothing more than the sum of failures for short periods of time. Until now, this is consistent with public choice theory, or "economic policy". Therefore, the changes that are so painful in the short term, useful in the long term, but difficult to implement, whether they relate to pensions, health care, labor law or the flexibility of markets at the EU level, the infamous Lisbon strategy, which is the EU's failed attempt to catch up and surpass "United States.

The financial sector is also often criticized for not having been formed airbag in good times for the insurance for the time is not so favorable. And even in this situation, politicians are trying to show off the virtues, citing the previous crisis years of the "great moderation" in the management of the state budget, during which growth has been stable and inflation low.

Nevertheless, from 2000 to 2007, the overwhelming majority of European countries already had a substantial budget deficit. Every way the EU has demonstrated its commitment not to allow participating governments to allow a budget deficit greater than 3% of GDP in bad times. In good times, which is already behind us, the budgets had to be balanced and even create reserves. However, thanks to creative thinking by EU finance ministers, the permissible threshold of this criterion has been changed not only for the bad times, but for good. And even this criterion has been repeatedly violated in many countries, both east and west of the EU (see chart). I read with a smile conclusion ECOFIN (Council of EU Finance Ministers), which virtually every month with a serious face offer a new type of reporting, regulating or controlling a new tool designed to compel financial sector to think about the bad times to the present moment. Often, these are the same ministers who are responsible for the numbers in the chart.

On the one hand, many politicians give scolded bankers for the "herd behavior" that led to the destabilization of the entire market. On the other hand, they write a new directive that will limit the opportunities for banks and other financial institutions in matters of their own making decisions that will lead to greater vysheupmyanutogo "herd behavior". Regulation - there is nothing more than the prescribed behavior "herd." Sometimes it affects positively, sometimes - not. In any case, the same straitjacket can bind and those financial institutions that have not followed the "herd" and came out winners of the crisis.

Moreover, it is ironic that in today's EU new regulatory measures were written and promoted mostly big western countries whose financial systems are most affected by the crisis. Just imagine what would happen if the new financial regulation in Central and Eastern Europe will be written by Latvians.

Just to be clear: I am not among those who default relates to politics with contempt and disdain, and I do not belong to politicians, as beings from another planet. I have a pragmatic point of view, I believe that a certain type of universal rules in the middle leads to similar results and behavior. Public administration - not the exception. That's why I was surprised how cheap a lecture on markets around the world are taken for granted so quickly and without a doubt, while it is easy to see that the proponents of these lessons are experiencing a serious lack of credibility at the point of view that they are preaching.

Mr. Hampl is vice president of the Czech National Bank and a member of the Economic and Financial Committee of the EU.

The Wall Street Journal

Morgan Stanley: Dubai World will not help the dollar

According to analysts of Morgan Stanley, the dollar will not be able to significantly strengthen its position against the anti-risk sentiment caused by concerns about debt restructuring Dubai World. "We do not consider these events as systemic risks", - noted in the bank. Thus, the dollar will not get support. In contrast, other currencies with a low beta, such as the yen, Swiss franc and euro even able to extract more benefits from the situation. "More than others in these circumstances, the downside risks to currencies with high beta and weakened fundamentals, such as the New Zealand dollar. Not in the best position of the U.S. dollar and the pound."

UAE push to head off debts damage

In the resurrection of the UAE made in defense of their banks in order to prevent any potential capital outflows. Thus, national, federal authorities are trying to resist the debt problems of Dubai.

Central Bank of UAE has created additional lines of liquidity injection to ease fears about the banking system, but investors are worried because of the short-term impact on local markets, as regional traders felt that the cause of global sale was reported that one of the flagship sites of Dubai - "Dubai World" requests the postponement of the creditors until May.

Because of the Muslim holiday of stock markets in Dubai and Abu Dhabi opened only on Monday after the shocking statements by Dubai World, which was made on Wednesday. Some players predicted a market of Dubai and Abu Dhabi fall to record low levels because of the likely impact on the banking system.

UAE Central Bank announced its readiness to provide creditors access to additional liquidity and that the UAE is committed to support banks and branches of foreign groups. "The Central Bank says that UAE's banking system is strong and provide liquidity, even more than a year ago," - said in a government response.

Meanwhile, Dubai World is prepared to persuade the owners of bonds to refinance Nakheel timing of payments, while the government will compensate for losses due to inactivity officials belittled the problem of failure to respond to Dubai's debt, which reached a high of $ 80 billion

UAE authorities have been negotiating with officials in Dubai at the weekend to formulate a response to the fears of investors and reduce the damage to the UAE economy.

Nakheel has to pay $ 4 billion of Islamic bonds in the next month, while the total debt of the parent company amounts to $ 59 billion

Bankers expect intervention from Abu Dhabi, which is funding its massive capital CB and plays a key role in the financial prosperity of Dubai. However, Abu Dhabi has always maintained that such issues should be addressed at the federal level.

Abu Dhabi officials also said that while they provide all the seven Emirates, they are not discharged Dubai blank check.

The reaction of CB was mixed.

Economist, Standard Chartered, Marios Marafeftis (Marios Maratheftis) said that he sees positive dynamics in the fact that the Central Bank sends signals to the rest of the banks and the world that he would support banks.

