Geo-Graphics

Barclays’ admission that it deliberately understated the interest rates at which it could borrow between September 2007 and May 2009 suggests grievous flaws in the widespread process of using LIBOR (the London Inter-Bank Offered Rate) as a benchmark off which to price commercial loans, mortgages, and other forms of lending.  Our figure above illustrates this by comparing LIBOR with so-called NYFR (ICAP’s New York Funding Rate), the operative difference between the two being that NYFR is based on anonymous reports from major banks.  Normally LIBOR and NYFR are closely aligned, yet a huge gap opened up between the two rates in September 2008, at the time of the Lehman Brothers and AIG crises.  During that month in particular, a bank revealing publicly that it could only borrow at elevated rates naturally put itself at risk of suffering a bank run or lending halt.  It should not be at all surprising, therefore, that banks would be less honest about their rate reports when their names were attached to them.  A Golden Rule of market practice and regulation should surely be never to trust prices – and certainly never to encourage actual transactions using such prices – when they are formulated not by supply and demand in competitive markets but according to what self-interested parties would like others to believe them to be. Financial News: Questioning LIBOR MacKenzie: What's in a Number? The Economist: Banksters Reuters: ICAP to Launch U.S. Rate Alternative to LIBOR

Back in July 2010, we produced a post examining the “Icelandic Post-Crisis Miracle,” as proclaimed by Paul Krugman.  We showed that Krugman’s “miracle” was merely an artifact of comparing changes in Iceland’s real GDP with that of Estonia, Ireland, and Latvia since the strategically chosen 4th quarter of 2007. Why did Krugman choose the 4th quarter of 2007?  Because starting with any other quarter would have ruined his story.  Based on the GDP data available at the time he made his figure (which have since been revised), Iceland’s GDP had fallen a whopping 5 percentage points between Q3 and Q4.  By starting his story in Q4 Krugman managed to lop that off, making Iceland look much better. We showed that the miracle story collapses as the starting date for the comparison is backed up.  What we find is a simple story of large booms and busts in Estonia and Latvia, and much smaller booms and busts in Iceland and Ireland.  Krugman’s post and our deconstruction are here and here. Recently, Krugman has produced a slew of new posts reviving his claims in different forms.  Geo-Graphics readers have, not surprisingly, asked us to revisit the question of Iceland’s economic performance. Krugman produced this figure in a post on June 14, showing that as of the 1st quarter of 2012 Iceland had a better real GDP growth performance relative to its GDP peak than the three Baltic states (Latvia, Estonia, and Lithuania) and Ireland had relative to their various GDP peaks.  “Looking at this,” Krugman asks rhetorically, “would you have expected that Latvia would be lionized as the hero of the crisis?” The answer is, of course, “no.” But Latvia only looks so bad because Krugman chooses to tell his story about post-crisis performance only in terms of how each country has performed since its peak. This makes little sense in the context of the IMF's 2009 staff report which concludes that Latvian "output exceeded potential by 9 percent" in 2007. (Updated 7/3/2012 2:04 p.m.) What if we decided to tell the story only in terms of how they have performed since their troughs – that is, how well they have recovered since they hit bottom? Here it is: We don’t yet have the Eurostat GDP data for Iceland in the first quarter of 2012, so we’ve plugged in data from the Icelandic government (as Krugman must have done). As can be seen, Iceland’s performance has only been on par with the bottom of the Baltic pack, Lithuania. Latvia’s performance has been better, and Estonia’s markedly better. Once again, Krugman has relied on a Potemkin-Village graphic to illustrate his wider claim, which is that Icelanders derive unambiguous net benefits from their government obliging them to hold and transact in a national currency that their trading partners will not accept. (80% of Greeks consistently reject going back to such a state.) Below we update the figure in our July 2010 Geo-Graphic, comparing Iceland’s economic performance with that of Estonia, Ireland, Latvia, and Lithuania going back to 2000. Iceland comes in tied for last with Ireland (for which 2012 Q1 data are not yet available) – well behind Lithuania, Estonia, and Latvia. Since 2009, those three have been growing strongly, while Iceland and Ireland have largely stagnated. Sorry, Virginia, there is no Icelandic miracle. Geo-Graphic: Post-Crisis Iceland: Miracle or Illusion? Krugman: Peripheral Performance Financial Times: Iceland: Recovery and Reconciliation Reuters: Baltic Countries' Austerity Lesson for Europe—Just Do It

When the Federal Reserve’s Open Markets Committee (FOMC) last met in April, the unemployment rate was on a declining path – having fallen to 8.2% in March from 9.1% the previous August.  Against this backdrop, the Committee was modestly sanguine on prospects for job growth going forward.  “The unemployment rate will decline gradually,” it predicted, “towards levels that it judges to be consistent with its dual mandate,” without need for new monetary stimulus measures. The two broken lines in the figure above show the upper and lower bounds of the “central tendency” of the Fed’s April unemployment forecasts – that is, the range of forecasts excluding the top and bottom three.  The three dotted lines show the trend of the unemployment rate if the pace of the decline in the number of unemployed people in the three months prior to March, April, and May, respectively, were to continue.  As can be seen by the May trend line at the top, the employment picture has clearly deteriorated since the FOMC met in April, and is above the most pessimistic of its “central tendency” forecasts.  This suggests that there will be significant pressure from within the Committee for further easing when it meets this Tuesday and Wednesday, June 19 and 20.  We believe this will take the form of extending “Operation Twist,” its program launched last September to push down long-term interest rates by buying long-term bonds using the proceeds of shorter-term bond sales. FOMC: April 2012 Meeting Statement Bloomberg: Fed Seen Twisting to Risk Management to Spur U.S. Growth The Economist: Shiny, New, Unopened & Unused Mallaby: The Fed and the ECB Should Be Trading Places