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. Read more
By Roger E. A Farmer
“Before I draw nearer to that stone to which you point,” said Scrooge, “answer me one question. Are these the shadows of the things that Will be, or are they shadows of things that May be, only?”
Economic policy is in a muddle. Academic voices are flooding the blogosphere and the intelligent policymaker can be forgiven for being unclear as to which side to listen to. On one end of the spectrum are classical revisionists who blame government for distorting market outcomes. On the other are Keynesians who think that fiscal deficits will rescue capitalism from its excesses. Both are partly wrong. Both are partly right. Read more
By Ricardo J. Caballero
Suppose it was possible to rewind the clock to the first time we had a strong urge to rewrite economic history. A favourite stopping date would be the days before the Lehman-AIG debacle last year. Until then, we were dealing with localised inefficiencies and predatory behaviour among the main financial institutions. There was plenty to fix but it seemed manageable, mostly a matter of accelerating the medicine and aggressively dealing with problems on a case-by-case basis. Read more
By Christopher Carroll
In a speech in his hometown of Dillon, South Carolina, Ben Bernanke, US Federal Reserve chairman, recently promised that the Fed would “forcefully deploy all the tools at our disposal” in responding to the financial crisis.
This is excellent news, since the tools at the Fed’s disposal are awesome, and if deployed forcefully enough, could almost certainly end the acute stage of our financial panic.
The Fed has already shown remarkable boldness in responding to the crisis; if not for that boldness, financial markets and the world economy would be in much worse trouble than they are now. Read more
By Michael Pomerleano, Harald Scheule, and Andrew Sheng
The US Treasury just announced a Financial Stability Plan (revamped Tarp) to help purge banks of their bad bets by partnering with the private sector to buy troubled assets. The basic idea is to lend government money (US Federal Reserve) or guarantee borrowings (Federal Deposit Insurance Corporation) at a suitable spread over Libor to anyone- e.g., hedge funds and pension funds – who wants to buy toxic assets from the banks. Read more
By Roger E. A. Farmer
We don’t need to nationalise the banks. We don’t need to guarantee bad assets. We don’t need government to own voting shares in private banks. We don’t need to create a bad bank full of toxic assets. We just need a little faith in free markets and a little creative intervention. I propose that the central bank should support the price of an indexed fund of bank stocks. Read more
By Christophe Chamley and Laurence J. Kotlikoff
T’was the year the country stood still. Not a car, truck, or bus rode the roads. No one drove to work, no one drove to shop, no one drove to visit. No one drove anywhere.
The reason was simple. No one could buy gas. Gas stations had gone broke. Read more
By Christopher Carroll
Pondering the role of the central bank in a modern economy, one cannot help but be reminded of the apocryphal story of the western explorer who encounters an eastern mystic teaching his disciples that the world rests on the back of a giant turtle. Read more
By Stephen Grenville
With the US official interest rate now in effect zero, there is much talk of monetary policy “running out of ammunition” and “pushing on a string”. Has monetary policy become impotent in the US and Japan? Does a similar fate await the rest of us? Read more
By Roger Farmer
For the past seventy years, policy makers have relied on fiscal and monetary policy to combat recessions. Monetary policy works by lowering real interest rates and stimulating private expenditure. Since the nominal interest rate on three month treasury bills has now reached zero in the US, the scope for further easing is limited. This has led to an intellectual tsunami of proposals for a Keynesian-style fiscal stimulus of historic proportions. Read more
By Roger Farmer
The US recession that began in December 2007 resulted in 403,000 lost jobs in September, 320,000 in October and 533,000 jobs in November. Projections for 2009 are ominous. Read more
By Alistair Milne
Central banks are worried about falling rather than rising prices. By early next year, it is possible that central banks’ target policy interest rates will all be reduced to their minimum possible level of zero. Does this mean that central banks will then have lost control over monetary policy and be unable to prevent a cumulative debt deflation? Read more
By John Richards
As the recession deepens, policy rates around the world are rapidly approaching zero and they cannot go any lower. Does that mean that central bankers have run out of ammunition? Not necessarily. Read more
By Chris Giles, Economics editor
It has been a bad year for economic forecasters. So bad that royalty wants to know what went wrong. “Why did no one see it coming?” Britain’s Queen Elizabeth asked during a visit to the London School of Economics this month. Read more
By Kumiharu Shigehara
In his most recent speech, Donald Kohn, vice-chairman of the US Federal Reserve, said that the Fed had learned that the aftermath of a bubble can be far more painful than it had imagined. Read more
By Laurence Kotlikoff and Perry Mehrling
As we advocated two months back (Bagehot plus RFC: The Right Financial Fix), Uncle Sam is finally starting to sell systematic risk insurance on high-grade securities in exchange for preferred stock. This is a critical function for the US government; Uncle Sam is the only player capable of hedging systemic risk because he’s the only player capable of taking actions that keep the overall economic system on the right course. Read more
By Perry Mehrling
In a speech last week on “Policy Coordination Among Central Banks”, Ben Bernanke, US Federal Reserve chairman, drew attention to the way that the Fed’s swap line with other central banks has been used to facilitate lender of last resort funding for dollar-denominated assets held outside the US. Read more
By Ronald McKinnon
As always, I am amazed by how much analytical ground Martin Wolf covers in each column; “Why agreeing on a new Bretton Woods is vital” is no exception. Let me first pick up on one point: the number of countries involved in the negotiation.
The original Bretton Woods agreement was essentially bilateral, and negotiated between the British Treasury (Keynes) and the US Treasury (White) in 1943-1944, with Canada sometimes acting as an umpire.
The post-war General Agreement on Tariffs and Trade cum World Trade Organisation negotiations were manageable and quite successful as long as they were also mainly bilateral – the eastern European bloc versus the US – with Most Favoured Nation treatment extended to most other countries.
Developing countries did have a marginal say. The old GATT exempted them from the requirement to reciprocally reduce their own tariffs. This was disastrous for them, and fortunately is being phased out under the new WTO. Read more
By Francis M. Bator
Shoring up lenders, unclogging lending, even direct action to limit the slide in house prices, will no longer suffice to prevent a severe recession. Only public or private spending on output will prevent spiralling cutbacks in production, jobs and incomes.
Action to boost spending should be temporary, phased out as the economy recovers. But it should be large enough to make a difference. It takes about $500bn growth in total spending each year just to keep unemployment rates and capacity utilization constant. Each extra percent of unemployment costs $250bn-300bn per year in lost pre-tax wages and profits.
Here are two examples of fiscal action that would be easy to implement, quick to boost spending, and unusual enough to make timely reversal credible. Read more