By Thomas Palley

There is widespread recognition that the financial crisis which triggered the Great Recession was significantly due to financial excess, particularly in real estate lending. Now, policymakers are looking to reform the financial system in hope of avoiding future crises. But like the drunk who looks for his lost keys under the lamppost because that is where the light is, policymakers remain fixated on capital standards because that is what is already in place. Continue reading "A better way to regulate financial markets: Asset based reserve requirements"

By Kumiharu Shigehara

Japan’s economic expansion stumbled by late 2007, and in the context of the global economic crisis, it has been trapped in the deepest recession of the post-war era. Initially, the impact of the global crisis on the Japanese economy was expected to be limited because Japanese banks and other financial institutions were relatively insulated from financial turmoil. However, between the third quarter of 2008 and the first quarter of this year, Japan’s exports fell at an annual rate of some 55 per cent in volume terms, the sharpest among OECD countries and double the area’s average rate of decline. Continue reading "Japan needs more aggression in warding off deflation"

By Roger E. A. Farmer

According to a widely-held consensus view, the world is slowly emerging from the Great Recession of 2008. Growth in China is projected to top 8 per cent in 2009. Australia raised the interest rate on the Australian dollar last week and the US and UK economies are showing signs that unemployment growth has slowed even though the unemployment rates in both countries are very high. Sometime soon, perhaps in the spring of 2010, perhaps earlier, the Fed, the European Central Bank, and the Bank of England are likely to respond to the perceived global recovery by reducing the sizes of their balance sheets and raising interest rates on overnight loans. Continue reading "Don’t give up on quantitative easing: We can have our cake and eat it too"

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"

From the FT:

Neil Dennis: Sterling declines after inflation hits 5-year low

UK Daily View: Chris Giles on the significance of a five-year low for consumer price inflation (video)

Peter Garnham: Ragged pound may prove the best ballast for rebalancing

Editorial: The upside of sterling’s slide

Peter Garnham: Weak dollar hides feeble pound

From Elsewhere:

World Bank Crisis Talk: Pity the pound

The Independent: Talking down the pound

Evening Standard: Why it’s a good thing the pound is weaker

From the FT:

Michael Milken: Prosperity rests on human and social capital

Wolfgang Münchau: Diverging deficits could fracture the eurozone

John Authers: Crisis creates new sophistication in risk

Deven Sharma: Insight: Consistency in credit ratings

Elsewhere:

Dimitri Vayanos and Paul Woolley, VOX EU: Capital market theory after the efficient market hypothesis

Simon Johnson, Peterson Institute: The G-20, the IMF, and Legitimacy

Paul Krugman, NYT: Obama’s Anzio

James Kwak, The Baseline Scenario: Fed Chest-Thumping for Beginners

I like and admire Lord Turner, chairman of the UK’s Financial Services Authority. He is more than an acute analyst. He is also brave. He showed that in his struggle with Gordon Brown, then chancellor of the exchequer, over plans for pension reform published in 2005. He is showing that again today in the lively debate he has initiated on the future of financial regulation. Continue reading "Turner is asking the right questions on finance"

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"