Adam Posen, external member of the Bank of England’s Monetary Policy Committee
UK: Three steps are needed to put the economy on the right track
Most of the economic problems that emerged in Britain during the financial crisis were due to the misallocation of capital over the preceding decade.
Private investment went disproportionately to pure financial transactions (and to rents taken by the financial sector) or to property rather than to the creation of productive assets. Non-financial corporations have been sitting on cash for years without either returning it to their shareholders or investing commensurately. Public investment caught up after years of neglect, particularly in the NHS, but the long-run return in terms of raising British productivity was lower than was expected. Paying for this unproductive investment has built up debt enormously among households and, obviously, the government.
Improving capital allocation is a matter for policy, but it requires structural rather than macroeconomic measures. In particular, three measures are necessary: One, there must be greater competition among financial intermediaries in Britain (bank and non-bank options). Two, corporate governance, both for financial and non-financial corporations, must become stricter. Three, government investment and tax policy must shift towards encouraging research and the creation of productive assets. If these policies are pursued, the present rebalancing of the British economy away from consumption and towards production will accelerate significantly.
Opportunities will become evident among smaller companies that were previously ignored and unfinanced. While corporations will retain more cash than they used to, a large stock of funds will be freed for employment by those who know where to put it.
Andrew Balls, Head of European Portfolio Management, Pimco
Europe: It’s time for Plan B, an orderly debt restructuring
Europe is in effect trying to “quarantine” Greece, Ireland and now Portugal, taking them out of the market and buying time for larger peripheral economies to adjust and for banks to recapitalise.
On one level, this approach is working. Contagion has been stemmed. Spanish debt has performed remarkably well this year in spite of the ongoing crisis in the small countries. Spain does not face the solvency problems of the three small, distressed countries, but even so, buying time for adjustment is helpful. There is no reason either why Spain should follow Ireland’s example and take on the liabilities of its banking system, thereby undermining its sovereign creditworthiness.
Europe’s Plan A is to struggle on and countenance sovereign debt restructurings only after 2013. But it is far from obvious that Greece, Ireland and Portugal will be able to sustain their austerity programmes amid recession. The fact that the European Central Bank is now raising interest rates does not help either.
It would be better to acknowledge now that Greece, Ireland and Portugal may have to restructure their debt. The danger with Plan A is that the quarantining may not work and that disorderly debt restructuring in the smaller distressed countries could prompt contagion to other countries and the banks.
Guan Jianzhong, Chairman, Dagong Global Credit Rating
Developing world: The west’s easy money will spread instability
The three US-based international credit rating agencies have become a tool to conceal the credit risks of the developed debtor countries. As a result, these agencies attract flows of capital from developing countries for free or at low cost. Dagong does not confer AAA ratings on developed debtor countries with slow economic growth, heavy debt burdens and lingering risks in their financial systems.
Looking forward, global turmoil caused by the sovereign credit crisis of the developed countries will continue. Measures taken in developed debtor countries, headed by the US, to address the credit crisis will trigger further disturbances in weaker parts of the international political and economic system. Instability in north Africa and the Middle East will continue and even spread to other African and Latin American countries.
The legitimacy of the US dollar as the international reserve currency has plummeted, while the speculative factor in international investment has increased.
Henry Kaufman, President, Henry Kaufman & Co
Global: Expect financial markets to be extremely volatile
The markets will continue to be challenged by the consequences of the latest financial crises and by the structural changes that are taking place. The growth of private sector debt will not return to the rapid pace of the past few decades. Debt burdens, particularly for households, are still too high and income growth too slow.
Volatility in the financial markets will be high by historical standards. This is because activity has become highly concentrated in a diminishing number of financial institutions. Unfortunately, that concentration will increase further. In the open market, the spreads between bid and ask prices will widen. Financing costs and fees will increase.
The increasing concentration of financial assets in fewer institutions will have the effect of reducing the allocation of credit via the market and so will increase the role of governments in this process.
Also in this month’s investment special:
Gavyn Davies, former chief economist at Goldman Sachs, assesses the prospects for global economic recovery.
DeAnne Julius, former MPC member; Jon Moulton, chairman of Better Capital; Diane Coyle, head of Enlightenment Economics and several other leading business figures reveal which investments they would buy—and which they would steer clear of.
