Monthly Archives: December 2010

By Espen Henriksen and David Backus

Several economists and policy makers have argued that the recent recession was caused by global imbalances. Correcting these alleged global imbalances should therefore be the centre-piece of any political response to the economic events of the past two years. According to this view, a substantial part of the “imbalances” was a result of US households saving “too little” and that “too much” of their consumption was financed by borrowing overseas.

The impression left by these arguments is that US households, on aggregate, lived beyond their means and that they are now heavily indebted after the sharp decline in value of equities and real estate. Read more

Although the European Summit reached agreement on how to develop the bail-out mechanism for sovereign countries after 2013, it was an agreement about process rather than content. Germany remained adamant that there would be no fiscal transfers to troubled economies, and that the best way forward is further fiscal consolidation, along with plans for the private sector to share in any losses after a sovereign default. EU finance ministers have been charged with filling in the blanks by 31 March, 2011 – if the markets are ready to wait that long. I am not confident that they will be. Nor do I believe that the present path is necessarily in the best interests of Germany itself, let alone other EU member states. Read more

A chorus of respected analysts is voicing pessimism about the future of the euro and the European Union.

Dani Rodrik writes about Thinking the Unthinkable in Europe. Barry Eichengreen comments on Europe’s Inevitable Haircut. Daniel Gros, in Big bang or endless crisis? argues for a big-bang solution to the eurozone’s problems. Ken Rogoff in The Euro at Mid-Crisis outlines an equally pessimistic scenario. Surprisingly, eternal optimists such as Desmond Lachman and Nouriel Roubini are joining the skeptics. Read more

The proposal to issue E-bonds, made in the FT by Jean-Claude Juncker and Giulio Tremonti, has sparked widespread controversy. Some observers (for example, Wolfgang Münchau) have said that it contains the kernel of a solution to the European debt crisis – which, under some circumstances, it might. But the initial response from Angela Merkel has been negative, exactly as it has been in many earlier rounds of this particular debate. The E-bond idea will obviously go nowhere without the support of Germany. But they have never before faced the real possibility that there could be a break-up of the euro if the sovereign debt crisis is not overcome. Maybe it is time for them to think again. Read more

By Michael Pomerleano

In response to the financial crisis, the most immediate fundamental reform adopted by several developed countries is to have a “systemic regulator” overseeing the stability of the financial system as a whole. Through data gathering, analysis and ultimately regulation, the systemic regulator is expected is expected to mitigate the risks associated with highly inter-dependent relationships between financial institutions. Many central banks are receiving significant new responsibilities for macroprudential supervision. Changes to the UK regulatory framework in 2010 gave the Bank of England responsibility for microprudential and macroprudential regulation. In the US, the Dodd-Frank Act established the Financial Stability Oversight Council, to be led by Treasury Secretary including the heads of the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Several arguments have been put forward for justifying why central banks are receiving a prominent role in macroprudential supervision: financial supervision offer insights into the condition of financial institutions that is essential in the conduct of monetary policy; and central banks are inextricably involved in the financial stability function through their lender-of-last-resort function. Read more

In 2008 President Obama captured the nation with a message of change, yet in office he has chosen to deliver change of style rather than change of substance. At the headline level this choice was reflected in his call for bi-partisanship that looked to split the difference with Republicans. In economic policy, it was reflected in the wholesale reappointment of the Clinton administration team led by Larry Summers and Timothy Geithner, a case of continuity not change.
Now, the administration is sinking under the failure of its economic policy. Read more