Crisis

The post post-Thatcher era begins

December 3, 2009 11:39 pm by Martin Wolf

Ferguson illustration

Margaret Thatcher became prime minister of the UK on May 4 1979 and remained in office for more than 11 years. Her government reshaped the politics of the UK and, after the election of Ronald Reagan as president of the US in 1980, these two reshaped the world. But, in the aftermath of the biggest financial crisis since the 1930s, one that centred upon the US and UK, where the world’s two leading financial centres are located, what is left of the Thatcher revolution?

Mrs (now Lady) Thatcher entered office determined to reverse a national decline marked by high inflation, slow growth and trade union militancy. Her government emphasised monetary control, deregulation, particularly of the financial sector, flexible labour markets, and privatisation. The post-1997 Labour government did not overthrow these policies but built upon them. Labour increased public spending but not hugely: in 2007-08, expenditure was below where it had been under Mrs Thatcher until 1988-89. Labour also abandoned active fiscal policy, adopted inflation targeting, introduced central bank independence and welcomed the vigour of the financial sector.

The remainder of the article can be read here. Please post comments below.

Posted in Crisis |

Give us fiscal austerity, but not quite yet

November 24, 2009 11:37 pm by Martin Wolf

Ingram Pinn illustration

Financial crises have devastating impacts on the public finances. The impact is also most severe where the pre-crisis excesses were greatest. Among members of the Group of Seven leading high-income countries, this means the bubble-infected US and UK. The question both countries confront is how soon and how far to tighten. Tightening will have to be substantial. But premature action could be a devastating error.

In their work on the history of financial crises, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University note that “the real stock of debt nearly doubles” in crisis-hit countries.* This will be true for the US and UK. It is only in small part the result of bail-outs of the financial sector or of stimulus programmes. According to the International Monetary Fund, in the UK none of the 10.6 percentage point rise in the ratio of fiscal deficits to gross domestic product between 2007 and 2010 will be due to crisis-related discretionary measures.** In the case of the US, 1.8 percentage points of a 6.5 percentage point deterioration will be due to such measures. Most of the change is structural: the levels of GDP and fiscal revenue will not return to the previous path.

How, though, does one assess this fiscal slippage? One way is historical (see charts). In the case of the UK, the crisis is forecast by the IMF to raise the ratio of net public debt to GDP by close to 50 percentage points between 2007 and 2014. The only comparable previous episodes are wars. The increase this time is smaller than that in the wars with revolutionary and Napoleonic France or the world wars of the 20th century. But it is as large, or larger, than in other 18th-century wars.

The remainder of the article can be read here. Please post comments below.

Posted in Crisis, Economics, Fiscal policy, IMF, Recession |

Grim truths Obama should have told Hu

November 18, 2009 12:52 am by Martin Wolf

Ingram Pinn illustration

Barack Obama, president of the US, met Hu Jintao, president of the People’s Republic of China, for a private meeting on Tuesday. The agenda was long, covering the world economy, climate change and non-proliferation of nuclear weapons. The last two are the most important, over the long run. But the first is the most urgent. If we do not achieve a healthy global economic recovery, hope of a co-operative relationship is likely to prove vain. Yet such a recovery is far from ensured. Worse, some of what is now happening – particularly China’s decision to depreciate the renminbi along with the dollar – makes healthy recovery less likely.

This, then, was an opportunity for Mr Obama to tell some brutal truths. I hope he did, after careful briefing from his staff, on the following lines.

“Mr President, as I said in Japan, ‘the US does not seek to contain China, nor does a deeper relationship with China mean a weakening of our bilateral alliances. On the contrary, the rise of a strong, prosperous China can be a source of strength for the community of nations’. For the foreseeable future, our two countries will be the leading players on the world stage. We must approach our challenges in a spirit of co-operation and accommodation. But that is, alas, not happening over your exchange rate policies.

The remainder of the article can be read here. Please post comments below.

Posted in China, Climate change, Crisis, Currencies, Monetary policy |

Victory in the cold war was a start as well as an ending

November 11, 2009 1:25 am by Martin Wolf

Pinn illustration

“A crisis is a strange way to celebrate an anniversary.” This is the wry judgment of Erik Berglöf, chief economist of the European Bank for Reconstruction and Development.* Yet a crisis is what we see in countries that began the march from communism two decades ago. So, has capitalism failed, as communism did? In a word, “no”. Some transition countries are in crisis; transition is not. The same judgment applies elsewhere: capitalist countries are in crisis; capitalism itself is not. But reform is necessary. The great virtue of liberal democracies and market economies is their ability to reform and adapt. They have shown these qualities before. They must do so once again.

