By Roger E. A Farmer
Anyone who thinks that the 2008 financial crisis is a new and unusual event on the world stage should read Walter Bagehot’s book, Lombard Street, written in 1873. Bagehot was editor-in-chief of The Economist magazine and the son-in-law of its founder James Wilson. He literally wrote the book on central banking. Read more
By Peter Bofinger
The “too big to fail” problem, one of the most negative consequences of the financial crisis, has become more severe than ever. Governments all over the world, with their comprehensive rescue packages for aiding banks, have strengthened their implicit commitment to save financial institutions and their lenders at any price. Therefore, for investors it is becoming less necessary to distinguish between banks of different quality. One simply invests money at the bank which offers the highest interest rate. Read more
Today, the people see in the financial sector not the skilful hands of erstwhile masters of the universe, but the grabbing hands of greedy ingrates. It is little wonder, then, that a desperate President Obama, battered by the voters in Massachusetts, has turned upon a group even less popular than his party. He has duly added the axe of Paul Volcker, 82-year-old former chairman of the Federal Reserve, to the regulatory scalpel offered by his Treasury secretary, Tim Geithner. Read more
As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. The last entry focuses on China, read the entries from the other countries below.
By Michael Pettis
Given the speed of its economic transformation, its sky-high bank-stock valuations, the unprecedented size of its accumulated reserves, and its much-advertised desire to change the global monetary system; it is tempting to assume that China will radically transform the world’s capital markets and financial systems with the same ruthless speed with which it has transformed export markets.
But this won’t happen. Beijing is skeptical of arguments supporting rapid financial and monetary deregulation, and policymakers continue to measure the usefulness of the financial system mainly to the extent that it serves the needs of rapid growth in manufacturing and infrastructure. This means continued heavy-handed control of the capital allocation process and the level of interest rates, the relinquishing of which are the two key measures of real financial sector liberalisation.
China’s main impact on the global financial system will continue, for the foreseeable future, to be limited to its massive accumulation of reserves. And because the US is still the only economy large and flexible enough to accommodate the high trade surpluses that the Chinese economy relies on, it will continue to accumulate dollars. Read more
Iceland is famous for its sagas. But the latest one is truly dramatic: the balance sheets of its privatised financial sector grew from twice to 10 times gross domestic product, in five years. In the absence of a lender of last resort, this story had to end badly. In the panic of 2008, it did.
Because Iceland was a member of the European Economic Area, its banks were allowed to set up branches freely. To raise money, Landsbanki, one of Iceland’s now collapsed banks, set up an internet bank, Icesave, which gulled depositors by offering attractive interest rates. Under the European Union directive, Iceland also had an obligation to establish a deposit insurance scheme, which it did, through a levy on those banks. Read more
There is a difference of opinion within the FT over the Icelandic president’s decision to block a deal to repay the UK and the Netherlands more than €3.9bn lost by savers in a failed Icelandic bank.
Lex write that if Iceland refuses to repay the debt, it risks becoming an international pariah. However, the FT’s editorial argues that Iceland should not be put in a debtors’ prison. Read more
In this post for the Financial Times’ Economists’ Forum, Martin Wolf answers a question on banks refusing to lend to businesses. Read more
The UK is poorer than it thought it was. This is the most important fact about the crisis. The struggle over the distribution of the losses is going to be brutal. It will be made more so by the second most important fact about the crisis: it has had a huge effect on the public finances. The deficits are unmatched in peacetime.
Happily, the general election would appear to offer a golden opportunity for a debate. Is that not the discussion the country ought to have? Yes. Is it the discussion it is going to have? No. What the government would do if re-elected remains, even after the pre-Budget report, “a riddle, wrapped in a mystery, inside an enigma”, as Churchill said of Stalin’s Russia. Read more
By Theo Vermaelen and Christian Wolff
In the recent financial crisis, taxpayers in many countries had to pick up the bills that resulted from governments bailing out banks. The idea that the government will save you if you make mistakes encourages excessive risk-taking. Bailouts have created popular resentment against bankers’ compensation, which makes it difficult to pay competitive salaries after a bank is rescued. So bailouts, which also add to the government deficits and crowd out other government spending plans, have many undesirable characteristics. Read more
By Moritz Schularick and Alan M. Taylor
Are credit bubbles dangerous? Long-run historical data reveal that important changes have taken place in the financial system over the past decades, setting in train an unprecedented expansion in the role of credit in the macroeconomy. It is mishap of history that just at the time when credit mattered more than ever before, the reigning doctrine had sentenced it to playing no constructive role in central bank policies. Over the past 140 years, episodes of financial instability were often the result of “credit booms gone wrong”. Read more