The blame for the global economic crisis has been placed on many different people, but one area that has been severely criticised for the extent of the financial crisis is banking and financial regulation (or a lack thereof). One thing that has been repeated is that we must learn from our mistakes and therefore tighten financial regulation on a global scale. The Institute for Public Policy Research (IPPR) says the ‘rapid return to the City’s bonus culture shows that real reform has been “very limited”’. France in particular is arguing for tighter financial regulation, including curbing bankers’ bonuses to avoid a repeat of last year’s meltdown. However, it is meeting resistance from the UK and USA. Indeed, some banks appear to have extended their bonus culture.
As the banking sector slowly begins to recover, there is concern that few changes have been made to ensure that there is no repeat of the recent crisis. Banks have been warned that they should not resume taking risks, as they did before, as future bailouts by the government (and hence the taxpayer) will not keep happening. The European Union has now unveiled plans for new ‘super-regulators’, but only time will tell whether they will be a success.
EU unveils new ‘super-regulators’ BBC News (23/9/09)
EU proposes new Financial-Market supervision system The Wall Street Journal, Adam Cohen and Charles Forelle (24/9/09)
FSA head launches fresh attack on ‘swollen’ system ShareCast (24/9/09)
Bank crisis lessons ‘not learned’ BBC News (15/9/09)
US, UK resisting French drive for regulation AFP (22/9/09)
European System of Financial Supervisors (ESFS): Frequently Asked Questions Mondovisione (23/9/09)
Tighter grip on economy needed BBC News (13/9/09)
Turner warns against regulation overkill Money Marketing (23/9/09)
EU calls for European Banking, Securities Regulators Bloomberg (24/9/09)
EU financial watchdog to rely on moral authority The Associated Press (23/9/09)
Obama issues warning to bankers (including video) BBC News (14/9/09)
Questions
- What are the advantages and disadvantages of tighter regulation of the financial sector for (a) the UK and (b) the global economy? What forms should such regulation take?
- What are the arguments for and against imposing a statutory capital adequacy ratio on banks that is substantially higher than the ratios with which banks have been operating in recent years?
- In what ways was a lack of financial regulation responsible for the financial crisis?
- Why is the continuation and possibly growth of the bonus culture a potentially dangerous issue for any future crisis?
- The articles talk about ‘lessons being learned’. What lessons are they referring to?
- The financial crisis has affected everyone in some way. What has been the impact on taxpayers?
In October 2004, the USA brought a complaint to the WTO that Airbus had received illegal subsidies from the UK, French, German and Spanish governments. One of these subsidies was the so-called ‘launch aid’, which the US government argued was a form of export subsidy. In a counter-complaint to the WTO made on the same day, the EU maintained that the US government had provided illegal support to Boeing in the form of subsidies, legislation, regulations and other administrative measures.
On 4 September 2009, the EU and the USA were handed the confidential preliminary findings by the WTO panel in the first of the two disputes. This found that some of the support measures by the EU countries violated WTO rules. However, some two thirds of the complaints by the USA were dismissed.
Despite some progress in its deliberations, the WTO is unlikely to give a final judgment in the first case for several months and not even a preliminary report has been issued on the second case (the EU’s complaint against the USA). But can any conclusions be drawn at this interim stage? The following videos and articles look at the findings and their implications.
Videos
Airbus violated trade laws msnbc news (4/9/09)
WTO issues report on Airbus-Boeing dispute AlJazeera (4/9/09)
Update – Boeing vs. Airbus Bloomberg (4/9/09)
Articles
Airbus Loans Toward A380 Jumbo Faulted in WTO Ruling Bloomberg (4/9/09)
World trade body ruling reflects pre-crisis time Boston Globe (Associated Press report) (5/9/09)
WTO rules that Airbus benefited from E.U. subsidies MarketWatch (4/9/09)
Boeing wins first round in trade battle with Airbus Independent (5/9/09)
WTO rules on huge plane dispute BBC News (4/9/09)
Boeing and Airbus: Round one to Boeing The Economist (4/9/09)
Partial US victory on Airbus funds Financial Times (5/9/09)
Questions
- What sanctions does the WTO have to enforce its rulings? (see the WTO site.)
- What sanctions do individual governments have for ensuring that countries abide by the WTO rulings?
