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”. Continue reading "Credit booms gone bust"

Windfall taxes are a ghastly idea. They are a sop to prejudice, a burden on risk-taking and a form of arbitrary confiscation. No sensible person should support them. So why do I now find the idea of a windfall tax on banks so appealing? Well, this time, it really does look different. Continue reading "Tax the windfall banking bonuses"

If we are to understand where we are, we must understand where we have
been. This is particularly true if we are to escape from the huge
fiscal deficits being run by many governments. These deficits are not
the result of government stupidity; they are mainly a consequence of –
and response to – private behaviour. We must not ignore this connection. Continue reading "Private behaviour will shape our path to fiscal stability"

About a month ago, I visited the aero engine factory of Rolls-Royce, in Derby. I was hugely impressed. Making jet engines able to work at extreme temperatures is an extraordinary achievement. Why does the financial industry not work this way? How might we bring the performance of finance close to that of other sophisticated businesses?

Continue reading "Why curbing finance is hard to do"

A year ago, at the height of the financial panic, the world yearned for a profitable and confident financial sector. It now has what it wants, but hates it. As joblessness soars and the hopes of hundreds of millions of people are blighted, the financial sector’s survivors are thriving. Even bonuses are back. Policymakers have made a Faustian bargain. Success feels like failure. Continue reading "How to manage the gigantic financial cuckoo in our nest"

by Kenneth Rogoff

When in doubt, bail it out,” is the policy mantra 11 months after the September 2008 collapse of Lehman Brothers. With the global economy tentatively emerging from recession, and investors salivating over the remaining banks’ apparent return to profitability, some are beginning to ask: “Did we really need to suffer so much?” Continue reading "Why we need to regulate the banks sooner, not later"

By Ronald McKinnon

The global credit crunch which began in 2007 but became acute in 2008, originated from the collapse in the bubble in US house prices and, to a lesser extent, in European ones.

Unsurprisingly, the declining home values made people feel poorer, so consumption spending fell. This fall in aggregate demand in the US and Europe reduced demand for imports and caused a parallel slump in the rest of the world, including in emerging markets. Continue reading "Liquidity traps and the credit crunch"

From the FT:

Germany still in credit crunch danger: James Wilson investigates the suggestion that Germany could still suffer as the financial crisis reaches its lowest point

Singh’s big chance to unchain the Indian economy: Eswar Prasad says financial sector reforms will determine the pace and quality of India’s growth

Elsewhere:

Easing job losses don’t change weak prospects for US recovery: RGE Monitor

Undersized: Could Greenland be the new Iceland? Should it be? Anne Sibert in VoxEU.org