Monthly Archives: January 2009

Read Martin Wolf’s blogs from the World Economic Forum

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.

The world economy, already on its knees, cannot afford escalating economic tensions between China and the US. Read more

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

Pity President Barack Obama. He won power partly because of the global economic crisis. He himself, most of his fellow citizens and much of the rest of the world agree that the US broke the world economy and now has the duty to fix it. Unhappily, this consensus is false. The crisis is a product of the global economy. It cannot be cured by the US alone. Read more

By Christopher Carroll

Pondering the role of the central bank in a modern economy, one cannot help but be reminded of the apocryphal story of the western explorer who encounters an eastern mystic teaching his disciples that the world rests on the back of a giant turtle. Read more

By Michael Pomerleano

The regulation and supervision of the banking system rest on three pillars: disclosure to ensure market discipline, adequate capital and effective supervision. Read more


Last week, President-elect Barack Obama duly unveiled his American recovery and reinvestment plan. Its title was aptly chosen, for Mr Obama spoke, astonishingly, as if the policies of the rest of the world had no bearing on the fate of the US. He spoke, too, as if a large fiscal stimulus would be enough to restore prosperity. If that is what he believes, Mr Obama is in for a shock. The difficulties he confronts are much deeper and more global than that. Read more

By Stephen Grenville

With the US official interest rate now in effect zero, there is much talk of monetary policy “running out of ammunition” and “pushing on a string”. Has monetary policy become impotent in the US and Japan? Does a similar fate await the rest of us? Read more

By Roger Farmer

For the past seventy years, policy makers have relied on fiscal and monetary policy to combat recessions. Monetary policy works by lowering real interest rates and stimulating private expenditure. Since the nominal interest rate on three month treasury bills has now reached zero in the US, the scope for further easing is limited. This has led to an intellectual tsunami of proposals for a Keynesian-style fiscal stimulus of historic proportions. Read more

By David Backus

My daughter has a T-shirt that reads: “I’m confused. No wait, maybe I’m not.” Obama’s stimulus package has a similar effect on me: “It’s a great idea. No wait, maybe it’s not.” Or maybe I’m just confused. Government spending could very well help get the economy going again. And its example might raise business and consumer confidence: in times of trouble, strong leadership can be a wonderful thing. Read more

By Michael Pettis

The post-1997 global balance is breaking down, and the world is lurching drunkenly to find a stable new balance. Until now, Chinese overproduction has balanced US overconsumption, leading to China’s massive trade surplus and capital account deficit. Inevitably, however, a reduction in US overconsumption, a necessary consequence of the financial crisis, must force a corresponding reduction in overproduction elsewhere, and China, like it or not, will have to bear the brunt of the adjustment. Read more

In tough times, politicians squabble. Out of this heat, light should emerge. Alas, it is not doing so, at least in the UK. The utterances of leading Labour and Conservative politicians do not explain how the UK economy is to emerge from its current quagmire. Read more

By John Eatwell and David Pitt-Watson 

The seizure of wholesale financial markets, distress of retail borrowers and apparent immunity of the financial sector to all remedial measures has produced an air of desperation among policymakers. Read more