jka on economics UK

Prospect magazine ranks Nouriel Roubini as Top Public Intellectual

Earlier this year Prospect teamed up with Foreign Policy to list the world’s 100 greatest living public intellectuals. The panel were instructed to measure on three criteria: novelty, real-world impact, and intellectual pizzazz. Here we list the top three including Nouriel Roubini as runner up.

1. David Petraeus American general and  commander of US Central Command.
General David Petraeus, PhD from Princeton, demonstrated the battlefield success of his marine field manual. Arguably, the “Petraeus doctrine” is the only piece of intellectual output in the last two years that has made a direct difference to the lives of millions. It’s radical, enshrining the ideas that winning a modern war requires the security and wellbeing of the civilian population, that humanitarian assistance and construction projects are critical to any fight, and that 80 per cent of the battle is a political one.

2. Nouriel Roubini, Professor of economics, NYU, and RGE Monitor runner up.
The Economist noted last year that Roubini’s “commentary seems carefully calibrated to avoid any hint that economic disaster may be avoidable.” The  sage of the credit crunch has been right almost every step of the way. Dismissed as Dr Gloom, Roubini is almost the only economist who can claim to have seen it coming. Definitely worth following.

3. Richard Thaler and Cass Sunstein, Professors at Chicago and Harvard universities third place.
Authors of Nudge, the year’s most talked about policy tract, the buzzy duo brought behavioural economics and social psychology into the mainstream. It was a simple idea, brilliantly packaged and communicated.

Others mentioned in despatches and worthy of following in 2009
Ben Bernanke -     Fed chairman threw every textbook at the credit crunch.
Niall Ferguson -     The ascent of money, ubiquitous writer and broadcaster.
Paul Krugman -     Economist, nobel winner, credit crunch writer/blogger Depression Economics
Nassim Taleb  -     Scholar of randomness, author of huge hit Black Swan.
Barack Obama -    The first “intellectual” in the White House since FDR.
Robert Shiller  -     Author of The Sub Prime Solution, and credit crunch sage.
Adair Turner   -     Just Capital author, now saving the City and the environment.
Paul Woolley  -     British economist, popularised dysfunctional capital markets.
Martin Wolf    -      Must-read credit crunch commentator.

Prospect Magazine : An intellectual surge

It makes for a great reading list. Who is missing and or who should be included?

UK Winter surge of redundancies predicted

Next year will be the worst for jobs for almost 20 years, with a net reduction of at least 600,000 people in employment. The Chartered Institute of Personnel and Development (CIPD) is predicting a "winter surge" of redundancies in the first quarter of the year that could see as many as 300,000 lose their jobs.

The institute warned that unemployment would continue to rise in 2010, taking the total number of jobs projected to be lost over the course of the recession to about 1 million.

The CIPD's annual Barometer Report, published today, predicts a net reduction in jobs of 600,000 next year - after 150,000 this year - and a further 250,000 to come in 2010.

The CIPD's chief economist, John Philpott, warns that the period between New Year and Easter will be the worst for redundancies since 1991, with up to 300,000 losing their jobs.

Philpott said: "This time last year, the CIPD warned that 2008 would be the UK's worst year for jobs in a decade. It was. But in retrospect it will be seen as merely the slow-motion prelude to what will be the worst year for jobs in almost two decades.

Earlier this month the post warned of the acceleration in unemployment, the CIPD numbers could be conservative. 

First the Germans then the Church, now the Austrians attack

I like Peter Schiff and enjoy the occasional visit to Europacific. Peter Schiff is a supporter of the Austrian school of economics. The Austrian school is predominantly laissez-faire with a belief in the self correcting mechanism of market excess.

In contrast to the belief we are all Keynesians now or should be, in a recent article in the Wall Street Journal Peter Schiff outlines the alternative view. Here is an extract :

“With faith in the free markets taking a back seat, the entire political spectrum agrees that the federal government must spend whatever amount is necessary to stabilize the housing market, bail out financial firms, liquefy the credit markets, create jobs and make the recession as shallow and brief as possible.

Taking the theories of economist John Maynard Keynes as gospel, our most highly respected contemporary economists imagine a complex world in which economics at the personal, corporate and municipal levels are governed by laws far different from those in effect at the national level.

Individuals, companies or cities with heavy debt and shrinking revenues instinctively know that they must reduce spending, tighten their belts, pay down debt and live within their means. But it is axiomatic in Keynesianism that national governments can create and sustain economic activity by injecting printed money into the financial system.

It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can't be repaid. However, this is precisely what we are planning on a national level.

As a follower of the Austrian School of economics I believe that market forces apply equally to people and nations. The problems we face collectively are no different from those we face individually. Belt tightening is required by all, including government.

The free market does have a cure: it's called a recession, and it's not fun, easy or quick. But if we put our faith in the power of government to make the pain go away, we will live with the consequences for generations.”

Euro Pacific Capital       WSJ There's no pain free cure for recession

Well that's the other option.

