Stalin’s mass killings are often viewed as the acts of a deranged dictator. But according to Konstantin Sonin of the New Economic School in Moscow, such violence may have reflected the Soviet leader’s rational efforts to avoid losing power. In an interview with Romesh Vaitilingam, recorded at the annual congress of the European Economic Association in Milan in August 2008, he discusses his research and its implications for thinking about modern day dictators.
Michael Kremer of Harvard University talks to Romesh Vaitilingam about the potential of ‘advance market commitments’ for encouraging innovative new products in health and agriculture for developing countries. The interview was recorded at the headquarters of the European Bank for Reconstruction and Development in London in October 2008 following a public discussion meeting on ‘Rising food prices: causes, consequences and remedies’.
A new IMF database, which covers the universe of systemic banking crises from 1970 to 2007, shows that the average fiscal cost was about 15% of GDP, or three times the US’s $700 billion. This column points out that quick action often lowers the ultimate cost. Moreover wishful thinking teamed with regulatory forbearance and bank liquidity plans often raises the cost by delaying vital, but politically painful, government action.
The euro is plunging and EU banks are coming under renewed pressure. There is a strong demand for ‘European’ bonds as well as a need for massive government capital infusions to prevent the crisis from getting worse in the banking sector and the European periphery. This is why the EU should set up a massive European Financial Stability Fund.
In the first half of 2008, Buiter and Sibert were invited to study Iceland’s financial problems. They identified the “vulnerable quartet” of (1) a small country with (2) a large banking sector, (3) its own currency and (4) limited fiscal capacity – a quartet that meant Iceland’s banking model was not viable. How right they were. This column summarises the report, which is now available as CEPR Policy Insight No. 26 with an October 2008 update.
The labour market suffers from asymmetric information, coordination, and collective action failures. This column explains how labour market intermediaries, such as online job boards and centralised job-matching institutions, work to improve labour market outcomes. These intermediaries will perform important coordinating functions even as information costs fall.
Would reducing poverty reduce the risk of civil war in poor countries? This column explains that the relationship between poverty and civil conflicts is probably driven by other factors omitted from previous econometric specifications, such as colonial history. To reduce the probability of civil war, policies need to address other structural problems.
With the world slipping into a recession of unknown magnitude, protectionist temptations appear across the globe. This column argues that finishing the Doha Round WTO negotiations would both provide a boost to the world economy and send a strong signal that beggar-thy-neighbour policies are not on the table this time.
Securitisation volumes have plummeted in the wake of the subprime crisis. As a result, banks are keeping more loans on their balance sheets and tightening lending standards. This column reviews the factors that have led to this virtual market shutdown and suggests structural changes, in the form of simpler and more transparent products trading at wider spreads, will be required to revive securitisation.
The current financial crisis will probably lead to an unnecessarily deep recession. This column suggests that European central banks, misguided by outdated econometric models, should have cut rates faster and deeper in a coordinated fashion. They should now scrap these models and agree on a large, coordinated cut of 2 percentage points.
Japan’s banking crisis of the late 1990s and early 2000s offer critical lessons on how to deal with the current financial crisis. This column warns against relying on fiscal stimulus, stresses the importance of recapitalising viable bank but letting the ‘zombie banks’ go bust to boost certainty about financial firms’ solvency. In order to avoid a vicious cycle of steady economic decline as in Japan, the G8 and emerging economies should create a "Financial System Stabilisation Fund".
The recapitalisation aspects of the October rescue packages have been widely analysed by the world’s most effective think-tank in this crisis – the blogosphere. Here finance professors from LBS and NYU evaluate the rescue packages’ loan guarantees. The UK scheme has the flavour of a small tax, and is partly market-reliant; The US plan has the flavour of a $50 billion subsidy, and is almost fully government-reliant. Which scheme works better may depend upon the depth of the coming recession.
The dizzying falls in equity prices seem to have stopped. If they restart, it may be time for radical measures. This column suggests one motivated by bubble theory. The Fed could temporarily guarantee a lower bound for the S&P 500 through targeted purchases of market portfolios via open-market operations and financed by injecting cash.
If markets are efficient, then there are no exploitable arbitrage opportunities. But if no one engages in arbitrage, then what eliminates such exploitable opportunities? This column puts international financial markets under the microscope and shows that arbitrage opportunities exist, but they are usually eliminated in less than five minutes. Such micro-arbitrage makes the assumption of no arbitrage safe for those looking at the bigger picture.
