US economic advisers called for aggressive fiscal stimulus, and some support further measures. But many macroeconomists are not so sure. This column analyses fiscal stimulus using a New Keynesian model that exemplifies contemporary academic thinking on the subject. It says that the spending multiplier is much lower than the Obama administration’s estimates – government spending may quickly crowd out private consumption and investment.
Banks’ corporate governance is under fire. Perhaps one of the worst failures of governance has been the continued payment of dividends throughout the financial crisis. This column says that dividends’ erosion of common equity deprived banks of capital when they most needed it. It proposes cutting dividends as the first step in the resolution of future banking crises.
Highly educated women tend to opt out of the labour force at motherhood. This column explores why some professions (doctors) opt out less than others (MBAs). One crucial finding is that women who worked in a family-friendly environment are 10% more likely to remain working, suggesting a role for improved work-family policies.
This column proposes the launch of a WTO Crisis Round at the G20 summit. Unlike the Doha round’s liberalising agenda, such a crisis round would simply aim to “hold the line on protectionism” and prevent a retreat from current levels of trade openness. This column that says that such action is necessary for the global trading system to survive these “potentially perilous times.”
The present financial crisis has placed financial stability at the forefront of policy discussions. At the same time, sovereign wealth funds have become much more significant players over the past two years. This column summarises the results of some recent studies about sovereign wealth funds and their implications for financial stability. Overall, the existing research on SWFs suggests that they can be a stabilising force in global financial markets.
As the crisis evolves, capital will flow out of emerging countries. The IMF's new facility may help with short term shocks. It is also a useful step towards risk pooling and away from self-insurance with large currency reserves and should thus help reduce global imbalances in the long run.
This column argues that more open countries have larger public sectors because greater involvement in foreign trade allows a government to shift more of the cost of providing a public good onto foreign consumers. Globalisation may actually protect or even promote public inefficiency.
This column examines the lessons of Latin America’s experience with sudden stops in capital inflows during the 1990s and applies them to the current crisis. While it is most important to be well prepared, today’s policy reactions will determine how well countries handle the crisis.
This column introduces an index identifying how much shocks to industrial production in one country spill over to other countries. Since September 2008, the index has jumped higher than ever – countries are pulling each other down. It argues that this reinforces the case for global action and calls for coordinated policy actions by the G20.
The financial crisis is a global phenomenon. The downturn continues to be rapidly transmitted across borders through trade and financial channels. A global policy response to provide fiscal stimulus, avoid protectionism and help developing countries is imperative. The G20 summit in London provides a unique opportunity to mobilise the needed cooperation.
Understanding the origins of the crisis requires understanding the failures of the market for ratings. This column explains how conflicts of interest and shopping for the best rating produced biased assessments of complex assets, whereas these bad incentives had not plagued ratings of simpler assets. We need to rethink how ratings are provided, lest the next bout of financial innovation trigger another round of ratings inflation and subsequent financial market turmoil.
David Autor of MIT talks to Romesh Vaitilingam about his research on the hollowing out of the occupational distribution in the US and Europe over the past 30 years: high- and low-wage occupations have been expanding rapidly and hiring younger workers, while routine middle-skill occupations have been shrinking and ‘getting old’. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
This column provides a tour of the main ideas discussed in the Macroeconomic theme of the Global Crisis Debate on VoxEU.org. Bottom line: fighting the current crisis and preventing future crises requires a holistic approach that tackles both short-term macroeconomic policy imperatives and longer-term institutional reforms. It is a false choice to argue that the upcoming summit should focus on one or the other. Fixing this crisis without redressing global imbalances may be setting the stage for the next crisis – a dollar collapse.
After unloading toxic assets, many banks will need new capital. This column proposes raising private capital to invest in distressed banks’ new equity using a mechanism similar to the Legacy Assets Program recently announced by Geithner. Since equity markets are more liquid, the leverage ratio and the public-equity participation in this new plan would be much smaller, e.g. the leverage ratio capped at two and the public-capital participation at 30%.
How effective is US merger policy? US policymakers lack any systematic quantitative study to answer the question. This column says that merger policy studies should measure the systematic bias in price predictions of the antitrust agency and see what methods work best. Such data-driven assessment would result in analysis replacing opinion as the basis for judging merger policy.
The crisis offers an opportunity for emerging countries to use their increased economic weight and take the lead in international trade policy, putting the industrialised countries’ own reforms and global initiatives under pressure. This column argues that emerging markets should take this opportunity to liberalise their external policies.
This column explains how the Geithner public-private scheme to buy toxic assets at inflated prices is – in expected value terms – a hidden subsidy to bank shareholders paid for by US taxpayers. If the toxic assets turn out to be good investments, there is no transfer, but if they turn out to be bad loans, the taxpayer is left holding the damage while the private investors walk away.
