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Stefaan De Rynck

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Stefaan De Rynck

Monthly Archives: November 2013

Sinners and Saints in the Eurozone Crisis

26 Tuesday Nov 2013

Posted by Stefaan De Rynck in EU Politics, Leadership

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ECB, Euro crisis, European Union, Jens Weidmann, monetary policy, Paul Krugman

In a talk at Harvard, German central bank governor Jens Weidmann warned against an overload of expectations on the European Central Bank for resolving the Euro crisis. Having recently opposed a decrease in the interest rate by the ECB, he said that a protracted period of low rates could lead to higher public expenditure and an undesirable situation whereby monetary policy becomes subordinate to government spending.

Reuters - Jens Weidmann wants central banks to do less and insists on national policies to solve the Euro crisis

Reuters – Jens Weidmann wants central banks to do less and insists on national policies to solve the Euro crisis

Weidmann started by referring to economics as moral philosophy, and used his sense of irony to declare himself a Keynesian philosopher for the purpose of the discussion.

Who are the sinners and saints in the Eurozone crisis so far? Weidmann mentioned reckless banks that now depend on ECB liquidity lifelines; wasteful states such as Greece; Germany ignoring the EU’s deficit rules in 2003; and interestingly, governments in the Eurozone who do not have a programme monitored by a Troika and thus do not feel real pressure to reform. In an attempt to raise the pressure, the Bundesbank president proposed to put a cap on how much sovereign debt banks can hold, which would be a more effective government debt brake than fiscal rules applied too leniently by the European Commission in his view.

Other sinners are wage earners in countries such as Portugal and Spain Continue reading →

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Surprise surprise? You haven’t been paying attention

14 Thursday Nov 2013

Posted by Stefaan De Rynck in Leadership, Public Policy

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financial crisis, Greenspan, Leadership

Will an ecological crisis surprise us, just like the 2008 financial crisis did? This question sets up a trap, because there was no surprise in 2008.

What is going up so fast: house prices, derivatives' trades, global warming emissions? Are we in for a surprise?

What is going up so fast: house prices, derivatives’ trades, global warming emissions? Are we in for a surprise?

In the latest issue of Foreign Affairs Alan Greenspan, the former Federal Reserve Governor, endorses a pervasive narrative that economists “never saw the crisis coming”. But that narrative is wrong. Ample warning signs announced the looming financial disaster before 2008. Policy makers and regulators simply chose to ignore them.

If plenty of indicators herald the arrival of bad stuff, acting as if you are surprised only demonstrates that you were not paying attention or did not care enough to get into action.

A new book Guardians of Finance by James Barth, Gerald Caprio and Ross Levine claims that financial regulators were aware of what was going on, but that their deep-seated assumptions on finance and free markets obfuscated reality and led to inertia. With the vast amount of books out on Lehman Brothers, AIG and other firms, we already knew that many financial players saw themselves as dancing and drinking the night away, waiting until the music would stop and the lights go on.

Here are some randomly picked data that regulators knew before 2008:

1. The FBI recorded a rise in mortgage frauds by 272% from 2004 to 2008, and issued public warnings.
2. In Ireland, house prices rose by 250% from 1995 to 2006; the bank Anglo Irish expanded by 40% a year from 1999 to 2006 (every year!).
3. Greenspan’s Fed allowed banks to reduce capital drastically by purchasing credit default swaps, an insurance product. By 2006 the Fed knew of AIG’s fragility as a result from selling tons of such credit insurance, and thus knew of the fragility of the banks that had purchased the swaps.
4. Gillian Tett writes in her book Fool’s Gold that the New York Fed became very concerned about the spectacular rise in Credit Default Swaps already in 2004, especially because of the opaque nature of the trades.
5. Debt of Spanish household and nonfinancial firms went from 70% of GDP in 1997 to 170% of GDP in 2008.
6. In 1998 the CFTC (the US regulator for swaps) proposed to regulate over-the-counter derivatives, but no one heeded the call. That same year hedge fund LTCM blew up in part because of OTC products.
7. Many bank reviews before 2007 by the FDIC, a US bank regulator, signalled that banks’ exposures to risks were too large, but no one followed up.
8. Multi-billion dollar losses by rogue traders demonstrated the taking of excessive risks.

Government agencies and experts are gathering data on the possibility of an upcoming ecological crisis, just as they did on the financial crisis. A United Nations’ report of a few weeks ago showed carbon dioxide emissions today that are unprecedentedly high. The negative impact already hits communities around the world, and the longer we wait, the costlier the adaptation will be. If only financial regulators had stopped the party well before 2008, we would not pay the huge price of adaptation now. In the US, 15 million people more are in poverty today compared to 2000, and nearly all of this increase happened since 2008. In Europe, the rapid turnaround of the economy in countries like Greece and Portugal tests the limits of what societies can bear.

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Getting rich slowly – by selling frozen water

04 Monday Nov 2013

Posted by Stefaan De Rynck in Leadership

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getting rich slowly, ice trade, Leadership, starting a business

In 1833 Frederic Tudor, a Boston merchant, shipped New England ice to hot, humid Calcutta in India. Nearly half of the cargo arrived intact after a voyage of several months. The story of Tudor is a lesson in how to overcome failure and get a business off the ground.

Spy Pond in Arlington MA - Frederic Tudor harvested ice here for his Boston-based global trade

Spy Pond in Arlington MA – Frederic Tudor harvested ice here for his Boston-based global trade

It was on a trip to Havana with his brother John Henry in 1801 that Frederic got the idea of sending ice to the tropics. Where others saw a ludicrous fantasy, he saw a lucrative market. And he persisted through a decade of adversity. Newspapers and family friends mocked him. Tudor spent time in jail for failure to pay his debts. He fell into a depression. But he died a millionaire.

His problems on the way to getting rich were plentiful. Once Tudor got the ice to hot places, consumers did not know how to preserve or even use the novel product. He turned to what social media today would call influencers and gave away free ice to local bartenders in the Caribbean islands. After creating demand and when faced with competitors, he would sell below cost, waiting for other traders to literally melt down.

But before he could even think about reaching consumers, Continue reading →

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  • Crimea and Kosovo, one stands where one sits
  • What kind of EU democracy is emerging?
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