Slides for speech to World Bank conference (Lessons from East Asia and the Global Financial Crisis), Tuesday in Seoul (1pm local time), are attached. This post summarizes my main points.
There are two views of the global financial crisis and – more importantly – of what comes next. The first is shared by almost all officials and underpins government thinking in the United States, the remainder of the G7, Western Europe, and beyond. The second is quite unofficial – no government official has yet been found anywhere near this position. Yet versions of this unofficial view have a great deal of support and may even be gaining traction over time as events unfold. Continue reading
We have been arguing, here and elsewhere, for a banking approach centered around scaling up FDIC-interventions. Part of the pushback is (1) Congress won’t provide any more money, (2) there is no point in even going to ask, and (3) if you did go ask, that could be destabilizing.
In that context, I’m encouraged by the moves in and around the Senate at the end of last week to increase the resources available to the FDIC (for details, see my assessment on The New Republic’s site this morning). The Administration seems to be taking the lead and key senators are coming on board.
There are still a lot of pieces that can go wrong: the vaunted “stress test” looks weak, the signals on banks from the Fed and Treasury are mixed at best, and the banking lobby is digging in for a long struggle. And the world economy is going to put severe pressure on any approach.
But eventually we will turn a corner and, at that point, the FDIC will likely play a central role.
Here’s a tough problem.
- The nation’s leading banks are short of capital, and only the government can provide the scale of resources needed to recapitalize, clean up balance sheets, and really get the credit system back into shape. Any sensible approach will put some trillions of taxpayer money at risk. We should get most of it back but – as we’ve learned – things can go wrong.
- Everyone hates bankers right now, and these feelings only deepen as we learn more about how the first part of the TARP was spent and mis-spent. No one wants to hear about anything that sounds like a bailout to bankers and their careers.
How does the Administration and Congress sort this one out? This weekend we seeing an approach take shape which, most likely, will work. There are five closely related moving pieces. Continue reading
We know there is going to be a large fiscal surge in the US (the latest estimate is a stimulus of $675-775bn, which is a bit lower than numbers previously floated). This will likely arrive as the US recession deepens and fears of deflation take hold.
The precise outcomes for 2009 are, of course, hard to know yet – this depends primarily on the resilience of US consumer spending and whether large international shocks materialize. But we can have a sense of what happens after the fiscal stimulus has played out (or its precise consequences become clear). There are two main potential scenarios. Continue reading