Raphael Stevens

On February 23rd, a week after David Malpass announced his resignation as president of the World Bank, and mere hours after the bank said the search for a successor would be months-long, “open, merit-based and transparent”, everyone knew who would win. Ajay Banga, a former boss of Mastercard, was nominated by the White House, making him the lender’s leader-in-waiting. A naturalised American who was, in his words, “made in India”, and a private-sector businessman, Mr Banga represents a break from tradition.Emerging economies did not, however, take his nomination as a victory. The White House has chosen every World Bank president since it struck a gentlemen’s agreement with Europe, which gets to pick the imf’s boss, in 1944. America also holds an outsized share of votes at the bank. This made sense after the second world war. Now countries from China to Panama want their growing presence in the world economy reflected in its institutions. Mr Banga’s first task will be to tackle infighting. The same tensions are spilling into disputes about the bank’s role. America and Europe want it to lend more, with looser constraints, to alleviate the burden of rising interest rates, climate change and reduced Chinese lending to poor countries. But some emerging economies are pushing back, saying such a move would risk the organisation’s ultra-safe aaa credit rating. Without extra capital, the bank has gaping holes in its coverage. Its officials have been quiet on Ukraine’s reconstruction, and struggled to pump as much as regional outfits into green infrastructure.Another fight is about debt relief, which China has brought to a standstill by insisting the World Bank takes write-downs on its loans. Mr Malpass has so far stood his ground, countering that this would impair the bank’s ability to lend. A more antagonistic China lowers the chances that American policymakers will consent to giving Beijing more votes any time soon.Some doubt Mr Banga (who is on the board of Exor, which owns a stake in The Economist‘s parent company) is capable of the bureaucratic manoeuvres needed to break the deadlock. He will be the first appointee with no full-time experience in development or government since James Wolfensohn, a banker and lawyer, in 1995. But Mr Banga’s career could be an asset. After more than a decade on Wall Street, he oversaw the rise of Mastercard from a credit-card firm worth $20bn in 2009 to a payment platform worth $300bn. He is well placed to guide work on digital payments, a priority at the bank. And he has a reputation for transforming unwieldy organisations into slicker outfits.Mr Banga may also help the bank at long last embrace a green agenda. In September Mr Malpass dodged a question about fossil fuels and global warming, saying he was “not a scientist”. In January Western countries rejected the bank’s climate plan for being insufficiently ambitious. By contrast, at Mastercard Mr Banga wrote super-green blogs. The hope is that he will use his Wall Street know-how to get firms to funnel cash to green tech and infrastructure. America’s ideal World Bank is a well-oiled machine with a sustainable bent, much like the Mastercard that Mr Banga left behind. Before he repeats the trick, the new president will have to first stop routine infighting by getting emerging economies on side. To do that, he will have to make them forget the less-than-equitable circumstances of his selection. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