The third column in this series discusses the ECB’s lack of fiscal backing in detail and suggests three ways in which it might be provided by EU governments.
Many are calling for significant new financial regulations. This column says that if the “regulate everything that moves” crowd has its way, we will repeat past mistakes and impose significant costs on the economy, to little or no benefit. The next crisis is years away – we have time to do bank regulation right.
The last column in this series on fiscal aspects of central banking reviews the differences in fiscal backing for the Bank of England, the US Federal Reserve, and the European Central Bank.
This column says that institutional reform is unique in that it could simultaneously address the short-run agenda of combating the collapse of aggregate demand and the long-run agenda of building a global economy fit for the 21st century. IMF reform has to be at the forefront of such an initiative.
The second of this four-column series on fiscal aspects of central banking discusses the institutional constraints on quantitative easing. It argues that the ECB can and should engage in quantitative easing since its independence gives it a credible non-inflationary exit strategy. The Fed, however, seems heading for a bout of inflation stemming from Congressional pressure. Buiter argues that the Bank of England’s situation lies between.
Many emphasise the importance of export growth in economic development, but does exporting increase economic growth or does growth increase exports? This column presents evidence from a natural experiment – demand shocks experienced by Chinese exporters due to the Asian financial crisis – suggesting that exporting improves firm performance.
Fiscal stimulus and financial regulation cannot restore credit availability. This column argues that we need a global lender of last resort to restore liquidity. In the short run, it presses for large liquidity facilities to protect emerging market economies from the risk of damaging sudden stops of capital inflows.
Estimates of the elasticity of substitution between domestic and foreign varieties are small in macroeconomic data and substantially larger in disaggregated studies. This column reconciles those facts by taking into account the heterogeneity of goods. A better estimate of the aggregate elasticity of substitution is twice the conventional value – suggesting that the US dollar need not depreciate as much as usually thought to reduce the US current account deficit.
This column claims that bilateral trade interdependence reduces the probability of inter-state military conflict. Moreover, global trade openness lowers the probability of conflict with the bilateral trade partner by a larger magnitude than bilateral trade does alone.
In the long run, a number of analysts believe that the G20 should replace the G8. This column argues that the G20 summit should focus on producing tangible outcomes that will clean up the financial sector and prevent a protectionist outbreak. Despite their obvious importance, other issues, including grand reforms, can wait.
This column argues that current account imbalances, easy US monetary policy, and financial innovation are not the causes to blame for the global crisis. It says that attacking Bretton Woods II as a major cause of the crisis is an attack on the world trading system and a sure way to metastasise the crisis in the global financial system into a crisis of the global economic system.
Fixing the banks is an absolute priority in G7 nations. Doing this by buying toxic assets is costly, inefficient, and risky. Governments should focus on which liabilities, rather than which assets, they need to support. This column proposes creating “bridge” banks as a way of re-establishing a healthy banking system.
This column explains how institutional investors can boost firm innovation. It shows that firms owned by institutional investors are granted more high-quality patents because institutional investors motivate managers to innovate via career concerns.
Francis X. Diebold of the University of Pennsylvania and Kamil Yilmaz of Koc University talk to Romesh Vaitilingam about their measure of financial asset return and volatility spillovers across global equity markets, described in the January 2009 Economic Journal. They discuss potential use of the index in macroeconomic policy; and application of the methodology to measure business cycle interdependence. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
The way Sweden handled its 1990s banking crisis has been offered as a useful case study in resolving systemic banking crises. This column discusses the merits of the Swedish experience relative to ideal resolution strategies.
What policy measures might reduce the economic damage developing countries suffer from the global crisis? This column says that developing economies should seek emergency liquidity, IMF reforms, greater fiscal support, and more humanitarian development assistance at the London summit next month.
Did securitisation disperse risks? This column argues that it undermined financial stability by concentrating risk. Securitisation allowed banks to leverage up in tranquil times while concentrating risks in the banking system by inducing banks and other financial intermediaries to buy each other’s securities with borrowed money.
Credit rating agencies played a significant part in the financial meltdown, failing (sometimes intentionally) to properly estimate complicated products’ risk. This column summarises the problems plaguing the industry – conflicts of interest, “shopping” for ratings, and informational issues. It concludes that regulators must reshape the agencies and their role.
Will the G20 agree to the reforms needed to make the IMF an effective part of international financial governance? The prospects are grim because it would require difficult political compromises or amendments to the IMF’s Articles of Agreement. Yet reforms are needed to address the IMF’s coordination with other international institutions, the scope of the financial regulatory regime, and its representative legitimacy. This column some initial steps the G20 might take.
