February 2009

Honohan, Lane, 28 February 2009, 70985 reads

Ireland’s huge exports to GDP ratio and privileged position in global supply chains helped it grow rapidly in the 1990s, but are now amplifying its downturn. This column argues that Ireland’s looming banking and public finance crises can be fixed. The government must find new sources of tax revenue and craft a package in which all social partners can claim ownership.

Berglöf, 28 February 2009, 49233 reads

Eastern European nations are on the edge. In this column, the Chief Economist of the European Bank for Reconstruction and Development argues that widespread banking crises are possible, if Western governments fail to coordinate. The situation is manageable, but it needs to be managed.

Freytag, Draper, 28 February 2009, 21872 reads

Zimbabwe needs major monetary reform to cure its hyperinflation. Three options are on the table – adopting a currency board, the South African Rand, or a crawling peg. This column argues against a currency board and says that “Randisation” deserves serious consideration – if South Africa will step up to the plate.

Acemoglu, 27 February 2009, 56966 reads

Daron Acemoglu of MIT talks to Romesh Vaitilingam about his new book, Introduction to Modern Economic Growth. They discuss why sustained growth took off in Europe in the nineteenth century, the roles of technology and institutions in explaining why some countries grow rapidly while others stagnate, and the growth prospects for the world’s poorest countries as well as the recent Asian success stories. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.

Perotti, Suarez, 27 February 2009, 14454 reads

Correlated liquidity risks caused subprime mortgage problems to spread widely and sow panic that led to the credit crisis. This column proposes a mandatory liquidity charge to insure against collective bank runs in the future. It argues for charges proportional to securities’ maturity mismatches so as to discourage practices that create systemic risk.

Richardson, 26 February 2009, 40273 reads

Sometimes the best way to repair a severely dilapidated house is to knock it down and rebuild it. This column argues for bank nationalisation as the best hope for maintaining a private banking system. Risky, and it could go wrong, but it is the surest path to avoid a “lost decade” like Japan.

Rossi, 25 February 2009, 13144 reads

There are two schools of thought on how to get credit flowing again. One suggests buying the toxic assets, the other says to recapitalise banks. This column says that both approaches are necessary, though the right balance will vary across nations. The real difficulty is aligning incentives – in both pricing assets and recapitalising banks, bank managers’ interests may thwart governments’ objectives.

Gros, 25 February 2009, 25574 reads

The European periphery faces significant economic turmoil. This column argues that Eastern European woes threaten the core of Europe and necessitate a systemic response. It proposes a new, massive European Financial Stability Fund (involving about 5% of EU GDP) run through the European Investment Bank.

Goldstein, 24 February 2009, 34061 reads

This column sketches proposed reforms for regulation, supervision, and oversight of international financial markets. At both the national and international levels, there will be plenty of work to do for the IMF, the FSF, international standard-setting bodies, and national regulators and supervisors.

Hall, Woodward, 24 February 2009, 32725 reads

Japan’s woes in the 1990s were prolonged by allowing ‘zombie’ banks to continue doing business (deleveraging slowly). Preventing this is a priority in today’s crisis, hence the many schemes for creating good/bad banks. This column, coauthored by one of the world’s leading macroeconomist, suggests a novel way of separating existing banks into good and bad entities.

Carbaugh, 23 February 2009, 13785 reads

The Obama administration is simultaneously imposing economic sanctions on Iran and North Korea and suggesting that it would like to take a more conciliatory approach. This column says that economic sanctions rarely work in altering the behaviour of a target country, especially as a stand-alone tool of foreign policy. That suggests that the new US president is right to use both carrots and sticks.

Editors, 23 February 2009, 12638 reads

Vox’s first compilation of columns on the crisis – what was called the Subprime crisis back then – was not the end of the story. Far from it. Since the publication of that volume in June 2008, the global crisis has both deepened and widened. Today, the editors are pleased to launch publication of the second volume of collected Vox columns edited again by Andrew Felton and Carmen Reinhart.

Rodríguez, 23 February 2009, 27590 reads

The development theme in the Global Crisis Debate has elicited many important and novel contributions on what the crisis means for the developing world and how developing nations should react. This column provides a synthesis and commentary of the key proposals.

Caballero, 22 February 2009, 34480 reads

Banks must be fixed as their troubles are at the heart of the economic recession. In this column, one of the world’s most distinguished macroeconomists suggests a radical alternative to current policies. Governments should promise to buy twice the number of outstanding bank shares in 5 years at twice their recent prices. Markets would immediately price-in this pledge, and the resulting price boom would allow banks to raise necessary capital from private sources.

