The General Economics Thread

German Chancellor Angela Merkel cannot afford to bail out Deutsche Bank given the hard line Berlin has taken against state aid in other European nations and the risk of a political backlash at home, German media wrote on Saturday.

The government denied a newspaper report on Wednesday that it was working on a rescue plan for Germany's biggest bank, as its shares went into a tailspin fuelled by a demand for up to $14 billion (10.79 billion pound) from U.S. authorities for misselling mortgage-backed securities before the financial crisis.

Germany, which has insisted Italy and others accept tough conditions in tackling their problem lenders, can ill afford to be seen to go soft on its flagship bank, the Frankfurter Allgemeine wrote.

"Of course Chancellor Merkel doesn't want to give Deutsche Bank any state aid," it wrote in a front-page editorial. "She cannot afford it from the point of view of foreign policy because Berlin is taking a hard line in the Italian bank rescue."

The Munich-based Sueddeutsche Zeitung wrote that Merkel would be breaking a promise to taxpayers if she were to bail the bank out, which could spell disaster for her re-election bid next year as the anti-immigration AfD party gains ground.

The AfD is already benefiting from a backlash against Merkel's open-door refugee policy, making huge gains in two regional elections last month and hitting an all-time high of 16 percent support in an opinion poll last week.

"A state aid package would drive voters into the arms of the AfD," the Sueddeutsche wrote in an editorial.

"Domestic political considerations make it unlikely that Berlin would play this joker. Even more unlikely is that the European Commission would agree. The political risk would be simply too high."

Shares in Deutsche Bank recovered somewhat on Friday from a record low early in the day after a report that it was close to a cut-price settlement of $5.4 billion instead of $14 billion.

The bank, the U.S. Department of Justice and the German finance ministry all declined to comment on the report.

The crisis also prompted Deutsche Bank's normally reticent Chief Executive John Cryan to publish a letter seeking to reassure staff the bank was stable and hitting out at "forces" that wanted to weaken trust in the bank.

The Stuttgarter Zeitung wrote on Saturday: "Deutsche Bank has to win back ground here because as exaggerated as the reports of an existential danger to the bank may have been, just as obvious are its continuing difficulties."

"Trust is a bank's most important currency."

I thought that, at least when it comes to live entertainment, you're allowed to walk out and get your money back if the show fucks up, is cancelled, or your enjoyment is otherwise ruined.

Nearly a decade after one of the most devastating financial collapses in modern history, Wall Street appears as corrupt as ever. Evidence is not hard to come by — most recently, the Wells Fargo scandal, in which employees of the company, spurred by perverse incentive structures, opened two million fraudulent accounts in their customers’ names. The bank had put intense pressure on employees to meet sales goals; some employees who reported the wrongdoing were fired, along with 5,300 more, after the scandal broke. All this is but one reminder of how far major actors in the economy have strayed from any reasonable standard of moral behavior.

Despite the recent urging of high-profile figures like Pope Francis and Senator Bernie Sanders to establish a “moral economy,” we have not. Free-market advocates hold fast to justifications that amount to variations on the “invisible hand” theory of Adam Smith — that the economy is not a moral space, but one that relies on a free and fair market, self-interested (as opposed to selfish) actors and amoral (as opposed to immoral) calculation to arrive at the most efficient and innovative outcomes. The invisible hand of the market must be allowed to act; placing moral limits on the economy, they argue, would hinder this flourishing.

To some, the unbridled force and overarching goal to be pursued is the efficiency of the market, even to the detriment of society, transforming market theory into a sort of divine scripture, to be faithfully followed. The suggestion of a moral economy is decried for the inefficiencies that moral limits would place on behavior in the market. It is as if society exists to serve the market, not the other way around.

The pursuit of a comparative advantage in the market has come to justify nearly any behavior and its consequences. The result of this approach in the United States is already well-known — a staggering level of economic inequality and widespread, devastating effects on millions of citizens struggling against this tide.

