Fiscal policy

Local currency bond markets: Will this time be different?

January 4, 2010 1:15 pm by FT

By Michael Pomerleano

As fears of debt disaster swirl around Dubai and Europe, it is useful to take a closer look at local currency bond markets. A recent superb book – This Time is Different: Eight Centuries of Financial Folly, by Carmen M. Reinhart and Kenneth Rogoff - offers a veritable tour de force of local currency markets. Reinhart and Rogoff have done an extraordinary job of putting together statistics covering eight centuries of government debt defaults around the world. The lengthy historical perspective documents never-ending cycles of boom and bust.

Their story is vastly different from the reports propagated by the official community. The official story of local currency bond markets reads roughly as follows. The typical report from a multilateral financial institution (and there have been several) points to the rapid development of local currency bond markets over the past years as a source of strength for financial systems in emerging-market economies. They report that foreign investment is buoyant, with foreign investors channeling increasing volumes of funds into these markets. The authors invariably commend developing countries for borrowing in local currency to reduce foreign currency mismatches end encourage them to adopt better macroeconomic policies, improve debt management strategies, and undertake further financial sector reform.

Continue reading: “Local currency bond markets: Will this time be different?”

Posted in Currencies, Economics, Fiscal policy |

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 |

Private behaviour will shape our path to fiscal stability

November 4, 2009 12:53 am by Martin Wolf

Pinn illustration

If we are to understand where we are, we must understand where we have
been. This is particularly true if we are to escape from the huge
fiscal deficits being run by many governments. These deficits are not
the result of government stupidity; they are mainly a consequence of –
and response to – private behaviour. We must not ignore this connection.

Continue reading: “Private behaviour will shape our path to fiscal stability”

Posted in Credit squeeze, Fiscal policy |

How mistaken ideas helped to bring the economy down

October 28, 2009 12:41 am by Martin Wolf

Image

How did the world economy fall into such a deep hole? It is recovering, but painfully, and after a deep recession, despite unprecedented monetary and fiscal easing. Moreover, how likely is it that a balanced world economy will emerge from this force-feeding? The very fact that such drastic action has been necessary is terrifying. The fact that there is little room for a policy encore is yet more terrifying. Most terrifying of all is that this is not the first time in recent decades the world economy has had to be guided through a post-bubble collapse.

In his latest book – a successor to Valuing Wall Street, which appeared in time to help alert readers avoid the 2000 meltdown – Andrew Smithers of London-based Smithers & Co, provides an invaluable guide to past errors of analysis and policy.* He is a rare guide – a man with a deep understanding of economics and a lifetime’s experience of financial markets. His work helps to explain the stock-market bubble of the 1990s, the fiscal errors of Gordon Brown and the recent credit excess.

The big points of the book are four: first, asset markets are only “imperfectly efficient”; second, it is possible to value markets; third, huge positive deviations from fair value – bubbles – are economically devastating, particularly if associated with credit surges and underpricing of liquidity; and, finally, central banks should try to prick such bubbles. “We must be prepared to consider the possibility that periodic mild recessions are a necessary price for avoiding major ones.” I have been unwilling to accept this view. That is no longer true.

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

Posted in Banks, Fiscal policy |

Further reading

October 19, 2009 1:29 pm by Financial Times

From the FT:

Goodbye, Macroeconomics – Eli Noam

The travesty of the commons – Christopher Caldwell on the field of Nobel winner Elinor Ostrom

The free market is not up to the job of creating work – Mort Zuckerman on US unemployment

Countdown to the next crisis is already under way – Wolfgang Münchau

Down but not out – Krishna Guha on the dollar

Elsewhere:

Cognitive Dissonance and Global Macroeconomics – James Kwak on rhetoric and reality in the global imbalances debate, at Baseline Scenario

Escaping the state should cost Lloyds – Peter Thal Larsen, Reuters

Herbert Hoover and the start of the Great Depression – Lee E. Ohanian on history VOXEU

No L – James Hamilton on having avoided an ‘L-shaped’ recovery, at Econbrowser

Goldman Turns Into a Financial Frankenstein While the Fed Snoozes Away – Huffington Post

A reflection on the G20 (The question never asked to Mr Zoellick) – Biagio Bossone on the legitimacy of the G20 for small nations, at VOXEU

Tags: ,
Posted in Banks, Economics, Fiscal policy, Recession |

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 |

Further reading: The US economy

October 12, 2009 2:50 pm by FT

From the FT:

Wolfgang Münchau: Making the case for a weaker dollar

Alan Rappeport: US trade gap unexpectedly narrows in August

Editorial comment: US jobs subsidies

Roger Altman: How to avoid greenback grief

John Authers: Manufactured surprises will keep stocks rolling

Elsewhere:

James Hamilton, Econbrowser: Will stimulating nominal aggregate demand solve our problems?

Brad Delong on the wisdom of more fiscal stimulus

Paul Krugman, NYT: The madness of the monetary hawks

James Kwak, Baseline Scenario: “What’s wrong with a phone call?” – How Wall Street influences Washington

Alan S. Blinder, VOX EU: 25 per cent of US jobs are offshorable

Posted in Economics, Fiscal policy, Recession |

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 |

Bolstering financial stability regulation

August 28, 2009 2:52 pm by Financial Times

By Masahiro Kawai and Michael Pomerleano

In a previous article in the Economists’ Forum, we expressed skepticism about the capacity of the Financial Stability Board to implement sound international financial stability regulatory architecture. We concluded that the prospects were more promising on the domestic front; this led to a discussion on creating a financial stability regulator at the national level.

The Obama administration has proposed that the Federal Reserve should become the overseer of financial stability in the US. The central bank would gain power to monitor risks across the financial system and sweeping authority to examine any firm that could threaten financial stability. The nation’s biggest and most interconnected firms would be subject to heightened oversight.

Continue reading: “Bolstering financial stability regulation”

Posted in Central banks, Crisis, Economics, Federal Reserve, Fiscal policy, Monetary policy, Regulation |

How the EU could stop the global crisis becoming a European problem

August 23, 2009 1:58 pm by Financial Times

By Andre Sapir

Imagine the US was facing the current crisis with the following situation: only 30 of its 50 states belong to the dollar area; most of the southern states are outside the dollar area and so is New York, home of the US financial centre; the seat of the US government is in Washington, but dollar area chairman Ben Bernanke operates from Pittsburgh and secretary Tim Geithner is mainly governor of Vermont, one of the smallest US states, with a population of roughly half a million.

Absurd? Yet this is exactly what the European Union looks like, with only 16 of its 27 member states belonging to the euro area; most of the eastern states and the UK, home of the EU financial centre, outside the euro area; the seat of the EU institutions in Brussels, but ECB president Jean-Claude Trichet operating from Frankfurt and Eurogroup chairman Jean-Claude Juncker mainly the prime minister of Luxembourg.

Continue reading: “How the EU could stop the global crisis becoming a European problem”

Posted in Eurozone, Fiscal policy, IMF, Regulation |
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