Monthly Archives: October 2009

From the FT:
Why the renminbi has to rise to address imbalances – Martin Feldstein
Close the funding gap for smaller businesses – Nigel Rudd
King’s proposal provides stability in banking sector – Nigel Collin
Goodbye to the pre-crisis trend line – Samuel Brittan

From elsewhere:
Selling stocks short: Ever controversial – Gerald P. Dwyer, Federal Reserve of Atlanta
Swiss Banking Is Finished – Joe Weisenthal, BusinessInsider
Can We Fix Too Big to Fail Without Shrinkage? – Noam Scheiber, The New Republic
What’s so bad about inflation? – David Blanchflower New Statesman
Sustainable Growth? – Tim Duy’s Fed Watch, Economist’s View
Design and effectiveness of fiscal-stimulus programmes – Robert Barro and Charles Redlick, VOXEU
Scientist Monkeys Around With The Economy – NPR audio on primate economics

From the FT:
How to avoid a repeat of the Great Crash – Peter Clarke
Goldman: reasons to be wrathful – Chris Gradel
A three-way split is the most logical
– John Gapper on ‘too big to fail’
Russia’s unsustainable energy model – David Clark

From elsewhere:
A Balanced Global Diet – Nouriel Roubini, RGE Monitor
Chinese railways and speculating pig farmers – Michael Pettis , China Financial Markets
Efficient Market Theory and the Crisis – Jeremy J. Siegel
Futures As Predictors of Commodity Prices – Menzie Chinn, Econbrowser
Turkey Dumps US Dollar For Trade With Iran And China – Joe Weisenthal, BusinessInsider
Why Do Financial Crises Happen in the Fall? – Catherine Rampell, NYT Economix Blog
Are Capital Controls In Fashion Again? – Nouriel Roubini, Forbes

By Ronald McKinnon

This is an updated version of Liquidity traps and the credit crunch, published in this forum on August 13, 2009

Since the onset of the credit crunch and global downturn, governments everywhere have responded to the shortfall in aggregate demand in a textbook Keynesian fashion. They have adopted fiscal stimuli: ramping up government expenditures and cutting taxes. Central banks followed the lead of the Federal Reserve by driving down short-term interest rates toward zero: almost exactly zero for overnight interbank rates in the US, Japan, and Canada, and generally less than 1 per cent in Europe into the autumn of this year. Read more

This post, in the Financial Times’ Economists’ Forum, argues that narrow banking is not the answer to systemic fragility. Read more

From the FT:

‘Too big to fail’ is too dumb an idea to keep – John Kay
Obama’s executive pay move is bad policy – Charles Calomiris
Speculators do drive prices, and it’s the developing countries that suffer – Andrew Mold Read more


How did the world economy fall into such a deep hole? It is recovering, but painfully, and after a deep recession, despite unprecedented monetary and fiscal easing. Moreover, how likely is it that a balanced world economy will emerge from this force-feeding? The very fact that such drastic action has been necessary is terrifying. The fact that there is little room for a policy encore is yet more terrifying. Most terrifying of all is that this is not the first time in recent decades the world economy has had to be guided through a post-bubble collapse. Read more

From the FT:

In depth: George Soros lectures
Storms lie ahead for politics’ odd couple – Philip Stephens on Mervyn King and George Osborne
We must overturn the status quo in derivatives – Kenneth Griffin Read more

By Kumiharu Shigehara

Japan‘s economic expansion stumbled by late 2007, and in the context of the global economic crisis, it has been trapped in the deepest recession of the post-war era. Initially, the impact of the global crisis on the Japanese economy was expected to be limited because Japanese banks and other financial institutions were relatively insulated from financial turmoil. However, between the third quarter of 2008 and the first quarter of this year, Japan’s exports fell at an annual rate of some 55 per cent in volume terms, the sharpest among OECD countries and double the area’s average rate of decline.

 Read more

From the FT:

Do not ignore the need for financial reform – George Soros
A polite discourse on bankers and bubbles – Wolfgang Münchau
The Fund should help Brazil to tackle inflows – Arvind Subramanian and John Williamson
Grim Britain – FT Editorial Read more

About a month ago, I visited the aero engine factory of Rolls-Royce, in Derby. I was hugely impressed. Making jet engines able to work at extreme temperatures is an extraordinary achievement. Why does the financial industry not work this way? How might we bring the performance of finance close to that of other sophisticated businesses? Read more

This post by Martin Wolf in the Financial Times’ Economists’ Forum lists suggestions for further reading on China’s economic growth and Mervyn King.  Read more

This post by Martin Wolf in the Financial Times’ Economists’ Forum shows the effects of quantitative easing.  Read more

From the FT:
King calls for the breakup of banks
Chris Giles
Darling responds to King’s bank speech Chris Giles FT video

Mervyn King’s speech in full
Bank of England
Volcker fails to sell a bank strategy NY Times
The consensus on big banks begins to move The Baseline Scenario
Mervyn King calls for banks to split as public finances take record hit The Times


Pinn illustration

A year ago, at the height of the financial panic, the world yearned for a profitable and confident financial sector. It now has what it wants, but hates it. As joblessness soars and the hopes of hundreds of millions of people are blighted, the financial sector’s survivors are thriving. Even bonuses are back. Policymakers have made a Faustian bargain. Success feels like failure. Read more

From FT:

Time for the ECB to get serious about the overvalued euro – Willem Buiter Read more

From the FT:

Goodbye, Macroeconomics – Eli Noam Read more

By Roger E. A. Farmer

According to a widely-held consensus view, the world is slowly emerging from the Great Recession of 2008. Growth in China is projected to top 8 per cent in 2009. Australia raised the interest rate on the Australian dollar last week and the US and UK economies are showing signs that unemployment growth has slowed even though the unemployment rates in both countries are very high. Sometime soon, perhaps in the spring of 2010, perhaps earlier, the Fed, the European Central Bank, and the Bank of England are likely to respond to the perceived global recovery by reducing the sizes of their balance sheets and raising interest rates on overnight loans. Read more

By Andrew Sheng and Michael Pomerleano

The national authorities and the international community should be commended for the speed of action taken to stop the spread of the financial crisis. To protect the financial system from the deflation in asset bubbles, the public sector has essentially guaranteed all deposits, rescued systemically important institutions, made large liquidity injections and brought interest rates to zero or near zero under a zero interest rate policy. Almost all systemically important central banks entered into ZIRP under emergency conditions at the same time.

But the polices adopted to combat the crisis are creating their own problems. In the medium term, the treatment may be as expensive as the crisis. Read more

It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements. Read more

From the FT:

Neil Dennis: Sterling declines after inflation hits 5-year low Read more