Cross-country comparisons have produced little evidence that democracy improves economic growth. This column summarises research using within-country comparisons over time to show that democratising countries realise higher long-run growth after the volatile transition period. Democracy’s value may lie in its dynamic aspects.
Institutional investors are increasingly turning to currency traders. This column confirms that past performance is no guarantee of future returns. But there is evidence that managers have a tendency to persistently use the same investment strategy, suggesting that investors may wish to diversify across currency managers.
According to Hans-Werner Sinn of CESifo, public policy discussion of climate change has focused only on the reduction of demand for fossil fuel, neglecting the supply side. In an interview with Romesh Vaitilingam, recorded at the annual congress of the European Economic Association in Milan in August 2008, he explains his view.
At the Global Economic Symposium in Schleswig-Holstein in September 2008, Nebojsa Nakicenovic of the Vienna Institute of Technology and the International Institute for Applied Systems Analysis spoke at a session on energy versus climate change. Afterwards, he talked to Romesh Vaitilingam about the options for reducing greenhouse gas emissions – improved energy efficiency; renewables; nuclear energy; and carbon capture and storage.
The standard pattern: capital flows into the new “hot” nation, but then stop or reverses forcing painful adjustment. This column presents research based on such episodes from 181 nations during 1980-2007 and for a subset of 66 nations for the 1960-2007 period. If the pattern of the past few decades holds true, emerging market economies may be facing a darkening future.
Sharp increases in world food prices over the last few years have impoverished millions. This column outlines the inadequacy of many countries’ safety nets and proposes means by which the international community might help poor consumers cope with rising food prices.
The Paulson plan envisages that the US Treasury will purchase financial assets held by distressed financial institutions for which there is currently no market. In order to set a price for these toxic assets, reverse auctions have been proposed. As this column explains, one has to be very careful in designing these auctions in the presence of asymmetric information.
The current credit crisis has prompted many calls for regulation to prevent such an event from ever happening again. This column defends a financial system that engenders systemic risk. Economies that risk occasional credit crises enjoy higher long-run growth, and the cost of the US bailout is well within historical norms.
The current crisis has exposed the poor organisation of financial supervisory responsibilities, as central banks, EU ministers, and treasury authorities fought to respond appropriately. This column argues for the reorganisation of the European financial regulatory apparatus using a “four peaks” approach that horizontally divides responsibilities according to objectives.
This column argues that current bailout plans do not address the roots of the crisis. It advocates a significant re-regulation of financial markets and assistance to households unable to manage their real estate debt.
Krugman the columnist offers strong views, attracting adulation and hatred. His newspaper-reading fans delight in his Nobel Prize; his foes are shocked and dismayed. Both are mistaken. His prize has nothing to do with his popular writing. Here one of the world’s most influential theorists explains that the prize celebrates Krugman’s achievements in science, not in the policy arena. This column clarifies exactly what those achievements are.
US climate change policy seems likely to include border measures to address competitiveness concerns. This column warns against such measures, arguing that they will do little to protect US industries, expose the US to retaliatory trade restrictions, and significantly burden the global trading system. The US would be better served by addressing its competitiveness concerns in international negotiations.
EU leaders have agreed on a bail-out plan but much is still unknown about its details. How will governments act as equity shareholders? Who will deal with cross-border banks? This column discusses the need for a Euro-area bank supervisory authority, as financial integration has outpaced regulatory integration.
Gilles Mettetal, director of agribusiness at the European Bank for Reconstruction and Development (EBRD), talks to Romesh Vaitilingam about food production in the countries in which the EBRD operates, from central Europe to central Asia. The interview was recorded at the EBRD headquarters in London in October 2008 following a public discussion meeting on ‘Rising food prices: causes, consequences and remedies’.
Erik Berglof, chief economist at the European Bank for Reconstruction and Development (EBRD), talks to Romesh Vaitilingam about the interlinkages between food markets, financial markets and development, particularly in the countries in which the EBRD operates, from central Europe to central Asia. The interview was recorded at the EBRD headquarters in London in October 2008 following a public discussion meeting on ‘Rising food prices: causes, consequences and remedies’.
This column examines the impact of stock market valuation changes on consumption and investment in emerging markets. Though the effects are smaller than those in advanced economies, emerging market policymakers ought to pay attention to how equity price swings will transmit business cycles and impact aggregate demand.
Females and minorities may be underrepresented at top jobs due to a sticky floor rather than a glass ceiling. This column says that if females and minorities face greater obstacles in signalling their abilities to employers early in their careers, then they may never have the opportunity to reach the top. Policies might try targeting the bottom of the job ladder.