Financial markets are not reacting well to the US Treasury’s Capital Assistance Programme. This column fleshes out Ricardo Caballero's plan for raising private capital by leveraging a government-guaranteed price five years from today. This implicit put option should cut out Knightian uncertainty about banks’ health, draw in capital, and avoid excessive government control. If it works, the cost to taxpayers would be minimal.
Sports contests produce a vast wealth of statistics and data describing players’ performance that fans love to analyse. So why are the contests themselves decided by a very crude measure – win or lose? This column explains that the rank order tournament reward scheme provides the incentives that create the sports drama fans crave – contestants giving their best effort when the uncertain outcome is up for grabs.
What do we know about the spread of protectionism during the Great Depression and what are the implications for today’s crisis? This column says the lesson is that countries should coordinate their fiscal and monetary measures. If some do and some don’t, the trade policy consequences could once again be most unfortunate.
We should not expect much global fiscal policy coordination, this column warns. The G20 will not be able to paper over the deep transatlantic divergences in the way economic policies are prepared and understood. While the US, UK, Japan, and China want a significant fiscal response, European nations are fixated on overhauling financial regulation.
What jobs are headed overseas? This column emphasises that the feasibility of offshoring tasks is heavily influenced by the costs of transferring technology and managing complex tasks. Offshoring may be less about lower factor costs and more about the race between technology transfers and trade costs.
The gathering economic crisis has induced major economic problems for African countries. This column highlights several key priorities for (South) African representatives to take into the London Summit, including maintaining access to finance, open markets and redoubling African economic reform efforts.
Do cultural imports threaten domestic customs and traditions? This column explains how further liberalisation of trade in audiovisual services would indeed induce cultural change, using the example of foreign influence on names. However, these changes are generally modest, and consumers gain from the enjoyment of consuming cultural goods and a broader cultural choice set.
Policymakers have committed substantial sums to addressing the global recession and the global financial crisis, but there is real doubt about their effectiveness. This column explains why the fiscal stimulus might fail.
There are legitimate reasons to fear that deficit-spending fiscal boost programs will not work well enough and have high enough longer-term costs to be not worth doing. This column says we do not need to fear bottleneck-driven inflation, capital flight-driven inflation, crowding-out of investment spending, nor reaching the limits of debt capacity because we will see them coming in time.
Eastern European countries have high external imbalances that constrain their policy responses to the crisis. This column says the EU should provide support through both fiscal and financial measures. Otherwise, it risks a much deeper and prolonged economic crisis in both new and potential member states that will have negative effects on the whole of Europe.
Zombie banks need fixing. Good Bank and Bad Bank solutions are the leading contenders. This column reviews the implications for distributional, incentive, and financial stability effects. It argues that too-big-too-fail bank should immediately be taken into public ownership and restructured decisively through a mandatory debt-to-equity conversion or debt write-down. The Fed and Treasury have been captured by save-unsecured-creditors reasoning pushed by special interest groups.
Sweden's fix of its banks in the early 1990s is considered a model for today’s policymakers. This column reviews the main features of the Swedish approach and discusses its applicability to today’s banking problems. Policy must be carried out swiftly and openly, aiming at saving banks, not their owners or managers.
The crisis has revealed many gaps in global economic governance – problems that G20 leaders should address at the London Summit. This column describes a proposal by the “Group of Lecce”, which argues that global economic decision-making should take place within the IMF and World Bank transformed by more responsible, representative, and powerful “Governing Councils”.
Matt Jackson of Stanford University talks to Romesh Vaitilingam about his new book, Social and Economic Networks. They discuss the impact of communication technologies like Facebook on social and professional relationships; how social connections interact with financial transactions in settings from western banks to rural India; and the potentially negative effects of networks on social fragmentation. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
The biggest risk facing the Swiss economy is its large financial sector with substantial international exposure. Foreign currencies, mostly held by UBS and Credit Suisse, account for nearly two-thirds of banks’ balance sheets – an amount equivalent to four times annual GDP. This column suggests splitting the two large banks’ domestic and foreign operations, so that losses on the latter do not jeopardise the domestic financial system.
By incorporating endogenous risk into a standard asset-pricing model, this column shows how banks’ capacity to bear risk seemingly evaporates in the face of market turmoil, pushing the financial system further into a tailspin. It suggests that risk-sensitive prudential regulation, in the spirit of Basel II, makes systemic financial crises sharper, larger, and more costly.
The WTO talks broke down last year over a highly technical issue – the Special Safeguard Mechanism in agriculture. This column highlights a flaw in the proposed mechanism. It also argues that fear of a retaliatory process in today’s recessionary climate should drive leading developed and developing trading countries to negotiate new rules aimed at preventing such an outcome. Within this larger framework, the technical sticking points holding up Doha negotiations may be settled quickly.
