Diplomacy & Crisis News

The United Nations Special Adviser for the Prevention of Genocide, Adama Dieng, arrived in Burundi today as the top UN political official met with a Burundian government representative at UN headquarters and discussed the need to prevent and investigate political violence and killings.

The Security Council must set aside its political differences and come together to find a solution for the “intractable” and drawn-out Syrian conflict, the top United Nations humanitarian official urged today as she warned the 15-member body that the situation in the country was “extremely grave and deteriorating by the day.”

The military is still facing the same problems in Iraq it has paid billions of dollars to fix over the past decade.

The Pakistani Taliban has published an essay criticizing the Islamic State's aggressive tactics.

As the United Nations Economic and Social Council (ECOSOC) met to discuss the role of partnerships in achieving the Post-2015 development agenda, the focus fell on the recent response to the Ebola crisis in west Africa and the need to work together to boost capacity in healthcare systems.

Secretary-General Ban Ki-moon has deplored the shooting incident that took place in Bamako, Mali, on Monday, 25 May, during which a peacekeeper with the United Nations Multidimensional Integrated Stabilization Mission in Mali (MINUSMA) was killed and another injured.

The United Nations General Assembly today expressed outrage that attacks on Iraq’s cultural heritage are being used as a tactic of war to spread terror and hatred, “a new phenomenon,” the head of the UN Educational, Scientific and Cultural Organization (UNESCO) labelled as a form of “cultural cleansing” threatening the people and security in the region.

The changes observed in the capital market over the last 30 years, its growing role in financing the economy, and the amplification of the business cycle have drawn attention to the relative importance of asset prices and wealth dynamics in the economy. There is much in economics that can and should be celebrated, and Arthur M. Okun’s book, Equality and Efficiency: The Big Tradeoff and the recent event dedicated to it, is one of those things.

Attending this event dedicated to Okun at the Brookings Institute in Washington, D.C., allowed me to take a step back and focus on a crucial issue that has influenced and changed a number of decisions and policies: the market bubble.

In his book, Okun emphasizes that the markets needs a place, and the market needs to be kept in its place. To achieve this, as Ben Bernanke noted in a 2002 speech at the National Association for Business Economics in New York, we must “use the right tool for the job.” Bernanke’s speech back in 2002 can help shed some light on the question of how asset prices have been taken under consideration in the past by the Fed. It also helps explain how these prices will affect monetary policy in the future.

Should monetary policy react to changes in prices of financial and real estate assets? The answer, in theory, would be that an increase in the interest rates could have consequences and make shares less attractive investments, which could end up being a signal of inflation or speculation. However, significant changes in asset prices, such as financial bubbles, could jeopardize price stability, as well as affect financial stability, thereby have significant impact in the economy.

Ben Bernanke called this phenomenon the “Internet bubble.” This has also been referred to as “the irrational exuberance effect” by Alan Greenspan in the 1990s and has been interpreted as a warning that the market may be currently overvalued.

The appearance of a financial bubble disrupts the tasks of a central bank. These bubbles are popping not because they were unpredictable but because they were unpredicted.

Part of this is because there are several channels though which the policy rate can influence asset prices or valuations. These are:

• The changes in interest rate alter the expectations of agents relating to economic growth and profit outlook.
• Monetary policy decisions can change the various discount rate that economic agents apply to their expectations of future earnings and interest flows or income generated by the assets they hold (housing).
• The changes in interest rate may lead to portfolio shifts between assets that may in turn affect their relative prices.

To date, economics has been two-parts wonder drug and one-part snake oil, and this strategy has proven to be weak when dealing with financial imbalances and bubbles. Ben Bernanke recalls the tools a central bank has to regulate the prices of financial assets and classifies them in two categories:

• The “lean against the bubble”: The Fed must take into account asset prices for its macroeconomic policy and prevent the formation of a financial bubble. For instance, increasing the interest rate from 25 to 50 points the interest rate to discourage the excessive increase in asset prices – because an increase is a signal that calms the economy.
• The “aggressive bubble popping”: a vigorous increase in interest rate prevention to avoid the formation of bubbles detached from economic reality.

For Bernanke, monetary policy is not the right instrument to fight against the bubbles in asset markets or in real estate. There is a problem of identifying the bubbles: the price of shares should match the expected dividends discounted by investors and the risk of holding this action. But even retrospectively, studies have difficulty assessing the link between share price and economic fundamentals. Troubles have their roots in reluctance to face up to these ineluctable choices.

Even if we can measure the bubbles imprecisely, does an action from a central bank have an effect? For example, if the Fed decides to increase its interest rate by 25 or 50 points, Bernanke reiterated in his last article that the expected effect would be multiplied by three or six empirically on financial assets.

In other words, a 0.25 percent increase in the interest rate results in a decrease in approximately one percent of the share price, which is low. Indeed, investors expect returns of 15 percent, 20 percent or even 30 percent per year. In the short term, an increase of the interest rate 0.25 or 0.5 percent, unless accompanied by a decline in economic activity, would have no real effect. David Wessel, the Director of the Hutchins Center on Fiscal and Monetary Policy at Brookings, has said that getting the timing of the rate hike right is one “really tricky” issue. It’s an art, not a science, and easy to mess up. Too early and recovery could be choked off. Too late and inflation could sap the Fed’s credibility.

On the other hand, a violent increase in interest rate will weaken the whole economy. Timing of the burst is what will determine who in the market would have a harder fall. There is no way to direct the action of monetary policy to a single sector of the economy, leaving the rest of the economy unscathed. The explosion of a specific bubble by an increase in interest rate will be at the risk of stifling the economy as a whole.