Are EU citizens ready to accept the crisis rescue plan that makes massive transfers of resources from taxpayers to the banking sector? This column proposes three ways to share the rescue’s benefits with citizens: increased competition in the banking sector, tax reductions for low-wage earners, and temporary relief schemes for families with mortgage problems.
The future of climate change policy is very uncertain due to economic, environmental, and political complexities. This column quantifies the economic cost of delaying action to reduce carbon emissions and argues that the best strategy is to hedge our bets by adopting a mild emissions reduction policy now rather than naïvely waiting for the uncertainties to be resolved.
Fears that the present crisis might reach 1930s proportions risk becoming a self-fulfilling prophecy. To quell them, we must anchor expectations in the right direction. This column advocates a temporary but aggressive expansionary fiscal policy to rebuild confidence. We need to exploit the stability pact in a different way: for the next two years, the pact should constrain national governments to significantly increase all deficits, beyond 3% if needed.
Government guarantees are no substitute for supervision – they are a complement. Free from short-term liquidity pressures, supervisors should focus on banks’ long-term prospects and limit their behaviour or encourage restructuring as needed.
Ethnically diverse groups are less successful in providing public goods. This column suggests that affective interpersonal relationships may be a critical component in cooperative behaviour and outlines the evidence – from brain scans to experimental games – of their importance.
Credit default swaps (CDSs) – bilateral insurance contracts against bond default – are now in the eye of the storm. Worries about counterparty risk are mounting among market players and is multiplied by the lack of global netting. This column discusses lessons from the 2005 crisis in CDSs.
Recapitalise the banks, yes. But how? One option is to sell troubled institutions to healthier ones with government help; the other is to restructure them piecemeal. Government-assisted bank sales overall present a better form of public-private partnership, but both may be necessary. A series of additional restructuring efforts and reforms are needed.
The US Economic Emergency Act of 2008 allows the SEC to suspend mark-to-market accounting rules. But a blanket suspension would be counter-productive. Crises are times when uncertainty quickly turns to panic. Now is not the time to increase uncertainty by changing accounting standards. This column proposes an alternative: mark-to-funding.
Europe’s new crisis plan will hopefully stop the panic. This column explores the remaining issues – the sharing the burden of transnational bank losses and restarting the inter-bank lending market. It suggests a technical change to the guarantees that would produce a better result.
There has been a lively debate over the sustainability of global imbalances in recent years. This column argues that capital gains on international assets and liabilities are an important ingredient in any assessment of the sustainability of global imbalances.
European innovators are increasingly turning to complex patent filing strategies. This column shows that such strategies pay off in patent value. But are applicants strategically abusing the filing process or turning to these methods because the current system does not meet their legitimate needs? Either symptom warrants reform.
Many optimisation problems in economics cannot be solved with standard methods due to discontinuities and the existence of multiple optima. This column introduces heuristic optimisation, which offers a solution in such cases.
Developing country central banks’ unprecedented accumulation of foreign reserves lies at the heart of global imbalances, but the trend has puzzled international macroeconomists. This column explains the great accumulation as a response to the dangers of financial instability.
Paulson’s plan won’t work. Leaders agreed to inject equity into the banking system, but too little, too late. Nothing short of a 5% increase in banks’ equity capital (about $600 billion) will restore confidence. This column explains that even then, there are three additional problems. We need a plan that minimizes the bailout money so we’ll have some for a stimulus package to restart the economy.
The world is on the cusp of an inflation “turning point”, so the standard models are likely to go badly wrong. Recent research with better models suggests that the US inflation rate could become negative within the next 18 months.
Catastrophic failures of risk management throughout the entire banking sector multiplied a relatively minor collapse in housing prices into a paralysis of the global finance system not seen since the Great Depression. To fix it, governments should embark on a coordinated fiscal and monetary expansion and a coordinated bank recapitalisation.
Nora Lustig of George Washington University talks to Romesh Vaitilingam about rising food prices – causes of the recent increases and how developing countries and international institutions should respond. The interview was recorded at the headquarters of the European Bank for Reconstruction and Development in London in October 2008 following a public discussion meeting on ‘Rising food prices: causes, consequences and remedies’.
Peter Timmer of Stanford University and the Centre for Global Development talks to Romesh Vaitilingam about the causes of high food prices – including the growth of China and India, dollar depreciation, biofuels and speculation – and the consequences – notably the renewed incentives for investment in raising agricultural productivity. The interview was recorded at the headquarters of the European Bank for Reconstruction and Development in London in October 2008 following a public discussion meeting on ‘Rising food prices: causes, consequences and remedies’.
