Economics Nobel issues timely warning about power of central banks

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The Nobel in economics is in a way the cousin by marriage of the Nobel family.

It emerged almost 70 years after its literary and scientific counterparts, in 1969, and is technically called the “Sveriges Riksbank Prize in Economics”. It is awarded by the Swedish central bank, in honor of the Renaissance man of the same name, Alfred Nobel, who created the prizes.

Some scholars really dislike the economics prize, including one of Nobel’s own descendants, who called it “an economists’ press stunt.”

But hey, it still comes with a cash prize. And it’s also very helpful in reminding the world that economics as an academic field is, frankly, a barely understood hodgepodge of study that’s constantly changing and so variable that it’s almost useless outside of the middle. university. (And I mean this with the greatest respect for economists who, like journalists, knew what they were doing when they chose their lives of suffering.)

Here’s the thing: Ben Bernanke, the former Federal Reserve Chairman who guided the US economy through the 2008 financial crisis and subsequent recession, was awarded the Nobel Prize in Economics along with two other economists, Douglas Diamond and Philip Dybvig . (Congratulations to all the winners, with apologies to Doug and Phil, who will forever be referred to in Nobel headlines as “and two other economists.”)

Bernanke, who previously taught at Princeton and earned his doctorate at MIT, received the award for his research on the Great Depression. In short, his work demonstrates that bank failures are often a cause, and not just a consequence, of financial crises.

It was groundbreaking when he published it in 1983. Today, it’s conventional wisdom.

WHY IS IT IMPORTANT

Timing is everything here. The Nobel Committee is known for playing politics (see: this time Barack Obama was awarded the Nobel Peace Prize after being in office for only eight months). And right now, he’s using his spotlight to draw attention to the high-stakes betting that’s going on at central banks around the world, including the Fed.

The rapid rise in interest rates, led by the US central bank, is disrupting markets around the world. And this is especially bad news for emerging economies.

Monetary tightening — especially when aggressive and synchronized across major economies — could inflict greater damage globally than the 2008 financial crisis and the 2020 pandemic, a United Nations agency warned early on. of the month. He called Fed policy a “reckless gamble” with the lives of the less fortunate.

LESSONS FROM HISTORY

On Monday, Diamond, one of three new Nobel laureates, acknowledged that rate movements around the world were causing market instability.

But he thinks the system is more resilient than it was due to hard lessons learned from the 2008 crash, reports my colleague Julia Horowitz.

“Recent memories of this crisis and improvements in regulatory policies around the world have left the system much, much less vulnerable,” Diamond said.

Let’s hope he’s right.

Oh hey, speaking of the Fed inflicting pain: we’re about to see big job losses, according to Bank of America.

Under rate hikes imposed by Jay Powell & Co, the US economy could see job growth halve in the fourth quarter of this year. At the start of next year, the bank expects to see losses of around 175,000 jobs per month.

The litigation between Elon Musk and Twitter is officially suspended. Both sides now have until October 28 to reach an agreement or prepare for a court battle again.

The big question now is all about money.

Here’s the problem: Even the richest person in the world doesn’t have that kind of money lying around. Musk’s wealth is tied to Tesla shares, which he can’t easily offload for a whole host of reasons. He needs to borrow money, which means he has to go to the banks.

By most accounts, he will be able to make it happen. But the Twitter deal is harder to do now than it was in April, when Musk said he had lined up more than $46 billion in funding, including two debt pledge letters from Morgan Stanley and Other Financial Institutions Anonymous, my colleague Clare Duffy writes.

Musk has spent the past few months trashing Twitter as he seeks to walk back his offer. Meanwhile, tech stocks have been hammered, ad revenue is down and the global economy has edged closer to a recession, undermining investors’ appetite for risk.

Musk’s legal team said last week that banks that previously committed debt financing were “working cooperatively to fund the closing.”

Twitter is understandably skeptical, given the many curveballs Musk has thrown at them since he got involved with the company earlier this year. The company expressed concern last week that a representative from one of the banks testified that Musk had yet to send a borrowing notice and “did not otherwise communicate to them that he intended to complete the transaction, let alone within a particular time frame”.

What is Musk’s endgame?

No one knows, let alone Musk. But many legal experts who have followed the case said Musk understood he would likely lose at trial and then be forced to buy Twitter anyway. He’d rather buy the whole company than be removed by Twitter’s lawyers and cause further damage to Twitter in a lawsuit.

And the banks may not be able to walk away even if they want to.

“The only way they could get away with this is if they claim a significant adverse effect and that Twitter has changed so much since they agreed to the deal that they don’t want to fund the deal anymore,” said George Geis, university professor of strategy. UCLA Anderson School of Management.

Even if the banks succeeded in this, Musk may not be off the hook. The judge hearing the case could rule that Musk was responsible for the funding failure – not a far-fetched idea after all the chatter – and order him to sue Morgan Stanley to provide the funds or go through with the deal without it. .

Ultimately, it looks like Musk will eventually own Twitter one way or another. And given his only vague thoughts about what he would actually do with it, there’s a whole host of unknowns lurking in Twitter’s future.

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