I LOVE this story, because it provides almost instant backing to the blindlingly obvious: the necessary regulatory changes that will increase the cost of capital WILL CUT BANK PROFITS and therefore BONUSES. A report from JP Morgan:
“calculates that investment banks’ return on equity will fall from 15 per cent to just under 11 per cent in 2011. JPMorgan says the drop in profitability is likely to lead to lower pay and bonuses at the investment banks. Its report forecasts that banks will be unwilling to operate at reduced profitability levels and will respond with massive restructuring, including further headcount reductions in some areas and swingeing cuts in compensation across the board”
In further details, there is this marvellous quote:
If [JP Morgan} is right, policymakers will have achieved all they set out to – containing investment bank risk, encouraging traditional lending and, for good measure, cutting bankers and their bonuses down to size.
Next confirmation of the CentreForum view: the magnificent Martin Wolf is back from sunning himself abroad, to give guidance to a world that sorely needs it (if the micro-nonsense and PR flummery that is the Tory approach to cost cutting is anything to go by). As ever, Wolf zeroes in on the issue that matters: WHEN to withdraw stimulus, but along the way touching on interesting issues of macrotheory:
Bernanke made the point . . . Without these speedy and forceful actions, last October’s panic would likely have continued to intensify . . . What we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted. . . .Two groups of thinkers reject this viewpoint. One argues that the economy is always in equilibrium. If unemployment has exploded upwards it can only be because, after Lehman imploded, workers chose to take a holiday. An alternative view is that depressions are the natural consequence of excess. Both the guilty and the innocent must suffer, as past errors are purged. Rightly, policymakers rejected such views.
Stimulus has made a difference. But withdrawing it too quickly might not make inflation risks better, they might be worse, ‘since it could well provoke yet another round of aggressive interventions.’ And, on the subject of the debt, “servicing a ratio of net public debt to GDP as high as 100 per cent would cost 2 per cent of GDP. It is ludicrous to argue that this would be an insupportable burden”.
The debt rating agencies agree. “Moodys said the public finances of the most highly-rated countries could cope with stretched national balance sheets because these countries were likely to be able to keep their public debt highly affordable, even as debt burdens rose.” I wonder if the Spectator, suffering from post-melodramatic stress disorder when S&P suggested a possible downgrade, will be bothered to cover this story?
John Kay spoils a perfect Wilkes-agreeing edition of the FT by poking holes in the idea that speculation is always useful, or tends to be useful in aggregate.
QE is making the inflation deflation guesswork more difficult. This matters: inflation control is as much about expectations as anything.
If I were to nominate anyone as “Brightest man blogging alive”, it would have to be Brad DeLong. This is a good thing: if he was 1% less bright, his abrasiveness would be hard to take . . .
His primer on Keynesianism for Monetarists is therefore well worth reading (I haven’t, yet).
UPDATE. Have read the DeLong pdf. It is brilliant: explaining in Monetarist terms (velocity, etc) why money-pumping does nothing at the zero bound unless you do something with it.