Monthly Archives: December 2008

By Ricardo Hausmann

The economic crisis in the US signals the end of American global hegemony. Or does it? Pundits from different camps, some with fear and others with glee, contemplate a future where the US will have a much diminished weight in global affairs. But if the US plays its hand well, things will turn out to be just the opposite. 

Nobody would want to start from here, least of all the bankers. A dearth of capital, worsening loan books and a lack of funding are a horrible combination. It is little wonder they are now as desperate not to lend as they were so recently to lend. Unfortunately, if banks stopped lending, they would create a depression from which everybody, including banks, would suffer. The economy cannot go “cold turkey”. A flow of net lending must be sustained.The starting point for any analysis must be with some harsh realities.

The first is that banks enjoy a state-supported licence to create money. No strictly private business can make a credible promise to do that. Banking is a utility in which taxpayers bear much risk. Regulators have to represent the interests of these risk-bearers of last resort. 

By Robert Z. Lawrence

If they build them, will they sell? Having humiliated the chief executives of the big three US auto companies to confess their sins and forced them to offer detailed proposals for their rescue, Congress is reportedly ready to support their plans. 

I think of it as an “oops” moment: the US goes into a recession; Europeans believe this deserved punishment has little to do with them; the European economy slows unexpectedly; the US throws everything at restoring growth; finally, the US recovers, pulling Europe behind it. 

By Eric Lonergan

The most direct and efficient solution to the economic and financial problems is for central banks to transfer cash directly to the household sector.

 

By Jonathan B. Berk

In any financial crisis, it is possible with 20/20 hindsight to identify the specific proximal causes. Armed with this knowledge, legislators are invariably tempted to outlaw specific activities. 

The world has run out of willing and creditworthy private borrowers. The spectacular collapse of the western financial system is a symptom of this big fact. In the short run, governments will replace private sectors as borrowers. But that cannot last for ever. In the long run, the global economy will have to rebalance. If the surplus countries do not expand domestic demand relative to potential output, the open world economy may even break down. As in the 1930s, this is now a real danger. 

By Mark Carney

Our response to the financial crisis will be as important as the event itself. We can never eliminate financial crises, but we can reduce their likelihood and severity.