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  Japan's failed postal privatisation: Return to sender

  Posted: March 31st, 2010, 5:24am MDT

  Japan Post, the world’s biggest bank, is handed an unfair advantage

  THE Japanese cabinet is a contentious lot. When Shizuka Kamei, the minister of financial services and postal reform, unveiled plans in March to halt the planned privatisation of Japan Post, several ministers publicly balked. The finance minister was shouted down on TV by Mr Kamei.

  On March 30th the government adopted Mr Kamei’s plans nonetheless. Japan Post, which is not only a post office but also the world’s biggest bank, with assets of more than YEN300 trillion ($3.2 trillion), will be allowed to double the amount of deposits it can take from a customer to YEN20m. Its life-insurance unit, which controls 40% of the market, will be permitted to raise its coverage limit to YEN25m from YEN13m. The government will retain a stake of more than one-third, giving it veto power. ...

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  Ireland's battered banks : Taking out the trash

  Posted: March 31st, 2010, 5:24am MDT

  The government takes a firmer line

  STEFAN INGVES, the governor of the Riksbank, Sweden’s central bank and an architect of his country’s bank bail-outs in the 1990s, cut an exasperated figure on the financial regulators’ conference circuit after the crisis. The medicine he administered during the Swedish crisis, and has prescribed ever since, is bitter: an immediate write-down of all bad assets and forced recapitalisation of banks, even if it means nationalising them. Few of today’s patients have been willing to stomach it. Many have chosen more palatable cures in the belief that the prices of banks’ bad assets will recover given time.

  Ireland was in this camp at first. Last year the government proposed to buy bad assets—most of them commercial-property loans from the country’s development boom—from Irish banks for about 30% less than their face value, arguing that this reflected their “long-term economic value”. The worry was that the government would overpay, enriching shareholders in the banks at taxpayers’ expense. ...

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  Fiscal tightening and growth: A good squeeze

  Posted: March 31st, 2010, 5:24am MDT

  Bigger budgetary adjustments are not always better

  ACROSS much of the rich world an era of budget austerity beckons. Government debt is rising faster than at any time since the second world war. By 2014 the public debt of big rich countries will reach an average of 110% of GDP, up by almost 40 percentage points from 2007, according to the IMF (see chart). On current policies it will continue rising.

  How to alter this bleak trajectory will be policymakers’ most difficult task over the next decade. Financial markets are already forcing some into drastic action. Greece plans to cut its deficit from 12.7% of GDP in 2009 to 3% by 2013, using spending cuts, tax hikes and heroic growth projections. Portugal has rushed out plans to cut its deficit from 9.3% last year to 3% by 2013. Britain’s election will be fought over the contours of future austerity. ...

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  Economics textbooks: Revise and resubmit

  Posted: March 31st, 2010, 5:24am MDT

  The crisis is changing how macroeconomics is taught

  IN MORE than 30 years of teaching introductory macroeconomics, says Alan Blinder of Princeton University, he has never seen interest as high as it was last year. At Harvard, says David Laibson, students in his undergraduate macroeconomics course are “chomping at the bit”. At elite American universities, where endowments have shrivelled and hiring is down, increased interest in economics is among the most benign of the recession’s effects.

  Yet the crisis has also highlighted flaws in the existing macroeconomics curriculum. Greg Mankiw, a Harvard economist and the author of a bestselling textbook, points out that students can hardly be expected to make sense of the crisis if they know virtually nothing about things like the role of financial institutions. Yet if there is a “financial system” in most introductory texts, Mr Blinder observes, it usually focuses on the demand and supply functions for money. “The current curriculum fails to give students even imperfect answers” to their legitimate questions about recent economic events, he says. ...

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  Marjorie Deane internship

  Posted: March 31st, 2010, 5:24am MDT

  Applications are invited for The Economist’s 2010 Marjorie Deane internship. Financed by the Marjorie Deane Financial Journalism Foundation, this award is designed to provide work experience for a promising journalist or would-be journalist, who will spend three months at The Economist writing about finance and economics. Applicants are asked to write a letter introducing themselves, along with an original article of no more than 500 words that they think would be suitable for publication in this section. The deadline is April 23rd 2010. To apply, visit www.marjoriedeane.com

  ...

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  Economics focus: Default settings

  Posted: March 31st, 2010, 5:24am MDT

  Sovereign defaults do not typically lead to economic catastrophe. How much comfort should that give?

  IN DECEMBER 2001 Argentina defaulted on $81.8 billion of sovereign debt, after months of turmoil in the country’s banking system. That led to the abandonment of its exchange-rate regime and a sharp devaluation of the peso. Argentina’s GDP plummeted by 10.9% that year. It has been locked out of international capital markets ever since. In Greece such tales now have a worrying resonance. Despite raising $6.7 billion on bond markets on March 29th, the scale of the country’s financing needs means that an eventual default cannot be ruled out. Both Greece’s 2009 budget deficit, at 12.7% of GDP, and its debt-to-GDP ratio of 113.4% are higher than the corresponding figures for any sovereign defaulter between 1998 and 2001. If the worst were to happen, how much pain might it suffer as a result?

