The London summit of 1933 marked the moment at which co-operative efforts to manage the Great Depression collapsed. The summit of the Group of 20 countries, in the same city, on April 2, must turn out quite differently. That may seem a simple task. It is not. The usual platitudinous communiqué would be a catastrophe.
By Enrico Perotti and Javier Suarez
Securitisation was meant to reduce risk by spreading it, but in practice it created risk via regulatory arbitrage.
Banks placed long-term assets in boxes sustained by short-term wholesale funding, but with the backup of their credit lines in case of trouble. They kept a significant amount of risk, while reducing their own capital.
When subprime mortgages were repriced, the house of cards fell apart.
By Patrick Honohan
Perhaps it was inevitable that this month’s announcement of the Irish government’s bank recapitalisation package was a bit of a damp squib.
What the government, and the public, look for comes down to two things: a resumed flow of credit, and the banks financially restored to the point where they can stand on their own two feet and are not going to be a continuing burden on, or threat to, public finances.
By Moritz Schularick
Over the past decade, China and other emerging markets accumulated foreign currency reserves to insure against the economic and political vagaries of financial globalisation. They were wise to do so. Countries with larger reserves are weathering the storm relatively better than those who have bought less insurance.
By Gerard Caprio
The lack of clarity in the US Treasury’s plan to deal with the financial system is hardly unexpected. The administration is just one-month-old, and the specifics of this crisis, like many of its antecedents, are unique. As the plan becomes more specific, we can hope that the administration will be able to educate the public, including the supposed friends of free enterprise, that any plan for dealing with the banks must include the failure of those that are truly and deeply insolvent.
The Nice – non-inflationary, consistently expansionary – decade has gone. The next decade is going to be nasty. It is time to start learning lessons. “Niceness” proved a mistake.
The UK economy has moved with brutal speed from what Andrew Haldane, the Bank of England’s new executive director for financial stability, in a brilliant paper*, calls “the golden decade” of steady growth and low volatility to its opposite. Stability has proved the economy’s nemesis, as Hyman Minsky predicted.
Today, the UK is confronting a painful legacy: the collapse of the housing market and the financial sector; high levels of household debt; evaporation of government revenue; huge fiscal deficits; and assumption by the government of responsibility for a banking system whose aggregate balance sheets are close to five times gross domestic product. This is scary.
The remainder of the article can be read here. Debate from our panel of economists appears below.
By Charles W. Calomiris
Tim Geithner, US Treasury secretary, has his work cut out. Any successful plan to revive the financial system will have to raise banks’ asset and stock values, but helping banks is unpopular. Neither Republicans nor Democrats in Congress seem excited about spending money helping banks. And some in the Obama administration probably are counselling the president against taking the political risk of helping Wall Street. Many in the electorate are incensed by the idea of propping up banks and exposing taxpayers to risk of loss.
What has Japan’s “lost decade” to teach us? Even a year ago, this seemed an absurd question. The general consensus of informed opinion was that the US, the UK and other heavily indebted western economies could not suffer as Japan had done. Now the question is changing to whether these countries will manage as well as Japan did. Welcome to the world of balance-sheet deflation.
As I have noted before, the best analysis of what happened to Japan is by Richard Koo of the Nomura Research Institute. His big point, though simple, is ignored by conventional economics: balance sheets matter. Threatened with bankruptcy, the overborrowed will struggle to pay down their debts. A collapse in asset prices purchased through debt will have a far more devastating impact than the same collapse accompanied by little debt.
Most of the decline in Japanese private spending and borrowing in the 1990s was, argues Mr Koo, due not to the state of the banks, but to that of their borrowers. This was a situation in which, in the words of John Maynard Keynes, low interest rates – and Japan’s were, for years, as low as could be – were “pushing on a string”. Debtors kept paying down their loans.
The remainder of the article can be read here. Debate from our panel of economists appears below.
By Benn Steil
“Many of the most successful economics blogs promote communication within political groupings, not across them. On the web you best build an audience by organising a claque and stroking its prejudices. Extend elaborate courtesy to people you agree with and boorish contempt to those who do not get it. Celebrate exasperation and incivility as marks of intellectual authenticity – an attitude easier to tolerate in teenagers under hormonal stress than in professors at world-class universities” (Clive Crook, FT February 8, 2009).
Two days before Clive’s column appeared, I experienced firsthand the econoblog treatment he describes. On February 6, the FT published an op-ed by me (“Keynes and the triumph of hope over economics”) criticising the tendency of economists to invoke Keynes, rather than logic and evidence, in support of any and all forms of new deficit spending, which are now massed together under the cozy umbrella of “stimulus” – a term that closes discussion by simply assuming the merits it claims.
By Ricardo J Caballero
In all likelihood, political constraints severely limited the ambition and effectiveness of the US financial stability package. Economists need to unite behind relaxing these constraints. Talking lightly about nationalisation, as is increasingly taking place, does exactly the opposite.
There are two types of arguments for nationalisation. One argument is a gut reaction that enough-is-enough and we must stop transferring resources to Wall Street’s “crooks and oligarchs.” This reaction only adds fuel to the fire and exacerbates self-destructive mob-mentality behaviour.
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