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By Eswar Prasad
Timothy Geithner, in his first foray into international economic affairs as US Treasury secretary, has kicked off a public row with the Chinese by accusing them of currency manipulation. The Chinese have vehemently rebutted this accusation and flexed their own muscles, telling the US to get its own house in order before lecturing others.
How much debt is too much? Nobody knows. But the governments of highly indebted high-income economies – such as the US and UK – think they know the answer: more than today. They want even more credit to flow to their struggling private sectors. Is that an attainable ambition and, if so, how might it be achieved? Read more
By Jeffrey Sachs
The US debate over the fiscal stimulus is remarkable in its neglect of the medium term – that is, the budgetary challenges over a period of five to 10 years. Neither the White House nor Congress has offered the public a scenario of how the proposed mega-deficits will affect the budget and government programmes beyond the next 12 to 24 months. Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package. Read more
By David Miles
The financial crisis has meant that the government has come to play a role in banking that all but the most interventionist would have baulked at 18 months ago. The scale of support and intervention in the UK is very large, and in the Green Budget published on Wednesday, produced by the Institute for Fiscal Studies in collaboration with Morgan Stanley, the implications for the public finances will be analysed. The most likely outcome may be that the cost to taxpayers of the support measures is small; they may even generate a profit. But the risks are great and the potential exposure of the government to losses is now huge. Read more
By Christophe Chamley and Laurence J. Kotlikoff
T’was the year the country stood still. Not a car, truck, or bus rode the roads. No one drove to work, no one drove to shop, no one drove to visit. No one drove anywhere.
The reason was simple. No one could buy gas. Gas stations had gone broke. Read more
By Ricardo Hausmann
China is definitely part of the global imbalance. It is running a current account surplus in excess of 10 per cent of gross domestic product and it is accumulating reserves as if they were as profitable as a Madoff investment was supposed to be. Were it not for this fact, its currency would have appreciated much more than it has. Read more
By Ricardo Caballero
World financial markets are being ravaged by uncertainty and fear. The prices of all forms of explicit and implicit financial insurance have skyrocketed and hence, by a basic identity, the prices of risky assets have plummeted or the corresponding markets have disappeared. Read more
By Christopher Carroll
A consensus seems to have emerged in the United States that fresh thinking is needed for a targeted stimulus package that will address effectively the many connected problems the economy faces. One piece of the problem is that there has been a near-halt in construction, as it has become clear that too many homes have been built on speculation that house prices could only rise and never fall. Moreover, there has been a large decline in borrowing to finance the construction of homes and commercial buildings, as both households and businesses (even financially sound ones) have hunkered down to weather the storm. Read more
Is the British government on the right path with its recent package of measures to help the banking sector or, as Mervyn King, governor of the Bank of England, put it this week, “to protect the economy from the banks”? The question, in truth, is not only whether the measures will work, but whether the UK can afford them.
Here are two frightening statistics: over the past five years, the balance sheets of many of the world’s largest banks more than doubled; and, according to the Bank, the median ratio of debt to equity in big UK banks is more than 30 to one. Read more
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