Economic Model accuracy and the Tiger Woods PGA Tour

Writing the post on economic forecast accuracy in 2008 brought to mind the early stages of the UK computer modelling process.

It was in 1966 Jim Ball and Terry Burns at the London Business School devised the first computer model of the British Economy. [This later led to experimentation at the Treasury and the National Institute but it was not until 1971, the Treasury produced computer forecasts]. In 1976, LBS established the Centre for Economic Forecasting headed by Terry Burns. It was a very exciting time.

In 1978 London Business School installed the first general programme multi-use computer at the school, it was a Hewlett Packard 3000. The model came as standard with 256 Kb of memory, expandable to 1 Mb and could support up to 32 terminals at a cost of some £70,000. It was a very, very exciting time. Imagine 256 Kb on one machine shared by up to 32 users!

That year, I had the opportunity to spend time at LBS and to play with the LBS computer using both the UK Economic Model and a golf simulator. The LBS computer had the equivalent processing power and speed of a peanut by today’s standards. The software, especially the golf software, was tedious in the extreme.

Select club, wait for simulation, select power wait for simulation, select direction wait for simulation, strike ball wait for simulation and wait and wait and wait. Dot matrix print output, Result: "You are now 200 yards from the hole". Second shot, select club etc ........... The realism lay in the fact it could take between three and four hours to complete eighteen holes, if you had the patience that is.

The economic model was equally slow and tedious to output simulations and one cannot be sure the model equations were robust by current standards.

The sure thing about computer power and software is the Golf simulation games and the processors have improved vastly, Tiger Woods PGA tour amongst the best. One cannot be equally sure about the same quantum improvement of the economic models and forecasting performance but it is surely faster and more fun.

UK household incomes fall by 3.4% in 2008

Latest Bank of England estimate for Housing Equity Withdrawal (2008 Q3) is minus £5.7 billion. As a proportion of household income, the Quarter 3 figure is minus 2.4%, the lowest figure ever recorded. The squeeze on household incomes is manifest as incomes fall by 3.4% compared to 2007 in the third quarter.

The negative figure implies that individuals returned a net total of £5.7 billion into housing equity in the third quarter. That compares to a revised estimate of a net injection into housing equity of £2.0 billion in 2008 Q2.

Housing equity withdrawal (HEW) is new borrowing secured on dwellings that is not invested in the housing market and represents additional funds available to finance consumption spending. It is important since the value provides a boost to income and expenditure when the figure is positive.

Adjusted for HEW, household incomes contracted throughout 2008 by 1.5% in Q1, 2.3% in Q2 and 3.4% in the third quarter. As housing activity contracts so too does the level of equity withdrawal, squeezing household incomes and reducing consumer spending power and consumption. The trend is an additional manifestation of credit contraction and the deflationary impact on consumption and economic activity.

Bank of England   Housing Equity Withdrawal

Economic Forecasters fail the test in 2008

David Smith suggests the chaos of 2008 caused havoc with the predictions of economists for the UK economy in 2008. The credit crunch and commodity prices wrong footed most analysts. “Any forecaster getting it right in 2008 would have required mystical powers of prediction” it is said.

The league table measures the performance of 42 forecasting institutions in predictions for GDP growth, inflation, current account deficit, unemployment and interest rates. The five parameters if predicted within certain bands could generate a maximum ten points.

The results are interesting and demonstrate the difficulty. Four institutions failed to register any points whatsoever, five scored one point and only fifteen scored more than two points. The best Standard Chartered and HSBC managed only five points but their forecasts for inflation and base rates were wide of the mark.

The graph illustrates the pattern of GDP 2008 forecasts from February 2007 to the end of the year. At the beginning of the process, the average forecast was for GDP growth of 2.3% (a reversion to mean model) this lasting until October of 2007. Fears of the credit crunch impact then pushed forecasts down to 2% and by the turn of the year this had fallen further to 1.8%.

It was not until July - August the forecasts were slashed falling to 1% by October and moderated to 0.8% last month.

2008 was a difficult year to predict but the pattern of the forecast is not unusual. The preliminary position is a reversion towards the norm of long term trend. This persists for a period of nine months before information is available to modify the position. Forecasting is a tough business at the best of times but 2008 has been extremely difficult.

"Economists have difficulty in spotting turning points within the economy but once the economy has turned into recession, economists are on firmer ground" DS suggests since prior patterns of recession can be used as a benchmark. The forecasts for 2009 should be more accurate.

HM Treasury   Forecasts for the UK Economy     David Smith's EconomicsUK.com

UK banks face £70bn loss on commercial property

UK banks face up to £70bn of losses on commercial property loans. This could result in a further round of taxpayer bail-outs according to investment bank Close Brothers.

The bank forecasts a 50pc-60pc slump in commercial property values by the end of 2009 compared to the market’s 2007 peak. The slump will result in massive write downs in property and loan values.

Close Brothers refers to a study by De Montfort University, which found that the country’s leading banks have a total £250bn exposure to commercial property loans. Some £83bn of the total was originated at the peak of the market.

