US politics

Shankar Acharya

By Shankar Acharya

What might 2011 hold for us? Given the intrinsic uncertainty about the future, the really honest answer would be: I don’t know. But that would be far too boring a response and, perhaps more to the point, would not fill a column. So, at the risk of looking foolish in a year’s time, here are some predictions for 2011. 

A hyperpower’s place is in the wrong. This is particularly true when, as last week at the annual meeting of the World Economic Forum in Davos, the hyperpower in question is barely represented, at least at the official level. But, truth to tell, the critics of the US – led by prime ministers Wen Jiabao of China and Vladimir Putin of Russia – had an easy story of incompetence and malfeasance to tell. 

Pity President Barack Obama. He won power partly because of the global economic crisis. He himself, most of his fellow citizens and much of the rest of the world agree that the US broke the world economy and now has the duty to fix it. Unhappily, this consensus is false. The crisis is a product of the global economy. It cannot be cured by the US alone. 

 

Last week, President-elect Barack Obama duly unveiled his American recovery and reinvestment plan. Its title was aptly chosen, for Mr Obama spoke, astonishingly, as if the policies of the rest of the world had no bearing on the fate of the US. He spoke, too, as if a large fiscal stimulus would be enough to restore prosperity. If that is what he believes, Mr Obama is in for a shock. The difficulties he confronts are much deeper and more global than that. 

By Ha-Joon Chang

By electing Barack Obama, US citizens have spoken – they not only want a more inclusive and less war-like country but one with different economic policies. 

In electing Barack Hussein Obama to the presidency, the American people have chosen an intellectual, a prophet of unity and a man with a Black Kenyan father and a white American mother. They have, at the same time, rejected the politics of fear and division that did such damage to their country. 

By John N Muellbauer

When future economic historians look back to trace the triggers for the October 2008 financial panic and the unnecessarily severe recession of 2009, they will likely put their fingers on two.

  • The failure to keep Lehman Bros functioning as a going concern.
  • The failure of the European Central Bank and the Bank of England to use their interest rate setting firepower to organise a substantial globally co-ordinated interest rate cut (the cut of October 8, 2008 was too timid).

A convincing argument for independent central banks adopting an inflation targeting framework is that, where central banks are forward looking and responsive, they should be able to avoid deflationary slumps. The markets then should expect the central banks to assess clearly the global economic situation and the downside risks, and take decisive action. 

By Ronald P. O’Hanley and Charles. J. Jacklin

Critics of the government’s financial rescue plan are rightly concerned about taxpayers getting stuck with a $700 billion tab that benefits Wall Street bankers.  No plan can be successful if it unduly enriches any of the participants at the expense of the taxpayer.

But does this rescue plan really need to be a ‘bailout’ in order to be successful?   Not if it is structured properly and strikes the right balance between protecting taxpayers and encouraging participation by the financial industry.  Remember how we got here: an increase in credit risk, a decrease in liquidity, and increased ambiguity of valuation.  The Treasury plan will not eliminate credit risk, and taxpayers should not bail out companies that made bad decisions.  However, Treasury can increase liquidity by increasing demand and can reduce ambiguity by providing transparency. The best way to do so is to put in place a reverse auction that can help lift the entire market.

Traditional auctions have one seller and many buyers competing on price.  But in this situation, there is likely, at least at first, to be only one buyer (the U.S. Treasury) and many potential sellers (all the banks holding these toxic securities).  Through such a reverse auction, these sellers would propose to the Treasury – and ultimately any other buyers willing to come into the market as co-investors – the lowest price they would accept for their eligible securities. This will help protect taxpayers from overpaying for these securities. 

 

By Martin Wolf