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.
By Michael Pomerleano
What are the broader implications of the report on Lehman Brothers issued by the bankruptcy examiner?
The report details the effort to conceal Lehman’s true debt levels through the so-called “Repo 105” structure. It finds “credible evidence” to back a claim that the failure of Dick Fuld, Lehman chief executive, to disclose the transactions was “grossly negligent”.
By Alistair Milne
Debt is a drug. High levels of debt used for unproductive purposes result in a temporary economic high. But after the high there is the inescapable low. Who should pay the bill when it eventually comes due? Should it be the debt user, for eagerly borrowing more than they can comfortably repay? Should it be the debt provider, for knowingly supplying more debt than they can reasonably expect to be paid back? Or should others rally round to help reduce the burden?
The struggle by Greece to repair its public finances is a big challenge to the European single currency. But the underlying question is no different from other previous debt crises, such as Imperial Spain in the 16th and 17th century, Latin America in the 1980s or most recently in US subprime mortgage lending. Who pays?
Germany says “nein”. That is the most important conclusion to be drawn from the debate on eurozone economic policy. What the German government is saying is that the eurozone must become a greater Germany. But this policy would have profoundly negative implications for the world economy.
Continue reading “Excessive virtue can be a vice for the world economy”. Please leave your comments in the box at the end of Martin Wolf’s column.
By Niels Thygesen
As financial markets and the public debate focus on very rapid debt accumulation by European governments, and by Greece in particular, many people have looked again at the unique construction of Europe’s Economic and Monetary Union.
By Paul De Grauwe
The crisis that started in Greece culminated into a crisis of the eurozone as a whole. It may find a temporary resolution. But even then, it will leave an important imprint on macroeconomic management within the eurozone.
Anybody who looks carefully at the world economy will recognise that a degree of monetary and fiscal stimulus unprecedented in peacetime is all that is prodding it along, not only in high-income countries, but also in big emerging ones. The conventional wisdom is that it will also be possible to manage a smooth exit. Nothing seems less likely. So let us consider the endgame, instead.
The remainder of this column can be read here. Please post comments below.
Niall Ferguson is not given to understatement. So I was not surprised by the claim last week that the US will face a Greek crisis. I promptly dismissed this as hysteria. Like many other high-income countries, the US is indeed walking a fiscal tightrope. But the dangers are excessive looseness in the long run and excessive tightness in the short run. It is a dilemma of which Prof Ferguson seems unaware.
The remainder of this column can be read here. Please post comments below.
By James Park
In October 2008, the flow of money stopped. As Lehman Brothers teetered on bankruptcy, the US financial system went into septic shock – from toxic assets representing worthless derivatives and collateralised debt obligations. To capture the gravity of the situation, the media latched onto metaphors. Warren Buffett called that October the economic equivalent of a Pearl Harbor.
While Buffet’s martial analogy serves to highlight the fall in the inter-institutional lending, a more apropos analogy is that the financial system found itself in the intensive care unit with the diagnosis of septic shock.
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.
Mr Volcker is proposing a version of the distinction between commercial and investment banking brought into the US by the Glass-Steagall Act of 1933. In announcing his new proposals last week, Mr Obama referred to a “Volcker Rule” that “banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers”. Furthermore, added the president: “I’m also proposing that we prevent the further consolidation of our financial system.”
The remainder of this article can be read here. Please post comments below.
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