  In theory, default should be costly. The damage it causes is the main incentive for debtor countries to honour their promises. Yet there are clearly lots of occasions when governments judge that the benefits of defaulting outweigh the costs. An IMF study by Eduardo Borensztein and Ugo Panizza counts as many as 257 sovereign defaults between 1824 and 2004. Between 1981 and 1990 alone, there were 74 defaults (see chart). ...

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  Buttonwood: Dangerous curve

  Posted: March 31st, 2010, 5:24am MDT

  Government-bond markets enter the twilight zone

  WHAT is going on in government-bond markets? Longer-dated bond yields have risen in recent weeks and the gap between long- and short-term rates (known as the “yield curve”) is much higher than normal. Potential explanations range from the benign (the economy is returning to normal) to the apocalyptic (investors have lost their appetite for government debt).

  An upward-sloping yield curve, in which long-term interest rates are above short-term rates, is normal. You would expect creditors to demand a higher return for tying up their money for extended periods. An “inverted” curve, with short rates above long ones, is usually seen as a herald of recession, as it turned out to be before the credit crunch. ...

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  Underwater borrowers in America: A splash of good news?

  Posted: March 31st, 2010, 5:24am MDT

  The government tries a new tack in the fight against mortgage foreclosures

  WITH America braced for 4m or more foreclosures this year, the government is still searching for an effective way to stop the rot in housing. Under the Home Affordable Mortgage Programme (HAMP), a mere 170,000 borrowers have received permanent loan modifications, well below the target of 3m-4m. Will a revamped HAMP, unveiled on March 26th, mark a turning-point?

  Until now the focus has been on lowering mortgage payments as a share of income, mainly through interest-rate reductions and term extensions. New rules put an emphasis on reducing principal (ie, loan balances). A crisis first sparked by subprime-mortgage defaults has since spread to better-heeled borrowers: one in four American households with mortgages owe more than their properties are worth. Forgiving some of this debt makes it less likely that they will throw away the keys. ...

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  Chinese tax breaks: Bankers' heaven

  Posted: March 31st, 2010, 5:24am MDT

  A lesson in regressive taxation

  AS AMERICA and Europe plan new ways to claw back money from high earners in finance, China is going the other way. When the Communist Party decided to transform Shanghai into a financial centre, it gave a great deal of thought to personal-tax incentives. A ruling put out at the end of 2008 by the city’s Pudong district is the most regressive form of taxation imaginable.

  Ordinarily, China imposes one of the highest top marginal income-tax rates in the world, 45%. There are few complaints about this from locals: nothing good is likely to come from provoking the authorities’ attention. But it is a turn-off for employees of companies that Shanghai wants to attract to the skyscrapers popping up on the western bank of the Huangpu River. ...

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  Dubai's debts: Finding the ripcord

  Posted: March 25th, 2010, 6:06am MDT

  Dubai reveals how it wants to restructure its debts

  EARLIER this year, Nasser al-Neyadi from the United Arab Emirates (UAE) leapt off Dubai’s newly opened Burj Khalifa, the tallest building in the world. He descended 672 metres (2,205 feet) in less than a minute, his fall broken by a parachute which opened ten seconds into the jump.

  From the heady heights it reached in 2008, Dubai, one of seven members of the UAE, has fallen almost as far and as fast. Its hopes for a soft landing have always rested with its wealthy neighbour, Abu Dhabi, which sits on over 90% of the UAE’s oil reserves. But for a few horrible weeks at the end of last year, Dubai’s parachute refused to open—or perhaps the emirate simply fumbled as it reached for the ripcord. ...

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  The FSA gets tough: From light touch to heavy brigade

  Posted: March 25th, 2010, 6:06am MDT

  Britain’s biggest insider-trading case fits a pattern

  TO GIVE the Financial Services Authority its due, it tends to mean what it says. In 2006 Margaret Cole, the director of enforcement at Britain’s financial regulator, boasted that when it came to light-touch regulation “nobody does it better” than the FSA.

  In 2009, too late to prevent the financial bubble which had been facilitated by lax regulation, the watchdog abruptly began to show its fangs. Hector Sants, its outgoing chief executive, talked of an “intensive supervisory model”, which should make people “very frightened” of the FSA. Ms Cole laid out a new policy of “credible deterrence” which involved making sure that the authority’s punitive actions grabbed the headlines. That year saw a big change in the level and nature of fines imposed by the FSA: GBP34.9m ($54.6m) compared with GBP22.7m in 2008 and just GBP5.3m in 2007. ...

