Monthly Archives: February 2010

If all the economists in the world were laid end to end, they would not reach a conclusion. The “battle of the letters” – two letters in the FT, from Lord Skidelsky and others and Lord Layard and others, replying to a letter in the Sunday Times from Professor Tim Besley and others – brings this hoary joke to mind.

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Anybody who looks carefully at the world economy will recognise that a degree of monetary and fiscal stimulus unprecedented in peacetime is all that is prodding it along, not only in high-income countries, but also in big emerging ones. The conventional wisdom is that it will also be possible to manage a smooth exit. Nothing seems less likely. So let us consider the endgame, instead.

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In Friday’s FT, more than 60 leading economists back the decision of Alistair Darling, UK finance minister, to delay spending cuts until 2011. In two letters, they argue that (1) a sharp shock now would be dangerous; and (2) the first priority must be to restore robust growth.

Rachel Lomax, Lord Skidelsky, Brad DeLong and Joseph Stiglitz are among those to have co-signed the letters. Read more

By Laurence Kotlikoff

Greece is being victimised by its use of the euro. Prices and wages within Greece are too high and can’t readily be adjusted downward.  Were the country using its own currency, it could simply devalue.” This, together with profligate government spending, is the generally accepted explanation for the run on Greek bonds. Read more

Niall Ferguson is not given to understatement. So I was not surprised by the claim last week that the US will face a Greek crisis. I promptly dismissed this as hysteria. Like many other high-income countries, the US is indeed walking a fiscal tightrope. But the dangers are excessive looseness in the long run and excessive tightness in the short run. It is a dilemma of which Prof Ferguson seems unaware.

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By Arminio Fraga

Greece and the EU face a momentous challenge. At stake are Greece’s future and, to some extent, the future of the EU itself. It is obvious that a very large economic adjustment will have to be at the core of any durable solution to the crisis. It also seems clear that the required adjustment will demand time and external support to be viable. Greece’s situation is dramatic but it is by no means the only such fiscal challenge the region, or the world, now faces. Some tough decisions are going to have to be made in the near future. Here a bit of history can be enlightening. Read more

From the FT:
The political constraints of the eurozone Wolfgang Münchau
Why we should not fear the spectre of deflation Edward Gottesman
Scapegoating will not stop another crisis John Cassidy
Japan: it’s not what you say it’s how you get there FT Alphaville
Central bank trendwatch: expanding remits Money Supply blog

From elsewhere:
Goldman goes rogue – special European audit to follow Baseline Scenario
Greece is more like U.S. than people think Seeking Alpha
Premature exit Paul Krugman
Off the cliff and back? Credit conditions and international trade during the global financial crisis Vox

The bogeyman of a hung parliament is being used to terrify British voters. What is needed, it is argued, is a government with a strong majority, to rescue the UK from the threat of national bankruptcy. This is nonsense. The UK does not face national bankruptcy and, if it did, would not need strong single party government to save it. Has everybody forgotten that in the gravest crisis ever faced by the UK, Winston Churchill governed with a coalition? Why is the present crisis so very different? So poorly has single-party despotism governed the UK that I would welcome a coalition or, at worst, a minority government.

No serious person denies that the country confronts a huge fiscal challenge. Among those serious people are, of course, the leadership of the Liberal Democrats. I cannot be the only person who believes that Vince Cable, the party’s shadow chancellor, is far better qualified to address this challenge than any current member of the Conservative front bench. Indeed, the latter has blown worryingly hot and cold over its elusive plans for fiscal stringency. Read more

By Chris Giles, the FT’s economics editor. This post was first published on the FT’s Money Supply blog.

Three wonderful ironies stand out from the tentative eurozone plan to back Greece in its hour of need. The Eurogroup’s leaders have agreed to pressure Greece to shore up its public finances, use International Monetary Fund expertise to help set the framework for reducing borrowing, but back Greece with an offer of emergency funds if it required liquidity and could not borrow in the markets. Socialist EU leaders issued a statement last night, talking about “a last-resort mechanism of financial support, coupling lending by private banks with a guarantee to be provided by eurozone members” Read more

By Tony Barber, the FT’s Brussels bureau chief. This post was first published on the FT’s Brussels blog.