IN 1912 America’s Supreme Court ruled that a coalition of 14 railroad proprietors had used their joint ownership of a bridge across the Mississippi river, near the St Louis terminal, to unlawfully stifle competition. The crossing gave the railroad trust a chokehold over traffic to and from the city’s main terminal. St Louis was an important railway hub. In the court’s opinion, the monopoly power over the railway bridge was therefore a means to foreclose the business of rival rail operators across America.More than a century later, American trustbusters are preparing for battle with another giant in a network industry. In January the Department of Justice (doj) set out a 155-page complaint against Google for monopolising digital advertising on exchanges. It alleges that Google used strong-arm tactics to lock up the ad-tech business. The case is billed as the biggest antitrust challenge to tech since the doj’s epic battle with Microsoft in the late 1990s. Central to the case is the acquisition by Google in 2008 of DoubleClick, which had developed a lead in the marketing of digital-advertising space. It has become almost an article of faith among regulators that the Federal Trade Commission (ftc) should have blocked the merger. As if to compensate for this laxity, trustbusters have recently sought to block many tech mergers, including Microsoft’s purchase of Activision Blizzard, a video-game maker. The doj is seeking to break up Google’s ad-tech business—in effect, undoing the DoubleClick merger. It is far from clear, however, that allowing this merger was actually a mistake. To understand why, start with a stylised view of Google’s ad-tech “stack”. The middle layer is Google’s Ad Exchange, which matches buyers and sellers of advertising space (or “inventory”). On one side of the market are website publishers who want to sell ad space. They submit sales requests via a digital tool. The antecedent of Google’s sell-side software is DoubleClick for Publishers, acquired in the merger. On the other side of the exchange are ad buyers, who have two routes to the market. Agencies and large ad buyers use demand-side platforms to bid for inventory. Smaller advertisers go directly to Ad Exchange. Google’s share of traffic varies between 40% and over 90%, depending on the stage of the journey. Bids and offers are matched by complex algorithms in the instant between a click on a website and a display ad appearing. In a case such as this, the best initial question is a straightforward one: where is the choke point? Microsoft was accused of tying Windows, the dominant operating system for desktop computers, to Internet Explorer in a manner that sought to exclude Netscape and others from the market for web browsers. Windows was the choke point, just as the bridge to St Louis was in the railroad case. The charge against Google is more complex, or at least the story is one that is harder to tell. The locus of monopoly, in the doj’s telling, seems to shift. First it lies with Google’s power on the demand side of digital advertising, through its adjacent strength in search ads. At other times, it is the company’s hold on the supply side, bolstered when it bought DoubleClick. At still other times, the locus of market power is the exchange. This shape-shifting may simply be how foreclosure works in digital markets. The doj’s trustbusters are certainly eager to present Google’s end-to-end presence in the ad-tech stack as inherently sinister. But is it? The profitability of the ad-tech stack might reflect the fact it is more efficient under a single roof. The integration of publisher ad server, exchange and demand-side platforms is likely to make for a smoother flow of data, better matches between buyers and sellers and a more streamlined experience. And there are “network externalities” to consider. Ad tech brings together distinct groups (advertisers, publishers and consumers). Each sort of customer benefits the more custom there is from the other sorts: advertisers want access to a broad range of inventory; publishers want lots of bidders for their display space; and so on. In similar kinds of networks, it is common for one enterprise to cater to all sides of the exchange. Think of payment systems, which have a business relationship with credit-card users as well as merchants. Implicit in the doj case is the idea that the only route to a large part of the consumer market goes through Google. Trustbusters like to define markets narrowly. The smaller the market, the larger the leading firms loom in it. For their part, businesses like to claim that good substitutes for their products are everywhere: Netflix’s boss once claimed the firm’s main competitor was “sleep”. It seems fair to say that “open-web display advertising sold via exchanges” is a distinct industry, because it has its own unique production technology. It is less obvious that it is a market which is truly separate from digital advertising or plain old advertising.Back to the futureNor is it obvious the ftc was lax in permitting the DoubleClick purchase. After all, the European Commission—no friend to American tech—allowed it after an in-depth investigation. Perhaps, however, there was a better option available, says William Kovacic, an ftc commissioner at the time of the merger and now a law professor at George Washington University. Instead of suing in court to block the merger and (probably) losing, the agency could have pursued an internal-administrative trial. This would have afforded officials More

In a land where labour is cheap, the man who drives the most luxury cars is not a billionaire. He is a parking attendant. On a meagre salary, he must park, double-park and triple-park cars in tight spaces, and then extricate them. In India, where car sales have increased by 16% since the start of the covid-19 pandemic—a trend partly driven by the growing popularity of hefty sports-utility vehicles—this tricky job is becoming even more difficult.To many, India’s automobile boom symbolises the country’s superfast economic rise. On February 28th new figures revealed that India’s gdp grew by 4.4% year on year in the last quarter of 2022, down from 6.3% in the previous quarter. Despite the slowdown, the imf expects India to be the fastest-growing major economy in 2023, and to account for 15% of global growth. The governing Bharatiya Janata Party (bjp) believes the country is in the midst of Amrit Kaal, an auspicious period that will bring prosperity to all Indians.Not everyone is convinced by the bjp’s More

