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October 10th, 2020

↳ Finance

Supermoon

RENTAL HOUSING

With millions facing housing insecurity, the economic downturn has sparked concerns of a new housing crisis. Where the subprime mortgage crisis thrust the centrality of unsustainable housing financing practices in the global economy into view, the Covid-19 recession has brought increased attention to widespread housing insecurity among the roughly forty-three million renter households in the US. And these units, too, are increasingly financialized.

A 2017 article by geographer DESIREE FIELDS examines these trends with a focus on New York City:

"Rental housing today constitutes an important new node for financializing projects globally, most noticeably in the US single-family market, as well as Spain and Ireland. Private equity funds have taken advantage of sharp price drops, surging rental demand and constrained mortgage credit to buy distressed real estate assets, convert them into rental housing and roll out novel rent-backed financial instruments. Tenants' homes may be subject to financialization even though residents themselves do not have mortgages.

Whereas private equity firms only discovered single-family rental post-2008, they had established themselves in New York City’s rental market in the years leading up to the crisis. New York has been characterized as a testing ground for neoliberal urban restructuring, experimentation made possible by its 1970s fiscal crisis. Three decades later, the city's mid-2000s real estate boom, together with the incomplete dismantling of postwar-era state rent protections in the 1990s, created the conditions for another round of experimentation: private equity firms, in concert with local banks and landlords, set about transforming the city's rent-regulated housing into a novel asset class for capital seeking investment opportunities, subjecting tenants to harassment, displacement and unsafe living conditions to extract financial yield. This experiment represents an important step towards incorporating rental housing into global circuits of capital."

Link to the piece.

  • In another paper, Fields and co-authors Rajkumar Kohli and Alex Schafran trace the growth of single-family rental securitization in the US post-2008. Link.
  • Joe Beswick et al. document the rise of corporate landlords in post-crisis London's rental market. Link. Manuel B. Aalbers and Andrej Holm compare privatized social housing in Amsterdam and Berlin. Link. Michael Byrne examines asset-management companies and financialized real estate in Ireland. Link.
  • For more on the financialization of real estate, see Herman Mark Schwartz's work linking the US housing market and global capital flows. Link. See also: Saskia Sassen on mortgages, and David Harvey on capital and urbanization. Link, and link.
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September 12th, 2020

Technological Improvements

FINANCE AND FARMLAND

Land acquisitions have been on the rise since 2008, when rising oil prices and an international food crisis dramatically increased demand. Changing ownership patterns have the potential to influence not only the terms of agricultural supply chains, but the structure of political power in economies across the Global South.

A new book by MADELEINE FAIRBAIRN analyzes the trajectory of global land grabs, focusing especially on the expanding role of the financial sector.

From the introduction:

"The giant US pension fund Teachers Insurance and Annuity Association (TIAA), one of the largest players in the emerging farmland investment sector, illustrates how recently financial interest in farmland has emerged—and how rapidly it has grown. In 2007, TIAA suddenly began acquiring enormous tracts of farmland as part of the investment portfolio it manages on behalf of retired teachers and other professionals. By 2012, it already controlled $2.8 billion worth of farmland in the United States, Australia, Brazil, and Eastern Europe, making it one of the largest farmland owners and managers in the world. This included more than four hundred individual farm properties totaling 600,000 acres, most of them leased out to tenant farmers and operating companies. By the end of 2017, less than a decade after its first farmland purchase, TIAA—a firm created to manage the retirement accounts of teachers—had come to control over 1.9 million acres of farmland worldwide.

The amount of financial-sector capital so far invested in global farmland markets is fairly paltry. But financial-sector spittle has the potential to buy a lot of land. In Iowa, where farmland cost an average of $7,943 per acre in 2014, $40 billion could buy slightly over 5 million acres—approximately a sixth of the state’s farmland. In Brazil’s soy frontier state of Piauí, where farmland cost around $1,000 an acre in 2014, it would buy well over half the state. Ultimately, the prospect of landownership concentration in the hands of the financial sector matters because it has the potential to propel economic inequality. It matters greatly if the financial institutions that control much of the accumulated wealth of society decide that land is a preferred route for storing that wealth and generating income from it."

Link to the book.

