Financial Structures and Regulation: A Comparison of Crises in the UK, USA and Italy

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David T. Visit David's website Barter is Evil and follow him on Twitter here. Mike 'Mish' Shedlock. It's been about 10 years since the last financial crisis. FocusEconomics wants to know if another one is due. The short answer is yes. In the last 10 years not a single fundamental economic flaw has been fixed in the US, Europe, Japan, or China. The Fed was behind the curve for years contributing to the bubble. Trump's tariffs are ill-founded as is Congressional spending wasted on war. Many will blame the Fed. The Fed is surely to blame, but it is prior bubble-blowing policy, not rate hikes now that are the problem.

It does not matter what the catalyst is actually. And there might not be any catalyst other than simple exhaustion: The pool of greater fools in stocks, bonds, and housing simply ran out. Regardless, I expect all eight of the above discussion points to be in play when the crisis does hit. Mike Shedlock a. Mish is a registered investment advisor representative for SitkaPacific Capital Management. Visit Mish's website Mish Talk and follow him on Twitter here.

Elliott Morss. Amol Agrawal. It is difficult to take a precise call about the next financial crisis will hit and what the catalyst s will be. The catalysts looks quite similar to the previous crisis: huge financial euphoria as seen in financial markets, rise in debt levels of governments and rebuild of hubris. Visit Amol's website Mostly Economics and follow him on Twitter here. John Quiggin. A characteristic feature of financial crises is that they arrive when least expected.

However, there are plenty of reasons for concern in the current environment. At an aggregate global level, the biggest problem is that US interest rates have been held at low levels for a long period as a response to the Global Financial Crisis. This has extended to what Minsky, the leading theorist of financial crises, called Ponzi investments, most notably cryptocurrencies, but also the investment strategies of authoritarian governments like that of Turkey.

As the US Fed begins to raise interest rates, problems are already emerging, such as the economic crisis in Turkey and the sharp decline of cryptocurrency markets. However, provided that the process of returning interest rates to more normal levels is slow and gradual, it is likely that only Ponzi investors will be harmed, and that the financial system as a whole will emerge unscathed. The big risk is that there will be a rapid increase in interest rates outside the control of monetary authorities such as the Fed.

The most obvious possibility is that Chinese holdings of US Treasuries could be dumped, either as a move in the trade war or to secure liquidity in response to a slowdown in China. That could easily produce a systemic collapse. Hopefully, the Chinese authorities are aware of this fact and will move cautiously. John Quiggin is an Australian laureate fellow in economics and professor at the University of Queensland, and a board member of the Climate Change Authority of the government of Australia.

Visit John's website his website here and follow him on Twitter here. Jeff Miller. The business cycle has become longer in recent decades.

Financial Regulation in the UK (2019 Update)

It follows no schedule. Many are itching to call a cycle top, but the actual evidence does not support that conclusion. This is possibly the most important topic for investors, so I have sought those with the best expertise and records. I have learned three things. First, no one can do an accurate business cycle forecast more than a year in advance. Even a cursory review of past records will show that. Third, many of those who have the right tools use too many variables in their forecasts.

There are not enough relevant past cases to apply a large number of independent variables. Using a lot of variables seems sophisticated, but it actually over-fits the model to past data. What do I think? I am careful not to exaggerate what we can actually conclude. We can safely say that a recession has not already begun despite some doomsayer claims and that the odds against a recession starting in the next year are And the cause? No one knows that either, although it usually happens after a pop in the ten-year yield, a later move in short-term rates via the Fed, and a yield curve inversion.

That process may play out again, but we are early in the story. Visit Jeff's website Dash of Insight and follow him on Twitter here. Wolf Richter. Financial crises happen all the time. Currently, there are several underway, including in Argentina and Turkey. A financial crisis is generally limited in impact, unless the economy where it takes place is very large and very interwoven with the rest of the world.

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The Financial Crisis in the US — when credit froze up in a credit-dependent economy — became the Global Financial Crisis because the US economy and banking system are so massive, and because US investment products, assets, and speculative bets are shuffled far and wide around the world. If a financial crisis breaks loose in China, it will become a global crisis, but likely on a much smaller scale than the US Financial Crisis since Chinese bonds and other assets and bets are not nearly as globally distributed as those originating in the US.

But a financial crisis in Italy will not become a global financial crisis. It will be tough on Italy and perhaps some other Eurozone member states, and it will ruffle some feathers globally. But that will be it. Going forward, there will be many financial crises, and they will be mostly limited to the economy where they occur.

But every now and then there will be a big one. Ken Houghton. Often the crisis comes from somewhere entirely different. Equities, Russia, Southeast Asia, global yield chasing; each time is different but the same. The first unforced error is Interest on Excess Reserves. This was a quaint, arguably academic, problem with Fed Funds running in the 0. As bank liabilities decline, balance sheet adjustment is an identity. Increasing assets, though, would require greater lending.

