Monthly Archives: October 2008

By Eswar Prasad 

The worldwide financial crisis has dramatically shown how globalisation has linked together the fates of economies around the globe. The benefits of multilateralism on economic matters have become evident. But so has the potential for globalisation to cause collateral damage. Even as the G7 economies are pulling back from the edge of the precipice, many emerging markets are at the risk of tipping over. 

By Alberto Alesina and Francesco Giavazzi

A “new Bretton Woods” is the name given to a summit next month of leaders of the world’s top economies to map out a response to the global financial crisis.

The New York meeting received this label because it aims to reconsider the structure and the role of international economic institutions such as the G7, the International Monetary Fund and the Financial Stability Forum. 

By Desmond Lachman

Among the more probable long-run casualties of today’s global and financial market crisis will be any further expansion of European monetary union. It is also more than likely that today’s global financial market crisis will mark the end of any serious challenge by the euro to the US dollar as an alternate international reserve currency.

A deep and long global economic recession will put severe strain on the current 15-country euro area. It will also expose the acute external vulnerabilities of those east European countries which aspire to full euro area membership. 

Give credit where credit is due: Nouriel Roubini of New York University’s Stern School of Business was right. On February 20 2008, I wrote a column entitled “America’s economy risks the mother of all meltdowns”, based on his analysis of the 12 steps to disaster. Alas, not only has the US taken those steps, but it has also – with help from others, including the UK – dragged the world behind it. 

By Anders Åslund

This is the worst global asset bubble and financial panic since the Great Depression of 1929-1933. Still, almost all argue that it cannot become equally bad, because we have learned those lessons.

Analytically, that statement does not hold. True, our policymakers are not likely to repeat the same mistakes of the Great Depression, but they may commit other mistakes. Bank deposit insurance has come to stay for good, but not all advances represent progress, and many create new vulnerabilities. 

By John N Muellbauer

When future economic historians look back to trace the triggers for the October 2008 financial panic and the unnecessarily severe recession of 2009, they will likely put their fingers on two.

  • The failure to keep Lehman Bros functioning as a going concern.
  • The failure of the European Central Bank and the Bank of England to use their interest rate setting firepower to organise a substantial globally co-ordinated interest rate cut (the cut of October 8, 2008 was too timid).

A convincing argument for independent central banks adopting an inflation targeting framework is that, where central banks are forward looking and responsive, they should be able to avoid deflationary slumps. The markets then should expect the central banks to assess clearly the global economic situation and the downside risks, and take decisive action. 

By Michael Spence

The accelerating asset deflation globally is going to cause a deep global recession. The deleveraging process is driving emergency sales of assets, capital hoarding and asset prices (including exchange rates) to overshoot any reasonable estimate of intrinsic values. 

By Jeffrey Sachs

Before our political leaders get too fancy remaking capitalism next month at the Bretton Woods II summit in Washington, they should attend to urgent business. Since the closure of Lehman Brothers triggered a global banking panic, political leaders in the US and Europe have successfully thrown a cordon round their banks to prevent financial meltdown. What they have not done yet is to co-ordinate macroeconomic policies to stop a steep global downturn. This is the urgent agenda. 

by Laurence Kotlikoff, Perry Mehrling and Alistair Milne

The infusions of equity in a score or so of major banks will help prevent a deep and prolonged world-wide recession. So will the Fed’s new Money Market Investor Funding facility, and similar guarantees provided in some other countries, which support unsecured short-term borrowing by top-rated financial institutions.

But these steps won’t help most banks to get back to their main job – lending to households and businesses. For banks to lend, they must borrow and doing so, on any scale, requires collateral. Collateral today is in terribly short supply because trillions of dollars in AAA or better senior structured credit securities, including top-tranche mortgage-backed securities, are no longer being accepted. 

by Laurence Kotlikoff  and Edward Leamer

The demise of financial titans and the incessant warnings of economic Armageddon have unleashed a tidal wave of asset sales across the globe, eviscerating trillions in personal wealth. Stock prices are now low enough to bring back some buyers, but the contest between fear and greed remains undecided.

The same defensive mentality that allowed the sale of equities at fire sale prices threatens to cause a sharp drop in consumer spending, which accounts for 72 per cent of US GDP.  If this happens, the economy will slide into deep recession.