Wyplosz, 21 February 2009, 53348 reads

Some European governments are contemplating bailouts of other European governments. This column argues that violating the Eurozone’s no-bailout clause this soon would be a mistake. Much as it was necessary to let Lehman Brothers go down before bailing out the remaining banks, it may be necessary to let a profligate government default and ask for IMF assistance.

Halla, Hackl, Pruckner, 21 February 2009, 13221 reads

Why do individuals volunteer? This seemingly personal question is not fully explained by individual characteristics. This column examines the state’s capability to affect individuals' decisions to volunteer. Macroeconomic stability increases volunteering, but higher confidence in government and democratisation reduce participation.

Buiter, 20 February 2009, 22103 reads

It looks like capital controls for central and eastern European countries as well as emerging markets everywhere. This column argues that imposing capital outflow controls – while sometimes unavoidable – discourages future capital inflows and creates rents. This is why they should be explicitly made temporary.

Bhidé, 20 February 2009, 15343 reads

Amar Bhidé of Columbia University talks to Romesh Vaitilingam about his new book, The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. He explains why know-how developed abroad enhances prosperity at home, and why trying to maintain the US lead by subsidising more research or training more scientists will do more harm than good. The interview was recorded in London in November 2008.

Goldstein, 19 February 2009, 20072 reads

The global crisis has laid bare the inadequacies of the existing global financial architecture. Absent a grand bargain to address the need for major reforms, countries will resort to beggar-thy-neighbour policies. This column outlines a major package – including increased IMF lending, significant IMF governance reform, coordinated fiscal stimulus, and greater WTO discipline – that could meet the needs of both developed and developing economies. Negotiations should start at the London summit.

Bossone, 18 February 2009, 61986 reads

This column summarises the global crisis debate on institutional reforms to build global financial governance. While various authors disagree about the G20’s suitability and effectiveness, there is agreement that a number of IMF reforms are needed. Moreover, many call for the IMF to significantly increase its lending resources.

Corsetti, Konstantinou, 18 February 2009, 25274 reads

The US net international investment position declined by an astounding magnitude in 2008. Does that imply a massive contraction in US consumption? This column provides empirical evidence that large swings in the US current account are driven by transitory shocks that don’t significantly alter consumption.

Hausmann, 17 February 2009, 41520 reads

A lot of effort has been put into discussing issues such as global imbalances and the voting rights at the international financial institutions, but too little effort has been dedicated to thinking about what these institutions should do in the context of the current global crisis. Global and regional international institutions need to step up to a much bigger role than is currently envisioned. If this strategy is successful, it will lead to a more balanced and sustainable global recovery.

Reisen, Ölcer, 17 February 2009, 35664 reads

The Extractive Industries Transparency Initiative has directed the international community’s attention to a sector that has traditionally been veiled in secrecy. But it has not been effective in producing change. Why have so many resource-rich countries failed to lower perceived corruption? This column points to low-quality information provided in reports and weak civil societies in resource-rich countries as possible explanations. Reforms and improvements are needed.

Baldwin, 16 February 2009, 15518 reads

The world is in the midst of an unprecedented economic crisis – a global event unfolding at extraordinary speed and in unanticipated directions. Now more than ever, the world needs research-based policy analysis: i) to understand this global and insanely interconnected event, ii) to formulate plans for alleviating its worst effects, and iii) to fix the system so it doesn’t happen again. Vox’s Global Crisis Debate is a vehicle for agglomerating ideas on these issues.

Poncet, 16 February 2009, 14988 reads

This column says that less-productive Japanese firms are more sensitive to distance and institutional quality in their locational decisions abroad. Alternatively, the greater responsiveness of low-productivity firms to the presence of an export promotion agency or a Japanese community indicates that networks and spillovers may help to mitigate these impediments.

Philippon, 15 February 2009, 37183 reads

Proposals for financial regulatory reform are everywhere. This column presents an opinionated synthesis of the key issues and proposals with the aim of focusing and stimulating the debate.

Williamson, 14 February 2009, 35782 reads

The IMF was created in part to help small economies deal with cyclical downturns. Yet few nations turn to the IMF except as a last resort. It sits hardly utilized in the face of the most severe shock the world has faced since the outbreak of WW I. This column argues that changing this unacceptable outcome requires two types of reforms.

Elsby, Hobijn, Sahin, 14 February 2009, 59950 reads

Unemployment is rising – job losses are up 30% in the US and 50% in the UK since 2007. How bad will it get? This column uses data on unemployment inflows and duration to predict labour market trends. A conservative estimate says that unemployment will reach at least 5% in Britain and 13.5% in Spain.

