Monthly Archives: September 2008

By Dominique Strauss-Kahn

These are exceptional times. Exceptional for what has happened to financial markets and for what has not happened, at least not yet, to the broader economy – the onset of a severe recession. Perhaps it was the absence of the latter that lulled too many into viewing the bursting of the housing bubble merely as a correction, the defaults in US subprime mortgages just as misfortune and the failure of important financial institutions as collateral damage. Read more >>

By Andrew Smithers

The aim should be to avoid a deep recession or prolonged weak growth, and to avoid a rapid recovery, which would induce a rise in inflationary expectations. This means a year or more of sub-trend growth, i.e. GDP plus or minus 1 per cent per annum. I think we have a good chance of muddling through, but at the moment the risks of inflation are surely much less than the risks of a deep recession. If that occurs the cause will be inadequate credit growth induced by the inadequate equity of banks and also, very importantly, inadequate profit retentions to support balance sheet growth. (As the latest FDIC report shows, US banks had negative retentions in the first half of 2008.) Read more >>

by Charles Calomiris

The US government is considering broad-based assistance to stem the financial crisis. Hank Paulson, Treasury secretary, and Ben Bernanke, Fed chairman, have proposed the establishment of an entity that would purchase subprime-related assets from troubled financial institutions.

A broad-based approach is needed, but this is not the best way of achieving policymakers’ objectives. Government injections of preferred stock into banks, advocated by Senator Charles Schumer, inspired by the Reconstruction Finance Corporation’s policies in the 1930s, would be a better choice. Pricing subprime instruments for purchase would be very challenging, and fraught with potentially unfair and hard-to-defend judgments. If the price were too low, that could hurt selling institutions; if it were too high, that could harm taxpayers. Who would determine how much should be purchased from whom in order to achieve the desired systemic risk reduction consequences at least cost to taxpayers? How would the purchasing entity dispose of its assets? Read more >>

By Raghuram Rajan

We have a full blown panic in financial markets. Any but the safest assets are being heavily discounted. Policymakers have to be thinking in more radical terms than they have done so far to fight the contagion. But that is no reason to do the wrong thing. Read more >>

By Kenneth Rogoff  

One of the most extraordinary features of the past month is the extent to which the dollar has remained immune to a once-in-a-lifetime financial crisis. If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three- month US Treasury Bills have now reached 54-year lows. It is almost as if the more the US messes up, the more the world loves it. Read more >>

Pinn illustration

by Martin Wolf

By Martin Wolf 

From Willem Buiter’s Maverecon blog

The US Secretary of the Treasury, Hank Paulson, has at last pulled the plug on the two giant GSEs (government sponsored enterprises), Fannie Mae and Freddie Mac. Read more >>

A Republican administration has nationalised Fannie Mae and Freddie Mac, though it is nationalisation with US characteristics. As a result, US housing finance has been brought under direct government control and, in the process, the gross liabilities of the US government, properly measured, have increased by $5,400bn (€3,800bn, £3,000bn), a sum equal to the entire publicly held debt and 40 per cent of gross domestic product.Yet the administration is merely recognising the reality that these “government sponsored enterprises” were undertaking a public purpose, at the public’s risk, though not without dispensing vast rewards to management along the way. That is a scandal. Whether the body politic will recognise it remains unclear. Since this is a bipartisan mess, the likely answer is No.

So what has the administration done? Was there an alternative? Will it work? What lessons should be learned? Read more >>

By Adrian Wood

Ministers from developed and developing countries are gathered this week in Accra, Ghana’s capital, for the latest high-level forum on aid effectiveness. Learning from past successes and failures, reformers are pressing for more ownership by developing countries of aid relationships, more predictability of aid flows and less fragment­ation of aid delivery. This agenda is important. If implemented, these reforms would give the taxpayers of rich countries better value for money and increase the benefits of aid to people in poor ones. Aid cannot on its own cause development, but if properly delivered and well used it can be enormously beneficial. Read more >>