Monthly Archives: November 2008

By Michael Pomerleano

For a long time after the crisis started, the silence of the policy making community was deafening. When the response finally came, it was reactive. Read more

By Martin Wolf

Is the UK on the road to disaster? Those who believe it is insist that it is mad to tackle a calamity caused by excessive borrowing with still more borrowing, this time by the government as borrower and lender of last resort. These criticisms are wrong and right: wrong, if the government remains creditworthy; right, if it does not. Read more

This is the text of a speech given by Martin Wolf, chief economics commentator, at the FT’s annual economists’ drinks party in London last night.  

Last year I enjoyed telling a number of entirely unfair jokes about economists. This year, I looked at the same source and found only one joke about the profession’s involvement in depressions. Here it is:

“Such a severe depression and banking crisis could not have been achieved by normal civil servants and politicians, it required economists’ involvement.”

This, in short, is a time for humility. Why did we mostly get “it” so sensationally wrong? How did something that looks increasingly like the precursor of a slump creep up on almost all of us this year? It is a pretty good question. It is a pretty embarrassing one, too. It is one everybody I meet now asks. Even Her Majesty has asked why we didn’t do a better job of forecasting this mess. Read more

By Jeffrey D. Sachs

Governments meet in Doha this weekend to review the global system of development financing, the means by which resources flow globally to support sustainable development. The system is broken, though the conferees are unlikely to say so clearly. Read more

By Chris Giles, Economics editor

It has been a bad year for economic forecasters. So bad that royalty wants to know what went wrong. “Why did no one see it coming?” Britain’s Queen Elizabeth asked during a visit to the London School of Economics this month. Read more

We have bad news and good news. The bad news is that the world economy is teetering on the brink of what may well be the most damaging slowdown since the second world war. Policymakers around the world – particularly in the inordinately complacent surplus countries – do not begin to understand what this may mean. The good news is that, after an extended period of overvaluation, stock markets are, at last, attractively priced. This should have enticing implications for investors and even for audacious governments. Read more

By Kumiharu Shigehara

In his most recent speech, Donald Kohn, vice-chairman of the US Federal Reserve, said that the Fed had learned that the aftermath of a bubble can be far more painful than it had imagined. Read more

By Nariman Behravesh

The full fury of the two shocks that have hit the world economy – the financial crisis and record oil prices – is beginning to dissipate. Unfortunately, the full impact of these shocks on the real economy has yet to be felt. Read more

By Martin Wolf

Stuff happens. Stuff has certainly happened to both the UK economy and the government’s fiscal position. What Alistair Darling, UK chancellor, delivered on Monday was not a pre-Budget report, but a crisis budget. Read more

By John Muellbauer

The world economy is suffering from a Keynesian shortage of demand. Worse, it is trapped in a dangerous downward spiral of falling asset prices, rising bankruptcies, foreclosures and unemployment feeding into more of the same, along with falling commodity and now goods prices. Since no country is exempt, international co-ordination is needed and made easier because of the obvious common interest. The rapidity of the current contraction also means that fiscal solutions, though helpful, are not timely enough and create obvious free rider problems. Read more

By Laurence Kotlikoff and Perry Mehrling

As we advocated two months back (Bagehot plus RFC: The Right Financial Fix), Uncle Sam is finally starting to sell systematic risk insurance on high-grade securities in exchange for preferred stock. This is a critical function for the US government; Uncle Sam is the only player capable of hedging systemic risk because he’s the only player capable of taking actions that keep the overall economic system on the right course. Read more

By Michael Spence

The crisis we are now in globally had its origins in an asset bubble fuelled by the interaction of excessive leverage and a widespread underestimation of the endogenously rising systemic risk – roughly the degree to which individual risks were becoming highly correlated via balance sheet linkages.  The potential seriousness went unnoticed or not fully understood (by market participants, regulators and commentators) for several years. Read more

By Ricardo Caballero and Arvind Krishnamurthy

Financial institutions specialise in handling risk but are not nearly as efficient in dealing with uncertainty.  To paraphrase a recent Secretary of Defense, risk refers to situations where the unknowns are known, while uncertainty refers to situations where the unknowns are unknown.  This distinction is not only linguistically interesting but also has significant implications for economic behaviour and policy prescriptions. There is extensive experimental evidence that economic agents faced with (Knightian) uncertainty become overly concerned with extreme, even if highly unlikely, negative events. Unfortunately, the very fact that investors behave in this manner, makes the dreaded scenarios all the more likely. This mechanism has played an important role in the financial crisis. Read more

By Brendan Brown 

A conundrum has long been known to monetary economists, but only comes into the open during the once in a quarter-of-a-century type of recession apparently plaguing the global economy.

The quandary is how, in a conventional monetary economy, to bring interest rates down to the negative levels essential to speedy recovery during periods when there is a sharp decline in spending propensities. Read more

By Johannes Witteveen

When we think about a second Bretton Woods conference, we have to realize that the international monetary system created in Bretton Woods was fatally damaged when the US suspended the convertibility of the dollar into gold in 1971. Read more

By Walter Mattli and Ngaire Woods

At the G20 summit in Washington this month, it was agreed that global growth will require sound new global regulation of financial markets. But what would it take to achieve such regulation? Read more


Is this the time for the British to swallow their pride, admit they made a mistake and beg to enter the eurozone? A growing number of people argue it is. They are wrong. Read more

By Perry Mehrling

In a speech last week on “Policy Coordination Among Central Banks”, Ben Bernanke, US Federal Reserve chairman, drew attention to the way that the Fed’s swap line with other central banks has been used to facilitate lender of last resort funding for dollar-denominated assets held outside the US. Read more

By Ha-Joon Chang

By electing Barack Obama, US citizens have spoken – they not only want a more inclusive and less war-like country but one with different economic policies. Read more

By Members of the Asian Economic Panel

The recession in the US and parts of Europe is likely to be severe and prolonged, and the Asian economies should take urgent and co-ordinated action to protect their economic growth in the face of recessionary conditions in the US and Europe. Read more