Finance & Economics
Finance & Economics
Fair Observer's analysis of important economic and financial issues, events and trends in global markets and the world economy.
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Is it possible to create an international and impartial credit rating agency? In recent years, no business has lost its reputation as devastatingly as credit rating agencies have. Leading up to the worst financial crisis in decades, the top rating agencies: Moody's, Standard & Poor's, and Fitch, rated questionable financial products with excellent marks. They exacerbated the ensuing credit crises by downgrading many European countries’ debt—wrongly, as many politicians later found. In order to prevent this from happening again, an international rating agency is sorely needed. This is true especially for the EU, which has learned its lesson from the crisis of the past...
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By Atul SinghGiven its role in the recent global financial crisis and major flaws including its participation in an oligopoly, lack of competence, and conflicts of interest, a new, more robust model for credit rating agencies must be created in the future. Background A credit rating agency (CRA) is a company that is in the business of rating the credit worthiness of debt. It does so by rating issuers of debt obligations and also by rating the debt instruments themselves. Credit ratings are meant to provide easy-to-use measurements of relative credit risk so that investors can make informed choices. The idea is to facilitate transactions and lower costs for both borrowers and lenders. Three CRAs...
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Analysis on the unexpected relationship between the dollar’s international acceptability and the US military’s global presence. Since World War II, the US has provided two essential services to the rest of the world: an international currency and international military protection. Producing them was costly, both in terms of achieving dollar stability and undertaking military expenditures in many parts of the world. However, the benefits were far more important. Foreigners were prepared to hold more dollars than they actually needed and to forgo risk premiums even when the dollar weakened. The more the dollar was held abroad the more gains the US could collect, as the production...
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Andrew Pollen and economist Edward Hugh find an unexpected link between Europe's ageing population and its ongoing financial crisis Developed country societies have been steadily getting older ever since the coming of the industrial revolution. But now they are ageing more quickly as birth rates in many developed countries continue to remain well below replacement rate and life expectancy continues to rise. Median ages in several countries are now around the 45 year mark, and during the late 2020s will even near the 50 year barrier. According to UN data, the proportion of the world's population aged over 65 is set to more than double by 2050, rising to 16.2% from 7.6% currently. The...
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By Amy HenslinBackground Ever since the Industrial Revolution, steady advances in medical technology, changing patterns in education and gender roles, and a wide range of other factors have caused populations around the world to reach old-age in growing numbers. For some time the problem of ageing populations seemed to be an affliction particular to developed nations, but United Nations (UN) data suggest that it is now a “global phenomena”, affecting developed and developing countries alike. Although in terms of technology and infrastructure, developing nations may be several decades behind developed nations, the problem still remains; populations are changing, causing nations with well...
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Why the world should care about the European debate on bank capital requirements. The European Union’s finance ministers are furiously debating a piece of legislation known as CRD4/CRR (the acronyms stand for the fourth Capital Requirements Directive and the Capital Requirements Regulation). The measure is intended to implement the Basel III accord on bank capital, leverage, liquidity and risk management, which was adopted at the global level by the Basel Committee on Banking Supervision in late 2010. There are two main unresolved issues. First, the legislation’s departures from the Basel III Accord; and second, whether individual member states should be allowed to impose core...
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Though China’s economy is growing at blinding speed, the country is witnessing increasing unrest in its towns and cities. By Conn Hallinan Behind the political crisis that saw the recent fall of powerful Communist Party leader Bo Xilai is an internal battle over how to handle China’s slowing economy and growing income disparity, while shifting from an export-driven model powered by cheap labor to one built around internal consumption. Since China is the second-largest economy on the planet—and likely to become the first in the next 20 to 30 years—getting it wrong could have serious consequences from Beijing to Brasilia and Washington to Mumbai. Whack-a-Mole China...
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Though the European Union is considering the viability of a Financial Transaction Tax or Tobin tax, it is unlikely to be implemented given the current economic situation. Excerpt from a working paper by Daniel Chorzelski, Lukas Doerfler, Alex Hodbod, and Hannes Timischl, students in the International Trade, Finance, and Development Masters Program at Barcelona GSE. Why Tax Financial Transactions? Financiers have a lot to answer for. As the architects of the ‘structured products’ that turned into ‘toxic assets’, as the funders of those subprime mortgages, and as the recipients of hundreds of billions in taxpayer bailouts during the crisis, they must shoulder some of...
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Background The idea of taxing speculative financial transactions was initially proposed by the British economist John Maynard Keynes in 1936 as a mechanism to reduce uninformed short-term speculative trading and thereby reduce the excessive volatility that the financial sector caused for the real economy. Keynes was concerned that the sheer proportion of speculators could harm enterprises by becoming the dominant force in the markets for finance. The introduction of a tax on all finance transactions would be a measure to regulate this problem. The American economist James Tobin reinvigorated the idea in 1971, after US President Nixon cancelled the US dollar’s convertibility into gold...
