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?
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.
Her Majesty’s question has sparked a series of ludicrous claims about the prescience of individual forecasters.
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.
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.
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.
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.
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.
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