Creditor countries are worrying about the safety of their money. That is what links two of the big economic stories of last week: Chancellor Angela Merkel’s attack on the monetary policies pursued by central banks, including her own, the European Central Bank; and the pressure on Tim Geithner, US Treasury secretary, to persuade his hosts in Beijing that their claims on his government are safe. But are they? The answer is: only if the creditor countries facilitate adjustment in the global balance of payments. Debtor countries will either export their way out of this crisis or be driven towards some sort of default. Creditors have to choose which. Continue reading "It is in Beijing’s interests to lend Geithner a hand"

By Michael Pomerleano

The consequences of the banking crisis will linger for a long time. In a recent seminal paper, The Aftermath of Financial Crises, (December 19, 2008) Carmen Reinhart and Kenneth Rogoff find that the outcome of severe financial crises share three characteristics. Continue reading "Credit growth in the aftermath of a crisis"

Did inflation targeting fail? Central banks have mostly escaped blame for the crisis. Do they deserve to do so?

Just over five years ago, Ben Bernanke, now chairman of the Federal Reserve, gave a speech on the “Great Moderation” – the declining volatility of inflation and output over the previous two decades. In this he emphasised the beneficial role of improved monetary policy. Central bankers felt proud of themselves. Pride went before a fall. Today, they are struggling with the deepest recession since the 1930s, a banking system on government life-support and the danger of deflation. How can it have gone so wrong? Continue reading "Central banks must target more than just inflation"

Spring has arrived and policymakers see “green shoots”. Barack Obama’s economic adviser, Lawrence Summers, says the “sense of freefall” in the US economy should end in a few months. The president himself spies “glimmers of hope”. Ben Bernanke, chairman of the Federal Reserve, said last week “recently we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding and consumer spending, including sales of new motor vehicles”. Continue reading "Why the ‘green shoots’ of recovery could yet wither"

By Douglas W. Diamond and Raghuram G. Rajan

Why are banks so reluctant to lend? One possibility is that they worry about borrower credit risk, though worries need to be extreme to justify the substantial drop in term lending. A second is that they may worry about having enough liquidity of their own, if their creditors demand funds. Yet, the many Federal Reserve facilities that have been opened should assuage these concerns. Continue reading "Fear of fire sales and the credit squeeze"

Is the US Russia? The question seems provocative, if not outrageous. Yet the person asking it is Simon Johnson, former chief economist at the International Monetary Fund and a professor at the Sloan School of Management at the Massachusetts Institute of Technology. In an article in the May issue of the Atlantic Monthly, Prof Johnson compares the hold of the “financial oligarchy” over US policy with that of business elites in emerging countries. Do such comparisons make sense? The answer is Yes, but only up to a point. Continue reading "Cutting back financial capitalism is America’s big test"

Did the meeting of the Group of 20 in London last week put the world economy on the path of sustainable recovery? The answer is no. Such meetings cannot resolve fundamental disagreements over what has gone wrong and how to put it right. As a result, the world is on a path towards an unsustainable recovery, as I argued last week. An unsustainable recovery might be better than none, but it is not good enough. Continue reading "What the G2 must discuss now the G20 is over"

The UK has followed the US and Japan into “unconventional monetary policy”. Meanwhile, Mervyn King, governor of the Bank of England warns the UK government of the dangers of further discretionary fiscal stimulus. Yet what are the implications of the policies followed by central banks? Are these not the big threat to monetary stability? Continue reading "Credibility is key to policy success"