Thursday, December 19, 2013


The Fed's outgoing chairman Ben Bernanke announced yesterday that the Federal Reserve would gradually pull back the stimulus policy, unless future developments would warrant a U-turn. Assurances were also given that interest rates would stay low after the bond-buying ends. Wall Street liked what it heard and the Dow Jones gained 300 points.  Obviously, the Fed's reading of the signs of improving growth had an immediate ripple effect (mostly in Asia). 

Investors who dislike uncertainties cheered and Bernanke leaves with well-deserved laurels, after the cataclysms of Bear Stearns and AIG,  rescued by the Fed in ways that were unorthodox. "Quantitative Easing" was also set in place.  The enacted Dodd/Frank act is an attempt to correct former transgressions.  It increased transparency at the Fed while maintaining independence of monetary policy. The act is supposed to further the stability, transparency and accountability of the financial system. It ends the former "too big to fail" mantra and protects taxpayers by ending bailouts. The recently adopted Volcker Rule prohibits an insured depository institution from engaging in proprietary trading or sponsoring a hedge fund or private equity fund. A firewall was set in place.

All this happened while Europe seemed shackled in austerity measures which were imposed from higher up and created a populist uproar, which still survives.  EU politicians did come up with a hybrid "Single Resolution Mechanism" and the creation of a "Banking Regulator," a set of measures too complex to convince. The EU stumbles from compromise to compromise with blurred demarcation lines between politics and global intervention and a myriad of decision-makers who stand in the way of efficiency.  For awhile the three central bankers at the Fed, the ECB and London were able to work together.  Now this looks suddenly more difficult.

Britain has recovered and follows the American model.  For now the EU might as well delete the words "growth" and "employment" in its dictionary.  The United States seems to be heading for a slow but steady recovery (unemployment, low inflation, low interest rates, energy independence, R and D boom, housing market up.)  The EU's problem is political and rooted in its heartland where inequality rules. Some decisions are considered as more imposed by necessity than by choice. Mario Draghi, the brilliant ECB'c chief lacks the room for manoeuvre that his American and (new) British counterparts have.

China is becoming a major player. The Renminbi, the "dim sum bonds" (traded in Hong Kong but denominated in RMB), and last but not least, the "sea turtles" (Chinese returning after US education) are dethroning the euro. The Chinese currency might as well choose London as a hub rather than anywhere else. China is a good learner.  London and the United States are the motors behind the Transatlantic Trade and Investment Partnership.  The United States should likewise accelerate a trade deal with its Asian partners. 

Diplomacy today evolves in  large part around free trade. The  quarrels in the East and South China Seas are more than just  about ego and natural ressources. They highlight the mostly categorical imperative of freedom of navigation, which is copming under threat, and which equals trade!  China's blue water ambitions are a larger menace than its "ostentatious" strives elsewhere!  Xi Jinping knows where his interests lie!  The new Fed Chairperson, Janet Yelen  - and the Obama administration as a whole-  better get used to "navigating" both economic crisis and Chinese treacherous waters.

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