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RECENT COMMENTS

Ben 1 day ago There is already a movement to establish an ethical framework for corporations. Google "B corporation" or Benefits Corporation. It is a... John Brews 1 day ago The "capitalistic economy" is an abstraction, and excludes morality as part of it. It is an odd point of view that we have to place morality... betty durso October 4, 2016 Regulating a "just" war and regulating a capitalist economy are equally impossible. They're both limitless in their momentum.Once begun, a... SEE ALL COMMENTS WRITE A COMMENT Hedge funds and investment banks utilize high-speed trading to place the individual investor at an insurmountable disadvantage. Multinational corporations pump money into political campaigns to influence tax policies that allow them to skirt paying taxes. The mega-wealthy deploy a small army of accountants and attorneys to hide their assets. Slavish devotion to market theories serves as a convenient rational justification for some to take selfish actions they know to be wrong or questionable.

In short, the amoral economy envisioned by free market theory is a fantasy, a theoretical construct that has never really existed in practice. It has been overwhelmed by immoral actors who have turned it into an immoral space, tipping the playing field to their advantage.

So what is to be done? Can the economy be transformed from an immoral space into a moral space?

Some progress on this question can be made by examining how we have chosen to navigate an even more perilous manifestation of the human condition: war. The economy, like war, creates winners and losers, makes heroes of those who seize opportunities and victims of those caught between forces beyond their control, and can transform the fortunes of society for better or ill. Yet, unlike war, the economy has no foundational morality. Instead it leaves critical moral judgments with real consequences in the tenuous hands of self-interested economic actors whose guiding light is the maximization of their own benefit, without consideration for the effects on others.

The Prussian military theorist Carl von Clausewitz warned of “total war” as a theoretical construct in which, by rationally following the escalations of war to their conclusion, war outstrips its strategic logic and becomes irrational, therefore requiring limits in practice. Without limits, Clausewitz argued, theory could be misused to justify and rationalize the unjust and irrational. Unless war is bounded by a higher societal purpose and tempered by what Clausewitz referred to as “the spirit of the age,” it threatens to become its own raison d’être, an irrational end in itself.

In war, immoral action may provide the combatant with a comparative advantage, but it also stains society and humanity in ways that we have collectively deemed to be unacceptable.

Humanity has tried to limit war on moral terms since Cicero first outlined the Just War Ethic, an effort that continues to this day. In war, the reversion to barbarism can be tempting in the heat of battle, and as passions and hatreds rise between peoples. However, even here, humanity has managed to place moral limits.

In the modern world, the Just War Ethic may seem like a distant abstraction; but its effects influence the relationship between war and society in profound ways. Michael Walzer, perhaps the most influential living philosopher of just war theories, articulated the importance of seeking to establish moral principles there: “War is the hardest place: if comprehensive and consistent moral judgments are possible there, they are possible everywhere.”

The Just War Ethic provides the foundational principles on which the laws of war have been constructed; when policy makers seek to justify the use of force, they employ the language of the Just War Ethic; they speak in terms of the principles of just cause, last resort, necessity, proportionality and the reasonable prospects of success. Although often overshadowed by the horrors of war, the principles of the Just War Ethic do limit war’s worst excesses by underpinning the discourse, decisions, behaviors and accountability related to war.

Of course, the Just War Ethic suffers from a problem: The normative ideal in this case is the absence of war, yet the reality of war precludes that ideal. Therefore, any applied ethics of war are by definition morally flawed. The question for the ethicist then is this: Is it more ethical to make continued (and often ignored) normative pronouncements against the existence of war, or to engage with the temporal reality of war with ethics that seek to limit the cases in which war is undertaken, to moderate its effects, and to guide it toward the normative goal, with the understanding that this goal is not immediately or fully achievable? Obviously, advocates of the Just War Ethic, myself included, come to the latter conclusion.

The question is not one of moral perfection, but of moral improvement. It is a step in the right direction.

If we can seek to regulate war in terms of morality, there is no reason such morality cannot be equally applied to the economy, as Walzer indicates. When faced with illegal or immoral orders, it is the duty of professional soldiers to refuse such orders. When such a refusal occurs, it is followed by thorough investigations, and potentially courts-martial or war crimes prosecutions for those who issue such orders. In the case of the former Wells Fargo employees, the opposite occurred. Imagine the moral and societal hazard if the military permitted such retaliation against those who reported illegal and immoral behaviors.