Earnings Before Management, once removed from reality. For that, we need more complications. Two things happened in The first was floating exchange rates finished correcting from long-sustained imbalances. The second was that energy costs moved closer to their fair market values, also from an artificially-low level.

When expected losses dwarf menu costs, you change the menu—raise prices, even as your customers are seeing the same issues on a micro scale. Finding an equilibrium takes time. Additionally, they are complications in the Chinese economy, even ignoring a general slowdown in their growth, there are possible squalls on the horizon. As part of that, the land was nationalized and then leased out by the state—for 70 years. Those leases expire beginning in October of —less than twelve months from now.

If Chinese real estate and rental prices move closer to a fair market value, the consequences of that will have to be managed domestically, leaving China with limited options in the event of a global contraction. If the early s taught us anything, it is that an exogenous shock can wither Aggregate Demand. If the rest of the world repeats its austerity gaffes and China cannot stimulate, whither Aggregate Demand? Corporations continue not to invest, banks continue not provide viable investment options, and demand continues to slow in the face of rising global interest rates.

Miles Kimball. There are two different types of extreme financial events; one is a crisis, the other isn't. In , banks and other financial firms were so highly leveraged that a modest decline in housing prices across the country led to a wave of bankruptcies and fears of bankruptcy. By contrast, the dot-com crash at the beginning of the millennium led to a large decline in stock prices, but no domino effect beyond that.

Because most stock-holding is done with wealth people actually have, rather than with borrowed money, people's portfolios went down in value, they took the hit, and basically there the hit stayed. Leverage or no leverage made all the difference. Stock market crashes don't crash the economy. Waves of bankruptcies in the financial sector—or even fears of them—can. The lesson is: Don't allow much leverage in the financial sector! Financial leverage means borrowing a lot. What does it mean to not allow much leverage? When people buy common stock, they know they are taking on risk.

By contrast, when banks borrow, whether in simple or fancy ways, those they borrow from may well think they don't face much risk, and are liable to panic if there comes a time when they are disabused of the notion that the don't face much risk. Common stock gives truth in advertising about the risk those who invest in banks face. If banks and other financial firms are required to raise a large share of their funds from stock, the emphasis on stock finance.

This book has persuaded many economists. Sometimes people point to aggregate demand effects as a reason not to reduce leverage with "capital" or "equity" requirements as described above. New tools in monetary policy should make this much less of an issue going forward. And in any case, raising capital requirements during times of low unemployment such as now is the right thing to do.

Sometimes people think the economy as a whole will take on too little risk if banks are required to have low leverage. My view is that if the taxpayers are going to take on risk, they should do it explicitly through a sovereign wealth fund, where they get the upside as well as the downside. See the links here. The US government is one of the few entities financially strong enough to be able to borrow trillions of dollars to invest in risky assets. However controversial that is, providing an implicit guarantee to financial firms that get the upside while the taxpayers foots the bill for the bailouts should be more controversial.

The way to avoid bailouts is to have very high capital requirements, so bailouts aren't needed. Miles Kimball is the Eugene D. Eaton Jr. Professor of Economics at the University of Colorado and also a columnist for Quartz. Colin Lloyd. A number of commentators have been surprised by the length of the current bull-market.

I myself have worried on several occasions over the last few years. Given that the main driver of the stock market has been interest rates, one should anticipate a rise in rates to drain the punch bowl. The recent weakness in emerging markets is a reaction to the steady tightening of financial conditions resulting from higher US rates. The domestic US economy has remained largely immune. Tariff barriers and tax cuts have more than offset the monetary drain. Historically the correlation between the US stock market and other equity markets is high.

Recent decoupling is within the normal range. There are sound fundemental reasons for the decoupling to continue, but it is unwise to predict that, 'this time it's different.

Ten Years After the Crash

The global economic recovery since has been exceptionally shallow. US fiscal policy has engineered a growth spurt by pump-priming. When the downturn arrives it will be protracted, but it may not be as catastrophic as it was in Lightening seldom strikes in the same way twice. A 'melancholy long withdrawing breath,' might be a more likely scenario. A decade of zombie companies propped up by another, much larger round of QE. Probably not yet. The economic expansion outside the tech and biotech sectors has been engineered by central banks and governments. Animal spirits are mired in debt; this has muted the rate of economic growth for the past decade and will prolong the downturn in the same manner as it has constrained the upturn.

Markets behave in a suboptimal manner unless they are permitted to clear. The Austrian economist Joseph Schumpeter described this phase as the period of 'creative destruction.

