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There is strong cirticism from many quarters about low interest rates as a prime culprit in causing the bubble in housing prices. In comments before the American Economic Association, America's Fed Chairman Bernanke defended his role as Fed governor in 2003 when he along with Greenspan was an advocate of the decision to cut the Fed's target interest rate to 1%, and to leave it here for a year and raise it only slowly. Bernanke says countries like Britain, New Zealand, and Sweden had tighter monetary policy but there home prices rose more, and monetary policy explains only 5% of the variation in home prices. Analysis has shown he says that capital inflows such as those the U.S. received from China and other Asian countries explains 31% of the variation in home prices, supporting a contrasting theory that that its these global imbalances that drove the crisis. He also placed the primary fault for the housing bubble on relaxed lending standards and views that housing prices would rise forever. Alongside these comments Fed chairman Bernanke also said that bank supervisors and other financial regulators of which the Fed was one, has a better ability to contain the excesses that led to the economic crisis including housing bubble and other excesses, than the Fed as a monetary policy maker. By saying this Bernanke is acknowledging that the failure of regulation was a key part of what happened in the economic crisis. The failure to fix the regulatory system even now leads Bernanke to say that he is open to using monetary policy as a supplementary tool for addressing risks should another bubble develop, if the regulatory system isn't reformed. Still Bernanke and Greenspan were quite complacent at the time of the low interest rates and did not point out the dangers of global capital imbalances which were evident at the time, preferring to say that the United States could benefit from the inflows of capital from overseas without serious risks. And the Fed did not exercize its role of vigilance in alerting the country to excesses in the way the housing industry operated and in exercizing its own powers to that effect. Instead the Fed as regulator and in role as asafeguard for serious risks let itself become part of the cheering section as the worst excesses in housing were being exposed....

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The appointments to key economic positions in the Jinping-Keqiang administration in 2013 reflect continuity and importance given to experience. Zhou Xiaochuan continues as head of the central bank PBOC, to keep an experienced person in the the event of a financial crisis. Lou Jiwei, chairman of the sovereign wealth fund, is now the new finance minister. Xu Shaoshi, minister of land and resources, is the new head of the National Development and Reform Commission, the economic planning agency. Xiao Gang, chairman of the Bank of China, one of four state owned banks, will be the new head of the securities regulator, China Securities Regulatory Commission. Zhang Gaoli, a member of the Political Standing Committee of the Communist party, and Wang Yang, party chief of southern Guangdong province, also join the economic team. Li Keqiang, the new prime minister emphasized the agenda for the next decade telling a press conference: "Talking the talk is not as good as walking the walk. We need to pursue market oriented reforms." This means giving the private sector and consumers a signficant role in the Chinese economy....

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Keith Bradsher visits Guangzhou, China, just as prime minister Wen Jiabao tells the National People's Congress that China is changing its priorities from high growth to sustainable development. As recently as 2007 GDP growth reached 14%! The minimum wage is expected to rise 13% each year under the five year plan. Even with the increase in wages owning an apartment is unaffordable in Guangzhou- a 1000 square feet apartment costs upward of $300,000, showing the extent to which the bubble in real estate prices affects young people who cannot afford to own an apartment. A new graduate with marketable skills such as computer engineering makes about $6000 a year, putting owning an apartmet beyond reach. Another change he notices today is that during visits to construction sites he does not see flood lit sites at night. This used to be the case because builders were scrambling to build. With government policies discouraging the property bubble there is no longer a need for work at night. The focus now has shifted to build low income housing....

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Transcripts from U.S. Federal Reserve meetings in 2006 that show Bernanke, as Fed chairman, and Geithner, as head of the New York Fed, ignored the risks of a collapsing bubble in housing and mortgages.

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Talks on June 28-29 in Rome between President Francois Hollande of France and Chancellor Angela Merkel of Germany. They will be joined by the Italian and Spanish prime ministers, Mario Monti and Mariano Rajoy. Hollande has invited the opposition Social Democrats in Germany for talks in Paris to win support for his approach to the eurozone crisis. The growth initiative proposed by Hollande is fairly modest and Merkel has expressed her support for this. The tougher issues revolve around some acceptable form of mutualizing of eurozone debt to tackle a loss of confidence in financial markets without a surrender of sovereignty by France and other eurozone nations- a particularly sensitive issue in France. More Europe, would mean more German influence in decisionmaking. Germany rejects eurobonds and direct aid to banks from the ECB. Centralized banking supervision and close regulation by a new European regulatory authority would be needed as part of a new eurozone financial architecture. The immediate issues are of some form of deposit insurance for the eurozone banking system so that there is no run on the banks in Spain and other countries....

