Alan Greenspan and Ben Bernanke still do not believe monetary policy bears any blame for the crisis

THE desire to rescue a damaged reputation is a powerful motivator. That is one conclusion to draw from a new 48-page paper written for the Brookings Institution by Alan Greenspan, the 83-year-old former chairman of America’s Federal Reserve. A man once hailed as the world’s outstanding central banker is now routinely blamed for the asset bubble and subsequent collapse. This is Mr Greenspan’s attempt to set the record straight.

The crisis, he argues, stemmed from a “classic euphoric bubble” whose roots lay in the sharp global decline in nominal and real long-term interest rates in the early part of the 2000s, which fuelled an unsustainable boom in house prices. Thanks to this euphoria, banks misread the risks embedded in complex new financial instruments. Mr Greenspan reckons the best remedy is to improve the system’s capacity to absorb losses by raising banks’ capital and liquidity ratios and increasing collateral requirements for traded financial products. ...

There are lots of private-equity funds in Japan, but very few deals

“PRIVATE equity is the garbage can of corporate Japan,” laments the boss of one fund with more than $1 billion invested in the country. The firm wants to do more deals, but there is nothing worth buying. By the time ailing firms are willing to accept outside capital and advice, it is too late: they are on their deathbeds. “They need morticians, not doctors,” sighs the boss of another private-equity fund.

Across Tokyo it is the same refrain: private equity in Japan barely exists. “I’m in the non-profit sector,” grumbles one manager. The value of all transactions in 2009 totalled a mere $3.8 billion, according to Dealogic (see chart). For the world’s second-largest economy, it is a pittance. Permira, a major international fund, has done one deal since it came to Japan in 2005. Kohlberg Kravis Roberts (KKR), which opened a Tokyo office the same year, has the same tally. Carlyle has done numerous good deals, but on March 12th it saw a $330m investment in Willcom, a bankrupt wireless operator, wiped out in a refinancing. ...

Productivity has surged in America and slumped in Europe. Neither trend can last

LIKE physical fitness or a healthy diet, productivity is a worthy goal that can require an unappetising change in habits. Producing more by working less is the key to rising living standards, but in the short term there is a tension between efficiency and jobs. America and Europe have managed this trade-off rather differently. America has gone on a diet: it has squeezed extra output from a smaller workforce and suffered a big rise in unemployment as a consequence. Europe, meanwhile, is hoping to burn off the calories in the future. It has opted to contain job losses at the cost of lower productivity. That probably means America’s recovery will be swifter. Further out, productivity trends in both continents are likely to be uniformly sluggish.

Analysis by the Conference Board, a research firm, shows just how different the recession was on either side of the Atlantic. America’s economy shrank by around 2.5% last year but hours worked fell at twice that rate, so productivity (GDP per hour) rose by 2.5%. The average drop in GDP in the 15 countries that made up the European Union before its expansion in 2004 was larger, at 4.2%. But hours worked fell less sharply than in America and, as a result, EU productivity fell by 1.1% (see table). Workers that held on to jobs in America and Europe had their hours cut by similar amounts. The reason total hours worked fell by more in America was that there were more job losses there: employment fell by 3.6% last year, compared with a 1.9% fall in the EU. ...

Banks’ professional advisers come under scrutiny

IF SUNSHINE really is the best disinfectant, the 2,200-page report into Lehman Brothers’ downfall by its court-appointed bankruptcy examiner may do more to clean up finance than any number of new regulations. It paints a remarkably detailed, and damning, picture of Dick Fuld, Lehman’s ex-boss, and the executives around him. Their spectacularly ill-advised strategy was to take on oodles more risk in property just as everyone else was running the other way. Risk management was risible, with risk limits raised whenever they were breached and dodgy investments excluded from stress tests.

Lehman’s former leaders are not the only ones squirming in the glare. Some of its counterparty banks get a slap on the wrist for changing the terms of their collateral demands, for instance. But the strongest criticism of those who interacted with the flailing firm is reserved for Lehman’s auditor, Ernst & Young (E&Y), for failing to “question and challenge improper or inadequate disclosures”. The main “accounting gimmick” hidden from investors, but apparently known to the auditor, was called Repo 105. This technique helped the firm flatter its numbers by temporarily moving assets off its balance-sheet at the end of each quarter. Lawyers are also in the spotlight: unable to find an American law firm to approve the transaction as a “true sale” of assets, Lehman got the nod from Linklaters in London. Both E&Y and Linklaters deny any wrongdoing. ...

A derivatives farce makes its way to court in Milan. Others are sure to follow

ONE of the great advantages of financial innovation, it was often said, was that risk would end up going to those best qualified to hold it. In fact, much of it seems to have ended up in the hands of those least able to understand it. How some of it got there may soon be revealed in an Italian court. On March 17th four big banks, 11 bankers and two former city officials were charged with fraud in connection with the sale of interest-rate derivatives to the city of Milan. The trial is due to start in May.