For those born, like me, shortly after the second world war, the cold war was the defining intellectual and political struggle of our lifetimes. With the collapse of communism ended a catastrophic epoch of millenarian politics and the delusion of a rationally planned economy. The freedom offered by democracy and the prosperity supplied by markets won. But the fact that communism expired not with a bang, but with a whimper, we owe largely to Mikhail Gorbachev.

Yet 2009 is a sobering year from which to look back. A year ago, capitalism careered over a cliff. With vast effort, states have put it back on the road. According to Piergiorgio Alessandri and Andrew Haldane of the Bank of England, in a superb new paper**, the total gross value of interventions on behalf of banks has been $14,000bn (€9,400bn, £8,400bn). This is state socialism.

The remainder of the article can be read here. Debate from our panel of economists appears below.

Posted in Banks, Capitalism, Central banks, Crisis, Economics |

A better way to regulate financial markets: Asset based reserve requirements

November 10, 2009 3:35 pm by FT

By Thomas Palley

There is widespread recognition that the financial crisis which triggered the Great Recession was significantly due to financial excess, particularly in real estate lending. Now, policymakers are looking to reform the financial system in hope of avoiding future crises. But like the drunk who looks for his lost keys under the lamppost because that is where the light is, policymakers remain fixated on capital standards because that is what is already in place.

Continue reading: “A better way to regulate financial markets: Asset based reserve requirements”

Posted in Central banks, Crisis, Monetary policy, Recession, Regulation |

Further reading

October 27, 2009 11:38 am by FT

From the FT:

In depth: George Soros lectures
Storms lie ahead for politics’ odd couple – Philip Stephens on Mervyn King and George Osborne
We must overturn the status quo in derivatives – Kenneth Griffin

Elsewhere:

Oil prices and bank profitability – Heiko Hesse and Tigran Poghosyan, VOXEU
The Big Banks Get Bigger: Notes – James Surowiecki, The New Yorker
Fixed rates and protectionism, 2009 edition – Paul Krugman, New York  Times
The Panic of ’08: Recession Cause or Effect? – Casey B. Mulligan, NYT Economix Blog
How international reserves and easy money caused the crisis – Guillermo Calvo, VOXEU

Tags: , ,
Posted in Crisis |

Don’t give up on quantitative easing: We can have our cake and eat it too

October 16, 2009 12:37 pm by Financial Times

By Roger E. A. Farmer

According to a widely-held consensus view, the world is slowly emerging from the Great Recession of 2008. Growth in China is projected to top 8 per cent in 2009. Australia raised the interest rate on the Australian dollar last week and the US and UK economies are showing signs that unemployment growth has slowed even though the unemployment rates in both countries are very high. Sometime soon, perhaps in the spring of 2010, perhaps earlier, the Fed, the European Central Bank, and the Bank of England are likely to respond to the perceived global recovery by reducing the sizes of their balance sheets and raising interest rates on overnight loans.

Continue reading: “Don’t give up on quantitative easing: We can have our cake and eat it too”

Tags:
Posted in Capitalism, Central banks, Crisis, Economics, Inflation, Monetary policy |

Zero interest rate policy: Treatment may be as expensive as the crisis

October 15, 2009 11:22 am by FT

By Andrew Sheng and Michael Pomerleano

The national authorities and the international community should be commended for the speed of action taken to stop the spread of the financial crisis. To protect the financial system from the deflation in asset bubbles, the public sector has essentially guaranteed all deposits, rescued systemically important institutions, made large liquidity injections and brought interest rates to zero or near zero under a zero interest rate policy. Almost all systemically important central banks entered into ZIRP under emergency conditions at the same time.

But the polices adopted to combat the crisis are creating their own problems. In the medium term, the treatment may be as expensive as the crisis.

Continue reading: “Zero interest rate policy: Treatment may be as expensive as the crisis”

Posted in Capitalism, Central banks, Crisis, Fiscal policy, Keynesianism, Monetary policy |

A second Great Depression is still possible

October 11, 2009 4:37 pm by FT

By Thomas Palley

Over the past year the global economy has experienced a massive contraction, the deepest since the Great Depression of the 1930s. But this spring, economists started talking of “green shoots” of recovery and that optimistic assessment quickly spread to Wall Street. More recently, on the anniversary of the Lehman Brothers crash, Ben Bernanke, Federal Reserve chairman, officially blessed this consensus by declaring the recession is “very likely over”.

Continue reading: “A second Great Depression is still possible”

Posted in Crisis, Economics, Federal Reserve, Fiscal policy, Recession |

This time will never be different

October 2, 2009 6:24 pm by Martin Wolf

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”

Posted in Crisis, Economics |
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