The Economist

Subscribe to The Economist feed The Economist
Finance and economics
Updated: 2 hours 58 min ago

The investigation into the Bangladesh Bank heist continues

Thu, 03/23/2017 - 15:44

A YEAR after one of the most spectacular robberies of modern times, the authorities in Bangladesh are still trying to crack the case. Hackers into the country’s central bank sent instructions through SWIFT, a messaging network for cross-border payments, to transfer funds from the bank’s account with the New York Federal Reserve to private accounts in Sri Lanka and the Philippines. Much of the stolen $101m has yet to be retrieved; the masterminds are yet to be identified. But the probe reveals the strikingly sophisticated, and international, nature of the crime.

After sifting 60 hard drives and thousands of pieces of paper, and interviewing dozens of people, investigators, talking anonymously in Dhaka, say they are confident about some details of the heist. They believe foreign hackers acted with inside help. The attackers’ coding style has raised suspicions of involvement by North Korea. This week the New York Times reported that American federal prosecutors were examining this possibility.

Egregious violations of the bank’s security procedures have also been uncovered. On the day of the robbery, its security cameras were...

A philanthropic boom: “donor-advised funds”

Thu, 03/23/2017 - 15:44

…and remember to claim the tax deduction

JEFF POWERS was raised as “a good Catholic boy”. So when he sold his wall-fastener business in 2012 for $225m, he wanted to give back. And, like many philanthropists, he started close to home. He donated to the hospital where his son had spent months recovering from a car accident. He helped pay for a swimming pool at his children’s school. Today he supports all sorts of causes, from scholarships in Florida to soup kitchens in New York.

The way Mr Powers finances these projects would strike old-school charitable types as odd. Traditionally, a budding philanthropist would either give directly to a charity or set up a foundation. But Mr Powers uses a donor-advised fund (DAF), a type of account held by a non-profit entity, in this case Bank of America Charitable Gift Fund, an arm of the bank. DAFs are taking root in Britain and Canada, but they are primarily an American phenomenon.

DAFs are way-stations for donor dollars. Mr Powers deposits some money into his DAF and, while he ponders where it should go, Bank of America invests it for him. At some point he will suggest a beneficiary and, as...

The unusual gap between American and European bond yields

Thu, 03/23/2017 - 15:44

AMERICA may be the world’s largest economy, but these days its government pays more than many others to borrow money. Its ten-year bond yields are higher than those in Britain, France, Singapore and even Italy.

The gap between American and German ten-year yields has been above two percentage points. For much of the past 25 years, it was very rare for the difference to exceed a single percentage point. On occasions, American yields fell below German levels (see chart).

Go back a generation and you might have expected the country with the higher bond yields to be the one with the weaker currency; investors would demand a higher yield to compensate for the risk of future depreciation. But that is not the case today. The dollar has been strong, relative to the euro, and many people expect it to strengthen further. Indeed, the higher yield on American government debt is one reason why investors might want to buy the dollar.

Instead, the gap may reflect differences in both monetary and fiscal policy. In America the Federal Reserve stopped buying Treasury bonds a while ago and has raised interest rates three times since December 2015; the...

China’s growing clout in international economic affairs

Thu, 03/23/2017 - 15:44

THE IMF “systematically impoverishes foreigners”, and the World Bank’s advice has “negative value to its best clients”. These harsh words were voiced not by lefty critics of the Washington Consensus, but by two men (David Malpass and Adam Lerrick, respectively) whom Donald Trump has picked to lead his Treasury’s dealings with the rest of the world, including the international financial institutions (IFIs), such as the World Bank and IMF, and the G20 group of leading economies.

Their future boss, Steven Mnuchin, America’s treasury secretary, is not much more reassuring to the global financial establishment. At his first G20 meeting, in Baden-Baden in Germany on March 17th-18th (pictured), he vetoed a long-standing pledge to “resist all forms of protectionism”. It had often been breached. But hypocrisy is the tribute vice pays to virtue.