The principles of a moral economy would seek to curb the market’s more harmful excesses while preserving its societal benefit. Developing fair and just principles to guide a more moral understanding of capitalism may provide a pathway to a more equitable distribution of income and wealth, one that creates more perfect outcomes for society at large.

While the immoral economy has provided advantages to some, it has also stained society and humanity in ways that we are beginning to collectively deem to be unacceptable. The task then is to develop and implement principles of a moral economy which serves the greater good of society.

In a “just” economy, venture capitalists would consider the collateral damage (layoffs, defaulted retirements, etc.) that may result from their actions in the same way that military commanders must consider whether the use of a certain weapon in proximity to civilians would be discriminate and proportional. Chief executives would begin to care for their employees and their families the same way that professional military commanders care for their troops and their families. The promise of these outcomes, and society’s growing dissatisfaction with the current reality, makes this a conversation worth having.

Some might argue that we already have laws and regulations to perform these functions, but these have, at times spectacularly, failed to maintain the market as a truly neutral, free, and fair space. In a theoretical sense, law should approximate the normative ideal in the real world. Yet, in economic thought we have no normative ideal, no foundational morality. We have economic ideals derived from market theory, but these are not tempered by a coherent set of ethical ideals, allowing the market’s worst excesses, and resulting in many of the morally troubling outcomes produced by the economy. We need better laws and regulations, but first we must establish a foundational morality to guide their development.

To demand moral perfection or to succumb in the face of seeming futility is to turn our backs on what can be achieved by acknowledging both the ideal and the limits of reality. Applied ethics guide our interactions in the world as it exists while nudging us incrementally closer to the normative ideal and the world we seek to create.

War is inherently unjust, but the Just War Ethic has made it more just. The economy is not moral, but a foundational ethics of the economy could make it more moral. The product of such ethics would be decidedly imperfect, but it would be better than no ethics at all.

The views expressed in this article are those of the author and do not reflect the official policy or position of the United States Military Academy, Department of the Army, Department of Defense or the United States government.

Britain's biggest retailer, Tesco, halted online sales of top-selling goods produced by Unilever in a pricing row following a plunge in the pound since Britons voted to leave the European Union.

The dispute between Tesco and one of the world's largest consumer goods companies was one of the first clear signs for consumers of the turbulence unleashed by the Brexit vote and of how it could hurt them.

Products such as Persil washing powder, Ben & Jerry's ice cream and Marmite, a brown yeast-extract spread which is among Britain's best loved brands, were not available on the website of Britain's largest online grocer on Thursday.

The June 23 vote to leave the EU took many investors and company executives by surprise, unleashing the worst political and financial chaos in Britain since World War Two and causing the biggest one-day fall in sterling against the dollar.

The pound's fall — it is down 19 percent against the U.S. currency and about 16 percent against the euro — has left suppliers and retailers battling for profits as imported goods become more expensive.

Now that fight could be hitting supermarket shelves. Supervalu, Ireland's largest supermarket, said it was also holding negotiations with Unilever over pricing and could "experience some supply issues on certain Unilever products".

Bruno Monteyne, a former senior Tesco executive who is now an analyst at Bernstein, said Tesco has typically one to two weeks' stock.

"While politicians can deny reality, a shampoo produced on the continent is now 17 percent more expensive," he said. "This isn't about Tesco or Unilever but about all UK retailers and suppliers."

Tesco and Unilever stock fell 2.2 and 3.5 percent respectively.

High street stalwart WH Smith said separately it would look to consolidate factories and negotiate better prices with suppliers to cut costs.

"If people are worried about losing Marmite from Tesco, wait until they find out about jobs...," said Wes Streeting, a lawmaker from the opposition Labour Party who backed the Remain campaign in the June 23 referendum.

The pricing row reflects the tensions building throughout the system, with Tesco the one retailer big enough^note  No, that doesn't include Wal Mart-owned Asda — GM to push back against Unilever's demands and Unilever one of the only suppliers powerful enough to stand its ground.

