Vox’s annual break and some holiday reading tips

Richard Baldwin

25 December 2010

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After months of preparatory work, Vox was launched in June 2007. The first weeks were going well – and then the subprime crisis struck.

The subprime crisis establishes Vox’s niche

On the 9th, 10th, and 13th of August 2007, the US Fed injected a total of $38 billion into the US banking system; simultaneously, the ECB injected ten times that much into Europe’s banking system.

This action – which made headlines around the world – seemed inexplicable.

As it turned out, the banking-finance-macro linkages had gotten radically more complex than most economists realized – even many macroeconomists. Some economists knew about the new world of banking (shadow banks, etc), some knew about the new world of finance (exotic derivatives like CDOs, etc), and some understood the economy’s reliance on credit. Nobody knew about all three, or at least not well enough to predict the crisis. (Leaving aside economists who predict a new crisis in every speech – even a broken clock is right twice a day; the trouble is that you never know when it’s right.)

To understand what the Fed and ECB did and why they did it required a level of detail and economics that far surpassed the sort of commentary traditionally published in the business press – even the Economist and the FT.

Steve Cecchetti (now BIS chief economist) and a band of well-informed economists wrote a series of Vox columns from August 2008 that explained what was going on in a way that trained economists could understand. This created a niche for Vox:

  • On the readership side; the press was using vague phrases ‘liquidity problems’, ‘toxic assets’, etc. and imprecise economics ‘bubbles’, ‘panics’, etc. What economists in policy positions, the private sector, and academia demanded was specificity and clear economic logic.
  • On the authorship side, Vox provided a rapid outlet for policy-relevant commentary and analysis in a situation where ‘impossible’ things happened every month.

The global crisis and Eurozone crises as boosters

The 13 months between August 2007 and September 2008 saw a steady rise in Vox readership and the quality of contributions. Then Lehman Brothers happened.

Vox readership skyrocketed. We had 194,625 pageviews in July 2008 and 870,439 in September; by November, our monthly pageviews topped a million. During this same period, the number of distinct visitors jumped from 69,424 to 474,648.

One very telling difference between the new media like Vox and the old media emerged when the Paulson plan was being considered in September 2008.

Things developed so quickly that the traditional media couldn’t keep up. There was so much demand for commentary from experts that the print media – with its one or two columns published once a day – seemed like an egg falling to the floor in slow motion. For example, Martin Wolf used his column to explain that the Paulson Package would not be the solution. Not a financial market expert himself, he bolstered his logic by citing the experts – all of whom posted on Vox days before.

  • He cited Chicago University Professor Luigi Zingale’s argument that Paulson has the wrong of the asset-liability stick; Vox posted Zingales 3 days before.
  • He cited Columbia University Professor Charles Calomiris' ideas on the US government injecting preferred stock into the ailing banks; Vox had posted that 2 days before.

The shift became clearest when the FT invited Daniel Gros and Stefano Micossi posted to publish a shorter, dumbed-down version of the Vox column they had posted 4 days before.

Eurozone crisis

The Eurozone crisis of May 2010 was another big boost to Vox readership. In February 2010, we had 1.4 million pageviews from 468,513 visitors. April, May and June 2010 saw monthly pageviews exceeding 1.5 million. The monthly numbers of visitors were just shy of a million. On the typical day, Vox now gets visits from 25,000 to 30,000 people who look at between 60,000 and 100,000 pages.

Think back to May 2010. While politicians were speaking soothing words and print journalists were gathering opinions from all sides, Vox columnists very precisely and very accurately pointed out the crux of the problem.

As far back as 2008, Carmen Reinhart pointed out (based on her book with Ken Rogoff) that one of the strongest stylised facts was that severe banking crises were often followed by sovereign debt crises. She posted three warnings on Vox:

Barry Eichengreen added specificity to this in January 2009 with his insightful column “Was the euro a mistake?”, noting: “What started as the Subprime Crisis in 2007 and morphed in the Global Credit Crisis in 2008 has become the Euro Crisis in 2009. Sober people are now contemplating whether a Eurozone member such as Greece might default on its debt.” The alternative to default was “fiscal retrenchment, wage reductions, and assistance from the EU and the IMF for the cash-strapped government.”

Charles Wyplosz and Paul De Grauwe also gave early warnings, both in December 2009, months before the crisis blossomed.

The Eurozone crisis came to a head in late April 2010. It became clear that some sort of rescue would be necessary.

