Global crisis

Jean-Pierre Danthine, 21 November 2017

There is little doubt that one of the main causes of the Global Crisis was excessive risk-taking by large international financial institutions. This column argues that the combination of very high leverage and limited liability continues to incentivise risky behaviour by bankers. Dealing with this problem requires the alignment of bankers’ incentives with those of society, rather than of shareholders. Deferred compensation in the form of contingent convertibles presents one promising strategy.

Yener Altunbaş, Simone Manganelli, David Marques-Ibanez, 14 November 2017

Prudential supervision of banks has increasingly relied on capital requirements. But bank capital played a relatively minor role in predicting bank solvency during the Global Crisis, except for scarcely capitalised banks. This column argues that while capital is a helpful tool to support bank financial stability, it is complex for supervisors to calibrate it precisely. Macroprudential authorities should be able to complement capital-based tools with additional, borrower-based prudential instruments.

Alejandro Justiniano, Giorgio Primiceri, Andrea Tambalotti, 31 October 2017

The US witnessed an unprecedented boom in mortgage debt and house prices in the early 2000s, which precipitated the crisis in 2007. This column documents a sudden, large and persistent fall in the spread of mortgage over Treasury rates in the summer of 2003. It argues that the emergence of this ‘conundrum’ marked a crucial turning point in the dynamics of the boom, with the resulting easier credit conditions in the subprime market in particular leading to the origination of mortgages that defaulted progressively more frequently down the road.

Russell Cooper, Moritz Meyer, Immo Schott, 28 October 2017

A major factor behind the ‘German miracle’ – which saw GDP collapse by almost 7% during the Global Crisis but unemployment increase by less than 1% – was a ‘short-time work’ policy that incentivised firms to reduce workers' hours rather than laying off workers. This column explores the effectiveness of the policy and the potentially negative effects on output and productivity. In the short term, short-time work prevented steeper falls in output and employment. However, it also affected the reallocation of labour between more and less productive firms, leading to medium-term productivity losses.

David Miles, Ugo Panizza, Ricardo Reis, Ángel Ubide, 25 October 2017

Occasionally, inflation is stubborn. For many years it was hard to bring under control, but in the last decade has been low and stable. The latest Geneva Report on the World Economy studies the latest bout of stubbornness, asking why inflation has remained in such a narrow range. It shows that a large number of diverse shocks have hit developed economies during the last decade, which have more or less cancelled each other out. One of these 'shocks' has been monetary policy, which was skilfully used in response to wider macroeconomic events. Central banks, in other words, combined good policies and good luck. Next time, however, we may not be so lucky.

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