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  Carbon markets: The wrong sort of recycling

  Posted: March 25th, 2010, 6:06am MDT

  Hungary’s sale of used carbon credits damages investor confidence

  THE point of carbon markets is to put an efficient price on the right to emit carbon dioxide. Recent events in Hungary show how tricky it is to achieve that goal. At issue is the sale by Hungary’s Ministry of Environment and Water of 800,000 certified emission-reduction credits (CERs). CERs are generated by the Kyoto protocol’s “Clean Development Mechanism”, whereby reductions in greenhouse gases in developing countries can produce a carbon credit for use in industrialised markets. The problem with the sale was that Hungarian firms had already used the CERs to offset their own emissions.

  Used credits are worthless on European carbon exchanges. The European Union argues that one credit must equal one tonne of carbon dioxide for its Emissions Trading Scheme, the largest emissions market, to be effective. Since the whole point of the credits is to cut carbon, double-counting them makes a mockery of the system. ...

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  Life insurance in Asia: Age concern

  Posted: March 25th, 2010, 6:06am MDT

  Local investors show confidence in shrinking markets

  INVESTORS may salivate over insurance prospects in the emerging markets of Indonesia, India and China, but the more mature Asian markets seem to have life in them yet. On March 17th Korea Life became the first of the country’s big life insurers to go public. Others are following. Dai-ichi—a household name in Japan—this week priced an $11.2 billion initial public offering, the biggest since Visa’s $19.7 billion listing in 2008. Samsung Life, another South Korean industry heavyweight, hopes to come to market in May. Foreign firms are also taking up positions in the region’s greyer markets: Alico, an AIG subsidiary which makes 70% of its revenue in Japan, has just been snaffled by MetLife.

  At a time when new investment opportunities are few and far between, the arrival of an entire industry on Japanese and South Korean stockmarkets has attracted lots of attention, particularly from locals. Korea Life’s shares debuted below initial estimates due to weak foreign demand, but since trading began prices have risen by a respectable 8%. It was a similar story with Dai-ichi, which scaled back its allocation to foreign buyers but saw heavy demand from domestic retail investors. ...

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  Rising prices in Asia: A weight on their shoulders

  Posted: March 25th, 2010, 6:06am MDT

  Inflation in Asia is not as bad as it looks

  SUPPORTERS of Mayawati, a member of India’s downtrodden castes who is now chief minister of Uttar Pradesh, India’s most populous state, show their appreciation by offering her garlands to wear around her neck. The one presented to her at an event earlier this month was enormous. It was estimated to weigh 65kg, according to the Times of India. The garland was made not of marigolds, but of crisp 1,000 rupee ($22) notes.

  That is as good a sign as any that money is too easy in India. Consumer prices for agricultural workers (among whom Mayawati has her supporters) rose by 16.5% in the year to February. Wholesale prices, which the central bank watches more closely, rose by 9.9% over the same period. That prompted the Reserve Bank of India (RBI) to raise interest rates on March 19th by 0.25 percentage points, without waiting for its scheduled meeting. ...

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  Greece's bail-out maths: Safety not

  Posted: March 25th, 2010, 6:06am MDT

  Greece is likely to need far more financial aid than seems to be on offer

  IN FEBRUARY European Union leaders vowed to take “determined and co-ordinated action” to protect Greece against a sovereign-debt default and to stop its troubles infecting the rest of the euro area. Weeks later the same politicians are still discussing how precisely to meet that pledge (see article).

  The need for clarity is now more urgent. Greece has to refinance some €20 billion ($27 billion) of debts that mature in April and May. The yields on ten-year Greek government bonds rose to 6.3% this week, a spread of some three percentage points over German Bunds. The euro fell to its lowest level against the dollar for ten months after Portugal, another troubled euro-zone country, suffered a downgrade. ...

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  Economics focus: Tricky Dick and the dollar

  Posted: March 25th, 2010, 6:06am MDT

  Does Richard Nixon have anything to teach Barack Obama about economic diplomacy?

  THE “Nixon shock” is not the name given to President Richard Nixon’s resignation in 1974 amid the Watergate scandal, his bombing of Cambodia during the Vietnam war or his audacious visit to communist China. It refers instead to a bundle of economic policies unveiled to an unsuspecting world on August 15th 1971. The president imposed a freeze on wages and prices for 90 days to break inflation, ended the convertibility of dollars into gold, and slapped a “surcharge” or tariff of 10% on imports.

  Nixon is not usually a source of inspiration for left-leaning pundits such as Paul Krugman of the New York Times. But like 130 congressmen, who this month signed a letter to Timothy Geithner, America’s treasury secretary, he is calling on the White House to emulate Nixon and impose a “surcharge” on imports from China. The tariff is supposed to force China to strengthen its currency, the yuan, against the dollar, just as Nixon’s surcharge prompted America’s trading partners to renegotiate their exchange rates four months later. ...