Managing International Financial Crises: Responses, Lessons and Prevention

Inequality has increased over the past 10 years. As the OECD has warned, this is undermining social mobility, perhaps the most important pillar of the liberal order. Although growth is back, the gains are not evenly distributed. There is excessive inequality in income, wealth and power. The financial sector is still too dominant and attracts excessive capital and talent. This is because economic growth continues to be dependent on credit, and the other side of credit is debt, which has not stopped growing. All this has created social discontent and economic anxiety.

The liberal order based on free trade, free competition and relatively free migration creates many winners although some win more than others , but also a number of losers. Although growth is weakening, its trend remains positive. Southern countries that have been under a program are growing and their public finances are improving.

Black swans are impossible to predict by definition. In the medium term, one could foresee two scenarios for Italy. In the positive scenario, a successful structural reforms program boosts growth and allows for a significant decline in public debt. Log in to access content and manage your profile. If you do not have a login you can register here.

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French president and the Italian prime minister agree to work together on migration. Search Term Search. Login Register. Brussels Commission Parliament Council. Log In Log in to access content and manage your profile. Forgot your password? Click here. Remember me. The larger threshold countries are demanding more influence.

A renewed conflict is imminent. This also explains the adamant attitude of the larger threshold countries. Obviously they also see the IMF rather than the UN as the decisive power centre and forum for disputes on global economic issues. And they take advantage of their access to the newly significant G They want to exercise their influence there for a new global financial order. Smaller and weaker States are rather committed to the UN, though without far-reaching success. The agenda of the global discussions still bears the stamp of the interests of the rich countries.

This can be demonstrated by three examples: the debate on debt, the issue of global taxes and the question of international tax evasion and capital flight. How to cope with this issue is a primary element of public economy and political debate. In , according to the IMF, the total burden of debt of all the developing countries mounted by a further USD billion to USD 4, billion 47 and will, according to predictions, continue to rise in the coming years.

But they simultaneously warned that in a number of countries the debt vulnerability has risen sharply, namely in high-risk countries like Afghanistan, but also in Ethiopia, Malawi, Mali, Mauritania, Nicaragua and Sierra Leone. All HIPCs would be exposed to at least a moderate risk of being involved in any future debt crisis. Half of the countries are still so severely burdened by old debts that their risk is very high or high.

This menacing time bomb is allowed only an insignificant place in the ongoing discussion. In August the President of the British Financial Services Authority, Adair Turner, therefore proposed the introduction of a financial transaction tax, 49 and French and German government circles supported the idea.

Before the Pittsburgh summit, non-governmental organisations wrote to the G that a tax of this kind should be introduced and the income used for development purposes. The motion was not discussed seriously either in Pittsburgh or in Istanbul. However, the measures introduced to date largely bypass the needs of the developing countries. Any country which did not have at least 12 double taxation agreements DTAs or tax information exchange agreements TIEAs with other countries was blacklisted.

These agreements must, at least, meet the OECD minimum standards for mutual exchange of tax information on request. The lists were updated continually OECD a. OECD presents a review of its efforts in the struggle against tax evasion in an informative brochure published in October In the meantime, according to OECD, the offshore centres monitored have signed 90 new agreements for improved exchange of information since April and over 60 are currently being negotiated.

New ones are being added continually. OECD argued that the developing countries would also benefit from them. Many of them have not yet been brought into operation. Developing countries have also contracted far fewer bilateral DTAs than the industrialised countries. The OECD standard for the exchange of information is not enforceable under international law. The Tax Justice Network has set out in detail why the exchange of information on request is not sufficient, why an automatic exchange of information is necessary and why multilateral rules are essential, precisely for developing countries.

Various studies in recent years have shown how the offshore centres foster corruption, capital and tax flight. According to the latest estimates, between USD and 1, billion of illicit flows are leaving the developing countries Global Financial Integrity Contrary to expectations, criminal dealings or bribery and corruption payments do not account for the greater part of these illicit flows.

Two-thirds derive from commercial transactions. Particularly targeted is internal transfer pricing by multinational group concerns. By under-invoicing or over-invoicing, book profits and losses can be shunted around virtually at will. This is linked with tax evasion on a grand scale. Four specialised non-governmental organisations demanded six immediate and trenchant measures by letter to the G Global Witness et al. The G should prepare for the transition to the automatic exchange of information. The rules on the identification of bank clients must be tightened up. Tax evasion should be declared a preliminary to money laundering.

The G should show ways of combating abusive transfer pricing. The ownership structure, control and invoicing of offshore enterprises, trusts and foundations should be disclosed. In particular, the multinational enterprises should be bound to detailed, public, country-by-country reporting on their subsidiaries and the associated turnovers, investments, profits, taxes paid as soon.

