The financial crisis: of blood and fungibility

May 11, 2011 3:00 pm by Financial Times

By James Park

With the demise of Lehman Brothers in 2008 and the subsequent septic shock that stemmed the flow of liquidity in the financial system, the Federal Reserve responded with an unprecedented infusion of liquidity that has continued into this year.

However, this heightened rate of infusion is scheduled to finish in July. With the looming end of the second dose of quantitative easing (QE2) the media has latched onto the analogy of Bill Gross, Pimco’s co-chief investment officer, of QE2 and subsequent liquidity pumping efforts as a Ponzi scheme. The recent exit of Pimco (one of the world’s biggest bond fund managers) from US Treasuries underscores Mr Gross’s huckster metaphor.

While there is an element of warranted alarm, seeing the crisis through the clinical prism of blood composition and stem cells may provide a more balanced view.

Continue reading: “The financial crisis: of blood and fungibility”

Posted in Credit squeeze, Crisis, Keynesianism, Monetary policy | Permalink

What next after the robber barons?

May 9, 2011 10:28 am by Financial Times

By Vivek Dehejia

In a recent essay in the International Herald Tribune (“After the robber barons,” April 14, 2011), I made the case that corruption and inequality were natural byproducts of rapid economic growth in the context of market-based capitalism and a lax regulatory regime.

The corollary is that, left unchecked, rampant corruption and rising wealth and income inequality threaten to delegitimize capitalism itself. This pressure, fuelled by middle class revulsion, gives rise to redistribution and regulatory reform in a democratic polity, regardless of ideological stance.

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Posted in Economics, India | Permalink

Don’t let banks gamble with taxpayer money

April 21, 2011 11:26 am by Financial Times

By Roger E.A Farmer

The US is in the process of implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act. In the UK, the Vickers Commission has released interim recommendations to “ring-fence” the retail operations of banks from their investment banking activities. The Vickers report is a model of clarity and if the ring fence proposals are implemented, they will have bite. But there is already a push from Lloyds to weaken the proposals of the interim report and that is only the opening salvo. The pressure from financial institutions for lax regulation will be intense. That pressure should be resisted.

Continue reading: “Don’t let banks gamble with taxpayer money”

Tags: Dodd-Frank Act, Glass-Steagall Act, Vickers Report
Posted in Banks, Economics | Permalink

How to raise interest rates and lower unemployment at the same time

April 10, 2011 10:00 am by Financial Times

By Roger E. A. Farmer

In August of 2010, I argued on this Forum that the Fed should expand its policy of quantitative easing. By now the US is well into a programme that, by the end of June 2011, will have added $600bn to the Fed’s balance sheet. There is widespread discussion of what to do next.

Was QE successful? The facts suggest yes. There are signs of a nascent recovery in the US. Unemployment has fallen for the fourth month in a row and the economy is adding more than 200,000 jobs a month. Not enough to bring unemployment down anytime soon, but it’s a start. Core inflation, dangerously low just a few months ago, is beginning to pick up and there are signs that the US has avoided a Japan-style deflation trap.

Continue reading: “How to raise interest rates and lower unemployment at the same time”

Tags: Bank of England, Quantitative easing
Posted in Economics, UK economy, US economy | Permalink

Economic recovery picks up pace, but expect some turbulence ahead

April 7, 2011 5:02 pm by Financial Times

By Eswar Prasad and Karim Foda

Despite a number of recent shocks, the global economic recovery is getting on to a firmer footing.

The latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER) indicates that resurgent job growth and rising business and consumer confidence are solidifying the recoveries in many advanced economies. Emerging markets are still doing well but some of the shine is coming off these economies as they tighten policies to cope with inflationary pressures.

The Overall Growth Index for the G20 economies shows a slight uptick in recent months, led by a gradual rebound in real activity. After the initial post-recession surge, financial markets have pulled back a bit, at least in terms of growth in stock market indexes and valuations. One bright spot is the resurgent business and consumer confidence in both advanced and emerging economies.

Continue reading: “Economic recovery picks up pace, but expect some turbulence ahead”

Tags: Brazil, Brics, China, G20, GDP, Germany, TIGER
Posted in Crisis, Economics, Fiscal policy, Monetary policy, UK economy, US economy, World trade | Permalink

There is no US federal debt crisis

March 28, 2011 1:00 pm by Financial Times

By Francis Bator

Our arguments about the US federal budget are now all about deficits and debt: the effect of the budget on the budget. We are cutting government spending with little thought to the value of the public services forgone, and no thought at all to the effect on production, jobs and incomes.

