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U.S. Federal Reserve vice chairman, Janet Yellen and Laurence Meyer, a former Fed governor call for consideration of downside risks emerging from the eurozone crisis and from the approaching fiscal cliff of government spending cuts, as the Fed debates policies in July 2012.

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Reilly raises the question why asset allocation decisions of the type made by JP Morgan Chase since 2008, does not make it similiar to a mutual fund or a hedge fund, and why this should itself not be considered a form of proprietary trading. JP Morgan Chase had $600 million of corporate debt in its overall debt portfolio or 1% in 4th quarter 2006. By end of 2008 this increased to 5% or $10 billion. By end of 2009, this went up to 17% of the portfolio or $62 billion, and they are at that level today. The holdings of non-U.S. residential mortgage securities was also increased, going up to 20% of holdings or $75 billion at end of 1st quarter 2012, from $2 billion or 1% of the portfolio in 2008. Corporate debt holdings at Bank of America at the end of the 1st quarter of 2012 were about 1% or $2.4 billion, and at Citigroup were about 4.5% or $12 billion. The Chief Investment Office unit of JP Morgan handles this portfolio, which is the result of deposits of $1.12 trillion exceeding loans of $700 billion. The low interest rate environment after 2008 creates incentives for banks to look for ways to improve crimped margins and in the process adding risk....

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The effects on Greece of a pullback in global financial markets in October 2014. Assurances that the Greek financial system and banking will be supported by the government and the EU. The pullback complicates the Samaras government's plan to exit the bailout program with the IMF early. There is also the prospect of new elections in early 2014 leading to a left of centre Syriza party government. Syriza's Tsipras says he would renegotiate the terms of the debt agreement to reduce debt owed to Germany and other countries in the EU.

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Norris provides an insightful account into the research and thinking of Janet Yellen, the new chairwoman of the U.S. Federal Reserve. In her research work Fed chairwoman Yellen has placed importance on the long term unemployment rate and the difficulties workers unemployed for long period have in finding work. This is likely to determine Fed policy on interest rates as the unemployment rate inches closer to the Fed target of 6.5% set by Bernanke in Dec. 2012. Norris points out the emphasis Yelen has placed on this in speeches since being nominated to succeed Ben Bernanke at the Fed. In a recent speech Yellen emphasized that in the recession of the early 1980's median time unemployed people said they were unemployed was 12 weeks, which jumped to 25 weeks for about 6 months in 2010 and is at 17 weeks in the most recent jobs report. Another indicator Yellen has emphasized is labor's share of income in the nonfinancial corporate sector which remained between 66% and 61% from 1950 to early 2000's. This fell below 60% in 2005 and is at 57.1% barely budging from the 2011 figure. In papers written with George Ackerloff, Yellen has advanced the "fair-wage hypothesis," that workers do not do as good a job when wages are held down. Their research also shows its normal for workers in periods of recession to hold out against the lower salaries offered during recession periods, because these workers tend to fall behind newer workers hired with better wages later when the economy recovers. At the confirmation hearing Yellen made it clear that the Fed would do all it can to help the long term unemployed by creating a stronger job market, a job market where these workers would be drawn into work and employers provide job training as well as opportunities for advancement....

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Martin Feldstein points out why the recent agreement for a "fiscal compact" is no more than an empty statement about fixing the eurozone's finances. In this respect it is no different than the Stability and Growth Pact it replaces, with serious weaknesses. Feldstein cites the weaknesses in the language of the agreement. Each eurozone country is required to limit its"cyclically adjusted" budget deficit to 0.5% of GDP and bring its debt down to 60% of GDP. Compliance will be performed by the European Court of Justice and fines imposed. In practice the questions loom large- for a country like Spain with a 23% unemployment rate, isn't all of the 6% budget deficit cyclical? Again the agreement says deficits are calculated "net of one-off and temporary measures." Under this provision a lot of the stimulus programs would be considered in the category of "one-off." Other language lets eurozone countries frame budgets based on "exceptional circumstances" and "periods of severe economic downturn." Italy has declining economic growth, does it make sense to have a large budget surplus in that situation to lower debt to GDP, and how does that goal relate to "exceptional circumstances."...

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New rules by the Government Accounting Standards Board (GASB) and Moody's would show U.S. public pension funds as about 57% funded instead of 75% funded under earlier rules. This will open up an even wider gap in how much they have in the funds and their promises to retirees to about an estimated $2.2 trillion. This puts pressure on state and local governments to either reduce benefits for new hires, have workers increase contributions, or set aside more money from the budget. Local governments face the risk of credit downgrades and higher borrowing costs if no action is taken and finances are worsening. An example is Illinois retired teachers who earn annual pensions of about $46,000 on average, and do not participate in Social Security under state opt-out. Even under old accounting rules this pension fund had $37 billion of assets and $81 in future liabilities. Under the new rules the unfunded liabilities could jump to 83% by one estimate, from over 50%.