De Nardi, French, Jones, 14 February 2009, 45683 reads

The risks of living long and facing high medical expenses go a long way toward explaining elderly persons’ saving decisions. This column shows that the elderly, especially those with high lifetime incomes, keep large asset holdings to address these health concerns. Such behaviour is particularly strong in the US.

Leijonhufvud, 13 February 2009, 62085 reads

This recession is different. Balance sheets of consumers, firms, and banks are under strain. The private sector is bent on reducing debt and this offsets Keynesian stimulus more than standard flow calculations would suggest. Bank deleveraging is by far the most dangerous. Fiscal stimulus will not have much effect as long as the financial system is deleveraging.

Bütler, 13 February 2009, 15391 reads

Pension system reforms have increased individual choice and individual risk. This column says that the current crisis proves that those reforms exposed individuals to too much risk. It argues for greater use of intergenerational transfers and says that it would be better if retirement plans were treated as insurance rather than pure investment decisions.

Eichenbaum, 13 February 2009, 12036 reads

Martin Eichenbaum of Northwestern University talks to Romesh Vaitilingam about the carry trade, a currency speculation strategy in which an investor borrows low-interest-rate currencies and lends high-interest-rate currencies. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.

Mendoza, 12 February 2009, 62347 reads

This column rehabilitates Irving Fisher’s debt-deflation theory to explain the current crisis. It suggests that fiscal stimulus will do little to prevent the crisis from becoming a protracted slump because the problem lies in finance. A cure will require reversing deflation and restarting the credit system.

Spilimbergo, Symansky, Blanchard, Cottarelli, 12 February 2009, 67031 reads

The global crisis demands bold initiatives to i) rescue the financial sector, and ii) boost aggregate demand, with early resolution of financial sector problems being a necessary condition for the stimulus to work. Since monetary policy is at the end of its rope, early, strong, and carefully thought-out fiscal policies are urgently needed. Time and action are of the essence if we are to avoid a contraction larger than any we’ve seen since the 1930s.

Warnock, 12 February 2009, 27847 reads

Global finance is made more fragile by the inability of most nations to borrow in their own currencies. This means depreciations often lead to debt and/or banking crises, and it encourages global imbalances. Capital flows out of emerging markets into US debt securities, returning to those same nations in the form of corporate and sovereign borrowing, with this roundtrip adding a currency and maturity mismatch. Encouraging the development of local currency bond markets would be one way of reducing the global financial system’s instability.

Calomiris, 12 February 2009, 15484 reads

The financial crisis happened because the rules of the game – shaped by government policy – promote the wilful undertaking of excessive, value-destroying risks by managers who were not effectively disciplined by shareholders. This column outlines the six key areas where regulatory reform is essential to preventing a repeat.

Perotti, Suarez, 11 February 2009, 31595 reads

Most financial system reform proposals rely on better managed, anti-cyclical capital requirements, or some sort of insurance. This column argues that mandatory liquidity insurance would be more effective. The insurance premiums – linked to maturity mismatch and term structure – would essentially be pre-payment for the cost of future financial crises and held in an Emergency Liquidity Insurance Fund.

Ophèle, 11 February 2009, 49618 reads

The recent rapid fall in inflation, amidst a financial crisis and a very sharp economic slowdown, has raised the spectre of deflation. But, this column argues, current dynamics in France and the euro area are actually characteristic of a much more positive disinflationary trend, resulting from a temporary correction of certain prices, such as energy prices.

Van Biesebroeck, 10 February 2009, 39634 reads

Following the US bailout of the automotive industry, Canada is now bailing out its own auto firms, lest they risk southward migration. However, this column shows that this most recent action only continues a long history of lavish subsidies for the auto industry. Are governments giving away money for nothing?

Danielsson, Zoega, 09 February 2009, 35084 reads

Some view Iceland’s crisis as holding lessons for any country with an outsized financial sector, e.g. the UK. This column disagrees, arguing that Iceland’s downfall is explained by the way its unique history, inappropriate policy responses, and weaknesses in EU banking regulations created a perfect storm, unlikely to happen elsewhere.

Pomerleano, Scheule, Sheng, 09 February 2009, 18028 reads

This column explains how the collective use of inappropriate market information and flawed models led to systemic financial problems. It suggests one of the keys to global financial stability is the revision, diversification, and publication of risk models.

De Grauwe, 07 February 2009, 49096 reads

Spreads of sovereign debt within the eurozone have increased dramatically during the last few months, largely as a result of panic in the financial markets. When it engages in quantitative easing, the ECB should privilege the buying of Irish, Greek, Spanish and Italian government bonds to eliminate the distortions and the externalities that these spreads create.