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It set up a special commission whose report on capital flight from the poor countries was published in June Commission on Capital Flight from Developing Countries The study proposes a more demanding development policy that will assure the developing countries sufficient tax income and root out corrupt practices that lead to flight of capital and taxes.

Each of these havens was examined according to 12 indicators, selected to provide information on the degree of transparency and the spheres of secrecy. In the wake of the financial crisis, the Swiss financial centre has come under heavy pressure from two sides and has had to make significant concessions.

It announced that it would rapidly initiate negotiations for the revision of DTAs with States that wished this. Three more have been negotiated but have not yet been signed. These agreements must now be ratified by parliament before they can come into force. It is striking that, with the exception of Mexico itself a member of OECD and Qatar, there are no developing countries on this list. Switzerland has contracted DTAs with only 42 developing countries. Another group of the agreements assures administrative aid only in the event of tax fraud. There are no treaties at all for over developing countries.

In these cases there are no contractual commitments with respect to tax evasion and tax fraud Alliance Sud Switzerland had already negotiated agreements with Bangladesh, Chile and Ghana before it switched to the OECD standard for exchange of information. The federal councillors ratified these old-model agreements. Those with France and Turkey, also originally negotiated on the old model without exchange of information even for tax evasion, were, in contrast, referred back for reworking.

An economic commission motion has been submitted instructing the Federal Council to draw up a concept for the equal treatment of OECD and developing countries. At a media conference in the run-up to a conference of OECD ministers of finance in Berlin in June Alliance Sud a , together with partner organisations from Austria and Luxembourg, presented proposals for a new tax foreign policy that would benefit not only industrialised States but also developing countries.

The three countries should contribute vigorously to drying out the tax havens.

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The OECD standard should also apply for developing countries. And finally, taxation of interest should be expanded, analogous to the agreement with the EU, to cover the developing countries. The latter demand was not new; the aid and development policy organisations had already called for it in vain in previous years. The Federal Council had rejected such motions out of hand several times. The idea was left on the shelf and was not followed up. In contrast, various bank representatives launched the idea of a capital gains tax on foreign assets Swiss Banking Switzerland should levy a tax for interested countries on income from foreign assets held in Swiss banks.

This would equate to a further expansion of EU interest taxation as dividends and fund income would also be taxed. This is aimed primarily at OECD member countries, not at developing countries. There were also initial defensive reactions from the capitals of individual European countries and in international press commentaries. Apparently the idea seems to be rated as an all too transparent manoeuvre by the Swiss banks in an attempt to save what can still be saved.

Foreign States would profit from increased tax income from Switzerland but would not have any information on the names of the holders of the assets. Such a capital gains tax contradicts the tendency to improved exchange of information. The EU wants data, not money. Alliance Sud. Discussion Paper. Media Conference. Joint Media Statement. Phuket, Thailand. Awad, I. The global economic crisis and migrant workers: Impact and responses.

ILO: Geneva. Burki, O. Mordasini Die Volkswirtschaft No. Cassen, B. Le Sucre contre le FMI. Le Monde diplomatique, December. Chowla, P. G Policy Brief No. Christian Aid. Death and taxes: The true toll of tax dodging. Commission on Capital Flight from Developing Countries. Tax Havens and Development. Status, analyses and measures. Press Release. Development Committee.

DC 29 September. Eurodad From London to Pittsburgh: assessing G action for developing countries. Media Report. Report on the short-term stocking up of IMF funds. Media Release. IMF annual meeting. Switzerland wants to adopt the OECD standard in administrative aid in tax matters. Federal Council Commission.

Progress report on the actions of the London and Washington G summits. Progress report on the actions to promote financial regulatory reform issues by the US chair of the Pittsburgh G summit.

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The global plan for recovery and reform. Global Financial Integrity. Illicit Financial Flows from Developing Countries, The links between tax evasion and corruption: How the G should tackle illicit financial flows. Hamdani, K. Can developing countries be a new engine of growth? Voices from the South. The impact of the global financial crisis on developing countries. Capital Flows to Emerging Market Economies. Global Financial Stability Report. Various editions. World Economic Outlook. New York 24 June. Review of Recent Crisis Programs.

IMF and World Bank. Jubilee USA Network. Kaiser, J. Knoke, and H. Towards a Renewed Debt Crisis? Friedrich Ebert Stiftung und Erlassjahr. Occasional Papers No. Morais de Sa e Silva, M. One-pager No. International Policy Centre for Inclusive Growth. New Rules. Report on the civil society fourth pillar consultations with the International Monetary Fund on reform of governance. Official development assistance: rising or falling? A progress report on the jurisdiction surveyed by the OECD Global Forum in implementing the internationally agreed tax standards. A Background Information Brief.

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