The standoff dominated the news in Britain on Thursday, with "Marmitegate" trending on Twitter and "Marmite Wars" splashed on the front pages. The Daily Mail dubbed it "Brexit Blackmail.

It also has a personal dimension as Tesco boss Dave Lewis' previous job was as a senior executive at Unilever, where his radical overhaul of the firm's businesses won him the nickname "Drastic Dave".

An executive at a rival consumer goods company that has not pushed for UK price increases said it was "absolutely brilliant positioning" by Tesco and no coincidence that the news broke on Wednesday, the eve of Unilever publishing financial results showing better-than-expected sales growth due to pricing.

"This makes Dave Lewis look like a hero defending consumers," the person said.

At a Tesco Superstore in Laindon in southeast England, Lewis had some support.

"Tesco should stick it out, and get the other supermarkets to do the same. Unilever shouldn't be able to tell them what to do," said Jeaninne Richards, 69, a retired dressmaker. "Unilever is being so greedy. They are using Brexit as an excuse."

Unilever Chief Financial Officer Graeme Pitkethly said that devaluation-led price increases were a normal part of doing business, but declined to comment specifically on the row with Tesco.

Two people familiar with the situation said Unilever had demanded 10 percent rises in the prices it charges Britain's big four supermarkets — Tesco, Sainsbury's, Asda and Morrisons — across a wide range of goods.

One said no other big consumer goods company had been as aggressive as Unilever on price demands while the second source said they had protested against Unilever's demands as some of the products were made in Britain.

The sources said two of the big four were still weighing whether to accept the rises or scrap some products.

Pitkethly said the increases were "substantially less" than what was needed to cover the hit from the pound's fall.

Tesco said it hoped to have the matter "resolved soon".

Tesco is rebuilding itself after a 2014 scandal when it acknowledged overstating profits and pressuring its suppliers into driving down prices. Last week Lewis hailed a transformed relationship with suppliers as a factor in the grocer reporting a 60 percent rise in first-half profit.

But he indicated it was not a given that suppliers should be able to recoup the cost of the falling pound as they had not always passed on benefits when sterling was much stronger.

Most analysts and economists believe sterling's slump will lead to higher grocery prices, following years of deflation because of a price war between the big chains.

The Economist: The march of the zombies

China’s excess industrial capacity harms its economy and riles its trading partners

“OVERSUPPLY is a global problem and a global problem requires collaborative efforts by all countries.” Those defiant words were uttered by Gao Hucheng, China’s minister of commerce, at a press conference held on February 23rd in Beijing. Mr Gao was responding to the worldwide backlash against the rising tide of Chinese industrial exports, by suggesting that everyone is to blame.

Oversupply is indeed a global problem, but not quite in the way Mr Gao implies. China’s huge exports of industrial goods are flooding markets everywhere, contributing to deflationary pressures and threatening producers worldwide. If this oversupply were broadly the result of capacity gluts in many countries, then Mr Gao would be right that China should not be singled out. But this is not the case.

China’s surplus capacity in steelmaking, for example, is bigger than the entire steel production of Japan, America and Germany combined. Rhodium Group, a consulting firm, calculates that global steel production rose by 57% in the decade to 2014, with Chinese mills making up 91% of this increase. In industry after industry, from paper to ships to glass, the picture is the same: China now has far too much supply in the face of shrinking internal demand. Yet still the expansion continues: China’s aluminium-smelting capacity is set to rise by another tenth this year. According to Ying Wang of Fitch, a credit-rating agency, around two billion tonnes of gross new capacity in coal mining will open in China in the next two years.

A detailed report released this week by the European Union Chamber of Commerce in China reveals that industrial overcapacity has surged since 2008 (see charts). China’s central bank recently surveyed 696 industrial firms in Jiangsu, a coastal province full of factories, and found that capacity utilisation had “decreased remarkably”. Louis Kuijs of Oxford Economics, a research outfit, calculates that the “output gap”—between production and capacity—for Chinese industry as a whole was zero in 2007; by 2015, it was 13.1% for industry overall, and much higher for heavy industry.