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  Securitisation: Earthbound

  Posted: March 25th, 2010, 6:06am MDT

  Large parts of the securitisation markets remain stagnant. Not all efforts to reform them are helpful

  FOR most capital markets, the financial crisis resembled a stomach-churning bungee jump: a precipitous fall followed by a sharp rebound, albeit not to the heights enjoyed before the turmoil. The big exception was securitisation, large parts of which are still dangling near the ground. Even as it struggles to recover, the market that brought the world the joys of collateralised-debt obligations faces two stern tests: the phasing-out of central-bank support and a raft of tougher rules.

  Securitisation’s boom and bust was spectacular. The packaging of mortgages, car loans, credit-card receivables and other debt to sell to capital-markets investors began to take off in the 1980s. By 2006 it was being used to channel around two-thirds of all residential mortgages and half of all consumer credit in America. By distributing loans, banks could cut their capital needs, allowing them to lend more. Hedge funds, insurers and the like gained access to a broader range of credit risks. ...

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  Economics focus: It wasn't us

  Posted: March 18th, 2010, 7:09am MDT

  Alan Greenspan and Ben Bernanke still do not believe monetary policy bears any blame for the crisis

  THE desire to rescue a damaged reputation is a powerful motivator. That is one conclusion to draw from a new 48-page paper written for the Brookings Institution by Alan Greenspan, the 83-year-old former chairman of America’s Federal Reserve. A man once hailed as the world’s outstanding central banker is now routinely blamed for the asset bubble and subsequent collapse. This is Mr Greenspan’s attempt to set the record straight.

  The crisis, he argues, stemmed from a “classic euphoric bubble” whose roots lay in the sharp global decline in nominal and real long-term interest rates in the early part of the 2000s, which fuelled an unsustainable boom in house prices. Thanks to this euphoria, banks misread the risks embedded in complex new financial instruments. Mr Greenspan reckons the best remedy is to improve the system’s capacity to absorb losses by raising banks’ capital and liquidity ratios and increasing collateral requirements for traded financial products. ...

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  Productivity growth: Slash and earn

  Posted: March 18th, 2010, 5:42am MDT

  Productivity has surged in America and slumped in Europe. Neither trend can last

  LIKE physical fitness or a healthy diet, productivity is a worthy goal that can require an unappetising change in habits. Producing more by working less is the key to rising living standards, but in the short term there is a tension between efficiency and jobs. America and Europe have managed this trade-off rather differently. America has gone on a diet: it has squeezed extra output from a smaller workforce and suffered a big rise in unemployment as a consequence. Europe, meanwhile, is hoping to burn off the calories in the future. It has opted to contain job losses at the cost of lower productivity. That probably means America’s recovery will be swifter. Further out, productivity trends in both continents are likely to be uniformly sluggish.

  Analysis by the Conference Board, a research firm, shows just how different the recession was on either side of the Atlantic. America’s economy shrank by around 2.5% last year but hours worked fell at twice that rate, so productivity (GDP per hour) rose by 2.5%. The average drop in GDP in the 15 countries that made up the European Union before its expansion in 2004 was larger, at 4.2%. But hours worked fell less sharply than in America and, as a result, EU productivity fell by 1.1% (see table). Workers that held on to jobs in America and Europe had their hours cut by similar amounts. The reason total hours worked fell by more in America was that there were more job losses there: employment fell by 3.6% last year, compared with a 1.9% fall in the EU. ...

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  Private equity in Japan: The waiting game

  Posted: March 18th, 2010, 5:42am MDT

  There are lots of private-equity funds in Japan, but very few deals

  “PRIVATE equity is the garbage can of corporate Japan,” laments the boss of one fund with more than $1 billion invested in the country. The firm wants to do more deals, but there is nothing worth buying. By the time ailing firms are willing to accept outside capital and advice, it is too late: they are on their deathbeds. “They need morticians, not doctors,” sighs the boss of another private-equity fund.

  Across Tokyo it is the same refrain: private equity in Japan barely exists. “I’m in the non-profit sector,” grumbles one manager. The value of all transactions in 2009 totalled a mere $3.8 billion, according to Dealogic (see chart). For the world’s second-largest economy, it is a pittance. Permira, a major international fund, has done one deal since it came to Japan in 2005. Kohlberg Kravis Roberts (KKR), which opened a Tokyo office the same year, has the same tally. Carlyle has done numerous good deals, but on March 12th it saw a $330m investment in Willcom, a bankrupt wireless operator, wiped out in a refinancing. ...

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  The Lehman report: Beancounters in a bind

  Posted: March 18th, 2010, 5:42am MDT

  Banks’ professional advisers come under scrutiny

  IF SUNSHINE really is the best disinfectant, the 2,200-page report into Lehman Brothers’ downfall by its court-appointed bankruptcy examiner may do more to clean up finance than any number of new regulations. It paints a remarkably detailed, and damning, picture of Dick Fuld, Lehman’s ex-boss, and the executives around him. Their spectacularly ill-advised strategy was to take on oodles more risk in property just as everyone else was running the other way. Risk management was risible, with risk limits raised whenever they were breached and dodgy investments excluded from stress tests.