The prosecution relates to a huge bet on interest rates that the four banks—UBS, JPMorgan Chase, Deutsche Bank and Hypo Real Estate’s DEPFA unit—helped the city authorities to take in 2005. The banks helped arrange the sale of €1.7 billion ($2.3 billion) of bonds for the city and then also helped it swap the fixed interest rate it was paying on the bonds for a lower, floating rate. Part of the contract is thought to have involved a “collar”, a way of limiting the range of outcomes on a bet, which protected Milan from rising rates but which also meant it would have to pay out if they fell. ...

The Senate bill is finally published

CHRIS DODD, the soon-to-retire chairman of the Senate Banking Committee, has staked his legacy on overhauling America’s financial regulations. If he fails, it won’t be for lack of trying.

On March 15th Mr Dodd unveiled a sweeping proposal to rearrange the duties of America’s financial regulators while creating new powers and authorities to sniff out and squelch the risks that brought on the financial crisis. This is not the first reform blueprint: the House of Representatives has passed its own bill, the Treasury issued proposals last year, and Mr Dodd himself had already unveiled one, aborted draft of the Senate bill. This version, however, is the first to reflect substantial input from Republicans, whose support is necessary to reach the 60-vote margin needed in the Senate for the bill to become law. ...

Hotel owners and operators have their banks over a barrel

FEW industries are as adept as hotels at providing tempting offers—a well-stocked minibar, for instance—that lead to regret the next day. Lenders to the industry are now firmly in the regret phase. Over the next year banks in Europe and America may be forced to write down billions in bad loans, further impairing already strained balance-sheets. In many cases they are also likely to become the proprietors of debt-ridden hotels.

It is difficult to determine exactly how much outstanding commercial-property debt was used to finance hotels. But if commercial property has long been seen as the next shoe to drop in financial markets, hotels are the steel toecap. “There is a vast wall of properties out there that is underwater,” says Paul Bartrop of CB Richard Ellis, a property consultancy. ...

Private-equity managers face a difficult outlook

THE locusts went hungry in 2009. The private-equity industry, the bete noire of many a European politician, managed just $81 billion of buy-outs, compared with more than $500 billion in 2007. Indeed, almost anything that could go wrong for the industry last year did so, as a recent report from Bain, a consultancy, makes clear.

Private equity has prospered for most of the past 25 years thanks to a favourable combination of circumstances: easy access to cheap credit, rising asset prices, a relatively stable economy and a friendly regulatory environment. But credit was neither available nor cheap last year. The industry raised just $20 billion of new loans in 2009, perhaps because managers were unwilling to pay double the spread (or excess interest rate) they had paid in the middle of the decade. ...

The merits of inflation as a solution to the rich world’s problems are easily overstated

IT HAS long been considered a scourge, an obstacle to investment and a tax on the thrifty. It seems strange, then, that inflation is now touted as a solution to the rich world’s economic troubles. At first sight the case seems compelling. If central banks had a higher target for inflation, that would allow for bigger cuts in real interest rates in a recession. Faster inflation makes it easier to restore cost-competitiveness in depressed industries and regions. And it would help reduce the private and public debt burdens that weigh on the rich world’s economies. In practice, however, allowing prices to rise more quickly has costs as well as benefits.

The orthodoxy on inflation is certainly shifting. A recent IMF paper* co-authored by the fund’s chief economist suggests that very low inflation may do more harm than good. Empirical research is far clearer about the harmful effects on output once inflation is in double digits. So a 4% inflation target might be better than a goal of 2% as it would allow for monetary policy to respond more aggressively to economic “shocks”. If the expected inflation rate rose by a notch or two, wages and interest rates would shift up to match it. The higher rates required in normal times would create the space for bigger cuts during slumps. ...

A financial system in suspense

THAT old Spanish stereotype of putting things off until manana still applies today. For nearly two years bankers have been talking about the need to restructure a bloated financial system, particularly the country’s 45 unlisted savings banks, the cajas de ahorros. About half of the cajas, which are controlled by local politicians, have announced their intention to merge, hoping to tap into the €99 billion ($135 billion) Fund for Orderly Bank Restructuring (FROB), which was created in June.

Regional politicians, reluctant to give away their piggy banks, are prepared to sanction some internal mergers. Catalonia, for example, has allowed some consolidation, as has Andalusia. Progress is slower elsewhere. Caixanova, a savings bank in Galicia, is resisting a union with Caixa Galicia, a rival. The sector has also been waiting for Spain’s second-largest savings bank, Caja Madrid, to make a move. Until recently, it was paralysed by a political power struggle at the top. ...