On February 24th America marked the anniversary of Vladimir Putin’s invasion of Ukraine by freezing the assets of a dozen more Russian banks. Britain and the EU also lengthened their blacklists. Part of the reason for tightening sanctions again is to close loopholes in the existing regime: America is going after “evasion-related targets”; Europe vows to punish those “betraying” Ukrainians. As joint research by The Economist and SourceMaterial, an investigative outfit, suggests, Russia’s sanctions-dodging is only getting more advanced—especially when it comes to flogging the oil that funds Mr Putin’s war. A month ago Europe imposed an import ban on refined Russian oil, having already banned purchases of the country’s crude. To keep global supply flowing while limiting Mr Putin’s revenues, the EU allows its shippers, insurers and banks to continue facilitating Russian exports to other countries so long as the oil is sold below a price set by the g7 group of big economies. But Russia’s petroleum has not become as much of a bargain as hoped. Most countries outside the West have not introduced their own sanctions, allowing the rise of an army of shady middlemen beyond the reach of Western measures. Our investigation sheds light on a missing piece of the puzzle: how their trade is financed.Take Bellatrix, a once-unknown trader which shipping data suggest now controls seven tankers capable of carrying 3m barrels. The firm did not respond to our questions, but a tax-return filing in Hong Kong, where it is domiciled, shows its ownership was transferred to Bilal Aliyev, an Azeri citizen, six weeks into the war. Data suggest it has been involved in at least 22 trades of Russian oil products since January 1st. On all but three occasions it bought barrels from Rosneft, Russia’s state-owned oil giant. Where did it find the money?A paper trail provides clues. A filing in Hong Kong shows that the Russian Agricultural Bank, a state-owned lender, approved a loan facility of up to $350m to Bellatrix on December 30th, to be repaid by May 2025. This is despite Viktoria Abramchenko, Russia’s deputy prime minister, saying on December 22nd that sanctions should be removed from the bank to ease food supplies, adding that “we, for our part, guarantee that only food, only mineral fertilisers will be the goods that go through this bank”. Another filing, dated December 27th, shows Bellatrix signing up to a loan facility with the Russian Regional Development Bank, a Rosneft subsidiary. Until recently it seemed a good chunk of Russia’s oil exports were financed on open credit by the Russian government, with traders paying for the goods once they had collected the proceeds themselves. Our findings suggest the trade is becoming more institutionalised. Many obscure traders appear to be tapping Russian banks on behalf of buyers further down the chain. Bellatrix itself seems to have a close business relationship with Coral Energy, a trader based in Dubai and owned by another Azeri businessman. A filing dated December 28th states that Bellatrix has a prepayment and offtake agreement with the Nayara refinery in India (49% owned by Rosneft) that it has assigned to Coral. Can the West do much to stem the stream of grey finance? Some interpret America’s decision to blacklist MTS, a Russian bank, just days after Abu Dhabi granted it a licence, as a signal that it could soon apply more pressure. But Russian fuel remains in high demand. Imports by China’s independent refiners jumped by 180% last month. Heavy-fuel shipments to Fujairah, a port in the UAE, are breaking records thanks to surging Russian exports. Some of the Russian crude is even finding its way back to Europe once refined. Global Witness, an advocacy group, alleges that Western energy companies and traders, such as Shell and Vitol, are shipping some to the bloc, often from Turkey. The firms have rightly said that such trades are not illegal. Our investigation suggests that, earlier in the supply chain, the mechanics of the Russian oil trade are increasingly being greased by the Kremlin’s money. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Until recently, there were two iron laws in investing. One, popularised by Milton Friedman, a Nobel-prizewinning economist, posited that a company’s responsibility above all else was to provide returns to its shareholders. The second, promoted by Jack Bogle, founder of Vanguard, an investment firm, held that asset-management fees must be driven to the lowest level possible. The growing importance of environmental, social and governance (esg) criteria has weakened Friedman’s doctrine of shareholder primacy, perhaps fatally. Global esg funds manage $7.7trn in assets, having doubled in size in the past seven years. Even the Business Roundtable, a talking shop for American bosses, declared in 2019 that companies must place the interests of a variety of clients, customers and communities on equal footing with shareholders. But like all revolutions, this one has generated a reaction. The anti-esg backlash is flourishing. Vivek Ramaswamy, author of “Woke, Inc.” and co-founder of Strive Asset Management, announced his candidacy for the Republican presidential nomination on February 21st. The firm he left to pursue his political ambitions promotes exchange-traded funds (etfs) and proxy-voting services that push back against what it sees as the politicisation of corporate governance.Anti-esg legislation is also rippling through American state legislatures. In February Ron DeSantis, Florida’s governor, who is also expected to compete in the Republican primaries, proposed legislation to prohibit the use of esg criteria in all of the state’s investment decisions. Given the supervisory role many statehouses hold over public pension funds, many of which have hundreds of billions of dollars in assets, this sort of legislation could have big implications for the asset-management industry.There are plenty of problems with the esg movement. Working out if assets are esg-compliant is complex, and prone to bias, mismeasurement and public-relations peacocking. Proponents of feel-good investing want to have their cake and eat it, insisting that the focus on stakeholders is actually better for shareholders, too.But in defending Friedman’s law, the anti-esg crowd is struggling with the other part of the investing canon—the importance of low fees. At the moment, taking a position against esg is much more expensive than going with the crowd. This is particularly true when it comes to anti-esg laws, which are more preoccupied with bashing esg-promoting firms than with prioritising shareholder returns and cutting costs for taxpayers. A study by Daniel Garrett of the University of Pennsylvania and Ivan Ivanov of the Federal Reserve Bank of Chicago considers one anti-esg stance. It finds that Texas’s anti-esg laws, which had the unfortunate side-effect of thinning out the number of bond underwriters, raised issuers’ interest costs by $300m-500m in their first eight months. Meanwhile, Indiana’s anti-esg bill was watered down after the state’s fiscal watchdog suggested that it would cut annual returns to the state’s public pension funds by 1.2 percentage points, because it would prevent the use of many active managers and limit investment in the private-equity industry and thus private markets.Similarly, the cost of anti-esg etfs is considerable, and their benefits questionable. Strive’s most popular etf, drll, focuses on the American energy industry. But the fund charges fees of 0.4% a year on assets, compared with 0.1% for xle, the largest regular energy etf, created by State Street Global Advisors, another investment firm. This amounts to a big drain on a buyer’s compounded returns. Moreover, the top ten holdings in both funds are the same. Any success that Strive achieves in changing corporate governance and raising returns will be enjoyed by holders of other energy funds as well. Therefore an anti-woke investor may be best advised to stick with lower-fee funds and wait to see whether the efforts of anti-esg activists amount to anything. It could be a long wait: it is difficult to see exactly how anti-esg offerings will expand their audience beyond the most committed fellow travellers.For a hard-headed investor who still believes in Friedman’s doctrine, the anti-esg movement would hold an obvious appeal were it to become less costly. But at the moment there is only one rational choice. Investors, and taxpayers, are far better placed when they follow the crowd. That means coming to terms with Woke, Inc., rather than paying hefty sums to push back against it.■Read more from Buttonwood, our columnist on financial markets:Despite the bullish talk, Wall Street has China reservations (Feb 23rd)Investors expect the economy to avoid recession (Feb 15th)Surging stocks undermine a hallowed investing rule (Feb 7th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