  Lehman’s former leaders are not the only ones squirming in the glare. Some of its counterparty banks get a slap on the wrist for changing the terms of their collateral demands, for instance. But the strongest criticism of those who interacted with the flailing firm is reserved for Lehman’s auditor, Ernst & Young (E&Y), for failing to “question and challenge improper or inadequate disclosures”. The main “accounting gimmick” hidden from investors, but apparently known to the auditor, was called Repo 105. This technique helped the firm flatter its numbers by temporarily moving assets off its balance-sheet at the end of each quarter. Lawyers are also in the spotlight: unable to find an American law firm to approve the transaction as a “true sale” of assets, Lehman got the nod from Linklaters in London. Both E&Y and Linklaters deny any wrongdoing. ...

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  Financial reform in America: The hand of Dodd

  Posted: March 18th, 2010, 5:42am MDT

  The Senate bill is finally published

  CHRIS DODD, the soon-to-retire chairman of the Senate Banking Committee, has staked his legacy on overhauling America’s financial regulations. If he fails, it won’t be for lack of trying.

  On March 15th Mr Dodd unveiled a sweeping proposal to rearrange the duties of America’s financial regulators while creating new powers and authorities to sniff out and squelch the risks that brought on the financial crisis. This is not the first reform blueprint: the House of Representatives has passed its own bill, the Treasury issued proposals last year, and Mr Dodd himself had already unveiled one, aborted draft of the Senate bill. This version, however, is the first to reflect substantial input from Republicans, whose support is necessary to reach the 60-vote margin needed in the Senate for the bill to become law. ...

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  Municipalities and derivatives: Cities in the casino

  Posted: March 18th, 2010, 5:42am MDT

  A derivatives farce makes its way to court in Milan. Others are sure to follow

  ONE of the great advantages of financial innovation, it was often said, was that risk would end up going to those best qualified to hold it. In fact, much of it seems to have ended up in the hands of those least able to understand it. How some of it got there may soon be revealed in an Italian court. On March 17th four big banks, 11 bankers and two former city officials were charged with fraud in connection with the sale of interest-rate derivatives to the city of Milan. The trial is due to start in May.

  The prosecution relates to a huge bet on interest rates that the four banks—UBS, JPMorgan Chase, Deutsche Bank and Hypo Real Estate’s DEPFA unit—helped the city authorities to take in 2005. The banks helped arrange the sale of €1.7 billion ($2.3 billion) of bonds for the city and then also helped it swap the fixed interest rate it was paying on the bonds for a lower, floating rate. Part of the contract is thought to have involved a “collar”, a way of limiting the range of outcomes on a bet, which protected Milan from rising rates but which also meant it would have to pay out if they fell. ...

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  Hotel finance: You can check out any time you like

  Posted: March 18th, 2010, 5:42am MDT

  Hotel owners and operators have their banks over a barrel

  FEW industries are as adept as hotels at providing tempting offers—a well-stocked minibar, for instance—that lead to regret the next day. Lenders to the industry are now firmly in the regret phase. Over the next year banks in Europe and America may be forced to write down billions in bad loans, further impairing already strained balance-sheets. In many cases they are also likely to become the proprietors of debt-ridden hotels.

  It is difficult to determine exactly how much outstanding commercial-property debt was used to finance hotels. But if commercial property has long been seen as the next shoe to drop in financial markets, hotels are the steel toecap. “There is a vast wall of properties out there that is underwater,” says Paul Bartrop of CB Richard Ellis, a property consultancy. ...

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  Buttonwood: Less debt, more charm

  Posted: March 18th, 2010, 5:42am MDT

  Private-equity managers face a difficult outlook

  THE locusts went hungry in 2009. The private-equity industry, the bete noire of many a European politician, managed just $81 billion of buy-outs, compared with more than $500 billion in 2007. Indeed, almost anything that could go wrong for the industry last year did so, as a recent report from Bain, a consultancy, makes clear.

  Private equity has prospered for most of the past 25 years thanks to a favourable combination of circumstances: easy access to cheap credit, rising asset prices, a relatively stable economy and a friendly regulatory environment. But credit was neither available nor cheap last year. The industry raised just $20 billion of new loans in 2009, perhaps because managers were unwilling to pay double the spread (or excess interest rate) they had paid in the middle of the decade. ...

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  Economics focus: The inflation solution

  Posted: March 11th, 2010, 3:43am MST

  The merits of inflation as a solution to the rich world’s problems are easily overstated

  IT HAS long been considered a scourge, an obstacle to investment and a tax on the thrifty. It seems strange, then, that inflation is now touted as a solution to the rich world’s economic troubles. At first sight the case seems compelling. If central banks had a higher target for inflation, that would allow for bigger cuts in real interest rates in a recession. Faster inflation makes it easier to restore cost-competitiveness in depressed industries and regions. And it would help reduce the private and public debt burdens that weigh on the rich world’s economies. In practice, however, allowing prices to rise more quickly has costs as well as benefits.

