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Lok Sang Ho
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Lok Sang Ho is professor of Economics at Lingnan University in Hong Kong. He holds a PhD in Economics from the University of Toronto and has worked in the Ontario Government as well as academia. Much of his research has focused on housing and the macro economy, with articles published in World... More
My company:
Lingnan University
My blog:
Life of Fulfilment
My book:
Public Policy and the Public Interest
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  • Bailout For Cyprus Is Bailout For The Big Brothers In Euro Zone

    I have written before that the various "bailouts" for American corporations are in reality not a bailout. The bailouts typically wipe out shareholders' equity. If they are bailouts, they are bailouts for the counterparties of the "rescued" companies--which is sometimes necessary, but certainly not for the shareholders. With this understanding, the headline "Rescued by a Bailout, A.I.G. May Sue Its Savior" in New York Times is completely unfounded and is entirely based on a misunderstanding of the nature of the "rescue" operation.

    The "Bailout" for Cyprus is an equally striking illustration of the misleading nature of the term. The "bailout" essentially aims at ensuring that creditors who had loaned to Cyprus will recover their money: if the bailout deal did not work out, Cyprus would default on money loaned. So the bailout is actually a bailout for the creditors on Cyprus. Because the operation is meant to help the creditors and not the Cypriots, the Cypriots would be better off without the bailout, and the creditors on Cyprus banks would be worse off without the bailout.

    Iceland is a case in point. The Global Financial Tsunami had rendered the Iceland economy bankrupt, whose outlook was extremely bleak. As any bankrupted entity would do, Iceland defaulted on its international creditors, who suffered deep losses. For example, the supreme court of Iceland ruled that loans indexed in foreign currencies were illegal, effectively causing huge losses on foreign creditors. As a result of much lighter debt load, and with assistance aimed at relieving the household sector, Iceland began to enjoy economic growth from 2011.

    In sharp contrast, the Cyprus "bailout" did not make life any easier for Cypriots. Quite apart from the absurdity of the deal-which makes a mockery of the European monetary union, calling it a bailout is to add insult to injury. The operation prevented an exit from the Euro zone of a member, which could lead to a break-up of the Euro zone altogether. Preserving the euro benefits Germany the most. No wonder Germany is so much behind the deal. But the short term benefits notwithstanding, the deal has really undermined the credibility of the ECB, which has engineered effectively a partial confiscation of bank deposits which are supposed to be secure and under prudential supervision and regulation. Despite claims to the contrary, the Cyprus deal will be taken as a precedent, and investor confidence has been shaken up forever. The outlook for the euro has dimmed forever.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Apr 02 1:15 PM | Link | Comment!
  • Wealth Gap Widening Less Under Obama, Bernanke

    A CNBC story posted February 15 2011 suggested that the wealth gap is widening under Obama and Bernanke.  That is a misleading statement.

     

    Obama conceded to the extension of the tax cuts on all income classes, as demanded by the Republicans, for two years because he had no choice.  If the Republicans had been in the helm, the extension would have been indefinite.

     

    Bernanke with his quantitative easing and innovative monetary policy helped bring the economy back from the brink of utter collapse.  He helped save jobs and create new ones.  We had been seeing job losses well in excess of half a million per month for months, now we have had positive job creation for many months.  The unemployment rate is now down to 9% from over 10%.  Saving jobs and creating new ones definitely had helped the poor.

     

    The claim that excess liquidity is fueling commodity price inflation is overplayed.  Food price rises are largely due to abnormal weather conditions that had destroyed crops from China and Australia to America.  Global food stocks are at their lowest point in years.  You cannot blame excess liquidity for this.

     

    Oil prices had hit almost $150 a barrel without quantitative easing before the financial tsunami.  Now they are hovering below $90 per barrel.  Much of the oil price rebound from its recent lows is due to the global economic recovery.  Commodity prices would rise with the global economic recovery regardless of quantitative easing.

     

    This is not to dispute that QE had to some extent fueled inflation.  But American inflation is still well below 2%.  This is still well within the range of any reasonable inflation targets.

     

    Inflation is rising much more sharply in India and China.  In part that is because food takes up a much larger proportion in household expenditures.  In part it is because their economies had started to overheat.  As Bernanke had claimed, these economies could rein in excess growth by monetary tightening, which they have been doing recently.

     

    Before we say a statement like what the CNBC story did, we need to compare with the realistic alternatives.  The poor definitely would not have fared better under a Republican administration, and inflation might have been lower—even deflation could have been possible, without the monetary stimulation.  But the poor would have fared even worse.

     

    Feb 16 6:08 PM | Link | Comment!
  • The Real Choices Central Bankers Face

    Monetary conditions, fiscal policy stance, as well as private sector readiness to spend jointly determine if a country is able to achieve full employment.  For a long time Europe has been profligate in fiscal spending, compensating for effectively tight monetary conditions that were a result of excessively strong exchange rate or excessively high interest rates.  For this reason, the recent reversion to fiscal restraints and looser monetary conditions are a welcomed change.

     

    However, asset prices have been too weak, leading to weak household and corporate balance sheets, resulting in insufficient market readiness to consume or to invest. For this reason, a rise in asset prices is a necessary condition for economic recovery in Europe, and must not be construed of as a “bubble”, even though in percentage terms the rise from the trough may appear to be excessive.

     

    The same logic applies to America and Japan as well.  Weak asset prices in recent weeks are threatening to abort an emerging economic recovery.  Quantitative easing will help boost asset prices.  While some market observers fear this will touch off a “hyperinflation” of sorts, such fear is totally unwarranted when there is still a huge slack in our production capacity.

     

    To fear excessive monetary expansion boosting an unsustainable bubble is effectively to disallow the recovery of the economy.  When interest rates have already hit the limits for possible downward adjustment, quantitative easing through direct bond purchases is a smart way of monetary easing.  In America in particular, it is important to note that without quantitative easing mortgage rates are likely to go up, and with inflation virtually gone, at about 5% mortgage rates are not really excessively low. 

     

    The following diagram depicts the effective monetary conditions for the United States from 1973 to 2005.  A number less than 1 signals excessively tight effective monetary conditions(which takes into account of asset prices). I will post the latest monetary conditions in the coming week.  But the general picture is clear.  Monetary conditions had been very tight during Paul Volcker’s term as Fed Chairman.  Greenspan gradually reversed the tightness which turned somewhat excessively loose in the years leading to the bursting of the dotcom bubble.  Profligate fiscal policy kept the economy buoyant during the tight money years however.  More recently, because of outbreak of the financial tsunami, effective monetary conditions have been insufficiently loose, however.  




    Disclosure: no positions
    May 22 10:20 PM | Link | Comment!
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