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Shiller says policy is captured and communicated by metaphors, the most effective being belt tightening for a family. However what works for a family does not work for a country in the same way, especially if not accompanied by other measures and implemented in a strict manner without looking at the real situation. Better suggests Shiller, and more real is the metaphor of "winter on the family farm," where people work to do other chores than planting and harvesting, because a lot of other things need to be done and this is a good time to do it. This would include cleaning up the place, fixing the farm and the barn, fixing machinery, building fences. The farm's members pay a tax in terms of donated labor which goes to do all the work needed and helps the farm's productiveness as the weather changes. Similiarly the Salant-Paul Samuelson balanced budget theorem from the FDR days shows an increase in national output by the amount of a tax, such as the one proposed in France by president Hollande; that would then be invested in hiring more teachers (the labor) and investing in education infrastructure....

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Migrant workers in China are not allowed to bring their children with them when they move to work in factories located in urban areas. This is the large price being paid for the rapid industrialization in China for 2 decades 1990-2010 by the 61 million children of migrant workers. Lixin Fan's documentary "Last Train Home" documents the life of children of migrant workers separated from their parents for long periods of time. Analysis from the All China Women's Federation shows 75% of the 61 million children left behind by migrant workers have parental visits once a year mostly during the national Spring holiday. 82% of these children want their parents to come back home and 42% say they have no one to talk to when they feel bad. A large proportion of the children are missing parental attention at the most sensitive age when they most need it- 38% left behind are ages 1-5, 32% ages 6-11.

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Compared to the situation in 2008-2009 during the global financial crisis with the excess supply of labor, China in 2012 faces an excess in demand for labor. In 2009 about 20% of migrant workers were unemployed when the crisis hit, and wages dropped 10% for migrant workers, according to the Chinese Academy of Sciences and Stanford University. The situation three years later is one of tight labor markets and higer wages. A large stimulus in not only not needed today in the way it was in 2008-2009 as a way to maintain social stability, it would reduce the benefits of the anti-inflationary steps taken in 2011-2012, by putting more pressure on wages and prices. Manufacturing sector wages increased by 20.1% in 2011, according to China's statistics bureau. This may be why the Chinese government is taking measured steps to avoid creating more bad loans through indiscriminate lending, and being more selective in accelerating development projects in the pipeline. According to Hong Kong's new Chief Executive Officer China plans to have about 7% growth. This shift in approach would help China refocus on growth strategies recommended in the recent Development Reform Commission and World Bank Report on China....

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Efforts to boost the share of national income that goes to rural households and workers in China. The share of income taken by state owned enteprises and taxes paid by the enterprises would have to change for reducing the gap in incomes and reducing inequality in China.

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Li Keqiang, China's new premier, entered Peking University in 1978 by excelling in merit exams. Li and a fellow student, Yang Baikui, translated the English book "The Due Process of Law" by British jurist Lord Denning. Professor Gong Xiangrui, brought the book to China and educated his students in the ideas of constitutional law and western liberalism. Yang says Li learned English on his own and meticulously carried a stack of notecards with English on one side and Chinese translation on the other. Li would study the cards while waiting for a bus or in the line at the school cafeteria. Li has political discusions with students from that time, some of whom joined the pro-democracy demonstrations of 1989. He is the son of a mid level county official from Anhui province and moved in the party ranks through diligent effort. Li's doctoral thesis is in economcs and he is expected to focus on economic changes, with Xi Jinping, the new president, taking the lead in making changes to the political system. Fellow students from Li's days at Peking University say the difference between them and Li is the pace of democratization, with Li looking at it as a longer process. Recent articles by Li Keqiang on economic change show his emphasis on urbanization as a way to improve agricultural conditions with a smaller number of farmers improving producitvity in agriculture, and the importance of creating a better social safety net for people in China....

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Krugman reflects on the discontent in Europe reflected in anti-EU opinion at the time of the elections to the European parliament in 2014.

