Monthly Archives: November 2008

In electing Barack Hussein Obama to the presidency, the American people have chosen an intellectual, a prophet of unity and a man with a Black Kenyan father and a white American mother. They have, at the same time, rejected the politics of fear and division that did such damage to their country. Read more

By Morris Goldstein

With a global recession in prospect, now is the time to strengthen the provisions of the International Monetary Fund’s old Compensatory Financing Facility and to put it back into action. Read more

By Richard Portes

Expectations for the G20 meeting on November 15 are excessive. It will not agree on changes to the institutions of global governance, nor will it come up with an ‘n-point plan’ for dealing with the crisis. Read more

By Jon Danielsson and Casper de Vries

Neither the recent massive money market injections, the coordinated lowering of interest rates nor the use of public funds to recapitalise banks have done much to restart interbank lending. This action did not solve the underlying problem preventing interbank lending: extreme information asymmetry. Read more

By Arvind Subramanian

Getting countries with persistent current account surpluses to adjust obsessed Keynes because he was acutely aware of the limited leverage that could be exerted against such countries. Sixty years later, that problem continues to haunt the international financial system. The ongoing global crisis originated predominantly in poor national policies and regulation. But large current account surpluses, stemming in part from undervalued exchange rates, and the resulting liquidity surfeit was a facilitating factor.

Failure to address this issue by the Bretton Woods II process would be a serious abdication of responsibility by the financial system. Few issues are as central to the system or as much in need of multilateral cooperation.

Adding to the urgency of multilateral action will be US politics. If the US economy takes a downturn and the dollar continues to strengthen, a resurgence of protectionist pressures is likely. This time around, these pressures could well take the form of unilateral action against competitive currencies. It is noteworthy that President-elect Obama has actively and repeatedly supported action against “currency manipulation.” Read more

By Ronald McKinnon

As always, I am amazed by how much analytical ground Martin Wolf covers in each column; “Why agreeing on a new Bretton Woods is vital” is no exception. Let me first pick up on one point: the number of countries involved in the negotiation.

The original Bretton Woods agreement was essentially bilateral, and negotiated between the British Treasury (Keynes) and the US Treasury (White) in 1943-1944, with Canada sometimes acting as an umpire.

The post-war General Agreement on Tariffs and Trade cum World Trade Organisation negotiations were manageable and quite successful as long as they were also mainly bilateral – the eastern European bloc versus the US – with Most Favoured Nation treatment extended to most other countries.

Developing countries did have a marginal say. The old GATT exempted them from the requirement to reciprocally reduce their own tariffs. This was disastrous for them, and fortunately is being phased out under the new WTO. Read more

By Mario Blejer

The current financial crisis is putting substantial pressure on emerging markets. Many if not all face a serious risk of a sudden and severe slowdown in credit as a consequence of the withdrawal of international liquidity pools until recently available to these countries. The consequences of a credit crunch could be dire for both their public and corporate sector. This would ultimately stall the last engine of growth on which the world economy relies. The International Monetary Fund should quickly put together a preventive facility to restore the capacity of countries with healthy macroeconomic accounts to borrow from private capital markets. Read more

Sometimes boldness is caution. The Bank of England’s monetary policy committee has, in extreme circumstances, adopted the “risk management” approach followed by Alan Greenspan and Ben Bernanke at the Federal Reserve. It was right to do so.

In my column of last Friday (“What the British authorities should try now”) I recommended a cut of two full percentage points. The MPC has not gone quite that far. But it is to be congratulated for coming as far as it has, with its one and a half percentage point cut bringing rates down to 3 per cent, their lowest since 1955. Read more

By George Magnus

The economic and financial effects of rapid ageing in western countries start to become more evident from now, as the leading edge of the baby boomers leads the long march into retirement.

Dealing with the so-called demographic transition poses challenges for which governments, not least that of President-elect Obama, and citizens are still largely unprepared. For at least three reasons, the financial crisis and the ensuing recession could not be happening at a worse time. Read more

We have arrived at the point in a crisis when ambitious leaders call for a “new Bretton Woods”. It is easy to mock such language. Yet it is easy to see why this crisis should make people think in such heroic terms. Read more

By Edmund Phelps

What theory can we use to get us out of the impending slump quickly and reliably? To use the “new classical” theory of fluctuations begun at Chicago in the 1970s – the theory in which the “risk management” models are embedded – is unthinkable, since it is precisely the theory falsified by the asset price collapse. The thoughts of some have turned to John Maynard Keynes. His insights into uncertainty and speculation were deep. Yet his employment theory was problematic and the “Keynesian” policy solutions are questionable at best. Read more

By Francis M. Bator 

Shoring up lenders, unclogging lending, even direct action to limit the slide in house prices, will no longer suffice to prevent a severe recession. Only public or private spending on output will prevent spiralling cutbacks in production, jobs and incomes.

Action to boost spending should be temporary, phased out as the economy recovers. But it should be large enough to make a difference. It takes about $500bn growth in total spending each year just to keep unemployment rates and capacity utilization constant. Each extra percent of unemployment costs $250bn-300bn per year in lost pre-tax wages and profits.

Here are two examples of fiscal action that would be easy to implement, quick to boost spending, and unusual enough to make timely reversal credible. Read more