Paul Krugman has a reputation as an angry liberal polemicist. But he’s also very good at giving clear, simple explanations to some basic questions about the financial crisis. His recent interview with Terry Gross on Fresh Air covers a lot of fundamental topics and concepts, such as where the money for the bailouts comes from. Advanced readers probably won’t learn much, but newcomers could find it very helpful.
Day: October 24, 2008
Emerging Markets: The Differences from Last Time
Arvind Subramanian has a new article on the financial crisis in emerging markets. He focuses on some of the differences between the 1997-98 crisis and the present day. For one, increased global trade makes emerging markets more susceptible to economic conditions in wealthy nations – and, as we all know, those conditions are considerably worse now than ten years ago.
Smoke in the Eurozone
So far, rising spreads on credit default swaps have accurately predicted what sectors of the global economy would run into trouble next. The sharp rise in spreads on emerging market countries’ debt is old news. But recently, CDS spreads have been rising for countries that are part not only of the EU but of the Eurozone, such as Greece, Portugal, Ireland, and even Italy. The basic fear is that these countries may not be big enough to bail out their banks, so risk has spilled from the private sector into the private sector. The need for flexibility in monetary policy (currently ceded to the European Central Bank), the pain of a severe recession, and the increase in nationalist politics that often accompanies economic misery could lead one or more countries to abandon the euro. The costs of abandoning the euro would be very high, but it is a scenario that has changed from unthinkable to merely unlikely.
There are steps that policy makers can take now to reduce the threats of national defaults and of a fragmentation of the Eurozone. We discuss the situation and our policy proposals in a new op-ed in The Guardian.
Waiting for G7 Currency Intervention: It Won’t Be Long
Major currencies are on the move, big time, since yesterday. The yen has risen to 91 yen per dollar (from 97) today. The euro has fallen to nearly 1.25 dollars per euro (from 1.29). You get the picture.
The G7 needs to slow down the disorderly run into the dollar. This run is in danger of snowballing into a panic – as people fear further rises in the dollar (and falls in their local currency), they rush to buy more dollars (to cover debts in dollars and also to shift their portfolios), and so on.
Coordinated intervention, announced over the weekend most likely, will involve selling dollars, selling yen, buying euros and pounds. This can calm things, by showing there are no one way bets. (Will the Chinese be involved?)
But the global deleveraging (reduction in lending worldwide) will continue. And this seems to involve more of a move into dollars that we previously thought. So how long can even the most coordinated intervention hold the line?
Update: Typo fixed to clean up an inconsistency. Sorry for any confusion.
I Like the G20’s Chances, But They Need To Update Their Website
It is pretty common these days, at least in Washington, to pour scorn – or at least cold water – on the idea that a global summit could have much impact on the crisis. I would count myself among the skeptics with regard to a mega-meeting with 100+ countries around the table, and it does seem like at least one of those meetings is scheduled for December or thereabouts.
But, in addition, President Bush has invited G20 heads of government to meet at one of his places (exact location TBA) on November 15. The G20 convenes the ministries of finance and central banks of 19 countries, and sensibly adds the European Union (represented by both the European Commission and the European Central Bank.) Continue reading “I Like the G20’s Chances, But They Need To Update Their Website”
The Baseline Scenario 