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Transcripts released for the U.S. Federal Reserve's Federal Open Market Committee (FOMC) 2006 meetings show Fed chairman Bernanke and then New York Fed president Geithner ignored the risks of a hard landing from the mortgage and housing bubble. Geithner even went so far as to say about retiring chairman Greenspan, who also ignored the risks from the bubble and set the tone during his long period as chairman at the Fed: "I'd like the record to show that I think you're pretty terrific, too...And thinking about the probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative." In evaluating the risks facing the U.S. economy in December 2006, at the height of the bubble, Geithner stated: "The current weakness in the economy still seems principally to stem from the direct effects of the slowdown in housing on construction activity... The softer than expected recent numbers don't argue in our view, for a substantial reassessment of the risks in the outlook." The Fed chairman, Ben Bernanke, said at the first meeting in March 2006: " Strong fundamentals support a relatively soft landing in housing... I think we are unlikely to see growth being derailed by the housing market." When a Fed economist gave a presentation in March 2006 on the risks in Iceland, Bernanke said- "We'd like a full report on the Icelandic," at which point the rest of the group erupted with laughter. Iceland defaulted on its debts in 2008. Warnings about housing by Fed Governor Susan Bies were ignored by Bernanke and Geithner. Two highly leveraged Wall Street investment banks collapsed in 2008- Bear Stearns in March and Lehman in September- from the impact of the bursting of the bubble in housing and mortgages. When they collapsed these banks were leveraged at about 30 to 1, as most of the warning signs had been ignored by regulators including the Federal Reserve....

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This New York Times editorial says a smaller Wall Street and growing jobs in other fields will be good for New York as well as good for the country. It says New York politicians should focus on finding new ways for New York to broaden its tax base and get new businesses and new opportunites in fields such as media, advertising, entertainment, health care and tourism. Especially welcome are initiatives such as the science and tech campus of Cornell University promoted by Mayor Bloomberg. Tighter financial rules and higher capital requirements are good for the country and for New York the editorial emphasizes, because they help control reckless banking practices that destroy capital and opportunities for growth elsewhere in the economy. It points to Kevin Rose's Nov. 21, 2011 account in the Times showing a healthy culture shift in New York and the country with the status jobs being seen not at Goldman Sachs but at Google, Apple and Facebook. Rose's account shows that in the last 3 years the number of Wall Street employees of ages 20-34 declined by 25%....

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A new report, "China: 2030," by the World Bank and the Development Research Center (DRC), has major implications for the course of action taken by new Chinese leaders. The limits to China's economic model with the dominant role of state owned companies has been pointed out in the past. It has now reached a point where China must choose to move to a modified model or face the "middle income trap" of countries like Brazil and Mexico, where income levels and growth reaches a certain level and then decelerates suddenly with little warning. The report makes some major recommendations that would modify the current system. It says the state owned companies should be supervised by asset management firms focussed on commercializing these companies, and not supervised by the State-owned Assets Supervision and Administration Commission (SASAC). The asset management firms would restrict the state owned companies on what areas they participate and sell off businesses to make it possible for private companies to compete. Zoellick says- "China needs to restrict the role of the state-owned companies, break up monopolies, diversify ownership and lower entry barriers to private firms." The state owned companies would be required to pay sharply higher dividends to the government which could then be used for social programs. Currently state owned companies invest in land which is sold by local governments for revenue helping fuel the real estate bubble. Significantly, the report had its origins when it was proposed by Mr. Zoellick, head of the World Bank, during a visit to Beijing in Sept 2010. It was supported by Li Keqiang, then vice premier, and now expected to be the new prime minister of China. The World Bank is widely respected by Chinese leaders because of its assistance during the early stages of reform in the 1980's. The DRC reports to China's State Council, a top governmental institution, and the No. 2 person at DRC, Liu He, is a senior advisor to the Politburo Standing Committee. He helped draft the current five year plan and is close to Li and Xi Jinping, the next president of China. The SASAC has opposed these ideas, especially any shift in its personnel selection of management at the state owned companies, which it shares with the Communist party's personnel department. Respected China economists say China faces large risks of a sudden sharp slowdown because the the state owned companies have largely copied foreign technology and have not generated enough technological advances, which will be needed for the next stage of growth. Lower growth rates could worsen problems in China's banking system leading to a crisis. The Conference Board, estimates China's growth at 8% for 2012, slowing to an average annual growth rate of 6.6% from 2013 to 2016. Barry Eichengreen of UC Berkeley, Donghyun Park of the Asian Development Bank, and Kwanho Shin of Korea University, say the annual growth rate will drop by at least 2 percentage points by 2015....

