Global Economic Snapshot

The Libor (London inter bank offered rate), or the interest rate that banks lend to other banks, has been called under question as a reliable indicator of banks' access to credit. Because of the tightening of credit conditions worldwide and hesitance to reveal the sting of the credit crunch, banks may not be reporting the actual rates at which they are able to borrow from other banks. The repercussions for the unreliability of Libor are catastrophic. Interest rates on home loans, auto loans, and student loans worldwide depend on the Libor rate. Citigroup's Scott Peng believes that Libor could be underestimated by as much as .3 percent, causing all banks to lend money cheaper than they should.

Snapshot asks, if Libor is underestimated, how much more pressure will it put on banks?

Wall Street Journal - Bankers Cast Doubt on Key Rate Amid Crisis
Wall Street Journal - Bank Group Expedites Libor Probe
Financial Times - Lenders examine Libor alternatives
Bank of International Settlements - Interbank rate fixings during the recent turmoil

On April 9^th, Senator Barack Obama joined a growing chorus of public figures demanding that President Bush boycott the Beijing Olympics opening ceremony. In a debate in The New Republic, American Strategy Director Steve Clemons and The New Republic Deputy Editor Richard Just debate the best action for the United States government to take vis-à-vis China's record of human rights violations. Clemons cites a potential nationalist backlash and the greater importance of geostrategic concerns. Just cites China's steadily worsening human rights abuses and the success of previous shaming attempts.

Economists concerned anout rising oil and food prices can add another item to their list of fears, Chinese wage growth. In 2007, unit labor costs increased for the sixth consecutive year while the price of Chinese imports to the U.S. surged by 4%. With a global economy that has become reliant upon inexpensive Chinese manufactures, the question of whether Chinese wage inflation is transitory or part of a long term structural change is of great importance.

Snapshot asks, will wage growth add to China's inflationary threat?

Bureau of Labor Statistics - U.S. Import and Export Price Indexes
New York Times - Asian Inflation Begins to Sting
China Daily - China's 'Demographic Dividend' to End in 2010
Goldman Sachs - Globalization and Disinflation: Can Anyone Else ' Do a China'?
Business Week - How Rising Wages are Changing the Game in China

If the U.S. enters a deep recession, a bailout to Fannie Mae or Freddie Mac could threaten the United States' AAA credit rating according to a statement from Standard & Poor's. Government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac are large in size, have high common equity, and are highly exposed to a deteriorating housing market, leaving them vulnerable to a deep recession. If they go under and need a large cash infusion from the government, it could cost the country 10% more of GDP to service its debt.

Barron's - Is Fannie Mae the Next Government Bailout?
Wall Street Journal - Fannie, Freddie Could Hurt U.S. Credit
Bloomberg - U.S. Rating Threatened More by Agencies Than Bailouts, S&P Says

Rioting has broken out in Egypt, Senegal, Ivory Coast, Cameroon, and Ethiopia and 33 more countries around the world may face instability due to rising food prices. During IMF/World Bank meetings last week, leaders cited the U.S. demand for bio fuels as a major reason for high grain prices. Throughout the weeklong meetings, World Bank President Robert Zoellick repeated the need for more food assistance to poor countries. To date, the United Nations has only received half of the $500 million it said it needed to sustain assistance through the World Food Program.

Snapshot asks, will cutting the U.S. demand for bio fuels sufficiently curb inflation in food prices?

World Bank - Rising food prices: policy options and World Bank Response
Wall Street Journal - Food Inflation, Riots Spark Worries for World Leaders
European Bank for Reconstruction and Development - Fighting Food Inflation through Sustainable Investment
Time - The Clean Energy Scam

Despite a likely recession in the United States, the Mexican economy is growing beyond expectations and the Mexican Stock Market, Bolsa Mexicana de Valores (BVM), is one of the few markets up in 2008. This unexpected divergence from the U.S. has come as a surprise for many analysts. Although 80% of Mexico's exports are destined for the United States, these goods are mostly related to industrial production - a sector of the U.S. economy that has performed relatively well given the fall of the U.S. dollar and rising exports. This buffer gives the Banco de Mexico, Mexico's central bank, additional room to tighten monetary policy and fight inflation.

Morgan Stanley - Three Anomalies
Bloomberg - Mexico Inflation Rate Jumps to Highest in 17 Months
Financial Times - Mexican Waves

A guest post by Ian McAllister

The International Monetary Fund recently released its assessment of world economies and its outlook for 2008 and 2009. In addition to its estimates of unprecedented potential losses--totaling almost a trillion dollars--the report offered a gloomy picture for recovery later this year. More influential may be the report's calls for improved regulation of our increasingly complex financial system.

Snapshot asks, does the IMF have any impact on the regulatory environment in the United States or EU?

IMF Report, Chapter 2 - Structured Finance, Executive Summary
Financial Times - A Risk Shared May Be More Risky
Economist - Fixing Finance
Deutsche Bank - Dr. Josef Ackermann Leads Debate on Globalized Regulation
Financial Stability Forum - Interim Report to G7 Finance Ministers

The Tibetan struggle for independence has captured the attention of the world. The Olympic torch was greeted with pro-Tibet demonstrators on two continents. Chinese officials are more nervous and more likely to use forceful suppression. Director of the New America Global Governance Initiative, Parag Khanna, recently adapted a section of his new book, The Second World, to talk about Tibet as well as its lesser known counterpart, Xinjiang. He states that these autonomous regions are important to Chinese nationalism and contain natural resources of vital importance to China. Only when Beijing secures absolute control over the people and resources in these regions will the government relax political control.

First rule of empire: dominate

Alan Greenspan wrote in Monday's Financial Times that he was blameless for the development of the real estate bubble, echoing his dismissal of blame during the popping of the tech bubble. Greenspan is right to point out that the ability of regulators to foresee crises are exaggerated and housing bubbles in other countries have risen despite tight monetary policy. However, he is wrong that tighter monetary policy, further regulation over both mortgage lending and complex financial instruments would not have helped slow soaring housing prices. As Martin Wolf points out in his column linked below, a rise in interest rates of 1% would not lead to market collapse if people expected their houses to rise in value by 10%.

Alan Greenspan - The Fed is blameless on the property bubble
Martin Wolf - Why Greenspan does not bear most of the blame
Desmond Lachman - The Economic Consequences of Mr. Greenspan

A guest post by Ian McCallister

As banks on both sides of the Atlantic grapple with plummeting investor confidence and increasingly tight credit, Iceland's central bank is struggling to keep its own financial system out of the speculative cross fire. In recent years, Iceland's three main banks, Glitnir, Kaupthing, and Landsbanki, have become massively leveraged in global markets, and total assets valued at more than eight times total Icelandic GDP. Investor confidence in these banks has plummeted, pushing the Icelandic Kronor down, exacerbating Iceland's huge current account deficit, and driving up inflation past six percent last year. With small currency reserves on hand and a central bank too small to serve as a lender of last resort, Iceland's banking system appears to have gotten itself into very hot water.

Snapshot asks, what effects would an Icelandic bank collapse have in international markets?