  • "We devised a new methodology for uncovering corporate organization and actors who benefit from farmland investment through an analysis of creditors and proprietors." Loka Ashwood, John Canfield, Madeleine Fairbairn and Kathryn De Master draw on county-level tax parcel data to analyze corporate land ownership structures in Illinois. Link.
  • International investment law, which construes land as a commercial asset, can facilitate access to land for foreign investors and impose discipline on the exercise of regulatory powers in land matters. But shifts in the political economy that underpins international investment law can create new opportunities to reflect the non-commercial relations within which land rights remain embedded in many societies." Lorenzo Cotula's 2013 article on the legal underpinnings of global land acquisition. By the same author, a 2013 book looks at landgrabs across Africa. Link, link.
  • Another new book by Stefan Ouma presents an ethnography of agricultural-focussed asset management, through case studies of New Zealand and Tanzania. Link.
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August 13th, 2020

Geoeconomics and the Balance of Payments: A Reading List

Suggested readings on the savings glut, critical macrofinance, and the balance of payments

Below is a rough reading list assembled by the panelists in the August 13, 2020 discussion on “Geoeconomics and the Balance of Payments.”

A recording of the discussion—with Mona Ali, Daniela Gabor, Izabella Kaminska, Matt Klein, JW Mason, Michael Pettis, Brad Setser, Jon Sindreu, Colby Smith, and Nathan Tankus, and moderated by Adam Tooze—can be found here.

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August 3rd, 2020

Nocturnal Pasture

OFFSHORING

Much research has documented the vast sums of "missing wealth" stored in tax havens, and detailed its implications for inequality, fiscal policy, and economic growth. Less present in the discussion is the institutional and political history of these offshore financial centers.

In a 2017 paper, VANESSA OGLE recounts the making of what she terms the offshore "archipelago"—the various institutions that, outside of the core of powerful nation-states, became central to the international financial system. From the paper:

"Contemporary definitions of tax havens are often too static to capture the more fluid and multifaceted legal constellation among such sites as they appear to the historian. In the age of empire, the natural state of affairs entailed legal unevenness. This world was made up of centralized nation-states, multiethnic land empires, overseas empires with their colonies, protectorates, settlements, and dominions, as well as 'informal empire' with its regimes of extraterritoriality and legal pluralism. Local administrations in overseas territories had considerable leeway in drafting company and bank laws or tax codes and accounting standards for these respective entities and sub-entities. Legal and political unevenness greatly benefited tax avoidance on a global scale.

As empires came undone, an archipelago-like landscape of distinct legal spaces re-created some of the unevenness that had characterized the nineteenth century. Yet in the twentieth century, this offshore world and the unevenness it offered existed in and for a world order in which bounded, homogeneous national state spaces and generally sizable nation states had eventually become the norm. The New Deal, the European welfare state, decolonization, and the Bretton Woods system were state-based and government-driven projects. The offshore world emerged on a more significant scale precisely at the moment when these state-based projects began to assume their greatest importance. It consisted of tax havens, flags of convenience registries, offshore financial markets and banking institutions, and special economic zones. This landscape allowed free-market capitalism to flourish on the sidelines of a world increasingly dominated by larger and more interventionist nation-states."

Link to the piece.

  • Antonio Coppola, Matteo Maggiori, Brent Neiman, and Jesse Schreger recalculate global capital flows, accounting for cross-border financing and tax havens: "We find that portfolio investment from developed countries to firms in large emerging markets is dramatically larger than previously thought. The national accounts of the United States, for example, understate the U.S. position in Chinese firms by nearly $600 bn, while China’s official net creditor position to the rest of the world is overstated by about 50 percent." Link.
  • Drawing on interviews with key informants from banks, shell companies, foreign real estate, and investor citizenship programs, Alexander Cooley and J. C. Sharman argue that "professionals in major financial centers serve to lower the transaction costs of transnational corruption by senior foreign officials." Link.
  • Daniela Gabor and Cornel Ban's 2017 paper on the political economy of shadow banking. Link. And Jan Fichtner's 2016 "anatomy" of the Cayman Islands offshore financial center. Link.
  • The 2011 book The New Fiscal Sociology, edited by Isaac Martin, Ajay Mehrotra, and Monica Prasad, marks and collects interdisciplinary research in the comparative history and politics of taxation. Link.
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July 20th, 2020

Dramatic Fire

CENTRAL BANKS AND CLIMATE

Common wisdom around central bank independence (CBI) is increasingly a matter of debate. Before the Covid-19 crisis, a growing number of scholars and commentators have proposed means by which central banks can address looming climate catastrophe—either by integrating new risks into their assessments, or by promoting more active resource allocation—and argued that central bank's attention to climate risk has focused too squarely on financial stability.

