Monthly Archives: October 2010

By Eswar Prasad and Mengjie Ding

The global financial crisis triggered a sharp increase in public debt levels, both in absolute terms and relative to GDP. The level of aggregate net government debt in the world rose from $23,000bn in 2007 to an expected $34,000bn in 2010. IMF forecasts indicate the level will reach $48,000bn in 2015. The ratio of world debt to world GDP rose from 44 per cent in 2007 to 59 per cent in 2010, and is expected to climb to 65 per cent in 2015.

Rising debt levels pose risks to fiscal and macroeconomic stability and also imply transfers of wealth across generations. Our analysis shows that advanced economies (AEs) account for much of the increase in world public debt, putting their own as well as global financial stability in jeopardy.

View the FT’s interactive graphic

 Read more

By Francis Bator

Sir Andrew Large, former deputy governor of the Bank of England, advises the US to soon follow the UK example of fiscal surgery (in a letter to the FT on October 22). He appears to believe that the US too is “living beyond its means,” so “reductions in gross national product from… public spending cuts are inevitable”.

Not so, for the time being at least. True we continue to spend more on goods and services than we produce, importing more than we export to cover the difference ($539 bn/year in the second quarter = 3.75 per cent of gross domestic product). But we currently spend much less — and therefore produce much less — than our capacity to produce. Read more

Martin Wolf in his recent column fully embraces the message of Chapter 3 of the recent WEO (IMF World Economic Outlook). He suggests that this chapter “demolished” previous research on the possibility of expansionary fiscal adjustments, the most recent instalment of such research being a paper by Silva Ardagna and myself. Read more

The recent report of the committee chaired by Lord Browne, former BP chief executive, on UK higher education funding and student finance raises concerns about policy being driven by accountancy rules, rather than by rational argument. Read more

From Gavyn Davies’ blog:

Ben Bernanke’s speech in Boston on Friday seems to have disappointed those who were expecting him to announce concrete measures to restart quantitative easing, but we already knew from the last set of FOMC minutes that the groundwork for such an announcement had not been undertaken. That announcement will come after the committee’s next meeting on November 2nd and 3rd. Nevertheless, Mr Bernanke has nailed his colours to the mast, even more clearly than he has done in recent speeches. This is a Fed Chairman who is very dissatisfied with the depressed state of the US economy, and who is not afraid to say so. Read more

In his article “The economist’s reply to the ‘Inside Job”” Prof Frederic Mishkin misrepresents both his own activities, including his interview for my film, and the widespread conflicts of interest which have distorted academic economics and its role in the financial crisis. Read more

The US Fed’s policy-setting committee (FOMC) undertook large asset purchases last year, buying $1.7 trillion of mortgage-related and Treasury bonds. Last month, the Fed reaffirmed the easing bias and indicated that it could start buying vast quantities of government debt if unemployment did not improve. Read more

As the world struggles to recover from the financial crisis, the Nobel prize for economics has been awarded to three researchers whose work explains how market frictions can hinder the smooth functioning of the economy and its ability to adjust to shocks.

By Prof Frederic Mishkin

“You ought to be in pictures” is something no one has ever said to me. And as one of a number of economists making uncomfortable cameo appearances in the new Hollywood documentary, “Inside Job,” I now know why.

In July 2009, I agreed to be interviewed on camera for a film that was presented to me as a thoughtful examination of the factors leading up to the 2008 global economic collapse. About five minutes after the microphone was clipped to my lapel, however, it became clear that my role in the film was predetermined – and I would not be wearing a white hat. Read more

By Eswar Prasad and Karim Foda

The October 2010 TIGER update paints a sobering picture of a global economy that has lost momentum and is teetering between a slowdown and at best a tepid recovery. Advanced economies are stuck in a funk and even the dynamic emerging markets have lost some of their swagger.

The Global Financial Index took a beating in 2010 Q2 roughly around the initial period of the European debt crisis and has continued to weaken. Stock markets around the world remain in a state of torpor after a correction that signals a reversal of the optimism that led to their getting ahead—perhaps too far ahead—of improvements in real economic activity.

Credit growth, the latest addition to the TIGER financial (and overall) index, fell sharply towards the end of 2009, but has since begun to rebound, especially in emerging markets. Emerging market bond spreads and the TED spread have remained flat this year indicating that, despite the correction, financial markets are not under huge stress. Read more

By Michael Pomerleano

In response to the global financial crisis that began in mid-2007, governments around the world are introducing reforms designed to address the way financial markets operate. Although it will take many years to implement the multitude of rules and regulations, we know the contours and can focus on the question of whether the changes will instill a safer system. The answer is likely to be a disappointing no.

To date, reform in financial regulation and supervision has focused mainly on large, regulated institutions. Three examples are the just announced Basel III capital rules, much of the US Dodd-Frank Act, and the US Federal Reserve’s revamping of its large holding company supervision.

Some attention has also been paid to the systemic source of risk, notably in Dodd-Frank’s provisions for prudential supervision of payments, clearing, and settlement systems. Yet, shoring up the capital of the banking system is equivalent to fortifying the Maginot Line while the financial system has changed. Read more

Shankar Acharya

The proximate cause for this column is the publication by BS Books of the India Health Report 2010 edited (and mostly written) by Ajay Mahal, Bibek Debroy and Laveesh Bhandari. For anyone interested in India’s health status, access to healthcare and medicines, emerging health problems, infrastructure of health services, medical ethics, healthcare financing, government programmes and regulations and key issues in health sector reform, this report is an excellent introduction-cum-survey. Here I provide a selective summary to whet the appetite of readers to peruse the full report. Read more