By Alex Plough January 23, 2015
Mario Draghi at the European Parliament. © European Parliament
ECB’s Bid to Save Europe
The big news this week comes from the European Central Bank (ECB), which unveiled a $1.3 trillion bond-buying program designed to stimulate the region’s stagnant economy.
On Thursday, ECB President Mario Draghi announced plans to buy up roughly $68.7 billion of debt each month until at least the end of September 2016 in a last ditch effort to head off the deflationary spiral that threatens the continent.
With unemployment at 11.5% across the Eurozone, growth at less than 1% and negative inflation in several European countries, the ECB hopes that aggressively buying up government bonds from the private sector will encourage firms to take more risk with their investments and boost the overall economy.
A pile of 50 euro notes© Images Money
This process, known as quantitative easing or QE, has had mixed success in the US and the UK. Critics argue there is little evidence of a ‘trickle down’ into the real economy, that banks use the huge sums of cheap money to prop up their balance sheets instead of making loans to businesses.
The Eurozone faces the added problem of having a monetary union, through the single European currency, without a central federal government. Its 19 member states have widely varying creditworthiness, from Germany’s triple-A sovereign debt to the junk-bond quality of Greece’s debt.
Germany has been a vocal opponent of QE and Draghi has had to appease Jens Weidmann, head of the German Bundesbank, to get the policy approved. In practice, this means the ECB may not be directly buying government bonds itself, which is usually the case for monetary policy operations, but national central banks of each country will be responsible for purchasing the assets and will bear the risk.
Securities and Exchange Commission headquarters, Washington D.C.
© Securities and Exchange Commission
S&P Rating Agency Slapped
The world’s largest investment rating agency, Standard & Poor’s (S&P), faces a year-long ban from one of its most lucrative business after agreeing to an unprecedented settlement with the U.S. Securities and Exchange Commission (SEC).
On Wednesday, the SEC said S&P would pay a total of almost $80 million to end multiple investigations into whether the agency had fraudulently inflated the ratings of certain financial products between 2011 and 2012 to win more business from issuers. According to media reports, the deal also bans S&P for a year from rating debt that bundles multiple loans tied to commercial properties, ranging from shopping malls to skyscrapers, into securities that are sold to bond investors.
It is the first time the SEC has imposed civil charges on any of the big three credit-raters, which include Moody’s and Fitch Group, since it won authority from Congress in 2006 to police the sector.
This is not the end of S&P’s troubles. The firm is still negotiating with the US Justice Department over separate allegations that it misled investors with ratings of residential mortgage-backed securities, widely seen as a major catalyst for the 2008 subprime-driven Wall Street crisis. Rumor has it that Justice Department settlement could cost the firm as much as $1 billion in fines.
Oil Price Crash: Cause and Effect
As the price of oil continues to crash this week, top economists are weighing in on the causes and implications of one of the biggest single forces reshaping the global economy.
At the World Bank, experts blame a supply glut rather than collapsing demand. US investment in new technologies allowed producers to access previously unreachable reserves and ramp up output, turning the country into the world’s largest petroleum exporter in 2013. The previous holder of this title, Saudi Arabia, responded by flooding the market in order to keep its market share. According to the report, prices are not going to stabilize until the Saudi decide to restrict supply. “You have a producer that is willing to supply at a lower price, which changed market dynamics quite dramatically,” said Ayhan Kose, a key author of the bank’s report.
Chevron oil well pump jacks, Lost Hills Oil Field, San Joaquin Valley, California © Richard Masoner
Meanwhile Leonardo Maugeri, an associate professor at Harvard University’s Belfer Center for Science and International Affairs, points to weaker demand as a major factor. He estimates that world oil production capacity currently sits at 101 million barrels a day, nearly 10% more than expected demand next year. Maugeri is also known as one of the few people who predicted the current collapse in prices back in 2012.
Another analyst who anticipated the crash is hedge fund manager Zach Schreiber. Eight months ago, when a barrel of crude oil traded at $99 a barrel, he made a bold prediction that oil was heading for a tumble. “We believe crude oil is going lower—much lower,” Schreiber, 42, told an audience of roughly 3,000 investors at Avery Fisher Hall in New York. “If you are long, I’m sorry for you.” Today Schreiber must be feeling rather smug after his fund made a reported $1 billion from its oil trading in recent months.
Traffic jam © Kathy McEldowney
Getting to Work
A fascinating interactive data visualization by Nathan Yau explores how Americans get to work each day. Yau dug into individual county-level data from the US Census Bureau’s 2013 American Community Survey to find that (unsurprisingly) most people travel to work by car on their own. There are distinct regional variations however, and users can explore which are the most used public transportation systems, where carpooling is most popular or where the high percentages of Americans work from home.
The Secret History of Silicon Valley
For those looking for a meaty long-form business story, Techcrunch journalist Kim-Mai Cutler has uncovered the hidden demographic history of Silicon Valley’s hometown, Palo Alto. Cutler’s story ‘East of Palo Alto’s Eden: Race and The Formation of Silicon Valley’ combines narrative with extensive research to document the effect of the tech industry on what was once the “Murder Capital of the U.S.A”.
Oracle headquarters in Silicon valley © Dave
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Alex Plough is a freelance business journalist based in New York. Originally from London, England, he has a background in data-driven investigative reporting and has worked on a number of agenda-setting projects such as the award winning Iraq War Logs for the Bureau of Investigative Journalism. More recently he graduated from Columbia Journalism School’s masters program, business and economics reporting concentration, as well as Columbia’s Lede Program – a three month course designed to apply the tools of computer science to journalism. He is particularly interested in the overlapping fields of finance, technology and how young people are shaping the new American economy.