Financial institutions and sensible regulation have made great strides in emerging markets, but this column warns that the current crisis may cause emerging markets to re-enact internal battles for their economic souls that we thought had been conclusively decided. Developed country leaders should not fan the flames of anti-market sentiments.
Policy has been reactive and reluctant, and politics have trumped efficiency and common sense. There are three steps that must be applied quickly and decisively: close the bad or small banks; recapitalize the good or too big to fail banks; and remove the bad assets from the system so that banks can return to lending.
Without rapid and coordinated action by G7/8 leaders, this financial crisis could turn into a jobs crisis, a pension crisis and much more. This column introduces a collection of essays by leading economists on what the G7/8 leaders should do this weekend. The dozen essays present a remarkable consensus on a few points: we need immediate, coordinated global action that includes recapitalisation of the banks.
The financial crisis has turned attention away from the food crisis. Low- and middle-income countries face significant challenges, and this column proposes EU policy changes that could help.
The current crisis is a case of financial panic that risks a self-fulfilling nightmare. Governments should guarantee bank loans to end the panic.
To give banks capital and liquidity while protecting taxpayers, governments of the G7 should buy straight preferred stock in their banks.
European fundamentals are in good shape, but its banks are suffering from contagion. To avoid further real damage, EU leaders should guarantee intra-bank lending and recapitalise the banks.
While the US is trying to attack the bank solvency crisis with the Paulson Plan, no comprehensive response is emerging in Europe. Finance ministers must agree on a common set of rules to recapitalise European banks and establish a European institution to manage this recapitalisation.
Various governments are moving to absorb toxic assets, recapitalise banks, restart the interbank market, and guarantee deposits. They should do all four in a comprehensive plan and coordinate internationally.
Now is the time for action, as empty promises will only exacerbate the panic. We need coordinated measures to help banks – international policymakers led by the US should emulate the UK’s recapitalisation plan.
Policies are needed to unfreeze the credit market and recapitalise banks. Here is a plan to do both.
On top of more transparency, guarantees, and capital injections, international policy coordination is urgently needed to restore confidence in markets.
The UK strategy to recapitalise banks and unfreeze the term funding markets is the right approach. It should be the template for international coordination by the G7/8 and others.
If the panic of the second week of October 2008 worsens, governments need to be prepared to stop it using auditing, recapitalisation, and liquidation. A stopgap stabilisation plan would be to guarantee all banks’ short-term liabilities, audit their assets, and then clean up the mess.
Governments need to adopt a mixed strategy of short-term and long-term measures to handle the crisis. The key is worldwide concerted action, based on similar policies executed by national governments. Some of the measures necessary have already been undertaken – but without the international coordination essential for their effectiveness.
Five separate national and international initiatives are needed to contain the crisis, reverse some of its effects, and prevent its reoccurrence.
To save the European banking system, Daniel Gros suggests a coordinated approach by all EU member countries under which the large banks are re-capitalised and each government guarantees the lending of its own banks to other EU banks.
Should Western powers take more significant actions against Russia to punish its hostilities with Georgia? This column, based on analysis of all major sanctions episodes in the 20th century, argues that sanctions against Russia would be futile.
The crisis is shaping up to be a perfect storm – a huge surge in uncertainty that is generating a rapid slow-down in activity, a collapse of banking preventing many of the few remaining firms and consumers that want to invest from doing so, and a shift in the political landscape locking in the damage through protectionism and anti-competitive policies.
With its relatively high wages, the financial sector has, over the last two decades, attracted many brilliant minds, probably too many. In this column, Esther Duflo explains how the current financial crisis could lead to a better allocation of talent where creative energies would be socially more useful.
By simplifying the information they transmitted to investors, banks managed to expand the market for the structured bonds that they issued. But this has also led to a catastrophic uncertainty that paralyses markets and even affects policy choices. The choice of opacity by issuers and rating companies has been socially harmful and should have been constrained much more tightly by regulation. Until today, though, few believed that transparency could be worth as much as 5% of US GDP.
Subprime mortgages account for less than 1% of the world’s debt stock. How could they cause the greatest financial crisis in modern times? “Risk sensitivity” is this column’s answer. Regulators gave bankers incentives to combine bad loans with good ones and securitise the package in complex structures. The inseparability of the suspect parts meant problems with one package questioned the value of all packages. The least liquid banks failed, triggering a vicious cycle of fear and failure.