Fiscal prudence matters. But the helter skelter rush to cut this year’s and next year’s budget deficits is high-priced folly. For want of enough spending overall by households, businesses and government taken together, i.e., for want of enough buying, a huge amount of production capacity is standing idle, producing nothing. 13.7m unemployed workers — four for every job that is vacant — are searching for jobs instead of working and earning income. At the same time, states and local governments, forced by shrunken revenues and shrinking federal subsidies to curtail their spending, are shutting health centres, allowing roads and bridges to crumble, and laying off nurses, firemen and teachers.

Continue reading: “There is no US federal debt crisis”

Posted in Economics, US economy | Permalink

From gavyn davies February 10, 2011

Why can’t economists predict disruptive events?

When the Queen asked asked an academic at the LSE why the economics profession had failed to predict the credit crunch, she raised a topic which continues to resonate. In fact, the IMF’s watchdog criticised the organisation on exactly those grounds yesterday. Although many answers have been given to Her Majesty’s question, I suspect that none of them has really settled the issue. Her question is disarmingly simple, but the answer is not.

The latest academic attempt to tackle the question is this piece by Raghuram Rajan. He is well qualified to write on the matter, having delivered a very perceptive warning about a possible crisis to the entire senior cast of global central banking at Jackson Hole in 2005. They politely ignored him. Prof Rajan now argues that economists had all of the models required to understand the credit crisis, but that the subject suffers from being segregated into increasingly narrow fields. It therefore lacks people with the broad overall view necessary to connect all of the diverse strands. This is indeed a problem, but it may not be the whole answer to the Queen’s question.

Continue reading: “Why can’t economists predict disruptive events?”

Posted in Crisis, Economics | Permalink

Remember why inflation expectations matter

February 8, 2011 3:41 pm by Financial Times

By Paul Segal

Macroeconomists have understood for a long time that inflation expectations are an important determinant of inflation. But those who argue that interest rates must be raised today in order to keep inflation expectations down have forgotten why these expectations matter in the first place.

The idea that governments can systematically stimulate the economy at the cost of high, but stable, inflation went bust during the stagflation of the 1970s. The reason is that high inflation over time leads to high expected inflation, and that these expectations will themselves then tend to raise inflation in the future as wage bargaining and other contracts take expected inflation into account. The result is not high and stable inflation, but rather high and ever-increasing inflation – - an unsustainable situation.

Continue reading: “Remember why inflation expectations matter”

Posted in Economics, Inflation | Permalink

Open letter to Sir John Vickers on his banking reform speech

January 28, 2011 12:54 pm by Financial Times

By Laurence Kotlikoff

Dear John,

I read with great interest your terrific speech about banking reform. I agree with essentially everything you said, but want to take issue with some aspects of your brief remarks about Limited Purpose Banking.

In your remarks, you lump Narrow Banking together with Limited Purpose Banking, but they are very different proposals. Limited Purpose Banking includes Narrow Banking insofar as cash mutual funds would be held strictly in cash. Such cash mutual funds would be used as the payment system under Limited Purpose Banking and would be the only mutual funds that would be backed to the buck. All other mutual funds, whether open end or closed end, would float in the market.

Continue reading: “Open letter to Sir John Vickers on his banking reform speech”

Tags: Limited Purpose Banking, mutual funds, Narrow banking
Posted in Banks, Economics, Regulation | Permalink

Current accounts after the crisis: War and peace?

January 27, 2011 1:14 pm by Financial Times

By Manoj Pradhan and Alan M. Taylor

Around five years ago, concerns over global imbalances between emerging and developed countries were rising in discussions among policymakers and economists. More recently, the rhetoric has escalated, with rumblings about currency wars or trade wars, talk of capital controls, or threats of other forms of uncooperative behaviour splashed on the front pages. Despite these new flashpoints, we think much of the debate is missing the point. Global rebalancing is already underway, following patterns going back a century or more, and is understandable in terms of new and most likely ongoing shifts in economic fundamentals in both emerging and developed economies.

Continue reading: “Current accounts after the crisis: War and peace?”

Posted in Economics | Permalink

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