- How could strategic trade theory be used to justify support to aircraft manufacturers? Do such arguments apply to Airbus and Boeing?
- Do airlines and airline passengers gain or lose from the behaviour of Airbus and Boeing? Should the WTO take this into account?
On 30 August, Japan’s opposition party, the Democratic Party of Japan (DPJ), won a landslide victory in the Japanese election. Although there are signs that the Japanese economy is beginning to pull out of recession (see Green shoots as autumn approaches), deep economic problems remain. Unemployment is at record highs; it has the highest national debt as a proportion of GDP of any of the G8 countries (see OECD Economic Outlook Statistical Annex Tables; consumer spending remains subdued; deflation seems entrenched; exports have slumped; bureaucracy is deeply embedded in government; and it has a rapidly ageing population.
So what is expected of the new government and what can it do? The following articles address these questions.
Japan’s Hatoyama sweeps to power (video) BBC News (31/8/09)
New Japanese government seeks a strategy for growth The Nation (Thailand) (1/9/09)
Japan’s new leader faces tough task Radio Australia (1/9/09)
Hatoyama faces daunting economic task BBC News (31/8/09)
DPJ needs to reinvigorate domestic economy of Japan China View (1/9/09)
Analysts worry DPJ’s policies may be a bane to Japan’s economy Channel NewsAsia (31/8/09)
Hamish McRae: Post election, what do the Japanese really want to do with their country? Independent (1/9/09)
Japan’s Government: Five Ways to Fix the Economy Time (1/9/09)
The vote that changed Japan The Economist (3/9/09)
Questions
- Paint a brief picture of the current state of the Japanese economy.
- What policies are advocated by the new government and what difficulties lie in the way of achieving the policy goals?
- What supply-side policies would you recommend for Japan and why?
Even in the current gloomy economic climate, there is something else that has grabbed media attention – the outbreak of swine flu. This is of particular concern, given the WHO’s announcement that we are in an H1N1 flu pandemic. The symptoms and health risks have been widely broadcast, but it is not just this that governments are concerned about. The economies of some countries, in particular Mexico, have been suffering. ‘Swine flu has dealt a major blow to Mexico’s already battered economy’. Many countries have issued advice to businesses on dealing with a potential pandemic and some countries are facing trade restrictions. It’s important to consider the economic consequences of this outbreak in a time of global recession. How will some of the worst hit industries cope and what are the costs that firms could face if the situation gets worse? The following articles explore the issues.
Economic impact of swine flu BBC News: World News America (4/5/09)
Advice to businesses on swine flu BBC News (4/5/09)
Swine flu nations make trade pleaBBC News (3/5/09)
WTO protectionism report to feature swine flue bans The Economist (12/6/09)
Mexico economy squeezed by swine flu BBC News (30/4/09)
Swine flu fears hit travel shares BBC News (27/4/09)
Swine flu: Four ETFs to watch Seeking Alpha (12/6/09)
Employers have to pay for swine flu quarantines Scoop Business: Independent News (12/6/09)
Questions
- Which industries are the most affected by the outbreak of swine flu?
- What are some of the costs that businesses will face following the WHO’s announcement that we are in a flu pandemic?
- Some of the articles talk about possible trade restrictions. What are the arguments (a) for (b) against protectionist measures in these circumstances?
- How will this flu pandemic add to the global crisis we are currently facing? What will happen to share prices, to tourism, to people’s expectations?
- Do you think that firms have a social responsibility to deal with this pandemic?
- Will there be additional health costs and who should bear them? What do you think will be the impact on the NHS, given its method of provision and finance?
- Do you think that this pandemic will affect the global economy’s ability to recover from this recession?
The following article from The Economist looks at the role of imports in stimulating economic development in developing countries. It questions the simple perception of many people, not least politicians, that exports are good, but imports are bad. Far from merely being a drain on the balance of payments and a threat to domestic industries, imports can provide both useful competitive pressures and access to intermediate goods.
Opening the floodgates The Economist (7/3/09)
(The paper referred to in The Economist article above)
Questions
- How can reducing trade barriers and thereby reducing the price of imports help a developing country?
- Consider whether the total removal of trade barriers would be desirable for developing countries.
- Explain what is meant by “But the Indian variant of creative destruction seemed unusually benign” and why this was so.
- Why has it proved so difficult to secure an international agreement to reduce trade barriers under the Doha trade round?