The G20 has stepped up to provide political guidance to global economic governance. This column argues that East Asian members should embrace a pro-active role aimed not only at securing their role in global economic governance but also at increasing East Asia’s effectiveness in projecting the region’s strategic efforts towards global economic recovery.
This column shows that 25% of US merchandise trade growth since 1980 was due to policy liberalisation. But as the financial crisis has taken hold, policymakers seem more likely to accept new episodes of protection than to energetically seek trade liberalisation. Protectionist initiatives on top of crisis losses would be a colossal mistake.
This column analyses the impact of the euro’s adoption upon European firm’s productivity and international competitiveness. The euro produced significant competitiveness gains for relatively small economies such as Finland, Belgium, and Austria. If Denmark and Sweden had joined the euro area in recent years, they would have enjoyed gains equivalent to a 5% across-the-board reduction in trade frictions.
Financial regulation was flawed. However, there are signs that regulators could have done much more with the rules and information they had. Even the best rules are useless if regulators are not interested in enforcing them. This column says regulatory bodies should open their books and make their industry connections transparent so we can evaluate and reduce the risk of regulatory capture.
The crisis is global; the solutions must be cooperative and coherent across countries. This column introduces the recent ebook on the fundamental financial and macroeconomic issues over which the G20 leaders should agree, stressing above all the short-run policy imperatives.
Financial regulation is a now-or-never proposition as the sector’s lobbying power is greatly diminished. This column argues that we should embrace robust regulation now, risking over-regulation. Correcting mistakes later would be better than risking another era of “self-” or “soft-touch” regulation.
A controversial article recently published in the Lancet argues that mass privatisation is responsible for the increased mortality in post-communist societies during the 1990s. It suggests privatised firms cut employment, which hurt health and mortality. This column uses firm-level data to show that there is no evidence that privatisation systematically lowered firm-level employment.
Standard macroeconomic theory did not help foresee the crisis, nor has it helped understand it or craft solutions. This columns argues that both the New Classical and New Keynesian complete markets macroeconomic theories not only did not allow the key questions about insolvency and illiquidity to be answered. They did not allow such questions to be asked. A new paradigm is needed.
This column warns against bank nationalisation without state control. Bankers will not hesitate to enrich themselves at the expense of the public good if they have the opportunity.
Raj Chetty talks to Romesh Vaitilingam about the optimal design of tax policies and social welfare programmes like unemployment insurance. They discuss his work on US public finance as well as new research on how to improve tax compliance in developing countries. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
The Obama team’s strong words are followed by policies focused on getting a ‘deal’ for taxpayers. Here one of the world’s leading macroeconomists argues that squeezing current stakeholders for political appearance is short-sighted and self-defeating. Until the systemic panic is alleviated, the crisis will continue. This requires the investment of massive political capital right now; we are running out of time.
This column introduces a new ebook presenting in-depth analysis of i) the collapse of global trade, and ii) the new, murkier protection emerging as governments around the world massively increase their role in the economy. A negative protection-recession spiral is one of the few things that have not yet gone wrong in this crisis. The book presents concrete steps that G20 leader should take to avoid such a spiral and the threat it would pose to global recovery.
The de Larosiere report is an important contribution to the future global financial architecture, especially its proposals for reform of EU regulatory supervision and global coordination. There is a surprisingly broad consensus on what needs to be done to fix the global financial system emerging. One hopes that the G20 summit will be a platform to launch key international reforms.
Trade protection is on the rise around the world and risks pushing the economy into prolonged contraction. Officials have proposed more than 60 new trade restrictions since the beginning of the financial crisis. While a serious outbreak of protectionism has yet to occur, vigilance and leadership are required.
This column introduces Edward J. Kane’s new Policy Insight on the incentive roots of the securitisation crisis
This column proposes the organisation of a round of "multilateral consultation", under the auspices of the IMF, on how to avoid worldwide deflation. Ineffective fiscal and financial policies mean that attention will inevitably return to monetary policy – policymakers should be prepared. Getting the main central banks to agree on a basic set of principles would reduce the fog of Knightian uncertainty prolonging the crisis.
Bonuses are seen as drivers of greed, irresponsibly, and short-sighted behaviour. This column discusses the research on how bonuses affect bankers’ behaviour. It argues that bonuses are a valuable tool for guiding managers to do what’s right for corporations and even society. The debate should be about performance criteria and sustainable goals, not the size of bonus payments.
The G20 replaced the G7, but it has its own problems of legitimacy, size, and inconsistence with other governance vehicles. This column argues that the G20 membership should be re-jigged and the G20’s four separate work programmes should be merged to foster a “Grand Bargain”. Most of all, the G20 needs a vision.