Monthly Archives: January 2010

Iceland is famous for its sagas. But the latest one is truly dramatic: the balance sheets of its privatised financial sector grew from twice to 10 times gross domestic product, in five years. In the absence of a lender of last resort, this story had to end badly. In the panic of 2008, it did.

Because Iceland was a member of the European Economic Area, its banks were allowed to set up branches freely. To raise money, Landsbanki, one of Iceland’s now collapsed banks, set up an internet bank, Icesave, which gulled depositors by offering attractive interest rates. Under the European Union directive, Iceland also had an obligation to establish a deposit insurance scheme, which it did, through a levy on those banks. Read more

From the FT:
Intolerance of small crises led to this big one – Jacek Rostowski
Britain needs investors for the long term – Peter Mandelson
Financial Crisis Inquiry Commission: Live Coverage – John Gapper’s Business Blog

From elsewhere:
Managing China’s crisis management – Yu Yongding for Project Syndicate
The “other” imbalance and the financial crisis – VoxEU
The Obama financial tax is a start, not the end – Baseline Scenario
‘Sorry’ still seems to be the hardest word on Wall Street – Dana Milbank for the Washington Post

From elsewhere:
Did low interest rates or regulatory failures cause the bubble? – Economist’s View
The roots of American dominance – Free Exchange
Changing times: Global governance reform and the IMF – IMF Direct
Financial globalisation has improved international risk sharing – VoxEU
Bubble denial – Paul Krugman

Twenty years ago, the conventional wisdom was clear: Japan was the world’s most successful high-income country. Few guessed what the next two decades held in store. Today, the notion that Japan is on a long slide is conventional wisdom. So what went wrong? What should the new Japanese government do? What should we learn from its experience?

We must put this in context. The quality of the train system and the food make a visitor from the UK realise he comes from an utterly backward country. If this is decline, then most people would welcome it. Read more

From the FT:
Why Greece will have to leave the eurozone – Desmond Lachman
Busting the myth of the Brics – Peter Tasker

From elsewhere:
The case for a supertax on big bank bonuses – The Baseline Scenario
Too big to fail fail? – Paul Krugman
Learning from Europe – Paul Krugman
Obama and FDR – Economic Principals
Holding off inflation, blowing bubbles- Free Exchange
Administration bank tax plan: An empty populist gesture by design? – Naked Capitalism

From the FT:
Is Ben Bernanke descended from the Bourbons? – John Cassidy
The ECB: Believing in inflation- FT Money Supply

From elsewhere:
The future of derivatives: A good idea is coming – The Baseline Scenario
The Fed’s culture of secrecy – Felix Salmon
Don’t forget financial sector reform – IMF Direct
Simon Johnson: “The worst is yet to come” – Naked Capitalism
Bubbles and the banks – Paul Krugman for the New York Times

From the FT:
Radical choice has been central bank critic – Michiyo Nakamoto
How to make the bankers share the losses – Neil Record
The soap opera of China’s housing boom – Geoff Dyer

From elsewhere:
The American economy will recover even if the housing market doesn’t – Slate
The need for special resolution regimes for financial institutions – VoxEU
Did demand for credit really fall? – Baseline Scenario

There is a difference of opinion within the FT over the Icelandic president’s decision to block a deal to repay the UK and the Netherlands more than €3.9bn lost by savers in a failed Icelandic bank.

Lex write that if Iceland refuses to repay the debt, it risks becoming an international pariah. However, the FT’s editorial argues that Iceland should not be put in a debtors’ prison. Read more

From the FT:
The cause of our crises has not gone away – John Kay
Emerging markets need to target inflation – Ravi Kanbur and Eswar Prasad
China must promote consumption – John Plender

From elsewhere:
2010 Predictions From Shiller, Blinder, Rajan and more – Real Time Economics
2010 Outlook: New year, new decade, new challenges – IMF Direct
Grandmasters and global growth – Ken Rogoff for Project Syndicate
That 1937 feeling – Paul Krugman for the New York Times

What would have happened during the financial crisis if the euro had not existed? The short answer is that there would have been currency crises among its members. The currencies of Greece, Ireland, Italy, Portugal and Spain would surely have fallen sharply against the old D-Mark. That is the outcome the creators of the eurozone wished to avoid. They have been successful. But, if the exchange rate cannot adjust, something else must instead. That “something else” is the economies of peripheral eurozone member countries. They are locked into competitive disinflation against Germany, the world’s foremost exporter of very high-quality manufactures. I wish them luck.

The eurozone matters. Its economy is almost as big as that of the US. It is three times bigger than those of Japan or China. So far, it has passed its initial test. Nevertheless, the peak to trough decline of the US economy was only 3.8 per cent (second quarter 2008 to second quarter 2009), while the eurozone’s was 5.1 per cent (first quarter 2008 to second quarter 2009). Read more

From the FT:
A 10-year plan to close the budget deficit – John Podesta and Michael Ettlinger

Refocus the regulatory debate on essentials – Nicholas Brady

Asia must loosen the grip of its exporters – Lorenzo Bini Smaghi
Inflation angst troubles investors – Sushil Wadhwani

From elsewhere:
No to Bernanke – Baseline Scenarios
Best and highest use – Economic Principals
The end of the revolution is nigh – Free Exchange
‘The once and future Fed policy error?’ – Naked Capitalism

Shankar Acharya

In this post for the Financial Times, Shankar Acharya writes on employment in India.

 Read more

By Michael Pomerleano

As fears of debt disaster swirl around Dubai and Europe, it is useful to take a closer look at local currency bond markets. A recent superb book – This Time is Different: Eight Centuries of Financial Folly, by Carmen M. Reinhart and Kenneth Rogoff - offers a veritable tour de force of local currency markets. Reinhart and Rogoff have done an extraordinary job of putting together statistics covering eight centuries of government debt defaults around the world. The lengthy historical perspective documents never-ending cycles of boom and bust.

Their story is vastly different from the reports propagated by the official community. The official story of local currency bond markets reads roughly as follows. The typical report from a multilateral financial institution (and there have been several) points to the rapid development of local currency bond markets over the past years as a source of strength for financial systems in emerging-market economies. They report that foreign investment is buoyant, with foreign investors channeling increasing volumes of funds into these markets. The authors invariably commend developing countries for borrowing in local currency to reduce foreign currency mismatches end encourage them to adopt better macroeconomic policies, improve debt management strategies, and undertake further financial sector reform. Read more