To veterans of international economic affairs, this combative stance is baffling. America’s government now seems to disdain a set of institutions it nurtured into life—institutions that are more commonly criticised for following America’s will too closely. “The United States is just handing the leadership over to China of the...

The Trump administration will review all of America’s trade deals

Thu, 03/23/2017 - 15:44

ACCORDING to a document crafted by the Trump administration, a model trade agreement has 24 elements. Second on the list is “trade-deficit reduction”, giving a hint as to why Mr Trump wants to review America’s existing agreements. In January Sean Spicer, his press secretary, said the administration would “re-examine all of the current trade deals.” A presidential order to do just that is reported to be in the offing.

America boasts 14 bilateral and regional free-trade agreements (FTAs). Mr Trump seems to blame these agreements for America’s large trade deficit. Most economists disagree, seeing it as reflecting macroeconomic imbalances. The FTAs are in any case with countries representing just two-fifths of America’s two-way trade in goods, and less than 10% of its goods-trade deficit (see chart). Most (77%) of America’s deficit stems from trade with China, the European Union and Japan. None has an American FTA.

A focus on trade deficits means that tiddly deals such as those with Jordan and Oman will not face much heat. NAFTA (an agreement with Mexico and Canada), and KORUS (South Korea), will face more scrutiny because of chunky American...

An earthquake in European banking

Thu, 03/23/2017 - 15:44

IN BRITAIN alone millions of people make formal complaints each year about their banks. For them, Sebastian Siemiatkowski, founder of Klarna, a Swedish payments startup, brings good news. New European rules, he says, will open the door to a host of innovative services that analyse transactions, so “an app could tell you there’s a cheaper mortgage available and start the switching process for you.” Apps could warn account-holders if they spend more than a predetermined amount or are about to become overdrawn, or even nudge them to save more. Customers need barely ever interact with their bank.

To date, despite dire warnings, European retail banking has been remarkably unscathed by technology-driven disruption. Customers stay loyal, and banks still do the most of the lending. Financial-technology (“fintech”) companies are beginning to mount a challenge, most conspicuously in the online-payments industry in northern Europe: Sofort, iDEAL and other fintech firms conduct over half of online transactions in Germany and the Netherlands, for example. But their reach is more limited elsewhere in Europe. Physical payments are still overwhelmingly made with cash or bank cards.

...

Economic shocks are more likely to be lethal in America

Wed, 03/22/2017 - 19:41

AMERICAN workers without college degrees have suffered financially for decades—as has been known for decades. More recent is the discovery that their woes might be deadly. In 2015 Anne Case and Angus Deaton, two (married) scholars, reported that in the 20 years to 1998, the mortality rate of middle-aged white Americans fell by about 2% a year. But between 1999 and 2013, deaths rose. The reversal was all the more striking because, in Europe, overall middle-age mortality continued to fall at the same 2% pace. By 2013 middle-aged white Americans were dying at twice the rate of similarly aged Swedes of all races (see chart). Suicide, drug overdoses and alcohol abuse were to blame.

Ms Case and Mr Deaton have now updated their work on these so-called “deaths of despair”. The results, presented this week at the Brookings Institution, a think-tank, are no happier. White middle-age mortality continued to rise in 2014 and 2015, contributing to a fall in life...

Economic shocks are more likely to be lethal in America

Wed, 03/22/2017 - 19:41

AMERICAN workers without college degrees have suffered financially for decades—as has been known for decades. More recent is the discovery that their woes might be deadly. In 2015 Anne Case and Angus Deaton, two (married) scholars, reported that in the 20 years to 1998, the mortality rate of middle-aged white Americans fell by about 2% a year. But between 1999 and 2013, deaths rose. The reversal was all the more striking because, in Europe, overall middle-age mortality continued to fall at the same 2% pace. By 2013 middle-aged white Americans were dying at twice the rate of similarly aged Swedes of all races (see chart). Suicide, drug overdoses and alcohol abuse were to blame.