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Spain delays setting up a financing mechanism for aiding regions short of funds by extending existing credits till Spain's high bond yields of 7% decline.

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The Bank of Cyprus and the Cyprus Popular Bank (Laiki Bank), passed stress tests given by the EU in 2010 and 2011. By the end of 2010- even as other banks such as Barclays were cutting their Greece government bonds by over 50%- the two banks held 5.8 billion euros of Greece bonds, over $1 billion euros larger exposure to Greece than nine months earlier, according to European regulators. Regulatory supervision failed to alert the banks and the banks risk management failed to see the warning signs in Greece. The Laiki Bank Risk Officer went in the opposite direction actually increasing exposure to Greece, saying in a conference call in August 2010, that he had used the bank's capital position "to deepen selectively some highly profitable client relationships." What went wrong with the stress tests by the EU regulators in July 2010 of these two banks, was that the tests looked at what would happen if economic conditions deteriorated, but did not consider the possibility that government bonds could produce losses. The two banks suffered total booked losses of 4.3 billion euros in 2013 from holdings of Greece bonds. The EU stress tests of July 2010 showed the two banks having total of 572 million in surplus capital. The two banks then went on to issue dividends in 2010-2011 totalling 141 million euros. By March 2013 the Laiki Bank was "on respirator" for a few months, according to the Central Bank of Cyprus, until the 10 billion euro EU bailout in March 2013 with the closing of Laiki Bank and the sharp downsizing of Bank of Cyprus....

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JP Morgan Chase CEO Jamie Dimon's confidence in Ina Drew was based on her hands on abilities, especially demonstrated during the 2008 financial crisis. Current and former bankers in this account by the Times Silver-Greenberg and Schwartz, say things changed in the years that followed. In 2010 Ina Drew was ill with Lyme's disease. The conflicts between the risk taking propensities of traders at the London trading desk under Mr. Macris, and the more risk conscious New York trading desk under Ms. Duersten, had already led to shouting matches under Ina Drew. After her illness and her absence from the office for long periods this spilled out into the open. In early 2011 Ms. Duersten left Chase after 16 years. Her replacement who would be new to Chase could not restrain the risk taking propensities of Mr. Macris and the London trading desk, the way Duersten and Ina Drew had done earlier. Macris and a trader reporting to him, Mr Iksil (referred to as the "London Whale" for his massive trading positions and bets), were free to operate without any restraint in this environment. Ina Drew returned in 2011, but she was not the same hands on person after the illness. She moved to the corporate offices on the 48th floor, instead of being on the floor above the New York trading desk. In 2008 she had held daily meetings with traders required to defend their trading positions. This did not happen in 2011. Jamie Dimon learned about the London Whale in the Wall Street Journal, April 6, 2012. Dimon's efforts in pushing back against stricter regulation, stress tests, and other issues were to lead to the CEO of the 2008 crisis becoming a much more distracted person in 2011. He was taken unawares by the breakdown in the relationship between the London and New York offices of the Chief Investment Office, the changed situation of Ms. Drew, and that risk management controls at the bank were not in place. Risk management overly depended on one person and the trust of the CEO in that person, and was not institutionalized. At the same time it should be noted that Jamie Dimon became CEO of Chase after the acquisition of Bank One in 2005, and Ina Drew was hired in that year, only three years before the crisis of 2008. The merger of other banks into JP Morgan Chase created a bank with $360 billion investment portfolio- even Ina Drew had never previously handled a portfolio of this size and the complex risks brought in with the Washington Mutual portfolio....

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Economist Lawrence Lindsey says the Fed has boxed itself and has little choice but to keep interest rates low. Borrowing at the more normal interest rates of 5.7%- which is what it was over the last three decades- and not at the current 2.5%, would mean an increase in borrowing costs for the U.S. government of $800 billion in 2021, says Lindsay. Lindsay bases this on the U.S. debt growing from $14 trillion in 2011 to $25 trillion by 2021, and interest rates going back to normal levels by 2021. Just to put this in perspective Lindsay says it would require all the cuts Republicans and Rep. Ryan are asking for just to pay for the added interest, not even about reducing the size of the U.S. debt. This would be a disaster for the U.S. Treasury, so we're stuck with really low rates. The term used by economists is "financial repression." Savers and retirees will have to put up with low returns. Lowering unemployment is only one aspect of U.S. Fed policy, the other aspect is in the constraints Bernake faces....

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Hilsenrath gives an account of how U.S. Federal Reserve chairman Bernanke convinced his fellow governors to support QE III and achieved a rare consensus.

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Britian's Chancellor of the Exchequer, George Osborne, on the economic recovery in Britain. He points to total public spending under control, with it dropping from 45% when the Tories entered government to 36.4% in 2015. He also points to the drop in the unemployment rate and the economic plan to cut the remaining budget deficit and show a surplus. This puts Britain in the best position to spend more on defense, says Osborne. Osborne makes a commitment to spend 2% of national income on defense, and raise Britain's defensive and offensive capabilities. This includes buying 138 F35 aircraft from the U.S. manufactured in the U.S. and Britain, and a fleet of maritime patrol aircraft, increasing cybercapabilities by over 75%. It would be backed up by spending 0.7% of national income on overseas development to back hard power with soft power.

