Where danger lurks
Olivier Blanchard 03 October 2014
Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.
Until the 2008 global financial crisis, mainstream US macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment.
The benign view reflected both factors internal to economics and an external economic environment that for years seemed indeed increasingly benign.
Macroeconomic policy Monetary policy
macroeconomics, global crisis, great moderation, rational expectations, nonlinearities, fluctuations, business cycle, monetary policy, inflation, bank runs, deposit insurance, sudden stops, capital flows, liquidity, maturity mismatch, zero lower bound, liquidity trap, capital requirements, credit constraints, precautionary savings, housing boom, Credit crunch, unconventional monetary policy, fiscal policy, sovereign default, diabolical loop, deflation, debt deflation, financial regulation, regulatory arbitrage, DSGE models
Who is to blame for the credit crunch: foreign ownership or foreign funding?
Erik Feyen, Raquel Letelier, Inessa Love, Samuel Munzele Maimbo, Roberto Rocha 15 March 2014
Eastern Europe was hit especially hard by the credit crunch during the global financial crisis. This column presents new evidence suggesting that reliance on foreign funding was more important than foreign bank ownership per se in exacerbating the post-crisis credit contraction. These findings point to the need to put more emphasis on the discussion of bank business models, regulatory standards, and supervisory arrangements.
From boom to crunch
Although most developing countries around the world experienced a severe contraction of bank credit during the recent global financial crisis, the Eastern Europe and Central Asia (ECA) region was disproportionately hit after it had experienced very high credit growth (Figure 1).
Figure 1. Banking system trends in ECA
Financial markets Global crisis International finance
Credit crunch, global financial crisis, banking, Eastern Europe, cross-border banking, credit growth, Central Asia
Job losses from the credit crunch during the Great Recession
Samuel Bentolila, Marcel Jansen 01 February 2014
The evidence about the effect of declined lending during the Great Recession on the employment is quite limited. This column presents new research on the problem focusing on the case of Spain. A large part of credit to non-financial firms before the crisis came from weak banks, which solvency was strongly eroded during the crisis. As a result, firms that relied heavily on loans from such weak banks displayed significantly higher employment reduction in comparison to similar, less exposed firms. The bulk of employment destruction was driven by firm closures, which carries higher economic costs than downsizing, and could potentially make the recession more protracted.
Policymakers in both Europe and the US are concerned about the economic implications of the current shortage of credit. As the International Monetary Fund put it recently, “policymakers want to support markets because the decline in lending is seen to be a primary factor in the slow recovery” (IMF 2013).
Spain, Credit crunch, Great Recession, job losses
Is lending by state banks more stable over the business cycle?
Ata Can Bertay, Asli Demirgüç-Kunt, Harry Huizinga 02 August 2012
Bank bonuses may not have changed much in the last few years, but their owners have. This column asks whether government-owned banks may bring stability to the supply of credit over the business cycle and especially at a time of financial crisis.
During the banking crisis of 2008-2009, government bailouts of banks in Europe and elsewhere frequently resulted in state ownership of the bank. The rescue of Fortis Bank in 2008, for instance, involved the nationalisation of ABN Amro by the Dutch state.
Global crisis International finance
Credit crunch, Bailouts, state banks, bank ownership
Credit demand, supply, and conditions: A tale of three crises
Sarah Holton, Martina Lawless, Fergal McCann 04 March 2012
As the Eurozone crisis continues, lending to the real economy has fallen significantly. But it is difficult to know if this is due to a drop in demand for loans or a drying up of supply. Using data for small- and medium-sized companies in 11 Eurozone countries, this column identifies the effects of the crisis on credit demand, supply, and conditions.
The post-2007 Eurozone economic crisis has taken on a number of forms. Real economic activity has declined, in certain cases significantly. Turmoil in sovereign and financial sectors has seen yields on government bonds and spreads on bank credit-default swaps (CDSs) increase dramatically. The vast credit expansion of the previous decade has led to large private sector debt overhang.
Europe's nations and regions International finance
Credit crunch, Small and medium enterprises, Eurozone crisis, credit
Home bias and the credit crunch: Evidence from Italy
Andrea F Presbitero, Gregory F Udell, Alberto Zazzaro 12 February 2012
Understanding credit crunches is a major concern for policymakers. This column suggests that the severity of a credit crunch in a specific area depends on the hierarchical structure of the banks operating in that credit market. It explores the Italian case and shows that, in the months following the collapse of Lehman Brothers, banks retracted disproportionally from markets that are more distant from their headquarters.
The management of the Eurozone sovereign debt crisis will have significant effects on the stability of national banking systems, as argued in some recent Vox columns (Acharya et al 2011, Wyplosz 2011). The interaction between the debt crisis and banking risk will likely affect bank capital positions and might also affect bank liquidity and the fragility of the interbank markets.
Italy, Credit crunch, banks, cross-border banking
European Banking Authority and the capital of European banks: Don’t shoot the messenger
Marco Onado, Andrea Resti 07 December 2011
The newborn European Banking Authority has been fiercely criticised in the few months of its life. This column argues that most of the criticisms have been driven by lobbying interests more than by noble worries on the future of the European economy. It adds that the current market turmoil requires a pan-European guarantee scheme for banks, a ‘big bazooka’ for sovereign debt which does not boil down to a pop gun, and stronger bank supervision at the EBA level.
The newborn European Banking Authority (EBA) has been fiercely criticised in the first few months of its life. According to many observers:
- This summer’s stress tests were ineffective; and
- The October rise in capital ratios to 9% has raised concerns about a massive credit crunch
We think these criticisms are off the mark. As happens to regulators, analysts are in the process of shooting the messenger because they don’t like the message.
EU policies Financial markets
Credit crunch, stress tests, European Banking Authority
The credit crunch of 1294: Causes, consequences and the aftermath
Adrian R. Bell, Chris Brooks, Tony Moore 13 May 2009
It is widely believed that the current credit squeeze, leading to bank failures, is a modern phenomenon arising from the interplay of a historically unique set of circumstances that could not have been foreseen. But a team of academics – a finance professor and two medieval historians – at the University of Reading’s ICMA Centre has documented a medieval credit crunch that bears remarkable parallels with the current crisis.
The Ricciardi and Edward I
Economic history Financial markets
Credit crunch, economic history, Edward I
Fiscal policy and the credit crunch: What will work?
Daniel Gros 21 December 2008
Most countries need a fiscal stimulus, but how should it be implemented? This column assesses fiscal policy's potential to increase demand and argues that any meaningful boost must come from transfers to the private sector, not infrastructure investments. Tax cuts will be most effective in countries where households are net borrowers.
As the real economy sinks quickly into a deep recession, governments are groping for measures to limit the downturn. And as interest rates are quickly bumping against the zero bound, an aggressive use of fiscal policy seems to be the only way to sustain demand. Fiscal policy seems particularly appropriate since our macroeconomic models tell us that fiscal policy multipliers increase when more economic agents become liquidity constrained because they are then likely to spend any additional income they receive.
Credit crunch, fiscal stimulus
India’s credit crunch conundrum
Arvind Subramanian 10 November 2008
The Indian variant of the credit crunch is different. This column outlines potential means of expanding India’s credit supply. Simply cutting interest rates will not suffice.
How can India be facing credit crunch if credit continues to grow at a torrid 30%? Yet, it is undeniable that call rates have risen sharply to double-digit levels. What is going on? And how should monetary policy respond?
interest rates, India, Credit crunch