Ms Case and Mr Deaton have now updated their work on these so-called “deaths of despair”. The results, presented this week at the Brookings Institution, a think-tank, are no happier. White middle-age mortality continued to rise in 2014 and 2015, contributing to a fall in life expectancy among the population as a whole. The trend transcends geography. It is found in almost every state, and in both cities and rural areas. The problem seems to be getting worse over time. Deaths from drugs,...

Is the Federal Reserve giving banks a $12bn subsidy?

Thu, 03/16/2017 - 15:55

EVERY time the Federal Reserve has raised rates since the financial crisis, as it did on March 15th, it has done so in part by increasing “Interest On Excess Reserves” (IOER). This obscure policy rate is surprisingly controversial. Jeb Hensarling, the Republican chair of the congressional committee that oversees the Fed, has called it a “subsidy” to some of the largest banks in America.

To understand the argument, consider the Fed’s year-end financial statement. In 2016 it earned $111.1bn in interest income on its vast portfolio of securities. But it also paid JPMorgan Chase, Wells Fargo, and other mostly big banks $12bn in interest on excess cash deposited at regional Federal Reserve banks. Such IOER payments are both woefully unpopular and critical to the Fed’s monetary policy.

Over a decade ago, to give the Fed better control of short-term interest rates, Congress authorised it to pay interest on funds in excess of those banks need to meet reserve requirements. The policy was first used during the financial crisis in 2008. But today, IOER is the Fed’s primary monetary-policy tool, essential to its setting of the...

The progressive case for immigration

Thu, 03/16/2017 - 15:55

“WE CAN’T restore our civilisation with somebody else’s babies.” Steve King, a Republican congressman from Iowa, could hardly have been clearer in his meaning in a tweet this week supporting Geert Wilders, a Dutch politician with anti-immigrant views. Across the rich world, those of a similar mind have been emboldened by a nativist turn in politics. Some do push back: plenty of Americans rallied against Donald Trump’s plans to block refugees and migrants. Yet few rich-world politicians are willing to make the case for immigration that it deserves: it is a good thing and there should be much more of it.

Defenders of immigration often fight on nativist turf, citing data to respond to claims about migrants’ damaging effects on wages or public services. Those data are indeed on migrants’ side. Though some research suggests that native workers with skill levels similar to those of arriving migrants take a hit to their wages because of increased migration, most analyses find that they are not harmed, and that many eventually earn more as competition nudges them to specialise in more demanding occupations. But as a slogan, “The data say you’...

Correction: Green finance for dirty ships

Thu, 03/16/2017 - 15:55

Correction. We made a mistake in last week’s article on green-shipping finance. The oxides of sulphur and nitrogen emitted by shipping are very harmful; but they are not, as we asserted, much worse for global warming than carbon dioxide. Sorry.

Do smart-beta investment funds work?

Thu, 03/16/2017 - 15:55

IN THE world of investing, everyone is always looking for a better mousetrap—a way to beat the market. One approach that is increasingly popular is to select shares based on specific “factors”—for example, the size of companies or their dividend yield. The trend has been given the ugly name of “smart beta”.

A recent survey of institutional investors showed three-quarters were either using or evaluating the approach. By the end of January some $534bn was invested in smart-beta exchange-traded funds, according to ETFGI, a research firm. Compound annual growth in assets under management in the sector has been 30% over the past five years.

The best argument for smart-beta funds is that they simply replicate, at lower cost, what fund managers are doing already. For example, many fund managers follow the “value” approach, seeking out shares that look cheap. A computer program can pick these stocks more methodically than an erratic human. A smart-beta fund does what it says on the tin.

But does it work? The danger here is “data mining”. Carry out enough statistical tests, and you will always find some strategy that...

Why too much oil in storage is weighing on prices

Thu, 03/16/2017 - 15:55

IT SOUNDS like a scene from “The Big Short”, a film about financial speculation. Light aircraft fly photographers close to America’s oil-storage facilities, using infra-red imaging and photographs to gauge the rise and fall of levels of crude in 2,100 storage tanks, in an attempt to work out whether oil futures are overvalued or not.