  The orthodoxy on inflation is certainly shifting. A recent IMF paper* co-authored by the fund’s chief economist suggests that very low inflation may do more harm than good. Empirical research is far clearer about the harmful effects on output once inflation is in double digits. So a 4% inflation target might be better than a goal of 2% as it would allow for monetary policy to respond more aggressively to economic “shocks”. If the expected inflation rate rose by a notch or two, wages and interest rates would shift up to match it. The higher rates required in normal times would create the space for bigger cuts during slumps. ...

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  Correction: Bank administrative costs

  Posted: March 11th, 2010, 3:43am MST

  The administrative costs per $1m lent by the World Bank and the International Development Bank during 2009 were $20,600 and $15,314 respectively, not $19,000 and $26,833 (“Cap in hand”, March 6th). And despite "general consensus", shareholders of the European Bank for Reconstruction and Development do not vote on its capital-increase plan until May. Sorry.

  ...

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  Labour markets: Distemper

  Posted: March 11th, 2010, 3:43am MST

  Temporary work may dim future employment prospects

  IS ANY job better than no job? Some research has suggested that unemployed workers should take up any job they can get, including temporary work, as a bridge to higher-paying employment. But what may be good for the economy, reducing the drain on government coffers, may be bad for the individuals concerned. In a forthcoming paper in the American Economic Journal: Applied Economics, David Autor of the Massachusetts Institute of Technology and Susan Houseman of the W.E. Upjohn Institute for Employment Research in Michigan show that taking up temporary work after a spell of unemployment can hurt future earnings.

  The authors looked at data from Detroit’s “Work First” welfare-to-work initiative, which uses placement agencies to put low-skilled unemployed people into paid jobs. They then assessed participants’ earnings and job tenure before and after their involvement in the programme. ...

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  Chinese local-government debt: Shell game

  Posted: March 11th, 2010, 3:43am MST

  Beijing signals a crackdown on borrowing by local governments

  ENDLESS arcane pronouncements spew forth from China’s bureaucracies. But some matter much more than others. In recent weeks a number of the country’s senior leaders and regulators have signalled an end to the practice of local governments extending guarantees on loans taken out by their special financing entities. That could spell big trouble for Chinese banks.

  The comments have focused attention on research done by Victor Shih, a professor of Northwestern University in America, into China’s local investment companies. These financing vehicles allow municipalities to circumvent central-government restrictions on direct borrowing. As many as 8,000 of these investment companies may exist, estimates Mr Shih, whose work draws on regulatory filings and various government announcements. ...

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  Spanish banks: All talk, no walk

  Posted: March 11th, 2010, 3:43am MST

  A financial system in suspense

  THAT old Spanish stereotype of putting things off until manana still applies today. For nearly two years bankers have been talking about the need to restructure a bloated financial system, particularly the country’s 45 unlisted savings banks, the cajas de ahorros. About half of the cajas, which are controlled by local politicians, have announced their intention to merge, hoping to tap into the €99 billion ($135 billion) Fund for Orderly Bank Restructuring (FROB), which was created in June.

  Regional politicians, reluctant to give away their piggy banks, are prepared to sanction some internal mergers. Catalonia, for example, has allowed some consolidation, as has Andalusia. Progress is slower elsewhere. Caixanova, a savings bank in Galicia, is resisting a union with Caixa Galicia, a rival. The sector has also been waiting for Spain’s second-largest savings bank, Caja Madrid, to make a move. Until recently, it was paralysed by a political power struggle at the top. ...

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  MetLife buys Alico: Snoopy sniffs an opportunity

  Posted: March 11th, 2010, 3:43am MST

  AIG reluctantly hands its crown as America’s global life insurer to MetLife

  ANOTHER week, another opportunity for AIG’s rivals to expand at the American insurer’s expense. Days after sealing a $35.5 billion deal for its Asian life-insurance operations with Britain’s Prudential, the firm, which is being dismembered to recoup bail-out costs, agreed on March 8th to sell another crown jewel, Alico. This will propel New York-based MetLife, which is paying $15.5 billion, into the industry’s global elite. Although it is the biggest life insurer in America, where its Snoopy mascot is ubiquitous, it has been tentative abroad. Alico will give it a presence in 64 countries, up from 17 now, taking its non-American revenue from 15% of the total to 40%.

  The biggest leap will be in Japan, the world’s second-largest life market, in which Alico is a top-tier competitor. But MetLife’s boss, Robert Henrikson (who took over in 2006 from Robert Benmosche, now AIG’s chief executive), also has his eye on the faster-growing markets in eastern Europe, the Middle East and Latin America that make up almost a quarter of Alico’s business. Another attraction is its distribution network: 60,000 agents, brokers and other local middlemen. ...