Scarier than ghosts

Much has been made of China’s property bubble in recent years, with shrill exposés of “ghost cities”. There has been excessive investment in property in places, but many of the supposedly empty cities do eventually fill up. China’s grotesque overinvestment in industrial goods is a far bigger problem. Analysis by Janet Hao of the Conference Board, a research group, shows that investment growth in the manufacture of mining equipment and other industrial kit far outpaced that in property from 2000 to 2014. This binge has left many state-owned firms vulnerable to slowdown, turning them into profitless zombies.

Chinese industrial firms last year posted their first annual decline in aggregate profits since 2000. Deutsche Bank estimates that a third of the companies that are taking on more debt to cover existing loan repayments are in industries with overcapacity. Returns on assets of state firms, which dominate heavy industry, are a third those seen at private firms, and half those of foreign-owned firms in China.

The roots of this mess lie in China’s response to the financial crisis in 2008. Officials shovelled money indiscriminately at state firms in infrastructure and heavy industry. The resulting overcapacity creates even bigger headaches for China than for the rest of the world. The overhang is helping to push producer prices remorselessly downward: January saw their 47th consecutive month of declines. Falling output prices add to the pressure on debt-laden state firms.

The good news is that the Chinese have publicly recognised there is a problem. The ruling State Council recently declared dealing with overcapacity to be a national priority. On February 25th the State-Owned Assets Supervision and Administration Commission, which oversees big firms owned by the central government, and several other official bodies said they would soon push ahead with various trial reforms of state enterprises. The bad news is that three of the tacks they are trying only make things worse.

One option is for China’s zombies to export their overcapacity. But even if the Chinese keep their promises not to devalue the yuan further, the flood of cheap goods onto foreign markets has already exacerbated trade frictions. The American government has imposed countervailing duties and tariffs on a variety of Chinese imports. India is alarmed at its rising trade gap with China (see article). Protesters against Chinese imports clogged the streets of Brussels in February. There is also pressure for the European Union to deny China the status of “market economy”, which its government says it is entitled to after 15 years as a World Trade Organisation member, and which would make it harder to pursue claims of Chinese dumping.

Another approach is to keep stimulating domestic demand with credit. In January the government’s broadest measure of credit grew at its fastest rate in nearly a year: Chinese banks extended $385 billion of new loans, a record. But borrowing more as profits dive will only worsen the eventual reckoning for zombie firms.

A third policy is to encourage consolidation among state firms. Some mergers have happened—in areas such as shipping and rail equipment. But there is little evidence of capacity being taken out as a result. Chinese leaders are dancing around the obvious solutions—stopping the flow of cheap credit and subsidised water and energy to state firms; making them pay proper dividends rather than using any spare cash to expand further; and, above all, closing down unviable firms.

That outcome is opposed by provincial officials, who control most of the country’s 150,000 or so publicly owned firms. Local governments are funded in part by company taxes, so party officials are reluctant to shut down local firms no matter how inefficient or unprofitable. They are also afraid of the risk of social unrest arising from mass sackings.

China’s 33 province-level administrations are at least as fractious as the European Union’s 28 member states, jokes Jörg Wuttke, head of the EU Chamber: “On this issue, increasingly Beijing feels like it’s Brussels.” So Mr Gao’s claim that the problem is not entirely his government’s fault may be true in a sense. But in the 1990s China’s leaders did manage bold state-enterprise reforms involving bankruptcies and capacity cuts, that overcame such vested interests. To meet today’s concerns, the central government could provide more generous funding to local governments to offset the loss of tax revenues arising from bankruptcies, and also strengthen unemployment benefits for affected workers.

If China’s current leaders have the courage to implement such policies, there may even be a silver lining. Stephen Shih of Bain, another consulting firm, argues that much quiet modernisation “has been masked in many industries by overcapacity”. For example, little of the fertiliser industry’s capacity used advanced technologies in 2011; most of the new capacity added since then has been the modern sort that is 40% cheaper to operate.