In a 2018 working paper, SIMON DIKAU and ULRICH VOLZ outline how, despite the "second-best" nature of this kind of intervention, the shift is already occurring:

"Allocating financial resources toward or away from certain sectors and companies implies favoring certain segments of the economy over others and appears to be incompatible with our modern understanding of independent central banks. Nonetheless, many central banks in emerging and developing economies have resorted to these policies as viable, second-best solutions to promote sustainable development and green investment. The notion of the neutrality of monetary policy has come under intense scrutiny more recently, not least in the context of discussions about the distributional consequences of the negative interest and quantitative easing policies adopted by major central banks. It is apparent that central banks in developing and emerging economies especially, and in Asia in particular, have been at the forefront of using a broad range of instruments to address environmental risk and encourage green investment."

Full paper available here.

  • On VoxEU, Markus K. Brunnermeier and Jean-Pierre Landau on the applicability of central banking tools for the climate crisis: "The conventional wisdom on monetary policy is that it has no impact on long-term growth; its influence is mostly felt on a 1.5 to 2.5 years horizon. By contrast, climate change is all about the long term; effects and policies materialize and matter over several decades." Link.
  • An IMF report by Pierpaolo Grippa, Jochen Schmittmann, and Felix Suntheim surveys the field: "Climate change will affect monetary policy by slowing productivity growth (for example, through damage to health and infrastructure) and heightening uncertainty and inflation volatility." Link.
  • As governor of the Bank of England, Mark Carney gave an oft-cited 2015 speech, proposing a scheme of physical risks, liability risks, and transition risks. Link. And Jean Boivin argues for abandoning CBI in the face of Covid. Link.
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July 16th, 2020

The Dollar and Empire

How the US dollar shapes geopolitical power

What does the US dollar’s continued dominance in the global monetary and financial systems mean for geo-economic and geo-political power? In a recent article, Yakov Feygin and Dominik Leusder question whether the United States actually enjoys an “exorbitant privilege” from the global use of the USD as the default currency for foreign exchange reserves, trade invoicing, and cross-border lending. Like Michael Pettis, they argue that the USD’s primacy actually imposes an exorbitant burden through its differential costs on the US population.

Global use of the dollar largely benefits the top 1 percent by wealth in the United States, while imposing job losses and weak wage growth on much of the rest of the country. This flows from the structural requirements involved in having a given currency work as international money. As Randall Germain and I have argued in various venues, a country issuing a globally dominant currency necessarily runs a current account deficit. Prolonged current account deficits erode the domestic manufacturing base. And as current account deficits are funded by issuing various kinds of liabilities to the outside world, they necessarily involve a build-up of debt and other claims on US firms and households.

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July 1st, 2020

Balanced Sheets

On the conceptual and methodological stakes of Trade Wars Are Class Wars by Matthew C. Klein and Michael Pettis

Good writing on international macroeconomics reads like a detective novel. There’s a suspicious event—hundreds of millions of dollars in phantom FX swaps, a container port’s worth of missing exports—and an enormous cast of closely-linked characters. But instead of a preternatural ability to see the clear-cut means, motive, and opportunity of fictional characters in a pulp whodunit, the macroeconomic detective is armed with the knowledge that balance sheets always balance. This simple insight, that every transaction has two sides, means that there are certain aggregate relationships between transactions that must obtain for the world economy. Knowing this, it’s possible to chase actors across seemingly unrelated balance sheets to find where the system as a whole was forced to balance. From here, the skillful economist can identify the long-run tendencies that a given balance is likely to create. (Wynne Godley famously predicted the Global Financial Crisis in just this way, following US mortgage debt around the world and back.) This kind of detective work is difficult, and often unpopular. The balance sheet approach cuts through political and media platitudes to reveal who the winners and losers are in a given regime. By taking this approach to examining trade policy, Michael Pettis and Matthew Klein have, with Trade Wars Are Class Wars, written the ideal book for understanding the long-run trends that have shaped our dysfunctional present.

Pettis and Klein tell a broad story about the last fifty years of global economic development, which links the dynamics of global supply chains and tax evasion, and the historical shift from wage-led to profit-led growth.

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June 13th, 2020

Trade Wars Are Class Wars

A discussion between Adam Tooze, Michael Pettis, and Matthew Klein

Michael Pettis and Matthew Klein's new book Trade Wars Are Class Wars begins with an epigraph from John A. Hobson: "The struggle for markets, the greater eagerness of producers to sell than of consumers to buy, is the crowning proof of a false economy of distribution. Imperialism is the fruit of this false economy." Pettis and Klein's book updates the Hobsonian thesis for the twenty-first century, arguing that, while trade wars are often thought to be the result of atavistic leadership or the contrasting economic priorities of discrete nation states, they are best understood as the malign symptoms of domestic inequalities that harm workers the world over. In a panoramic account of the shifts in the global economy over the past several decades, Pettis and Klein detail the development of the economic ills that define modern international political economy. It is essential and provocative reading with broad implications for international politics, the study of inequality, and the future of the global monetary system.

