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.
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.
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.
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.
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.
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?
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.
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.
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.
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.