Monthly Archives: March 2009

By Ricardo J. Caballero

Suppose it was possible to rewind the clock to the first time we had a strong urge to rewrite economic history. A favourite stopping date would be the days before the Lehman-AIG debacle last year. Until then, we were dealing with localised inefficiencies and predatory behaviour among the main financial institutions. There was plenty to fix but it seemed manageable, mostly a matter of accelerating the medicine and aggressively dealing with problems on a case-by-case basis. Read more

By Christopher Carroll 

In a speech in his hometown of Dillon, South Carolina, Ben Bernanke, US Federal Reserve chairman, recently promised that the Fed would “forcefully deploy all the tools at our disposal” in responding to the financial crisis.

This is excellent news, since the tools at the Fed’s disposal are awesome, and if deployed forcefully enough, could almost certainly end the acute stage of our financial panic.

The Fed has already shown remarkable boldness in responding to the crisis; if not for that boldness, financial markets and the world economy would be in much worse trouble than they are now. Read more

By Laurence J. Kotlikoff

The US federal government faces a long-term fiscal gap, which exceeds, from all indications, $70 trillion. This gap is the present value difference between all projected future expenditures and all projected future receipts.

Its size reflects the impending retirement of 78m baby boomers and the fact that when retired, they will receive annual benefits from social security, Medicaid (the healthcare scheme for people on low incomes) and Medicare (for the elderly and disabled) that average more than per capita gross domestic product. Read more

By Charles Goodhart and Dirk Schoenmaker

The recent de Larosière report on financial supervision and stability in the European Union should be praised for its rigorous assessment of the shortcomings of the current, mainly national-based regulatory system. It also makes some recommendations to resolve these shortcomings.

First, the report recommends the introduction of macro-prudential supervision. The financial crisis has illustrated that the micro-focus of supervisors on individual institutions does not suffice. This micro-focus
should be supplemented by a macro-approach to detect the development of imbalances in the financial system, such as excessive capital growth. Read more

The summit of the Group of 20 leading advanced and emerging countries in London on April 2 2009 will fail. Its members are refusing to meet what Lawrence Summers, senior economic adviser to the US president Barack Obama, calls “the universal demand agenda”. Conventional wisdom is the enemy. Alas, it is winning. Read more

By Ricardo Caballero

We are running out of time. There is no end in sight unless much political capital is put at risk now. We have a superb team of economists and technicians, but their voices seem to have been lost.

I recall Lawrence Summers, chief White House economic adviser, rightly claiming that if markets over-react, the government has to over-react even more. US Treasury secretary Tim Geithner, even in his much criticised first announcement, sounded like a man of the right principles: We must stabilise the financial system, regardless of cost, was the message delivered with clenched teeth. Read more

Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.

“The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’” Thus quipped Ronald Reagan, hero of US conservatism. The remark seems ancient history now that governments are pouring trillions of dollars, euros and pounds into financial systems. Read more

The UK government looks increasingly like a python that has swallowed a hippopotamus. In acting as insurer of last resort to the British-based banking system, it is taking on huge risks on behalf of taxpayers. If this turned out to be a global depression, with huge losses for British-based banks, fiscal solvency might even come into question. Can this make sense? I doubt it. Read more

By Edi Karni

Despite extraordinary government largesse intended to increase the availability of loanable funds, consumers and businesses alike are finding it hard to access credit, with grave consequences for the US economy.

The increased uncertainty caused by the worldwide recession means that loans are riskier, leaving banks reluctant to extend credit. In return for taking on this increased risk, banks must raise the interest rates they charge. However, the economic slowdown has reduced expected returns for businesses, making it difficult for prospective borrowers to bear the burden of higher rates. Consequently, fewer projects receive the financing they need. Read more

By Joseph Stiglitz and Nicholas Stern

We face two crises: a deep global financial crisis, caused by inadequate management of risk in the financial sector; and an even deeper climate crisis, the effects of which may seem more distant but will be determined by the actions we take now. Read more