The banking analyst at EFG-HERMES Madhu Raj (Raj Madha) welcomes this step, but also said that the Central Bank will have to do much more.

The Financial Times
November 30

The political curse

Financial crisis may take a long time, because effective measures to deal with them politically unacceptable

U.S. crisis on the scale close to the Japanese, however, the United States can reassure residents that their political culture is more suited to finding solutions. But is this true? The current anti-bank sentiment surprisingly reminiscent of resentment of Japanese voters, who in the 190's have blocked attempts to restore the Japanese banking system. In fact, financial crises - is a vivid example of how political constraints hamper the implementation of economically viable solutions. For example, the Ministry of Finance and the U.S. Fed began to explore options for using public funds to buy illiquid mortgage assets and capital infusions into financial institutions immediately after the rescue of Bear Stearns, the difficulties of investment bank - in March 2008. But six months passed before they began to implement these plans. According to Henry Paulson, the former Minister of Finance at the time, they could not go to Congress, yet people do not realize that a crisis. Of course, Paulson and Ben Bernanke, Congress asked for permission to spend 700 billion dollars to maintain the system after the collapse of Lehman Brothers triggered a general panic.

Some argue that Paulson would take more perseverance to get the funds to the bankruptcy of Lehman. Maybe, but doubtful that he has made a success. По его словам, "это было чрезвычайно сложно сделать даже в разгар кризиса". Economist Philip Svagel, who this fall will begin work in Georgetown University, writes in his article, devoted to working with Paulson in December 2006. to January 2009. that market participants and academic economists are often suggested solutions, which do not take into account the political and legislative obstacles real world. Some scientists have argued that it is necessary, for example, to compel the creditors of banks to exchange debt for shares. However, Mr., Svagel notes that this is wrong, without changing the law on bankruptcy - intricate political process. Similarly, to reduce the incidence of foreclosure mortgage bonds the Ministry of Finance and the Congress have taken a decline in interest rates for homeowners in need, even in spite of the fact that it would not be as effective as the subsidization of major write-offs of amounts under the mortgage. However, the policies and the voters would have reacted to this as an unacceptable way of salvation is not deserving homeowners.

Economists have long been exploring how the institutional constraints impede the efficient economic choices, such as the specific interests of creating barriers to market access for goods and services. The rapidly expanding literature on the study of financial crises, such restrictions have given little attention. Nevertheless, a more careful study shows that with each new crisis, often the same political obstacles. First, the Ministry of Finance of Japan tried to resolve the crisis with the help of the private sector, so as not to cause the anger of voters over the use of taxpayers' money. When these solutions failed, the government in 1995. Invited to spend about 685 billion yen (7 billion U.S. dollars) for the purchase of problem loans seven mortgage finance companies (jusen). This caused great discontent. Opposition parties demanded the resignation of the Minister of Finance and organized a sit in Parliament. According to one survey, against the decision expressed 87% of voters. Ultimately, the measure was adopted, but the experience was so painful that, as a result, the Government has not engaged in the larger banks' overdue loans before 1997.

Despite these difficulties, some governments still struggling hidden political dangers. South Korea is often praised for the fact that after a 1997-98gg. in a financial crisis, it is rapidly and persistently engaged in the acquisition terpevshih the collapse of banks and the purchase of overdue loans. However, the South Korean Government has been able to overcome the anger of the public, claiming that to adopt these measures they forced the IMF, which Koreans still blamed for the crisis. In the early 1990s Sweden has acquired two banks and implement a program of general guarantees of bank liabilities, even though the ruling coalition did not have a majority in parliament. Bo Lundgren, the then finance minister, said that in the case of the Swedish referendum, voters would have voted against the rescue. First, however, the government enlisted the support of the opposition party (which was inherited and the crisis has passed), and then got in the parliament, permission to use unlimited funds, so he did not have to return later and ask more money.

The current case is no different with an open check amount would be an ideal solution for Barak Obama, who recently warned that U.S. banks may "require significant additional resources." Mr. Obama plans to get another 750 billion dollars in the form of stabilization funds budgeted for 2010. But to free up additional funds will be very difficult. Despite dominating the majority in Congress and high level of support, Obama must overcome strong opposition from voters tired of immoderation bankers. This can lead to a breach of certain economic principles.

In general, economists prefer the transparency of hidden subsidies. However, Mr. Svagel said that the Ministry of Finance finally realizes that the understatement of the value of the guarantee of bank assets has caused less political resistance than overpaid for assets precisely because the guarantee is less transparent. Also in the financing of illiquid assets of the Ministry of Finance relied on the Fed to print money, because it does not require the approval of Congress (even if it jeopardizes the independence of the Fed). Another temptation - to combine punishment with help bankers to meet the thirst for justice by the public. Sweden submitted a claim of government nationalized two banks. Some members of the board agreed to return the "significant financial compensation" paid a termination indemnity, to avoid prosecution. Mr. Obama promised that if the banks still need help, they are asked to those who bear the responsibility. Of course, one should not forget that the desire to propitiate the voters could lead to the opposite effect and reinforce their anger. In this case, to direct funds into the banking system becomes even more difficult.

From The Economist print edition