Bernanke’s position is widely debated among researchers and economists, partly because it is difficult to estimate the value of asset prices. There, what matters is not only the level of asset prices but their deviation from a hypothetical value, which by definition is difficult to measure. It is unclear whether bullish momentum actions would be the consequence of fundamental changes or if prices will move forward pathologically.

A central bank does not intervene in the event of rising asset prices but takes into account the impact of inflation risks. So if a central bank can respond when the bubble bursts and the financial and monetary stability is threatened, this asymmetric response will have a cost. An intervention can provoke the problem of “moral hazard”: As economic agents believe the central bank will use its safety net, they will be drawn to invest in riskier projects to increase the profitability of their investments, bearing in mind that potential losses will be limited.

Bernanke advocated a systematic and symmetric reaction is also a problem because the Fed can be wrong in the estimation of asset prices.

Still, one question remains: Should asset prices be taken into account in the definition of price stability? Asset prices are an indicator of future inflation, particularly housing prices. It is difficult to measure the effect of wealth. Moreover, inflation can either lower or be limited and asset prices will still increase. What action a central bank should take may be less clear when central bankers have too many contradictory objectives.

For Bernanke, if monetary policy does not respond directly to changes in asset prices, it must clearly consider all the consequences of these global changes on supply and demand, and on trust and economic expectations. In addition, a central bank is responsible for the proper functioning of financial markets and should perform its role of lender of last resort to increase liquidity following drop in share price.

Bubbles arise because of uncertainty and incomplete information provided to economic actors. These deficiencies make the behavior seem like rational agents who prefer to follow the participants and expect to be better informed. Therefore, the increased transparency of company accounts must be the priority so that investors are well informed about the actual health of companies. Similarly, it is to develop the skills required for a more detailed analysis and to allow the greatest number to be properly informed.

One goal of transparency is to enable better differentiation of the solvency of borrowers. A fight against contagion effects of a decline in confidence.

Bernanke insists that financial liberalization must be done in a healthy way, such as a “principle of policy targeting” approach, which looks at the policy intervention at the source of the problem. Sensible as far as it goes, it is a powerful tool for liberalization without worries about adverse effect.

Thus, Bernanke stresses caution for action by the central bank in relation to asset prices. Certainly, as a Fed governor, it is difficult to hold a different position, but his argument seems persuasive because neither identifying a bubble nor the means of a central bank seem to allow appropriate actions.

However, asset prices should be monitored by central banks given the complementary nature of the goals of price stability and financial stability, without including asset prices in monetary policy rule.

Designing a better balance between states and markets doesn’t mean that we jettison conventional economics. It requires that we actually pay more attention to it. The economics we need is not that of the “rule of thumb” but rather a result derived from theory. Beware any salesman who offers a “sure thing.”  As Okun concluded in his recent talk, “instead of compromising, we are polarizing. The nation solely needs a serious dialogue and a major educational undertaking to develop the enlightened attitudes of compromise.” It’s an economy that recognizes its limitations and flaws and know that the right message depends on the context.

Still, as Bernanke said, “I have an open mind on this question. We’re learning. All central bankers are learning.”

The Islamic State is making million selling antiquities to foreigners, including Americans. Here's how U.S. buyers illegally purchase them.

Yang Xiuzhu topped the "most wanted" fugitives list China circulated last month, although it turns out that U.S. authorities had already detained her last June.

Addressing the graduating class at the Catholic University of Leuven in Belgium, where he was bestowed an honorary degree today, United Nations Secretary-General Ban Ki-moon gave students one final homework assignment: become global citizens with global vision.

The ruling AKP and Turkey’s increasingly authoritarian president are pulling out all the stops for victory in high-stakes elections.

The Pentagon said Thursday it was testing anthrax samples it had sent to as many as nine states after one came up “hot” for live, and potentially dangerous, spores. The scare comes amid an investigation by two top U.S. homeland security experts that raises concerns about government mishandling of chemical and biological agents. Defense Department ...

The Burmese government refuses to acknowledge its responsibility for migrant Rohingya - since the official position is that no such people exists.

South African President Jacob Zuma has faced hundreds of corruption allegations in the past. Now he's been cleared of overusing government funds to ramp up his already lavish private home.

Today, the Greek Cypriot leader, Nicos Anastasiades, and the Turkish Cypriot leader, Mustafa Akinci, took the next steps towards fulfilling their joint vision for a united federal Cyprus, the United Nations Special Adviser of the Secretary-General on Cyprus has confirmed.

Recognizing the growing challenge of feeding city dwellers, who will become the world’s majority by 2050, the United Nations Food and Agriculture Organization (FAO) and the World Union of Wholesale Markets today signed a partnership aimed at reaching the urban poor and reducing food waste estimated at 1.3 billion tonnes every year.

This is 35-year-old Oscar Ouedraogo’s first deployment with a United Nations peacekeeping mission. The native of Burkina Faso has been working as a corrections officer for the UN Multidimensional Integrated Stabilization Mission in the Central African Republic (MINUSCA) since 20 September 2014, in the capital, Bangui.

I admit it. I was prepared to scoff, because too many teams I have seen military officers recommend today’s pop favorite biz book. But I found this a surprisingly good list.

When French novelist Jean-Baptiste Alphonse Karr uttered the immortal words, "the more things change, the more they remain the same," he probably didn't have the military in mind. However, the written works of Admiral William S. Sims, commander of United States naval forces in Europe during World War I, remind us that this dictum, in fact, often holds true in military affairs.