The four most dangerous words in finance are “this time is different”. Thanks to this masterpiece by Carmen Reinhart of the university of Maryland and Kenneth Rogoff of Harvard, no one can doubt this again.

As the authors note, “If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by government, banks, corporations or consumers, often poses greater systemic risks than it seems [to do] during a boom”. Continue reading "This time will never be different"

The FT has a new series on the future of investment. But what, I wonder, is the future of finance itself? Who is confident that the financial system now emerging from the crisis is safer, or better at servicing the public’s needs, than the one that went into it? The answer has to be: few people. The question is how to remedy this dire situation.

Continue reading "Why narrow banking alone is not the finance solution"

Has Vince Cable, much-praised Treasury spokesman of the Liberal Democrats and vindicated Jeremiah of the UK’s property bubble, produced a “batty idea”? Even the FT thinks so. But the batty Lib Dem idea is not Mr Cable’s “mansion tax”, but replacing council tax with a local income tax. Taxation of property should be heavier, not lighter. But it should also be less regressive. That is why the mansion tax is the germ of an excellent idea.

Continue reading "Why Cable’s mansions tax is right"

China has had a good crisis. That became obvious at the “summer Davos” of the World Economic Forum, in Dalian, less than two weeks ago. Chinese confidence was palpable. But so was anxiety. The giant has survived the shock. But its recovery is driven by a surge in credit and fixed investment. In the longer term, China needs to rebalance its economy, by increasing consumption. It is time for the Chinese to enjoy themselves more. How unpleasant can that be?

Continue reading "Why China must do more to rebalance its economy"

“If the price of oil stabilises, I believe we can weather the financial crisis at limited cost in terms of real activity.” Thus did Olivier Blanchard, newly appointed head of the International Monetary Fund’s research department, describe the prospects ahead on September 2 2008. He was swiftly proved wrong.

Continue reading "Do not learn wrong lessons from Lehman’s fall"

I like and admire Lord Turner, chairman of the UK’s Financial Services Authority. He is more than an acute analyst. He is also brave. He showed that in his struggle with Gordon Brown, then chancellor of the exchequer, over plans for pension reform published in 2005. He is showing that again today in the lively debate he has initiated on the future of financial regulation. Continue reading "Turner is asking the right questions on finance"

“Our unprecedented, decisive and concerted policy action has helped to arrest the decline and boost global demand.” Thus did the finance ministers and central bank governors of the Group of 20 leading high-income and emerging economies pat themselves on the back over the weekend. They were right. The response to the crisis was both essential and successful. But it is still too early to declare victory.

Continue reading "Why it is still too early to start withdrawing stimulus"

If the government of the UK wishes to find a suitable motto, it should adopt the advice of a great Scot. “Great Britain should,” wrote Adam Smith in The Wealth of Nations, “…endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.” Smith offers wise counsel. The country’s circumstances are more mediocre than imagined two years ago. The question is how to respond. Continue reading "Adapting to Britain’s mediocre prospects"