In fact, it is less mischievous than that. The intelligence-gatherers work for a company, Genscape, that sells the information to traders everywhere, giving them a few days’ jump before storage surveys are published by the government.

These data are particularly useful at a time when near-record levels of oil inventories in America are weighing on oil prices and frustrating attempts by OPEC, the producers’ cartel, to prop up the market. The high level of inventories is vital to an understanding of why crude prices suddenly plummeted this month, according to the International Energy Agency (IEA), a forecaster. West Texas Intermediate is back below $50 a barrel, its level before OPEC in November agreed to cut output (see chart).

Three reasons explain why the tanks are so full....

Iceland lifts capital controls

Thu, 03/16/2017 - 15:55

Hope springs eternal

IT WAS one of the worst-hit casualties of the financial crisis 0f 2007-08, but Iceland this week took steps that symbolised its recovery. The last remaining controls on capital outflows were lifted, allowing pension and investment funds to invest their money abroad. And the central bank struck another deal with offshore holders of frozen krona-denominated assets—buying more of them back at a discount.

The country’s crisis experience was a cautionary tale of an over-exuberant financial sector. Three of its banks, with assets worth 14 times GDP, keeled over within a week; the krona fell by 70% on a trade-weighted basis in a year; Iceland was the first rich country since Britain in 1976 to need an IMF rescue.

To stem capital outflows and further falls in the krona, the government in 2008 slapped restrictions on money leaving the country. The measures also froze offshore holdings of krona-denominated assets, which at the time amounted to 40% of GDP. Even the IMF, usually in favour of more orthodox free-market policies, supported the move. The country nonetheless experienced a severe...

Sovereign-wealth funds catch on in Africa

Thu, 03/16/2017 - 15:55

SCRATCHING around for money to pay for free secondary schools, a government minister in Ghana last month floated an idea: raid the Heritage Fund. At least 9% of the country’s annual oil revenues are stashed there for future generations. The minister was rebuffed. But the row highlighted a trade-off: saving for tomorrow’s children makes it harder to help today’s.

Such dilemmas are acute in sub-Saharan Africa. The region has about a dozen sovereign-wealth funds, most of them established in the past decade. They have few models to emulate. A Norwegian approach—build a fund, invest abroad, and spend only the annual returns—works in places that are small, ageing and rich. Most African countries, unfortunately, are none of those things.

The oldest and largest African fund, Botswana’s $5.3bn Pula Fund, was created in 1994 from diamond revenues. Angola and Nigeria, the biggest oil exporters, have both established funds in the past few years; governments from Kenya to Zambia are talking of doing the same. Even Rwanda, with no great commodity riches, is soliciting patriotic donations to build its own (civil servants coughed up $2.5m last year...

The South Korea-US trade agreement turns five

Thu, 03/16/2017 - 15:55

IT SHOULD have been a happy anniversary. On March 15th 2012, KORUS, a trade deal between America and South Korea, came into effect. It slashed tariffs, tightened intellectual-property rights and opened up South Korea’s services market. When it was signed, the head of an American manufacturing lobby hailed it as meaning “jobs, jobs and jobs”. Wendy Cutler, its American negotiator, calls it “the highest standard deal we have in force”.

Five years on, jubilation has given way to anxiety. On the campaign trail, Donald Trump referred to the deal as a “job-killer”. On March 1st his administration’s official trade-strategy document singled it out for criticism. America’s trade deficit in goods with South Korea has more than doubled since 2011. “This is not the outcome the American people expected,” it lamented.

Trade between America and South Korea has indeed fallen short of expectations. When the deal was signed, the United States International Trade Commission predicted that it would boost American goods exports to South Korea by around $10bn. In fact they fell by $3bn between 2011 and 2016. The deal suffered teething...