Baosteel Group, a giant state-owned firm, has been forced by Shanghai’s local authorities to shut down dirty old mills in the gleaming city. So its bosses have built a gargantuan new complex in Guangdong province with nearly 9m tonnes of capacity. This highly efficient facility has cutting-edge green technologies that greatly reduce emissions of sulphur dioxide and nitrogen oxides, recycle waste gas from blast furnaces and reuse almost all wastewater. “When the older capacity in China is shut down, we’ll have a much more modern industrial sector,” Mr Shih says. “The question is, how long will this take?”

Britain's biggest retailer, Tesco, settled a pricing row with Unilever after halting online sales of goods produced by the Anglo-Dutch giant in a dispute caused by a plunge in the pound since Britons voted to leave the EU.

The dispute between Tesco and one of the world's largest consumer goods companies was a first clear sign for consumers of the turbulence unleashed by the Brexit vote and of how it could hurt them.

Products such as Persil washing powder, Ben & Jerry's ice cream and Marmite - a brown yeast-extract spread with a like-it-or-loathe-it reputation - had been unavailable on the website of Britain's largest online grocer on Thursday.

Both sides declared the spat over on Thursday. "We're pleased this situation has been resolved to our satisfaction," a Tesco spokesman said. Unilever also said the supply situation in Britain and Ireland had been successfully resolved.

The pricing row reflected the tensions building throughout the system, with Tesco the one retailer big enough to push back against Unilever's demands and Unilever one of the only suppliers powerful enough to stand its ground.

The standoff dominated the news in Britain on Thursday, with "Marmitegate" trending on Twitter and "Marmite Wars" splashed on the front pages. The Daily Mail dubbed it "Brexit Blackmail.

It also has a personal dimension as Tesco boss Dave Lewis was previously a senior executive at Unilever, where his radical overhaul of the firm's businesses won him the nickname "Drastic Dave".

An executive at a rival consumer goods company that has not pushed for UK price increases said it was "absolutely brilliant positioning" by Tesco and no coincidence that the news broke on Wednesday, the eve of Unilever publishing financial results showing better-than-expected sales growth due to pricing.

"This makes Dave Lewis look like a hero defending consumers," the person said.

The mood among shoppers was resolute at the Tesco superstore in this town east of London on Thursday after Britain's biggest supermarket chain halted sales of top-selling Unilever brands online.

Outraged by Unilever's demands for Tesco to buy its goods at higher prices, some said they would be ready to switch to competitors' brands, including Tesco's.

In an area that voted for Britain to leave the European Union, there seems to be little sympathy for Unilever, whose costs have risen because the pound has plunged since the June vote on EU membership, making imported goods more expensive.

"Tesco should stick it out, and get the other supermarkets to do the same. Unilever shouldn't be able to tell them what to do," Jeaninne Richards, 69, a retired dressmaker who voted for Brexit, said in the detergents aisle.

"Unilever is being so greedy. They are using Brexit as an excuse ... If they take their products off the shelves, people are going to buy different products and then stick with it, so they are going to lose a lot of customers because of it."

The Daily Mail newspaper reported that some shoppers were preparing to boycott Unilever products.

A spokeswoman for Unilever said the company was not commenting on the opinions expressed by shoppers.

One of the food items that has been pulled online by Tesco is Marmite, a salty, sticky yeast-extract spread which many Britons enjoy on toast.

Marmite was on sale at the Basildon superstore, but some shoppers were worried it could become hard to buy.

"The kids love Marmite," Joe Green, a 32-year-old man who works in insurance, said as he shopped with his two-year-old son Charlie.

Green said calls by Unilever for what sources have said is a 10-percent price increase are "a bit of a rip-off considering it's made in the country."

"It's nothing to do with Brexit, I think it's people getting greedy," he said. "Brexit is an easy excuse for everyone to use at the moment."

Richard Walton, a 42-year-old carer with a trolley full of Tesco's own-brand products, said there would always be an alternative to Unilever products such as Marmite.

"There's so many alternatives to every single food and cleaning product," Walton said.

"I'm fed up with other countries telling us what we can and can't do ... Nothing has changed with Brexit. Brexit's got nothing to do with any of it."