By Kevin P. Gallagher
Rio de Janeiro, Brazil. AFP/Getty Images
Emerging markets have fallen victim to unstable capital flows in the wake of the financial crisis. In an attempt to mitigate the accompanying asset bubbles and exchange rate pressures that come with such volatility, a number of emerging markets resorted to capital controls. Although these actions have largely been supported by the International Monetary Fund, some policy-makers and economists have decried capital controls as protectionist measures that can cause spillovers that unduly harm other nations.
Recently-published research shows that these claims are unfounded. According to the new welfare economics of capital controls, unstable capital flows to emerging markets can be viewed as negative externalities on recipient countries. Therefore regulations on cross-border capital flows are tools to correct for market failures that can make markets work better and enhance growth, not worsen it. Read more
By James Park
With the demise of Lehman Brothers in 2008 and the subsequent septic shock that stemmed the flow of liquidity in the financial system, the Federal Reserve responded with an unprecedented infusion of liquidity that has continued into this year.
However, this heightened rate of infusion is scheduled to finish in July. With the looming end of the second dose of quantitative easing (QE2) the media has latched onto the analogy of Bill Gross, Pimco’s co-chief investment officer, of QE2 and subsequent liquidity pumping efforts as a Ponzi scheme. The recent exit of Pimco (one of the world’s biggest bond fund managers) from US Treasuries underscores Mr Gross’s huckster metaphor.
While there is an element of warranted alarm, seeing the crisis through the clinical prism of blood composition and stem cells may provide a more balanced view. Read more
By Brendan Brown
There is a magic monetary wand out there which could accelerate economies along the road to prosperity out of the widespread destruction wrought by the global credit bubble.
This wand is not the creation of another monetary time-bomb labelled “quantitative easing”; rather the source of magic is an emergency conversion of banknotes. Read more
By Roger E.A. Farmer
For the past nine months I have been presenting some new ideas at academic conferences where economists have been grappling with the current financial crisis. Boston, Montreal, Amsterdam, London, Cleveland, Sydney, Atlanta … Only the venues change. The participants and the papers are always the same. Read more
By Ronald McKinnon
This is an updated version of Liquidity traps and the credit crunch, published in this forum on August 13, 2009
Since the onset of the credit crunch and global downturn, governments everywhere have responded to the shortfall in aggregate demand in a textbook Keynesian fashion. They have adopted fiscal stimuli: ramping up government expenditures and cutting taxes. Central banks followed the lead of the Federal Reserve by driving down short-term interest rates toward zero: almost exactly zero for overnight interbank rates in the US, Japan, and Canada, and generally less than 1 per cent in Europe into the autumn of this year. Read more
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. Read more
By Ronald McKinnon
The global credit crunch which began in 2007 but became acute in 2008, originated from the collapse in the bubble in US house prices and, to a lesser extent, in European ones.
Unsurprisingly, the declining home values made people feel poorer, so consumption spending fell. This fall in aggregate demand in the US and Europe reduced demand for imports and caused a parallel slump in the rest of the world, including in emerging markets. Read more
By Roger E. A. Farmer
Confidence is slowly returning to the stock market and the S&P is back to the level it reached when President Obama took office in January. This is enough to prevent a further collapse in spending; the Obama stimulus package may even move us into positive territory for US gross domestic product growth. But these ‘green shoots of recovery’ are not enough to create the jobs needed to restore full employment in the US. Read more
By Brendan Brown
Global equity markets are understandably not taking seriously the ominous pessimism from commentators dissatisfied with the notion of an economic recovery emerging from below.
Yes the S&P 500 may be down a few per cent in recent days but that is mainly a reflection of the US dollar’s mini-rebound (which means foreign earnings become worth less in US dollar terms) and some long overdue downward correction (very small so far) in commodity markets. Read more
By Roger E. A Farmer
In the FT’s Economists’ Forum, Benn Steil wrote a stimulating piece in which he argued that Keynes was wrong. His argument is that interpretations of Keynesian economics are all based on the assumption that wages and prices are sticky. But wages and prices are not sticky. Ergo – Keynes was wrong. Read more
By Benn Steil
The Congressional Budget Office estimates that the US budget deficit will reach $1.85 trillion this year and $1.38 trillion in 2010, 13.1 per cent and 9.6 per cent of gross domestic product respectively. Much more worryingly, it projects deficits averaging more than $1 trillion a year for the next 10 years, which will raise the US public debt-to-GDP ratio to more than 80 per cent by 2019.
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
Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.
“The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’” Thus quipped Ronald Reagan, hero of US conservatism. The remark seems ancient history now that governments are pouring trillions of dollars, euros and pounds into financial systems. Read more
What has Japan’s “lost decade” to teach us? Even a year ago, this seemed an absurd question. The general consensus of informed opinion was that the US, the UK and other heavily indebted western economies could not suffer as Japan had done. Now the question is changing to whether these countries will manage as well as Japan did. Welcome to the world of balance-sheet deflation. Read more
By Benn Steil
“Many of the most successful economics blogs promote communication within political groupings, not across them. On the web you best build an audience by organising a claque and stroking its prejudices. Extend elaborate courtesy to people you agree with and boorish contempt to those who do not get it. Celebrate exasperation and incivility as marks of intellectual authenticity – an attitude easier to tolerate in teenagers under hormonal stress than in professors at world-class universities” (Clive Crook, FT February 8, 2009).
Two days before Clive’s column appeared, I experienced firsthand the econoblog treatment he describes. On February 6, the FT published an op-ed by me (“Keynes and the triumph of hope over economics”) criticising the tendency of economists to invoke Keynes, rather than logic and evidence, in support of any and all forms of new deficit spending, which are now massed together under the cozy umbrella of “stimulus” – a term that closes discussion by simply assuming the merits it claims. Read more
By Peter Clarke
For more than 20 years after his death in 1946, the name of John Maynard Keynes achieved a sort of posthumous veneration that mythologised him as not just a great economist but an infallible prophet. This happened on both sides of the Atlantic and across party lines. It was US president Richard Nixon who declared: “We are all Keynesians now.” Well, times change. Myths become vulnerable to debunking – and, if you wait long enough, to rebunking too. The Keynesian era came to grief in the 1970s. For about 30 years Keynes’s reputation languished. Then, in about 30 days, it has apparently been restored. 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
We are all Keynesians now. When Barack Obama takes office he will propose a gigantic fiscal stimulus package. Such packages are being offered by many other governments. Even Germany is being dragged, kicking and screaming, into this race. Read more
By Niall Ferguson
In the Old Testament Book of Leviticus, God commands the children of Israel to observe a jubilee every 50 years. Nowadays we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth’s golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts. Read more
By Nariman Behravesh
The full fury of the two shocks that have hit the world economy – the financial crisis and record oil prices – is beginning to dissipate. Unfortunately, the full impact of these shocks on the real economy has yet to be felt. Read more