It was a year ago this month that the Federal Reserve launched its first rate increases in this latest cycle to bring down inflation.
The rate hikes appeared to have quelled some of the inflation surge that inspired the policy tightening. But the notion that the Fed was too late to get started lingers.
“They do not know more about inflation than the average consumer. That’s important,” said Quincy Krosby of LPL Financial.
With inflation still well above the Fed’s 2% target, there’s growing concern in the financial markets that more interest rate hikes will be needed.

A grocery cart sits in an aisle at a grocery store in Washington, DC, on February 15, 2023.
Stefani Reynolds | AFP | Getty Images

It was a year ago this month that the Federal Reserve launched its first attack against inflation that had been percolating in the U.S. economy for at least the previous year.
That first strike, in retrospect, would seem timid: Just a quarter percentage point increase to tackle price surges which in just a few months would peak at their highest annual rate since late 1981. It wouldn’t be long before policymakers knew that initial step wouldn’t be enough.

Subsequent months saw much larger hikes, enough to raise the Fed’s benchmark borrowing rate by 4.5 percentage points to its highest level since 2007.
So after a year of inflation fighting, how are things going?

In short, OK, but not a whole lot more.
The rate hikes appeared to have quelled some of the inflation surge that inspired the policy tightening. But the notion that the Fed was too late to get started lingers, and questions are increasing over how long it will take the central bank to get back to its 2% inflation standard.
“They have a ways to go,” said Quincy Krosby, chief global strategist for LPL Financial. “It took them a long time to acknowledge that inflation was stickier than they initially assessed.”

Indeed, Fed officials for months stuck to the narrative that inflation was “transitory” and would abate on its own. In the interim, prices soared, wages increased but failed to keep up, and central bankers were left with a public impression that they were asleep at the switch while an economic crisis raged.
A Gallup poll in late 2022 showed that just 37% of the public had a favorable impression of the Fed, which not so long ago was one of the most trusted public agencies around.
“This is not to criticize them, but to understand: They do not know more about inflation than the average consumer. That’s important,” Krosby said. “It’s just that, it’s their job to know. And that’s where the criticism comes in.”
That criticism has come amid some staggering inflation data.
Energy prices at one point last summer were up more than 41% in a 12-month span. Food inflation peaked out over 11%. Prices of individual items such as eggs, airline fares and pet food saw stratospheric increases.
Fed Chair Jerome Powell recently insisted that he and his colleagues are taking “forceful steps” now to bring down inflation. Powell and other policymakers almost universally have acknowledged they were slow to recognize the durability of inflation, but say they are acting appropriately to address the problem now.
“It would be very premature to declare victory or to think that we’ve really got this,” Powell added at a Feb. 1 news conference. “Our goal, of course, is to bring inflation down.”

Some signs of progress

Inflation is a mosaic of many indicators. At least recently, there have been signs that one of the more closely watched gauges, the Labor Department’s consumer price index, is heading in the right direction. The index most recently showed an annual inflation rate of 6.4%, down from around 9% last summer.

The personal consumption expenditures price index, which is more closely watched by the Fed as it adjusts more rapidly to swings in consumer behavior, also has been drifting lower, to 5.4% annually, and is getting closer to the CPI.

But with inflation still well above the Fed target, there’s growing concern in the financial markets that more interest rate hikes will be needed, even more than central bank officials anticipate. The rate-setting Federal Open Market Committee in recent months has reduced the level of rate hikes, from four consecutive three-quarter point increases to a half-point hike in December and a quarter-point move in early February.
“They slowed [the pace of hikes] prematurely. We’re just at the starting gate of their policy moves biting,” said Steven Blitz, chief U.S. economist at TS Lombard. “They started in baby steps, which really was reflective of how far behind they were in getting rates to where they would even begin to bite.”
Another big market fear is that the Fed will cause a recession with its rate hikes, which have taken the benchmark overnight borrowing rate to a range between 4.5% and 4.75%. Markets figure the Fed will take that rate up to a range between 5.25%-5.5% before stopping, according to futures trading data.
But Blitz said a mild recession might be the best case scenario.
“If we don’t get recession, we’re going to be at a 6% funds rate by the end of the year,” he said. “If we do get recession … we’ll be in a 3% funds rate by the end.”