Arguing that commerical property values could more than halve, Close Brothers said: “The fall is higher than most observers estimate. Lack of available debt finance and a limited number of investors with equity capital for acquisitions means that anything sold will only realise distressed valuations.”

The slump in valuations could force banks, such as Royal Bank of Scotland and HBOS which have lent billions of pounds to commercial property investors into a fresh round of capital raisings.

Like a circle in a spiral like a wheel within a wheel. The banks are under pressure to lend but realistically are forced with problems of refinancing and further write downs. The Crosby report warned of the £160 billion refinancing need over the next three years, the decline in the real economy will generate write downs in business loans, commercial property, buy to let and the private residential market. Pressures on capital ratios and asset values will restrict lending and require additional capital.

The government will have to step in as the investor of last resort and is prepared to do so without any due diligence.

Daily Telegraph UK Banks face £70bn property bombshell

UK GDP latest release doesn't change the outlook for 2009

Gross Domestic Product (GDP) contracted by 0.6 per cent in the third quarter of 2008, revised down from the previous estimate of 0.5 per cent. The level of GDP in the third quarter of 2008 was 0.3 per cent higher than the third quarter of 2007.

Output of the production industries fell 1.4 per cent compared with a fall of 0.9 per cent in the previous quarter, mainly due to declining manufacturing output.

Output in the service industries fell by 0.5 per cent in the third quarter, down from 0.2 per cent growth recorded in the previous quarter. There was significantly weaker growth in distribution and business services.

The trade deficit in real terms increased from £9.8 billion in the second quarter of 2008 to £10.4 billion in the third quarter of 2008. Growth in exports of goods and services was 0.3 per cent while imports were up 1.0 per cent.

The latest data makes no adjustment to the level of GDP growth year on year. Growth in the third quarter was just 0.3% as in the November release. For 2009, we still anticipate a fall in output of between 1.8% and 2.0% and see no basis to amend the growth outlook or pattern of recession compared to the 1980 and 1990 cycles.

Consensus forecasts for 2009 average a GDP fall of 1.5% with the most pessimistic forecasts of 2.6%.
ONS Data
HM Treasury : Forecasts for the UK Economy

Bank Lending - to fall over next two years says Barclay Chief

Consumers and companies will continue to find it difficult to access credit for the next one to two years, the boss of Barclays bank has said.

Talking to the BBC's Business Editor Robert Peston, Mr Varley stressed that the banks were open for business and they were still lending. But he said that a reduction in the overall quantity of debt in the economy was necessary. BBC news

"I think that we will see the process of reduced borrowing play out over at least the course of the next 12 months maybe, maybe 24 months," he said in the interview.

The amount of credit available was "shrinking and that is a painful process, it's a process through which the world absolutely has to go," he insisted. "As soon as asset prices stabilise, then we will see the financial economy recover. And when will that occur? That will occur some time over the course of the next 18 months."

Varley explains that which the Governor of the Bank of England and Chancellor Darling seem loathe to accept. Banks are confronted with the problem of falling asset prices, increased capital ratios, de-leveraging, asset write downs and a deterioration in the real economy accelerating the further process of de-leverage, asset write down and so on.

The Crosby report has highlighted the banks need for a further £160 billion of roll over finance over the next three years which will restrict the mortgage market.

Charles Bean Deputy Governor of the Bank of England has suggested the banks need more capital to maintain the status quo. On top of the £37bn the Government has already invested in three of the UK's largest banks, "it may well turn out that further capital injections are required to bolster bank lending."

Within Europe businesses face a massive £800 bn bond refinancing need in 2009. Blog

On Planet ZIRP such is the thirst for cash, liquidity will just be absorbed into the fissures within the financial system. Quantitive easing, helicoptering money, we cannot be sure this will work and neither is Bernanke.

FT : Questions resurface over bank strength          Crosby report predicts mortgage market paralysis

Guide to Planet ZIRP : Bernanke submits a chapter

 "Welcome to planet ZIRP. Unfortunately, we do not have a handbook, or fully understand the terrain. Our process of quantative easing, the plan to helicopter money may work but as a fire fighting option, it may be like dropping water into a desert, such are the fissures in the financial system."

This was the basis of the original post earlier this week Since Bernanke’s own paper has come to light “Monetary Policy Alternatives at the zero bound”. Rather worryingly Bernanke concludes :

“Despite our evidence that alternative policy measures have some effect, we  remain cautious about relying on such approaches. We believe that our findings go some way to refuting the strong hypothesis that nonstandard policy actions, including quantitative easing and targeted asset purchases, cannot be successful in a modern industrial economy.  However, the effects of such policies remain quantitatively quite uncertain”. 2004

OK so it’s official, the effects of such policies remain quantitively quite uncertain. We don’t have a hand book or fully understand the terrain. We cannot be sure this is going to work at all. Gulp.

This is your captain speaking, Welcome on board flight QE 2009. I hope you have a nice flight, I am relatively new at this, haven’t actually flown before, we shall be flying by the seat of our pants but have every confidence .....

Monetary Policy at the zero bound : Bernanke, Reinhart and Sack 2004