Today’s European Union summit in Brussels will set out the framework for a financial rescue operation for Greece. This much is clear is from various briefings being given by officials from countries as varied as Austria, Lithuania, Poland and Spain.  But financial markets will have to wait until next week to see the full details of the plan. Read more

By Thomas Palley

The last quarter of the 19th century witnessed a period of sustained global deflation. In the 1896 US presidential election, William Jennings Bryan famously attacked the gold standard as the cause of deflation, declaring “You shall not press upon the brow of labour this crown of thorns. You shall not crucify mankind upon a cross of gold.” Read more

Pinn illustration

The financial crisis of 2009 is morphing into the fiscal anxieties of 2010. This is particularly true inside the eurozone. Spreads between rates of interest on Greek bonds and German bunds touched 3.86 percentage points in late January (see chart). The risk has emerged of a self-fulfilling confidence crisis that would have dire consequences for other vulnerable members. Much attention has focused on what might happen if the crisis were not resolved, with talk of bail-outs, defaults or even exits from the euro. But what would need to be done to resolve the crisis, without such a calamity? It is the demand, stupid. Read more

By Jon Danielsson

Iceland’s president refused last month to sign a parliamentary bill authorising settlement of the Icesave dispute with the UK and the Netherlands. This does not mean a rejection of his country’s obligations. On the contrary, Icelanders have already agreed to compensate the UK and Netherlands. The decision by President Grímsson stems instead from the fact that over 70 per cent of Icelanders find the terms of the current deal unreasonable. Read more

From the FT:
A good stimulus should put cash in poor pockets – Roger Altman
Europe needs to show it has a crisis endgame - Wolfgang Munchau
How to make a bank raise equity – Oliver Hart and Luigi Zingales
China’s metropoli bubble fear – Izabella Kasminska, FT Alphaville

From elsewhere:
Europe risks another global depression – Simon Johnson, The Baseline Scenario
Citi reinvents end-of-the-world insurance – Felix Salmon
Monetary policy: What’s the real worry? – Free Exchange blog, The Economist
The mystery of Chinese savings – Shang-Jin Wei, Vox

From the FT:
Britain has been hit harder than you think – Samuel Brittan
Warning to Toyota: speeding can kill – Editorial comment
India: Potholes in the road – James Lamont
The race is on for Greece before the ECB exits – Gillian Tett

From elsewhere:
Chanos bullish on Cisco, bearish on China, Greece – CNBC video
Goldman Sachs and the Republicans – Simon Johnson, The Baseline Scenario
Mystery men of the financial crisis – William D Cohan, Opinionator

By James Park

In October 2008, the flow of money stopped. As Lehman Brothers teetered on bankruptcy, the US financial system went into septic shock – from toxic assets representing worthless derivatives and collateralised debt obligations. To capture the gravity of the situation, the media latched onto metaphors.  Warren Buffett called that October the economic equivalent of a Pearl Harbor.

While Buffet’s martial analogy serves to highlight the fall in the inter-institutional lending, a more apropos analogy is that the financial system found itself in the intensive care unit with the diagnosis of septic shock.

 Read more

From the FT:
Another housing market bubble? – Simone Baribeau, Money Supply
It is the poor that pay for the weak renminbi – Arvind Subramanian
Greeks in bondage – Editorial comment

From elsewhere:
Can Greece avoid the lions? – Kenneth Rogoff, Project Syndicate
Torry fiscal policy: The axeman reconsidereth – Bagehot’s Notebook

By Michael Pomerleano

The Basel II accord has done more harm than good for stability. In a previous post last month on the failure of financial regulation, I pointed out that Basel II has glaring deficiencies that virtually provide a navigational map to creating off-balance sheet instruments.

The regulatory incentives regarding capital requirements in Basel II contributed to the subprime crisis. It gave banks incentives to:

  • “originate and distribute” as opposed to originate and hold
  • securitise every asset and buy it back without changing the credit risk profile
  • use credit default swaps to reduce capital requirements even further
  • stuff toxic securities into structured investment vehicles       

 Read more

From the FT:
Medicine for Europe’s sinking south – Nouriel Roubini and Arnab Das
Why ‘too big to fail’ insurance is the world of all worlds – John Kay
Toyota: sorry is the hardest word to say – Dan Bogler
Central bank DeathMatch – Neil Hume, FT Alphaville

From elsewhere:
Are sovereign wealth fund investments politically motivated? -Roland Avendano and Javier Santiso, Vox
Deflation – Economist’s View
How China won and Russia lost – Paul R Gregory amd Kate Zhou, Hoover Institute
Never short of country with $2 trillion in reserves? – Michael Pettis, China Financial Markets

So what did I make of this year’s annual meeting of the World Economic Forum at Davos? It felt like sitting at the bedside of somebody who had survived a heart attack but was unsure how long it would take to recover full vigour, if, indeed, he would at all. The mood of “Davos men” (yes, they mostly still are) was, as my colleague, Gideon Rachman, has pointed out, one of anxiety. Meanwhile, the participants in a still predominantly western meeting looked at the youthful vigour of emerging economies with admiration, envy and even fear.

For me, the highlight of the programme was the economic outlook session on Saturday.* This is not only because I was moderator. The starting point for the discussion was an obvious one: the policy interventions of late 2008 and 2009 have been a resounding success. The outcome has been a far briefer and shallower recession than most participants imagined a year ago. That is obvious from the successive consensus of forecasts for 2010. For almost every significant economy, the forecast for growth this year is higher than it was a year or even six months ago (see charts). The world economy survived the heart attack in the financial system. Read more