Mongelli, Gerdesmeier, Roffia, 07 February 2009, 66249 reads

This column systematically compares the US Federal Reserve System, the Eurozone central banking system, and the Bank of Japan’s institutional structures and monetary policy frameworks.

Acharya, Richardson, 07 February 2009, 75520 reads

How did global finance become so fragile that a collection of bad mortgages in the US could bring the entire system to its knees and the global economy along with it? How can this fragility be eliminated? This column describes the answers provided in an important new book which has been written by a team of world-class scholars from NYU’s business school.

Collier, Vicente, 06 February 2009, 18682 reads

Recent research shows that anti-violence informational campaigns can increase voter turnout, suggesting that voter intimidation has large effects on turnout. This column summarises results from a nationwide field experiment during the 2007 elections in Nigeria revealing that illicit tactics were rife. Incumbent politicians often used vote buying and fraud, while opposition candidates used intimidation and violence.

Falk, 06 February 2009, 10164 reads

Armin Falk, director of the Bonn Laboratory of Experimental Economics talks to Romesh Vaitilingam about his experimental research on how people compare themselves with others and its impact on their health and wellbeing. The interview was recorded at a workshop on happiness research at the Centre for Economic Performance in London in October 2008.

Hufbauer, Schott, 05 February 2009, 47314 reads

The “Buy American” provision in the US stimulus package would violate US trade obligations, damage the US' reputation, and have almost no real impact on US jobs. Moreover, the provisions will be read as an Obama trade policy that leans toward protectionism – with severe consequences abroad.

Gros, 05 February 2009, 23724 reads

Uncertainty over losses from toxic assets is blocking the resumption of bank lending – thus prolonging and deepening the recession. Governments should take over these assets to kick-start credit markets, but to avoid the “market for lemons” problem, the bad bank should be big, and banks should be forced to transfer their entire portfolio of toxic assets.

Eijffinger, 05 February 2009, 28027 reads

This column outlines the Netherlands’ economic recovery plans and compares them to those of other EU members. The Dutch and German plans are sound, as they focus on inducing investment rather than assisting consumers and avoid picking winners amongst industries. But their efforts may not be enough, given recession forecasts.

Courty, Pagliero, 04 February 2009, 19457 reads

Is the music business doing business well? This column shows that offering multiple seating categories at concerts raises revenues by about 5%. But a quarter of concerts do not price discriminate, and most only offer two ticket types. The music industry seems to be leaving money on the concert floor.

Farmer, 04 February 2009, 43786 reads

This column proposes a new paradigm to reconcile Keynesian economics with general equilibrium theory. It suggests that, just as it sets the fed funds rate to control inflation, the Fed should set a stock market index to control unemployment. This would not let every manufacturing firm and every bank fail at the same time “as a result of speculative movements in markets that serve no social purpose.”

Van Biesebroeck, 04 February 2009, 29149 reads

This column proposes ending six policies that hamper the US automotive industry. It suggests replacing discretionary environmental policies with a CO2 tax, addressing legacy costs, ending the distinction between right-to-work and other states, levelling the investment subsidy playing field, resolving uncertainty surrounding the future powertrain, and allowing direct sales to the public.

Masciandaro, Quintyn, 03 February 2009, 32122 reads

Central banks that have historically been involved in financial supervision often resist reforms that would unify supervisory powers in an agency other than the bank. This column argues that regulatory innovation is necessary to keep pace with financial innovation. Policymakers should be open to changes, including unification, and adopt reforms needed in their circumstances.

Philippon, 02 February 2009, 23811 reads

Evidence from a new century-long dataset suggests that the key factors driving relative wages in the financial sector have been regulation and corporate finance activity, followed by financial innovation. Over the past decade, however, “rents” account for 30% to 50% of the sector’s wage differential. In this sense, financiers are overpaid.

Frieden, 02 February 2009, 52941 reads

If the crisis turns into a new Great Depression, it will most likely be due to a breakdown of cooperation among the major economies. But sustaining international cooperation requires domestic support; ignoring the demands of poor and middle-class citizens for relief will inflame more extreme anti-globalisation views, making international cooperation much more difficult.

Chu, Bajari, Park, 02 February 2009, 30416 reads

This column presents empirical evidence identifying the factors triggering mortgage defaults in the US. Both deterioration of borrowers’ net equity and liquidity constraints have been important. Policy remedies will have to address both concerns – the authors recommend write-downs on loan principal amounts as one such measure.