Obama acts to cut back on bank risks

Yesterday the US President announced plans to limit the risks taken by major US financial institutions. This came as a complete surprise and as a result we saw sharp falls in the shares of several banks including JP Morgan Chase and Morgan Stanley. The key measure is that US banks that take ordinary personal deposits will be forced to close or sell off their proprietary trading operations. This is the type of activity that got banks like Bear Stearns (see page 197 of "Reading and Understanding Economics") into severe trouble in 2008. Put simply, the bank's prop trading desk is involved in taking bets on financial markets using the its own money rather just than carrying out a trade for a client in which only the client's money is at risk. This type of activity has been associated with the creation of clear conflicts of interest with some banks encouraging their clients to buy financial products that the banks had a stake in. It is now expected that the UK Government will follow this lead and introduce similar measures in the near future.

Doves versus the Hawks!

The latest minutes (November meeting) from the Bank of England's Monetary Policy Committee (MPC) highlight some clear divisions among its members in relation to the future direction of UK monetary policy. Seven members voted for the further £25bn boost to the quantitative easing (QE) programme which took the total to date up to £200bn. One dovish member (David Miles) actually wanted the QE to amount to some £40bn. In contrast one other hawkish member (Spencer Dale) wanted no further QE at all. These divisions reflect the wider view of the City economists. In recent weeks we have seen some of them arguing that we should do more to promote growth and that any inflationary threat was minimal. In contrast some others now feel that the Bank's actions have gone too far. They fear that we could see a serious rise in UK inflation next year. To be honest it is hard to decide which side of this argument that I feel most comfortable to support. There are clearly some inflationary pressures mounting reflected in higher oil prices and the more confident tone of the stock market. Against that there is clearly a risk that the economic recovery could hit the buffers during 2010. If that happens the risk of higher inflation will soon disappear. We live in interesting times!

Manufacturing output improving?

Yesterday we saw the publication of some slightly more encouraging data on the UK's manufacturing sector. The Chartered Institute of Purchasing and Supply's Purchasing Managers Index (PMI) rose to 53.7% in October. This compared to a figure just below 50% in September. In the United States the equivalent PMI is a major economic release and this would have hit the headlines. However, in the UK this data is more low key. The significance of the data is that any figure above 50% indicates that this sector is growing. So the rise from below 50% to 53.7% in October could be taken a clear sign that the worst is over. However, we should wait to see this trend confirmed with November's data published in early December.

Investment Banks drive stock market indices forward!

Today Goldman Sachs, the US Investment Bank, announced that their profits had hit over $3.2bn in the third quarter compared to a year ago. This followed on from Wednesday's numbers showing that JP Morgan Chase had earned $3.6bn net income in the three months to the end of September 2009. This was way better than the analysts had expected and the outcome was that the Dow Jones Industrial Average (DJIA) went above 10,000 for the 1st time in a year. The broadly based rally in stock prices also reflected some very good retail sales numbers and some encouraging figures from Intel. The big question is can this stock market confidence build further taking the DJIA to even higher levels. For what it is worth I would not be too surprised to see some slight fallback in share prices as traders become more cautious perhaps deciding to sell some stock and take some profits. They have after all seen a 50% rise in the main stock market indices since March of this year. So keep an eye on all the key indices which are shown on the front page of the main section of the FT.

G20 take centre stage!

In recent days the actions of the G20 leading economies have dominated the news agenda. One aspect of this has been the various statements made by some of the key players on the need to clamp down on the level of bankers' bonuses and the activities of hedge funds in an attempt to avoid some of the causes of the credit crisis. There has, however, been a clear divide between those leaders representing continental Europe (Angela Merkel and Nicolas Sarkozy) and the those representing the Anglo-US axis (Brown and Obama). The former advocate much tougher financial regulation including explicit measures to limit bankers' pay in the future while the latter favour lighter regulation on financial institutions. There is little doubt that both Brown and Obama are facing stiff opposition from the city of London and Wall Street to any attempt to come down too harshly against the banks. This will be a debate that will continue for some time....

The problems in measuring unemployment in the UK

The UK Government is somewhat confused by the latest unemployment data. The problem is caused by the two different measures of unemployment that they publish. The first is based on the number of people claiming job seekers allowance (JSA). This indicates that unemployment is rising but at a relatively modest rate of around 120000 in the latest three months. In contrast the alternative measure is based on a survey conducted by the International Labour Organisation's (ILO) count. This focuses on those people looking for work. The ILO's latest data shows an increase of some 400000 people unemployed over the same period. The Government has announced an urgent enquiry to try to find out the reasons for the large difference. One very likely explanation is that a number of those people currently becoming unemployed were second earners and they are not bothering to sign on for unemployment benefits. They are living off their partner's income. In addition it seems likely that many migrant workers are registering as unemployed on the ILO survey but they are not entitled to receive JSA. Hopefully in a few months we will get to the full truth behind the UK unemployment data!

Chinese Inflation falls again...

In Article 18 in the book I looked at the reasons behind the sharp rise in inflation that China experienced last Spring (2008). A year on and it is such a very different picture. The latest data for their consumer price inflation showed a fall for the fourth successive month. Once again the key factor was the sharp declines in non-food items although the price of China's most key meat, pork, also fell by a third compared to a year ago. The main reason for the decline in China's inflation rate is mainly the impact of the World recession which has led to much less demand for their exports to overseas markets. So China's producers and retailers must cut their prices to compete overseas and also to sell more at home.