As the Fed raises rates, Janet Yellen’s legacy is pondered

Thu, 03/16/2017 - 09:48

THIRD time lucky. In each of the past two years, the Federal Reserve has predicted multiple interest-rate rises, only to be thrown off-course by events. On March 15th the central bank raised its benchmark Federal Funds rate for the third time since the financial crisis, to a range of 0.75-1%. This was, if anything, ahead of its forecast, which it reaffirmed, that rates would rise three times in 2017. “Lift-off” is at last an apt metaphor for monetary policy. But as Janet Yellen, the Fed’s chairwoman, picks up speed in terms of policy, she must navigate a cloudy political outlook. The next year will define her legacy.

Ms Yellen took office in February 2014 after dithering by the Obama administration over a choice between her and Larry Summers, a former treasury secretary. Left-wingers preferred Ms Yellen, in part because she seemed more likely to give jobs priority over stable prices. Indeed, Republicans in Congress worried that she would be too soft on inflation. The Economist called her the “first acknowledged dove” to lead the central bank.

Today Ms Yellen looks more hawkish—certainly than Mr Summers, who...

As the Fed raises rates, Janet Yellen’s legacy is pondered

Wed, 03/15/2017 - 20:31

THIRD time lucky. In each of the past two years, the Federal Reserve has predicted multiple interest-rate rises, only to be thrown off-course by events. On March 15th the central bank raised its benchmark Federal Funds rate for the third time since the financial crisis, to a range of 0.75-1%. This was, if anything, ahead of its forecast, which it reaffirmed, that rates would rise three times in 2017. “Lift-off” is at last an apt metaphor for monetary policy. But as Janet Yellen, the Fed’s chairwoman, picks up speed in terms of policy, she must navigate a cloudy political outlook. The next year will define her legacy.

Ms Yellen took office in February 2014 after dithering by the Obama administration over a choice between her and Larry Summers, a former treasury secretary. Left-wingers preferred Ms Yellen, in part because she seemed more likely to give jobs priority over stable prices. Indeed, Republicans in Congress worried that she would be too soft on inflation. The Economist called her the “first acknowledged dove” to lead the central bank.

Today Ms Yellen looks more hawkish—certainly than...

The end of “secular stagnation”?

Thu, 03/09/2017 - 16:30

IN PERIODS of economic stress all sorts of theories are entertained about the nature of the problem. When better times return, some theories fade from memory. Others linger, however. During the economic mess of the past decade, economists frightened themselves with tales of “secular stagnation”: a nasty condition that dooms its victims to chronically weak growth. Now that the economic outlook is brightening a bit—deflation has been dispatched, and for most advanced economies 2017 is forecast to bring a third consecutive year of economic growth—it is tempting to laugh off the idea of secular stagnation as a bit of crisis-induced hysteria. Tempting, but also premature.

In a time of secular stagnation, the normal relationship between saving and investment goes haywire. People save some portion of their income each year. Because one person’s spending is another’s income, such saving can drain away demand and lead to recession, unless the funds set aside by savers are reinjected into the economy through lending to those looking to invest: as when banks lend savers’ deposits to businesses, for example. Central banks help manage this process....

The coming revolution in insurance

Thu, 03/09/2017 - 16:30

IN THE stormy and ever-changing world of global finance, insurance has remained a relatively placid backwater. With the notable exception of AIG, an American insurer bailed out by the taxpayer in 2008, the industry rode out the financial crisis largely unscathed. Now, however, insurers face unprecedented competitive pressure owing to technological change. This pressure is demanding not just adaptation, but transformation.

The essential product of insurance—protection, usually in the form of money, when things go wrong—has few obvious substitutes. Insurers have built huge customer bases as a result. Investment revenue has provided a reliable boost to profits. This easy life led to a complacent refusal to modernise. The industry is still astonishingly reliant on human labour. Underwriters look at data but plenty still rely on human judgment to evaluate risks and set premiums. Claims are often reviewed manually.

The march of automation and technology is an opportunity for new entrants. Although starting a new soup-to-nuts insurer from scratch is rare (see...

Pages