On May 28, Pettis and Klein were joined by Adam Tooze, author of Crashed, for a discussion about their new book. A recording of the conversation can be watched here. The transcript was lightly edited for length and clarity.

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May 1st, 2020

The Class Politics of the Dollar System

Managing an international public good

The global dollar system has few national winners. The typical frame for understanding the US dollar is that of “exorbitant privilege.” But the role of the dollar in structuring the international financial system and defining the relationship between a hegemonic US and the rest of the world is ambiguous—as is the question of who exactly benefits from the current arrangement. Dollar primacy feeds a growing American trade deficit that shifts the country’s economy toward the accumulation of rents rather than the growth of productivity. This has contributed to a falling labor and capital share of income, and to the ballooning cost of services such as education, medical care, and rental housing. With sicknesses like these, can we say for certain that the reserve currency confers substantial benefits to the country that provides liquidity and benchmark assets denominated in that currency?

For the rest of the world, the ills are clear enough. In developing countries, the need to insure their economies against currency crises and debt deflation has meant the accumulation of dollars at the expense of necessary domestic investment. These policies are usually accompanied by a suppression of consumption and incomes to establish a permanent trade surplus vis-à-vis the dollar system. And in many countries, the dollar system allows corrupt elites to safely transport their ill-gotten earnings to global banking centers located in jurisdictions with opaque ownership laws.

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September 3rd, 2019

Eye Machine

IMPLICIT FAVOR

The failures of research on fin-tech and poverty alleviation

Last week, we considered how social and political standards can pressure climate scientists to under-report their findings, introducing an underestimation bias into published climate research. In a recent thread, Nicholas Loubere examines the development buzz around mobile money, showing how similar factors can serve to exaggerate the findings of academic studies.

In a new article quoted in the thread, MILFORD BATEMAN, MAREN DUVENDACK, and NICHOLAS LOUBERE contest a much cited study on the poverty alleviating effects of mobile money platforms like M-Pesa. The criticism rests largely on grounds of omission: the study, they argue, ignores the closure of nearly half of microenterprises opened with M-Pesa, the jobs and incomes lost with the introduction of new businesses into fragile markets, the burgeoning debt accrued through digital loans, the overwhelmingly foreign ownership of M-Pesa and its profits, and the wealthy networks composing its primary users. Methodologically, it had no control group, used a small sample size, and overlooked the potential for reverse causality.

Why was a potentially flawed study so well regarded? According to Bateman, Duvendack, and Loubre, it's in part because its results told researchers and policymakers what they wanted to hear. From the article:

"The rapid popularization of fin-tech as a developmental solution is premised on the continued prominence of microcredit and the broader concept of financial inclusion. The microcredit movement was established and validated in the 1980s on overblown and ultimately false claims that providing small loans to groups of poor women was a panacea for global poverty reduction—claims that were especially associated with Dr Muhammad Yunus. Empirical justification came from an impact evaluation undertaken in Bangladesh by then World Bank economists Mark Pitt and Shahidur Khandker, which claimed that microcredit programs had significant beneficial results for impoverished female clients. For many years, Muhammad Yunus used Pitt and Khandker’s findings to successfully ‘sell’ the microcredit model to the international development community, generating a consensus that the microcredit model was the most effective way to efficiently provide enormous benefits to the global poor."

Link to the article, and link to a blogpost in which the authors outline their key findings.

  • "Kenya’s new experience of debt reveals a novel, digitized form of slow violence that operates not so much through negotiated social relations, nor the threat of state enforcement, as through the accumulation of data, the commodification of reputation, and the instrumentalization of social ties." Kevin P. Donovan and Emma Park report on the consequences of mobile debt for poor borrowers. Link.
  • In an article from 2017, Loubere "examines examples of exploitation, fraud, instability, and extraction related to expanded digital financial coverage in contemporary China." Link. At Bloomberg, David Malingha compares credit markets in Asia with those of sub-Saharan Africa. Link.
  • "This article claims that to bring finance back to serve the real economy, it is fundamental to (a) de-financialize companies in the real economy, and (b) think clearly about how to structure finance so that it can provide the long-term committed patient capital required by innovation." Mariana Mazzucato on governments' role in ensuring that finance serves public ends. Link.
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