Federal Reserve chairman Ben Bernanke is speaking now at his old employer, Princeton University. He has taken the opportunity to forget about current monetary policy, wonk out, and talk about “The Implications of the Financial Crisis for Economics”.
Mr Bernanke’s conclusion? There are not that many implications. Most of the economic theory was correct but regulators did not update their practices to keep up with financial innovation and when the crisis came they were slow in their response.
Most of Mr Bernanke’s speech deals with microeconomics – of bank runs, moral hazard, asset price bubbles, and market liquidity – which is a little odd given that the most valid criticisms are of macro models that did not predict the crisis, and could not predict the crisis since they do not have a financial sector.
Probably the biggest open question in US fiscal policy is whether or not Congress will extend – in part or in full – more than $3,000bn in tax cuts enacted in 2001 and 2003 by George W. Bush.
With the provisions expiring at the end of the year, pressure is mounting on lawmakers to take some action in order to prevent all Americans from experiencing tax cuts on January 1 - an outcome which Goldman Sachs economist Alec Phillips this week warned would pose a significant downside risk to the US economy.
And yet, we learned yesterday that the Democratic majority in the Senate decided to throw in the towel and push back any debate and vote on the issue until after the midterm elections, prolonging the uncertainty for several more months – at least. Why ?
Inevitable, really. Though we wouldn’t have expected the staid Norwegian central bank to be the first (?) to take up legal arms.
After the US Securities and Exchange Commission exposed Citi’s super senior subprime slip — in which the bank misled investors over its subprime exposure between July and October 2007 — now come the lawsuits.
The SEC fined Citi $75m for the subprime deception. Norges Bank is suing over $835m worth of losses on Citi shares and bonds incurred between January 2007 and 2009. (For those wondering — in addition to overseeing monetary policy, Norges also looks after the international investments of Norways’ humongous sovereign wealth fund).
But the 221-page complaint goes much further than just the super senior CDO/liquidity put kerfuffle.
Stephanie Flanders reminds us that it takes two to tango in her latest blog post. The story concerns proposals that might fine euro members for failing to keep public finances within certain boundaries. Over to Ms Flanders:
There would be fines in the region of 0.2% of GDP for countries who borrow too much, and also smaller financial penalties for countries that don’t try hard enough to improve their competitiveness.
I’m told that competitiveness would be measured by a “persistent current account imbalance”. But as this blog has pointed out many times, it takes two to create a current account gap: if one country has a deficit, someone else must have a surplus.
In fact, all the signs are that the new system will have the same asymmetry that we see in the global economy more generally. Countries with deficits are pressured to reform, but the countries with surpluses are under no pressure to change their policies at all.
Speculation that Japanese authorities had intervened in the foreign exchange market to weaken the yen drove the currency sharply lower against the dollar. The dollar initially jumped 1.3 per cent to Y85.38 in reaction to market talk that the Bank of Japan had re-entered the market to sell yen and buy dollars.
Norway’s central bank might reduce the rate it offers banks on big deposits, in an effort to discourage cash-hoarding and incentivise interbank lending. More news is expected in 2-3 weeks.