Still growing

Thus far, though, a recession looks at the very least not a threat in the near term. The Atlanta Fed is tracking gross domestic product growth of 2.3% for the first quarter, just ahead of the 2.7% level in the fourth quarter of 2022.
Fed moves have hit hardest for the more rate-sensitive sectors of the economy. Housing has pulled back from its nosebleed heights early in the Covid pandemic, while Silicon Valley also has been hammered by higher costs and pushed into a painful round of layoffs after over-hiring.
But the larger jobs market has been stunningly resilient, posting an unemployment rate of 3.4% that is tied for the lowest level since 1953, after a January burst that saw nonfarm payrolls grow by 517,000.

The wide gap between job openings and available workers is one reason economists think the U.S. could avoid a recession this year.
There are, though, trouble spots: While housing is mired in a prolonged slump, manufacturing has been in contraction for the past three months. Those conditions are consistent with what some economists have called “rolling recessions,” in which the entire economy doesn’t contract but individual sectors do.
Consumers, though, remain strong, with retail sales popping 3% in January as shoppers put accumulated savings to work, keeping restaurants and bars packed and boosting online sales.

While that’s good news to those wanting to see the economy buoyant, it’s not necessarily pleasant for a Fed purposely trying to slow the economy so it can bring inflation under control.
Citigroup economist Andrew Hollenhorst thinks the Fed could tame key inflation metrics to around 4% by the end of this year. That would be better than the latest core CPI of 5.6% and core PCE of 4.7%, but still a good distance from target.
Recent stronger-than-expected readings for both gauges show the risk is to the upside, he added.
A decline “should keep Fed officials focused on slowing the economy sufficiently to reduce inflationary pressure,” Hollenhorst wrote in a client note this week. “But the activity data are also not cooperating.”
Goldman Sachs also is confident inflation will fall over the next month. But “some news over the last month has made the near-term outlook appear more challenging,” Goldman economist Ronnie Walker wrote.
Walker notes that goods prices for items such as used cars have been rising rapidly. He also estimated that “super-core” inflation — a measure that Powell has spoken of lately which excludes food, energy and housing costs — probably will hold around 4%.
Taken together, the data suggest that “the balance of risks to our forecast” for the Fed’s key interest rate are “tilted to the upside,” Walker wrote.

Looser conditions

One confounding part of the Fed’s efforts is that policy moves are supposed to work through “financial conditions” — an amalgam of indicators covering everything from bond yield spreads to stock market moves to mortgage rates and other far more arcane measures.
The Chicago Fed has a tracker that provides a good gauge on which direction things are heading. Interestingly, even though the Fed has continued to tighten policy, the Chicago index actually has eased since October, helping exemplify the challenge to calibrate policy with conditions on the ground. (Measures above zero represent tightening, while those below zero show looser conditions.)
That’s particularly confounding in that Powell said at the Feb. 1 news conference that conditions “have tightened very significantly” since the rate hikes began.

Despite the struggles to change the flow of inflation, Minneapolis Fed President Neel Kashkari said Wednesday he sees evidence that the policy is working.
However, he acknowledged there’s more work ahead.
“Real rates are positive across the curve, all of which suggests to me that our policy is having the desired effect of tapping the brakes on the economy,” Kashkari said during an event in Sioux Falls, South Dakota.
“But I am conscious of, hey, if we declare victory too soon, there is going to be this flood of exuberance and then we’re going to have to do even more work to bring that back down,” he said. “So, we’re going to continue doing what we’re doing until we finish the jobs, and I’m committed to doing that.”

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