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  Buttonwood: Apocalypse, not now

  Posted: March 11th, 2010, 3:43am MST

  The alarming future for Japan's finances

  CASSANDRA’S curse was that her warnings would never be believed. Doom-mongers in the Japanese government-bond market have suffered a milder fate: they were just far, far too early.

  The trade has seemed obvious for years. Japan has run continuous fiscal deficits and seen its debt downgraded by the ratings agencies. With its bonds yielding between 1-2%, the downside risk of a bearish bet has been limited while the upside potential has looked huge. ...

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  Microinsurance: Security for shillings

  Posted: March 11th, 2010, 3:43am MST

  Insuring crops with a mobile phone

  ONE of the things holding back agriculture in developing countries is the unwillingness of farmers with small plots of land to invest in better seed and fertiliser. Only half of Kenyan farmers buy improved seed or spend money on other inputs. Many use poor-quality seed kept from previous harvests. That is understandable when drought or deluge can destroy their crop, but it has the effect of reducing yields. A new microinsurance scheme promises to help.

  Kilimo Salama, which in Kiswahili means “safe farming”, uses a combination of mobile phones and 30 automated solar-powered weather stations to provide crop insurance. It has been set up by UAP Insurance of Kenya, Safaricom, Kenya’s biggest mobile-network operator, and the Syngenta Foundation for Sustainable Agriculture, part of a big Swiss agribusiness group. After a successful trial with 200 farmers last year, Kilimo Salama has just been expanded in the hope of attracting 5,000 farmers in western and central Kenya this year. ...

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  Sovereign debt and the euro: All for one

  Posted: March 11th, 2010, 3:43am MST

  Eurocrats offer up half-baked ideas to prevent a future sovereign-debt scare

  NOW that Greece has given in to pressure from its peers for a more austere budget, the euro zone’s policy brass suddenly seems more sympathetic towards its most troubled member. On reflection, perhaps the fault with Greece’s parlous public finances lay not just with its budgetary profligacy but also elsewhere: in the absence of a central euro-zone authority for helping out cash-strapped countries; or with the credit-rating agencies that had unhelpfully downgraded Greek government bonds; or with the amoral speculators who had bet against those bonds and helped drive up borrowing costs.

  It was mildly surprising that some of the messages of support came from Germany, where fiscal indiscipline is least tolerated. On March 7th the finance minister, Wolfgang Schauble, floated the idea of a European Monetary Fund (EMF) to act as a lender of last resort to euro-zone countries that could not raise funds in capital markets on tolerable terms. He offered few details about how an EMF would be financed or how it would operate. It would not be a “competitor” to the IMF, based in Washington, DC, though it would seek to police the fiscal policies of lax member countries. ...

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  Savings and the poor: A better mattress

  Posted: March 11th, 2010, 3:43am MST

  Microfinance focuses on lending. Now the industry is turning to deposits

  IT IS hard for people in the rich world to imagine what it is like to live on $2 a day. But for those who do, the problem is often not just a low income, but an unpredictable one. Living on $2 a day frequently means living for ten days on $20 earned on a single day. The task of smoothing consumption is made more complicated if there is nowhere to store money safely. In an emergency, richer people might choose between dipping into their savings and borrowing. The choice for the great mass of the unbanked in the developing world is limited to whom to borrow from, often at great cost.

  That they can borrow at all is partly due to the rapid growth of microfinance, which specialises in lending small amounts to poor people. Several big microfinance institutions (MFIs) also offer savings accounts: Grameen Bank in Bangladesh is a prominent example. But the industry remains dominated by credit, and the ability to save through an MFI is often linked to customers’ willingness to borrow from it. Of 166 MFIs surveyed in 2009 by the Microfinance Information Exchange, a think-tank, all offered credit but only 27% offered savings products. Advocates of a greater variety of financial services for the poor argue for more balance. ...

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  Economics focus: On deaf ears

  Posted: March 4th, 2010, 4:17am MST

  Does India’s government pay any heed to its economic advisers?

  ECONOMISTS like nothing better than giving advice to governments. But why do they, of all people, imagine that anyone listens? In their models economists assume that governments, like other actors in the economy, have objectives of their own, which they seek to advance as best they can. They are not disinterested servants of the public good. So governments will ignore a recommendation from their advisers unless it suits them, in which case they would have done it anyway.

  In his book “Prelude to Political Economy”, published in 2000, Kaushik Basu of Cornell University wrestled with this paradox. “If, seeing high unemployment in an economy, a person… advises entrepreneurs to employ more labourers, or consumers to demand more goods, this typically causes economists to share a laugh.” And yet economists routinely advise governments to act in the economy’s interests rather than their own. ...

