Monthly Archives: August 2009

Financial stability regulatory architecture is best realised on a national level.  Read more

Economist’s View: The Dangers Ahead for Bernanke

The Baseline Scenario: Which Bernanke? Whose bubble?  Read more

By Yu Yongding

Ingram Pinn illustration

China has rebounded from the global slump with vigour. In the second quarter, its official figures showed year-on-year gross domestic product growth of 7.9 per cent. Those who doubt the quality of China’s macroeconomic statistics can check its physical statistics: in June, electricity production increased 5.2 per cent, reversing the falls of the previous eight months. It is almost certain that China’s GDP will grow more than 8 per cent this year. Read more

From the FT:

Stephen Roach: The case against Bernanke  Read more

By Marc Flandreau

Our research shows investment banks are no longer selective when they underwrite emerging market debts. This is because responsibility for certification has been outsourced to rating agencies, leading to the emergence of a market for securities than is riskier than previous counterparts.

The debate on the responsibility of rating agencies for failing to see the making of the sub-prime crisis and even contributing to it through their behaviour neglects one important aspect of the matter which I came across with colleagues. Read more

By Andre Sapir

Imagine the US was facing the current crisis with the following situation: only 30 of its 50 states belong to the dollar area; most of the southern states are outside the dollar area and so is New York, home of the US financial centre; the seat of the US government is in Washington, but dollar area chairman Ben Bernanke operates from Pittsburgh and secretary Tim Geithner is mainly governor of Vermont, one of the smallest US states, with a population of roughly half a million.

Absurd? Yet this is exactly what the European Union looks like, with only 16 of its 27 member states belonging to the euro area; most of the eastern states and the UK, home of the EU financial centre, outside the euro area; the seat of the EU institutions in Brussels, but ECB president Jean-Claude Trichet operating from Frankfurt and Eurogroup chairman Jean-Claude Juncker mainly the prime minister of Luxembourg. Read more

by Kenneth Rogoff

Pinn illustration

When in doubt, bail it out,” is the policy mantra 11 months after the September 2008 collapse of Lehman Brothers. With the global economy tentatively emerging from recession, and investors salivating over the remaining banks’ apparent return to profitability, some are beginning to ask: “Did we really need to suffer so much?” Read more

From the FT:

Data raise hopes for eurozone recovery France and Germany return to growth Read more

By Ronald McKinnon

The global credit crunch which began in 2007 but became acute in 2008, originated from the collapse in the bubble in US house prices and, to a lesser extent, in European ones.

Unsurprisingly, the declining home values made people feel poorer, so consumption spending fell. This fall in aggregate demand in the US and Europe reduced demand for imports and caused a parallel slump in the rest of the world, including in emerging markets. Read more

by Randall Kroszner

Pinn illustration

Leaving a financial crisis is like leaving an awkward social gathering: a good exit is essential. In 1936-37, the Federal Reserve made a colossal mistake in its “exit strategy”. This time round it is crucial that central banks get their timing right. Read more

From the FT:

Germany still in credit crunch danger: James Wilson investigates the suggestion that Germany could still suffer as the financial crisis reaches its lowest point Read more

By Michael Pomerleano

Josef Ackermann, Deutsche Bank chief executive and chairman of the Institute of International Finance, wrote last month in the FT: “There is a danger that changes in the regulatory environment will, by accident or design, lead to a refragmentation of markets…Consequently, we should not seek answers in the perceived safety of nation-based structures, but rather establish effective processes for cross-border crisis management”.

According to Mr Ackermann, the inability to reach binding cross-border standards and insolvency systems is likely to lead domestic regulators to abandon trust in home/host regulatory arrangements, and encourage financial institutions to contract to their home turf.  Should we support to Mr Ackermann’s recommendations? No. Read more

By Roger E. A. Farmer

Confidence is slowly returning to the stock market and the S&P is back to the level it reached when President Obama took office in January. This is enough to prevent a further collapse in spending; the Obama stimulus package may even move us into positive territory for US gross domestic product growth. But these ‘green shoots of recovery’ are not enough to create the jobs needed to restore full employment in the US. Read more

“Why did no one see the crisis coming?” Queen Elizabeth asked last year. “A failure of the collective imagination of many bright people” who were all “doing their job properly on its own merit”, was the answer many of those bright people gave in a letter to the Queen last week.

If the economics profession could not warn the public about the credit crunch and the recession, what is the profession’s raison d’etre? Did this reflect, as some claim, that economics has gone astray with models that no longer help understand economic reality but rather distort it? Did such models even contribute to the crisis? FT writers and outside experts will set out their views in the posts below. What is the point of economists? What do you think? Click on the “comment” button to take part.

Robert Skidelsky: How to rebuild a shamed subject
Since the future a year ago included the present slump, it is natural that the failure of the economics profession – with a few exceptions – to foresee the coming collapse should have discredited its scientific pretensions. Economics is revealed to have no more clothes than other social scienceRead more

by Richard Thaler

Pinn illustration

I recently had the pleasure of reading Justin Fox’s new book The Myth of the Rational Market . It offers an engaging history of the research that has come to be called the “efficient market hypothesis”. It is similar in style to the classic by the late Peter Bernstein, Against the Gods. All the quotes in this column are taken from it. The book was mostly written before the financial crisis. However, it is natural to ask if the experiences over the last year should change our view of the EMH. Read more

By Greg Fisher

The UK government’s policies towards the banks are inadequate. This is not surprising because the British government and both main political parties lack firm ideological foundations. Neoliberalism has failed.  However, the circumstances the banks find themselves in are best understood through the lens of game theory; their situation is analogous to the prisoners’ dilemma. Government policy ought to be guided accordingly, with a firmer hand on bank lending. Read more

By Masahiro Kawai and Michael Pomerleano

In response to the crisis, the international financial community has established the Financial Stability Board (FSB). The FSB aims to address vulnerabilities and to develop and implement strong regulatory, supervisory and other policies in the interest of financial stability.
The FSB mandate is sweeping. Read more