By John Muellbauer
The world economy is suffering from a Keynesian shortage of demand. Worse, it is trapped in a dangerous downward spiral of falling asset prices, rising bankruptcies, foreclosures and unemployment feeding into more of the same, along with falling commodity and now goods prices. Since no country is exempt, international co-ordination is needed and made easier because of the obvious common interest. The rapidity of the current contraction also means that fiscal solutions, though helpful, are not timely enough and create obvious free rider problems. Read more
By Richard Portes
Expectations for the G20 meeting on November 15 are excessive. It will not agree on changes to the institutions of global governance, nor will it come up with an ‘n-point plan’ for dealing with the crisis. Read more
By Arvind Subramanian
Getting countries with persistent current account surpluses to adjust obsessed Keynes because he was acutely aware of the limited leverage that could be exerted against such countries. Sixty years later, that problem continues to haunt the international financial system. The ongoing global crisis originated predominantly in poor national policies and regulation. But large current account surpluses, stemming in part from undervalued exchange rates, and the resulting liquidity surfeit was a facilitating factor.
Failure to address this issue by the Bretton Woods II process would be a serious abdication of responsibility by the financial system. Few issues are as central to the system or as much in need of multilateral cooperation.
Adding to the urgency of multilateral action will be US politics. If the US economy takes a downturn and the dollar continues to strengthen, a resurgence of protectionist pressures is likely. This time around, these pressures could well take the form of unilateral action against competitive currencies. It is noteworthy that President-elect Obama has actively and repeatedly supported action against “currency manipulation.” Read more
By Edmund Phelps
What theory can we use to get us out of the impending slump quickly and reliably? To use the “new classical” theory of fluctuations begun at Chicago in the 1970s – the theory in which the “risk management” models are embedded – is unthinkable, since it is precisely the theory falsified by the asset price collapse. The thoughts of some have turned to John Maynard Keynes. His insights into uncertainty and speculation were deep. Yet his employment theory was problematic and the “Keynesian” policy solutions are questionable at best. Read more
By Anders Åslund
This is the worst global asset bubble and financial panic since the Great Depression of 1929-1933. Still, almost all argue that it cannot become equally bad, because we have learned those lessons.
Analytically, that statement does not hold. True, our policymakers are not likely to repeat the same mistakes of the Great Depression, but they may commit other mistakes. Bank deposit insurance has come to stay for good, but not all advances represent progress, and many create new vulnerabilities. Read more