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Spain's central bank was lauded for macroprudential supervision before the housing bubble burst. Will China's central bank and financial authorites which have managed the housing bubble upto this point face similiar problems? Can China be the sole exception even as housing bubbles burst with wide repercussions in the U.S., UK and Spain? Nicholas Lardy, of the Peterson Institute of international Economics, says urban housing stock makes up 41% of Chinese household wealth in 2011. The same figure for the U.S. is 26%. Chinese buyers invest in homes because low interest rates on savings accounts cannot keep up with inflation. Real estate investment was 13% of GDP in 2011. Home ownership is a recent development in China, only since 1990, Chinese have never experienced large price declines. Household debt as a percentage of disposable income has increased significantly in recent years, up to 53.6% in 2011 from 31.3% in 2008, according to Lardy.

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"China's Superbank," by Henry Sanderson and Michael Forsythe looks at the rise of China Development Bank to provide insights into the two decade real estate boom in China, and the trillions of dollars in loans made by state owned banks to finance China's state owned industries and infrastructure development. The authors say these loans based on land owned by the state, improved with roads and other infrastructure and then sold to industry, have helped finance China's urbanization and industrial development. But it has also created problems including eviction of farmers from the land by local government authorites increasing inequality, led to misallocation of capital on bad projects, and an unsustainable model of development focussed on state owned companies. A major side effect of this is not covered in the book. This is the impact of crowding out of credit for private industry in China, with privately owned business having to pay higher rates in the underground loan market or lacking financing. A major focus of the report "China: 2030" by the World Bank and China's official think tank Development Research Center is on reversing this development to come up with a sustainable development model. The report was supported by World Bank chief Zoellick and China's new prime minister Li Keqiang. "The Great Rebalancing," by Pettis, a finance professor at Beijing University, looks at the other side of the financing of China's boom- the low interest rates on savings for China's consumer. This reduces household incomes and reduces purchasing power as the interest rates are lower than the rate of inflation. Lower value of China's currency also reduces the purchasing power for China's consumers. Estimates show the low interest rates cost China's workers and consumers somewhere in the range of 3 to 8% of GDP annually in bank deposit income. This money is funnelled through the banking system to make more loans for infrastructure and growth at the state owned companies, concentrating exraordinary level of financing in one direction. As a result the consumption share of GDP in China has actually fallen in the two decades of hyper development. This is about 34% compared to 50-55% for other Asian economies....

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Eurozone finance ministers meeting in Brussels give Spain one more year to meet deficit targets because of a slumping economy and lower tax receipts after raising taxes. Spain now has till 2014 instead of 2013 to meet the EU's 3% deficit target. Spain can now run a deficit of 6.3% in 2012, down from 8.9% in 2011, without risking EU penalties. The 2013 deficit target is 4.5% of GDP and the 2014 target is 2.8%. Spain can also have $30 billion by the end of July in the event that a Spanish bank needs to be recapitalized quickly.

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Raghuram Rajan, Professor of Finance at the Graduate School of Business, University of Chicago, was appointed chief economist at the IMF in 2003. He presented a paper, titled "Has Financial Development Made the World Riskier," at the annual Jackson Hole meeting of economists and central bankers for 2005. Rajan says he had planned to write about how financial developments during Greenspan's 18 year old tenure had made things safer, but the more he looked the more evidence came up that the risk reward relationships in a normal functioning financial market had been terribly distorted. Market participants were being rewarded for wins but were not being asked to take on commensurate risks and impacts on their bonuses and rewards. He also cautioned about the use of credit default swaps which acted as insurance against bond defaults, and said insurers were generating big returns on this but with the appearance of little risk- even though the pain could be immense in a default. Banks were carrying credit securties on their books that posed risks to the whole financial system if things went wrong with the credit securities. Reaction from the gathering was unfavorable. Lawrence Summers, a former Treasury Secretary said, "the basic, slightly lead eyed premise of the paper was misguided."...