Analysis

Risk Politics

In 2022, Environmental, Social, and Corporate Governance (ESG) accounted for 65 percent of all new inflows in exchange traded funds in Europe. Investments in the US are also projected to grow—PricewaterhouseCoopers (PwC) observes that more than eight out of ten institutional investors plan to increase their allocations to ESG in coming years. ESG assets under management are expected to reach US$33 trillion by 2026, making up over 20 percent of all assets under management globally. 

Industrial Transformations

The latest US experiment with industrial policy—exemplified by the Inflation Reduction Act, the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act—has sparked outright opposition and pleas for restraint, but also calls for a far more ambitious action.

Pecuniary Salvation

Monetary financing—the issuance of public money to support public expenditure—has in recent times become a policy taboo. The message from economists to politicians, policymakers, and society more broadly is often that any central bank support for public expenditure is likely to destroy an economy.

Reforming the IMF

In March 2023, the US Federal Reserve expanded its balance sheet by $300 billion. Following the run on Silicon Valley Bank, the Fed provided emergency lending through a brand-new bank lending facility that accepted US treasuries at face value (higher than market value) as collateral against dollars, for cash-strapped financial institutions. The US central bank assured that even the uninsured deposits exceeding $250,000 at Silicon Valley Bank would be made whole. As the banking turmoil spread across the North Atlantic, the Fed reactivated its international dollar swap lines. Meanwhile, in Europe, the Swiss National Bank arranged a  public liquidity backstop for UBS Group AG, which had agreed to absorb Credit Suisse. Swiss authorities wrote new amendments into law that enabled them to structure the merger’s terms and conditions.

Two-Price Economy

The crisis affecting US and some European banks shows little sign of abatement. Following the collapse of Silicon Valley Bank earlier in the year, First Republic last week became the latest mid-size US bank to be bought up by a larger lender after investors withdrew more than $100 billion in deposits during the first quarter of the year. The Federal Reserve is now concerned about a “credit crunch” as mid-sized banks restrict their lending in the face of continued pressure on their balance sheets.

Best Execution?

Recent years have seen the rise of the meme stock frenzy—a wave of stock purchases driven by social media trends. This tendency culminated with the Gamestop bubble of 2021, in which the value of the company’s stocks increased more than a hundred times over in just a few months. Beyond demonstrating the added risk introduced by meme stocks, the occasion revealed crucial insights regarding the role of retail day traders in the structure of contemporary equity markets. 

The Revival of Neomercantilism

Amid intensifying geopolitical and economic rivalries, policymakers around the world—including those in the United States and European Union—are increasingly turning to neomercantilist industrial policies to promote the wealth and power of their states. This trend has been reinforced by the pandemic’s disruptions to international supply chains, the growing weaponization of economic interdependence, and the broader backlash against free trade in many countries.  

Testing Loyalties

Pain and resolve: have we reached the beginning of the end of sanctions?

Inside the Black Box

We live in a period of unparalleled financial complexity, and, as the history of recent decades has demonstrated, unparalleled financial risk. The recurring crises which plague the global economy have brought theorists of systemic instability to the fore. Key among them has been Hyman Minsky, whose framework for understanding financial market fragility takes a cyclical form. In his model, an excessive credit expansion (“displacement”) fuels a speculative bubble (“mania” ) and causes “financial distress,” leading to credit contraction and the bursting of the bubble (“panic” ). 

Illusions of Decontrol

The founding myth of modern Germany can be traced back to June 20, 1948, when Ludwig Erhard, economic director of the Anglo-American occupation zone in Germany, created the Deutsche Mark. To stabilize the new currency, he paired the paper issue with the removal of price controls. By spring 1949, German production rose from 51 percent to 78 percent of its 1936 level. Over the next eleven years, GDP grew at an annual average of over seven percent. 

The Eurochip

The headline “World trade war looms over microchip accord” might recall current commercial disputes around semiconductor supplies. In fact, it appeared in an issue of Nature in February 1987, when the US had signed bilateral agreements with Japan to promote its own semiconductor exports and limit imports from the latter. European governments, in turn, were angry at what they saw as the cartelization of the global market. The then-European Economic Community (EEC) (now the European Union) threatened to take the US and Japan to the then-General Agreement on Tariffs and Trade (now World Trade Organization) for violating international trade procedures. Like today, concerns on all sides were linked to the role that microchips play in crucial military and civilian industries.

Banks as Hedge Funds?

Silicon Valley Bank’s (SVB) short lifespan—from October 17, 1983 to March 10, 2023—has been witness to crucial transformations in the world of modern banking. The bank’s collapse has sparked wide ranging reflections on the roots of the crisis, the utility of government bailouts, and appropriate responses.

The Imperial Fed

The Federal Reserve is commonly depicted as an institution set up to fulfill domestic functions, only later taking on its significant international and geopolitical dimensions. This view sees the Fed’s origins in various domestic concerns, such as bankers’ desire to cartelize themselves, exporters’ bid to make the American financial system more stable and liquid so as not to rely on London for loans, farmers’ project to break up New York’s “money trust” and spread financial services more evenly throughout the country, and the collective desire to put an end to the apparently endemic panic in US money markets.

Red Finance

In terms of its size, dynamism, and degree of global integration, China’s market economy is extraordinary. Though it’s known officially as a “socialist market with Chinese characteristics,” its market features far predate the 1978 decision on “reform and opening.” The reformist Chinese growth model has always been characterized by a distinct pragmatism. This involves integrating macro programming and regulations, a mix of public and private ownership and control, market allocation to various degrees of resources and distribution, bureaucratic cronyism in productive and business organizations, and international “free trade.”

Profits, Prices, and Power

If they are remembered at all, the 1950s are now thought of as a lost golden age of stable growth and political economic consensus. But the second half of the decade saw rising prices, tightening financial conditions, diminished industrial employment, and stagnant investment. If contemporaries did not yet use the word “stagflation,” they might as well have, referring to this “new inflation” with terms such as “recession-cum-inflation.”

Wall Street Consensus a la Française

Since his election in 2017, French President Emmanuel Macron has periodically committed to resetting France’s relationship with Africa. In 2020, his so-called Macron Doctrine denounced the Washington Consensus for creating a “capitalism that has become financialized, that has become over-concentrated and that is no longer capable of handling the inequalities in our societies and internationally.” He called for a Europe-Africa partnership of equals to underpin the material and ideological work that would reverse financialized capitalism and its destruction of the climate.