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The implications of the U.S. Federal Reserve's loose monetary policy. Total U.S. debt in 2012 is expected to be $11.58 trillion, with 52% of this in maturities of less than 3 years. The average interest on this is about 2.24% in January 2012, with interest on the debt at about 225 billion in Jan. 2012. If interest rates were to go up in 2014-2017 as forecast by the CBO, an interest rate of 5-6% would result in doubling or tripling the amount of interest on U.S. debt. The U.S. Treasury is financing the huge increase in debt- $5 trillion added in the last four years- through low interest rates and shorter maturities. This stores up large financial risks for the future including calls for tax increases to pay for a sudden rise in the interest on U.S. debt.

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Applebaum provides an indepth look at the experiences and events that shaped the thinking of Janet Yellen, new chairwoman of the U.S. Federal Reserve in 2014. He describes the influence of Professor James Tobin of Yale on Yellen's thinking on how the government can influence the level of unemployment. A must-read for insights into the new Fed under Yellen.

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Macroprudential policies of central banks in S. Korea, Indonesia, China, Canada, and other countries, as concerns grow about a housing and credit bubble.

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The WSJ's Laurence Norman talks to Yukiya Amano, head of the UN agency, the International Atomic Energy Agency (IAEA), which has the responsibility of verification and inspection of Iran's nuclear development and facilities. Amano describes the issues raised by a 2011 report which outlined 12 sets of concerns to which Iran has to explain, a condition included in the final nuclear agreement. Iran has to respond by mid-August, IAEA then responds, and does work in Sept and Oct, and submits its report by Dec. 2015. Yamano says he has to fill in all the missing pieces in this jigsaw puzzle to get a full picture of Iran's nuclear development. Iran has denied access to military sites and Mr. Amano couldn't say if he has access to the Parchin military site. A concession that was made in the agreement is the long interval of three weeks before access to a particular site that arouses suspicions-the agreement gives Iran the right to appeal an IAEA request to visit such a site to a special commission. The U.S. and its European allies have a majority on the commission yet three weeks are allowed in which Iran could move material to some other location. For critics the question will be why such a concession was needed if Iran truly has decided not to develop nuclear weapons technologies. The U.S. president's response at a news conference on July 15, 2015, was that with the laws of physics the U.S. monitoring tools would detect nuclear activity at that site. The agreement also gives Iran an earlier than planned lifting of a ban on sales of arms and missiles and missile parts if the IAEA says Iran's nuclear activities are peaceful. Iran could conceivably wait till the ban is lifted and its economy in a much stronger position to withstand any future limited sanctions to pursue nuclear weapons development. This would have delayed development for a few years during which time the hope is that Iran has changed into a more peaceful nation pursuing economic development in its region, yet even if this is the case as as happened with India and Pakistan it could still pursue nuclear weapons development. The alternative is a status quo till a better agreement is reached with the leverage of tight economic sanctions and continuing dialogue during which time Iran continues to get closer to a nuclear weapon, or the use of force to prevent this. Iran added the arms embargo issue during the last weeks of the negotiation in June, a controversial move on Iran's part, as this may have complicated the picture with ballistic missiles technology exports to Iran approved after 8 years in the final agreement, compared to the agreement reached in April 2015 which made no mention of the lifting of the arms embargo. Iran played on the notion that if Zarif returned to Iran without an agreement hardliners including Khamanei would veto any agreement, yet this could just be the Iranian negotiating strategy. U.S. president Obama stated at the July 15, 2015 news conference that it would be hard to hold sanctions for longer. Critics might argue that China was already benefitting from the small easing of sanctions by increasing Iranian oil imports by 30% in 2014, and would have less incentive to withdraw from sanctions, as it is dependent on the U.S. and the EU, major markets for its exports and access to technologies. A WSJ/NBC poll in July shows almost half of the people polled in the U.S. saying they do not know enough to express an opinion, a steady 36% support an agreement, showing that the public has not been educated and taken along during the different steps in the largely secret negotiations....

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The ratification of the European Union's Fiscal Treaty of Dec. 2011 will require a two thirds majority in both houses of parliament. The coalition government of Angela Merkel lacks such a majority. This means the support of the Social Democrats and the Greens party will be needed to pass the treaty in Germany. The Social Democrats parliamentary leader Frank-Walter Steinmeier, says he cannot "picture an approval of the pact without growth-boosting measures." The Merkel position of strict austerity policies in tackling the eurozone debt crisis has come under intense criticism for lack of growth boosting measures. Recent economic performance clearly in Greece and Portugal, and to some extent in Ireland, Spain and Italy, shows the decline in GDP with austerity cuts alone will worsen the deficits or lead to a prolonged period of economic stagnation.