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. Continue reading "Bah Humbug: Stagflation is around the corner"

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. Continue reading "Constructive solutions to the financial crisis"

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. Continue reading "Bolder and more forceful"

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.  Continue reading "Is Tarp II enough?"

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. Continue reading "How to fix the banks"

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. Continue reading "Putting an end to financial crises"

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. Continue reading "Banks and turtles"

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? Continue reading "Does monetary policy still work?"