PLUS Max Hastings on the aftermath of his DIY investment lesson from John Kay
UK: Three steps are needed to put the economy on the right track
Most of the economic problems that emerged in Britain during the financial crisis were due to the misallocation of capital over the preceding decade.
Private investment went disproportionately to pure financial transactions (and to rents taken by the financial sector) or to property rather than to the creation of productive assets. Non-financial corporations have been sitting on cash for years without either returning it to their shareholders or investing commensurately. Public investment caught up after years of neglect, particularly in the NHS, but the long-run return in terms of raising British productivity was lower than was expected. Paying for this unproductive investment has built up debt enormously among households and, obviously, the government.
Improving capital allocation is a matter for policy, but it requires structural rather than macroeconomic measures. In particular, three measures are necessary: One, there must be greater competition among financial intermediaries in Britain (bank and non-bank options). Two, corporate governance, both for financial and non-financial corporations, must become stricter. Three, government investment and tax policy must shift towards encouraging research and the creation of productive assets. If these policies are pursued, the present rebalancing of the British economy away from consumption and towards production will accelerate significantly.
Opportunities will become evident among smaller companies that were previously ignored and unfinanced. While corporations will retain more cash than they used to, a large stock of funds will be freed for employment by those who know where to put it.
Andrew Balls, Head of European Portfolio Management, Pimco
Europe: It’s time for Plan B, an orderly debt restructuring
Europe is in effect trying to “quarantine” Greece, Ireland and now Portugal, taking them out of the market and buying time for larger peripheral economies to adjust and for banks to recapitalise.
On one level, this approach is working. Contagion has been stemmed. Spanish debt has performed remarkably well this year in spite of the ongoing crisis in the small countries. Spain does not face the solvency problems of the three small, distressed countries, but even so, buying time for adjustment is helpful. There is no reason either why Spain should follow Ireland’s example and take on the liabilities of its banking system, thereby undermining its sovereign creditworthiness.
Europe’s Plan A is to struggle on and countenance sovereign debt restructurings only after 2013. But it is far from obvious that Greece, Ireland and Portugal will be able to sustain their austerity programmes amid recession. The fact that the European Central Bank is now raising interest rates does not help either.
It would be better to acknowledge now that Greece, Ireland and Portugal may have to restructure their debt. The danger with Plan A is that the quarantining may not work and that disorderly debt restructuring in the smaller distressed countries could prompt contagion to other countries and the banks.
Guan Jianzhong, Chairman, Dagong Global Credit Rating
Developing world: The west’s easy money will spread instability
The three US-based international credit rating agencies have become a tool to conceal the credit risks of the developed debtor countries. As a result, these agencies attract flows of capital from developing countries for free or at low cost. Dagong does not confer AAA ratings on developed debtor countries with slow economic growth, heavy debt burdens and lingering risks in their financial systems.
Looking forward, global turmoil caused by the sovereign credit crisis of the developed countries will continue. Measures taken in developed debtor countries, headed by the US, to address the credit crisis will trigger further disturbances in weaker parts of the international political and economic system. Instability in north Africa and the Middle East will continue and even spread to other African and Latin American countries.
The legitimacy of the US dollar as the international reserve currency has plummeted, while the speculative factor in international investment has increased.
Henry Kaufman, President, Henry Kaufman & Co
Global: Expect financial markets to be extremely volatile
The markets will continue to be challenged by the consequences of the latest financial crises and by the structural changes that are taking place. The growth of private sector debt will not return to the rapid pace of the past few decades. Debt burdens, particularly for households, are still too high and income growth too slow.
Volatility in the financial markets will be high by historical standards. This is because activity has become highly concentrated in a diminishing number of financial institutions. Unfortunately, that concentration will increase further. In the open market, the spreads between bid and ask prices will widen. Financing costs and fees will increase.
The increasing concentration of financial assets in fewer institutions will have the effect of reducing the allocation of credit via the market and so will increase the role of governments in this process.
Also in this month’s investment special:
Gavyn Davies, former chief economist at Goldman Sachs, assesses the prospects for global economic recovery.
DeAnne Julius, former MPC member; Jon Moulton, chairman of Better Capital; Diane Coyle, head of Enlightenment Economics and several other leading business figures reveal which investments they would buy—and which they would steer clear of.
PLUS Max Hastings on the aftermath of his DIY investment lesson from John Kay