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  Prudential buys AIA: Grand Pru

  Posted: March 4th, 2010, 4:17am MST

  The insurance industry’s biggest-ever acquisition has prompted the largest-ever rights issue: AIG and Prudential are both playing for huge stakes

  INSURANCE is a pretty stodgy business. This week’s agreement by Prudential of Britain to buy AIG’s Asian life-insurance operations, AIA, is anything but. If the $35.5 billion deal goes through—and given the convulsions in both companies’ share prices, that is not certain—it will radically alter both Prudential and AIG and will provide a closely watched test of what can and cannot be done by financial firms as they try to build Asian franchises.

  On paper, the transaction would transform Prudential into the region’s dominant insurance company. It will have a leading, if not the leading, presence in 15 big markets with a vast sales force offering critical health and investment products to a population that is becoming wealthy enough to appreciate them. Assuming the transaction goes through successfully, the proportion of sales Prudential generates from Asia should eventually expand from 30% to 80%. Prudential is paying a fraction of what AIA would have gone for prior to AIG’s implosion. It is a remarkable opportunity at a rather pedestrian price. ...

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  The Federal Reserve: Back from the Fed

  Posted: March 4th, 2010, 4:17am MST

  The central bank loses a vice-chairman but starts to regain its standing

  THE Federal Reserve, accused by critics of monetary and regulatory malpractice, has seen its standing plummet. The House of Representatives has passed one bill to audit its monetary decisions and proposed others to strip it of regulatory duties. Almost a third of the Senate voted against confirming Ben Bernanke to a second term as chairman.

  It appears, however, that its rehabilitation has begun. As part of negotiations on a financial-reform bill, Chris Dodd, chairman of the Senate Banking Committee, is considering a proposal that would let the Fed retain most of its regulatory duties. Mr Dodd originally wanted to take oversight of banks away from the Fed and other regulators and give it to a new body. He wanted to hand oversight of consumer protection to another new creation, the Consumer Financial Protection Agency. ...

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  Sovereign-debt ratings: The grim rater

  Posted: March 4th, 2010, 4:17am MST

  Countries don’t like bad news about their creditworthiness

  WHEN the subprime crisis broke in 2007, credit-rating agencies were among the first groups to take the blame. Critics argued that investors had drawn false comfort from the AAA ratings that the agencies handed out on complex packages of mortgage-related debt. Furthermore, the raters were hamstrung by the conflicts of interest inherent in being paid by issuers to assess their bonds. Never again, it was solemnly proclaimed, should the markets rely on the word of the agencies.

  Now that investor attention has shifted to sovereign risk, the three big agencies (Fitch, Moody’s and Standard & Poor’s) once more find themselves at the centre of the action. Upgrades of sovereign debt exceeded downgrades in every year between 1999 and 2007. That has changed as a result of the financial crisis (see chart). ...

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  Buttonwood: Race to the bottom

  Posted: March 4th, 2010, 4:17am MST

  Countries compete to weaken their currencies

  ONCE upon a time, nations took pride in their strong currencies, seeing them as symbols of economic and political power. Nowadays it seems as if the foreign-exchange markets are home to a bunch of Charles Atlas’s 97-pound weaklings, all of them eager to have sand kicked in their faces.

  First the dollar took a battering in 2009 when the return of risk appetite, and the ability to borrow the currency at very low rates, sent money flowing out of America for use in speculative “carry trade” transactions. Then the euro got pummelled because of concerns about the euro zone’s exposure to sovereign-debt problems in southern Europe. Finally sterling hit the canvas this week because of concerns about the British government’s deficit and the policy gridlock that may result from a hung parliament after a general election expected in May. ...

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  Financial inclusion: A FAB idea

  Posted: March 4th, 2010, 4:17am MST

  Should every child receive a bank account at birth?

  YOU come into the world with nothing, the saying goes. A new campaign proposes to change that by giving every newborn child in the world an online bank account with $100 in it. The aim of the FinancialAccess@Birth (FAB) campaign is to do something about the fact that half the world’s population has no access to mainstream financial services. This is a huge handicap, exposing people who are typically already on the poverty line to risks that wealthier folk can manage through savings or insurance, and leaving them to pay unregistered moneylenders through the nose.

  The campaign is the brainchild of Bhagwan Chowdhry, a finance professor at the University of California, Los Angeles, and is starting to attract some prominent supporters, including Peter Singer, a well-known philosopher, and Vijay Mahajan, an Indian social entrepreneur. ...

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  Multilateral development banks: Cap in hand

  Posted: March 4th, 2010, 4:17am MST

  A difficult time for a fund-raising spree

  Correction to this article

  A SENIOR World Bank official describes its efforts to secure an additional $3 billion-5 billion in paid-in capital as a “once-in-a-generation increase to deal with the effects of a once-in-a-generation crisis”. The bank agreed to lend $32.9 billion to poor countries in the year to June 2009, two-and-a-half times the previous year’s outlay of $13 billion. If it carried on at this rate, Robert Zoellick, the bank’s president, warned in October, its lending would face constraints by the middle of this year. ...