Global crises used to remind us why we have the IMF. If the Fund doesn’t come up with some new ideas for how to handle this one, it may remind us why it has become increasingly unimportant. The IMF could reassert its relevance by aiding middle-income countries caught up in the crisis with new ideas on how to link emergency lending with policy adjustment.
The house and equity price busts on top of a credit crunch make this an unprecedented crisis for the modern US economy; its real economy effects are thus difficult to assess. This column provides insights based on evidence from 122 recessions in 21 advanced nations since 1960. Findings suggest recessions in such circumstances are much costlier and slightly longer. But the outcome can be affected by policy, and it’s high time that policymakers act swiftly and decisively.
Wage inequality between skilled and unskilled workers has increased in recent years, particularly in countries that opened their markets to international trade. This column explains how trade may push up the demand for skilled workers worldwide by creating larger international markets for differentiated goods.
Native Dutch are emigrating from the Netherlands in surprisingly large numbers. This column shows that most Dutch emigrants are choosing to exit due to dissatisfaction with the quality of the public domain, particularly high population density. Is their exit a vote of no confidence in the Dutch government?
The liabilities of the biggest US bank equal half the US tax revenues; the ratios in Europe are bigger. Deutsche Bank’s liabilities are one and a half times Germany’s annual tax revenue; Barclays' are twice Britain’s. This crisis will either leave European financial integration in tatters or quicken the development of European fiscal capacity. European integration is a historical process that routinely stumbles upon crises that threaten to destroy it, only to find that it has been deepened by the crisis.
The present financial turmoil has spurred many central banks to relax monetary policy. Should the Reserve Bank of India follow suit? This column says no, arguing that India should not risk the dangers of igniting inflation, though the central bank should be prepared to provide liquidity if the need arises.
While global integration of goods and capital markets proceeds apace, visa requirements and work permits frustrate global labour markets. This column summarises the costs of barriers to movement of persons and proposes ways to start global negotiations to liberalise them.
Some have argued that HIV/AIDS might increase future per capita incomes in Africa by inducing population declines. This column presents new data showing that HIV/AIDS does little to reduce fertility rates amongst non-infected women. The disease, which devastates human capital accumulation, is very likely to lower future per capita incomes in Africa.
Paradoxically, global integration has made emerging markets less dependent on the fates of the industrial nations. Have they “decoupled” from industrial country business cycles enough to dodge the current financial turmoil? This column dissects the decoupling debate and explains why the quickly shifting structure of the global economy makes predicting spillovers very difficult.
At the Global Economic Symposium in Schleswig-Holstein in September 2008, Patrick Messerlin of Sciences Po in Paris spoke at a session on reconsidering the international trading system. Afterwards, he talked to Romesh Vaitilingam about the key challenges facing the World Trade Organisation and potential solutions.
The opening of a casino on an American Indian reservation in North Carolina offered a natural experiment to examine the impact of changes in household income on children’s later life outcomes, particularly their educational attainment and involvement in crime. In an interview recorded at the annual congress of the European Economic Association in Milan in August 2008, Randall Akee of IZA talks to Romesh Vaitilingam about the findings.
Antidumping duties have become the most frequently used instrument of trade protection. Antidumping protection can be “abused” to shelter uncompetitive domestic industries from more efficient rather than “unfair” foreign importers. This column shows that antidumping duties protect inefficient domestic firms and impede efficiency gains.
European politicians have been quick to proclaim the bankruptcy of the US model of capitalism “as we know it”. But, this column explains, all this hyperbole is premature. In fact, the US system of today is the outcome of numerous similar interventions and offers further pause for Europe.
How should developing countries spend an unexpected surge in foreign assistance or natural resource revenues? This column makes the case for establishing a sovereign wealth fund and examines the market imperfections that may constrain such a policy.
Policymakers seeking to fight global warming need to reach an international agreement for post-2012 climate change policy, but developing countries seem unlikely to immediately participate. This column explains the importance of full global participation in reducing greenhouse gas emissions and proposes means of inducing developing countries, most notably China, to participate in an international agreement.
This is a once-in-a-lifetime crisis. Trust among financial institutions is disappearing; fear may spread. Last week’s US experience showed that saving one bank at a time won’t work. A systemic response is needed and in Europe this means an EU-led initiative to recapitalise the banking sector. Unless European leaders immediately unite to address this crisis before it spirals out of control, they may find themselves fighting over how best to salvage the aftermath.