By Vivek H. Dehejia
The gloss is coming off the India story. Recent weeks have seen downgraded growth forecasts, rising inflationary pressure, poor job creation numbers, a faltering stock market and an erratic trajectory in inbound foreign investment. These developments, coupled with the signal failure to deliver on any of its promised “second generation” economic reforms, are leading many commentators to point to a state of “policy paralysis” in the current government.
By Eswar Prasad and Mengjie Ding
Our analysis paints a sobering picture of worsening public debt dynamics and a sharply rising debt burden in advanced economies. These rising debt levels combined with heightened concerns about fiscal solvency now constitute a major threat to global financial stability.
Recent events in Greece, Ireland, Portugal and other economies on the periphery of the eurozone show the risks of debt buildups that are not tackled. Bond investors can quickly turn against a vulnerable country with high debt levels, leaving the country little breathing room to balance its fiscal books and precipitating a crisis.
Overall, the worldwide picture of government debt is not pretty.
By Domenico Lombardi
The agreement that eurozone leaders reached last week has succeeded in engaging the private sector in the Greek rescue. The package represents a sensible compromise: eurozone countries will provide some sort of guarantee for the collateral provided by Greek banks, which has been downgraded to default status. In turn, this will allow the European Central Bank to continue to refinance the Greek banking system, in keeping with its de facto role as lender of last resort which has led it to fill an institutional and political vacuum since the onset of the crisis.
By Joy A. Buchanan, Steven Gjerstad, and Vernon L. Smith
The US fiscal stimulus, we argue, led primarily to increasing imports and suppression of export growth. This brings us to the proposition that a reduction in the US government deficit would likely result in a devaluation of the dollar, a reduced trade deficit, and an increase in export output, spurred by higher profit margins. Devaluation of the dollar should be seen as a positive path to reviving exports and also to increasing net wealth from the US international investment position. This is because most of our foreign assets are denominated in foreign currencies while most of our liabilities are denominated in dollars.
By Thomas I. Palley
The global economy is suffering from severe shortage of demand. In developed economies that shortfall is explicit in high unemployment rates and large output gaps. In emerging market economies it is implicit in their reliance on export-led growth. In part this shortfall reflects the lingering disruptive effects of the financial crisis and Great Recession, but it also reflects globalisation’s undermining of the income generation process. One mechanism that can help rebuild this process is a global minimum wage system. That does not mean imposing US or European minimum wages in developing countries. It does mean establishing a global set of rules for setting country minimum wages.
By Domenico Lombardi
The IMF has just elected the first woman to its managing directorship, and already Christine Lagarde’s new desk in Washington is piling up with folders eagerly awaiting her arrival.
By Anat Admati and Martin Hellwig
Bankers on both sides of the Atlantic are lobbying furiously against stronger regulation. Authorities in different countries are reluctant to strengthen banking regulation as if the crisis never happened. The European Commission even hesitates to fully implement Basel III.
In this debate, many argue that global competition requires a “level playing field.” Following this argument, and concerned about the City’s competitiveness, the Interim Report of the UK’s Independent Commission on Banking avoids proposing tougher regulation for investment banks.
These “level playing field” arguments are invalid.
By Michael Pomerleano
The message of this article is straightforward. In response to the crisis, the reforms in financial regulation address threats to the banking system by increasing capital and providing for liquidity in the banking system. This article argues that the measures miss the point of the recent crisis. The liquidity crisis in the shadow banking system was a major source of financial and economic instability.
Liquidity grew within in the shadow banking system, and once liquidity evaporated, fire sales lead to downward revaluations of collateral assets. In a financial system increasingly dominated by market instruments, a collapse due to rapid revaluations or counterparty risk is a very high prospective risk. The liquidity and leverage ratios proposed by the Basel committee do not address the problem.
By David A. Levy and Srinivas Thiruvadanthai
Take a scary idea that sounds reasonable, repeat it often enough, and people begin to take it as truth. Unfortunately, current beliefs about US Treasury debt and deficits are a prime example of this principle: the US is being scared into seeking exactly the wrong sort of policy.
Many opinion leaders claim: “America is on the road to becoming the next Greece or Ireland,” “The deficit is destroying our children’s future,” or “We need to sharply cut the deficit now before it’s too late.”
By Michael Pomerleano
The international monetary system needs reform. The present system, dominated by reserve holdings of US dollars, places an unsustainable burden of creating reserves on the US.
While the US is privileged, in the short run, to issue a reserve currency, it hinders the productive capacity of the country’s economy in the long run. Recently Joseph Stiglitz, the Columbia University professor and Nobel laureate, proposed a solution, suggesting that the role of special drawing rights should be expanded through new issues and by increasing their use in International Monetary Fund lending. In essence, the Stiglitz proposal aims to move to a world where reserve needs are met by these IMF credits known as SDR allocations rather than by building precautionary reserves.
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