Vox columnists used straightforward economic reasoning and wisdom gathered from past crises to discuss the outlines of what the package should look like. Eurozone national leaders initially rejected IMF involvement, but to Vox columnists this was folly. As Charles Wyplosz wrote in February 2010: “if Greece, and other countries, needs support to refinance their public debts, they can and should call the IMF. In contrast to EU countries that have no instrument to impose debt discipline (the Stability Pact has failed over and again and is completely discredited by now), the IMF operates an effective conditionality machinery.”

In early May, bond markets had pushed Greek sovereign spreads so high that a disorderly default seemed to be inevitable without some outside intervention. This forced EU leaders to put together a rushed package of assistance over the first weekend of May.

The market wasn’t convinced with this first package. Neither were Vox columnists. The day after the plan was announced, Charles Wyplosz wrote a column “And now? A dark scenario”, which opened with this sentence: “The plan will not work.”

But even more striking than his prediction was his analysis: “The drop in public spending … will provoke a profound recession that will deepen the deficit. This, along with the social and political impact of the crisis, will undoubtedly prevent the Greek government from delivering on its commitments. … The EU governments, facing another loss of face (after letting the IMF into the den), may be tempted by forbearance. If they do, they will eventually to put in more money. If they don’t, the Greek government will default, precisely what the whole plan aims at avoiding.”

And he goes on: “The next headache should be contagion. There was no fundamental reason for markets to run on the Greek debt. But we know that self-fulfilling crises may happen, and that they may be contagious. Even if it seems unfair, other countries stand to face the same situation. Already we see markets fretting about Portugal and Spain.”

Remember that was posted on 3 May 2010 – months before the Irish rescue package and the current turmoil in Portuguese and Spanish debt markets.

The Eurozone’s second May 2010 package seemed to turn the tide; sovereign debt spreads – which had been rising precipitously – fell back to more normal ranges. Vox columnists, however, did not believe that the problem had been solved.

Three Vox columns posted just after the outlines of the EU’s second package became clear asserted that the second package was still lacking essential elements.

Daniel Gros and Thomas Mayer (2010) argue that while the European Stabilisation Mechanism was a good start, more needed to be done. They propose that all EU bank supervisors should conduct stress tests to gauge their banks’ exposure to risky sovereign debt; those who fail should be re-capitalised or closed to ring-fence the problem. The “Mechanism” should also be transformed into an institution that manages the Eurozone’s rescue contributions, supervises conditionality, and sets up mechanisms for orderly debt rescheduling should austerity programmes fail.

Charles Wyplosz (2010) worried that this was a hollow rescue noting that while markets liked the plan, a closer look showed that the money is announced but not available. When markets realise this, he claimed, they may do to Portugal and Spain what they did to Greece. Worse still, crucial principles have been sacrificed for the sake of unconvincing announcements. He closed darkly in predicting: “The debt crisis is unlikely to go away and the monetary union will have to be reconstructed to re-establish the principle of collective fiscal discipline.”

Mike Burda and Stefan Gerlach (2010) also argued that more was needed. If the euro is to survive the current decade, they reasoned, Greece cannot happen again. To prevent this, the EU needs to set up an independent institution to vet fiscal plans of Eurozone governments and apply a sliding scale of sanctions. Like Wyplosz, they weren’t sure to call the Eurzone’s second rescue attempt a success: “Future monetary historians will judge whether it was a brilliant move by Eurozone governments which put an end to speculation or the first step down a slippery path to ruin.”

The full logic of why the Eurozone must do more is laid out in the eBook that Daniel Gros, Luc Leaven, and I edited Completing the Eurozone rescue: What more needs to be done?  (17 June 2010). That’s been viewed 25,000 times, and the analysis still seems fresh. If you want to see what EU leader are going to have to do in early 2011, read the chapters that are written by economists who have a proven track record on this:

Holiday reading

Vox will not post new columns between 25 December 2010 and 2 January 2011 (unless something really radical happens in the Eurozone). There is, however, plenty to catch up on. My guess is that European leaders will be back at the drawing board very shortly. If you want to understand the basic economics of the problems they are trying to solve, you may want to read, or re-read some of the columns mentioned above.

Happy holidays from Team Vox!

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Topics:  Frontiers of economic research

Tags:  ECB, subprime crisis, global crisis, Eurozone crisis

Professor of International Economics, Graduate Institute, Geneva; President of CEPR; Vox Editor-in-Chief

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