Tag Archives: international

Recession and Recovery: How Long?

I’ve commented earlier that many economic forecasts seem to assume reversion to the mean – here, meaning average economic growth over the last two decades. For a great example, go to the Wall Street Journal and admire the GDP growth rates projected for Q3 2009 through Q2 2010, marching happily up and to the right. (The numbers are 0.6%, 1.8%, 2.3%, and 2.8%.) This recession is different, however, and even if there is a mean to revert to after U.S. households decide how much they want to save, there’s no telling how long it will take.

For one perspective, the Carnegie Endowment for International Peace had a session at the end of April featuring a few IMF economists. Marco Terrones (link to PowerPoint at the bottom of the page) looked at the typical duration of a recession and the ensuing recovery. The duration of recovery is measured to the point at which the economy reaches its previous peak output (the output level when the recession began – December 2007 in our case). He looked at 122 recessions since 1960. 

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Many Countries Are Worse Off Than We Are

These are real GDP growth rates for Q1 over Q4, not annualized (like we do here in the U.S.), for the G7 and the Eurozone:

  • Japan: -4.0%
  • Germany: -3.8%
  • Eurozone: -2.5%
  • Italy: -2.4%
  • U.K.: -1.9%
  • U.S.: -1.6%
  • France: -1.2%

Figures are from Bloomberg. Canada seems to be doing better, but Bloomberg doesn’t have quarter-over-quarter rates.

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Be Careful What You Tweet

In Guatemala, at least. Various commenters on this blog have, at one time or another, recommended pulling your money out of those “too big to fail” banks that are getting so much government support. In Guatemala, Jean Anleu Fernandez was arrested and jailed for sending this out on Twitter:

First concrete action should be remove cash from Banrural and bankrupt the bank of the corrupt.

I guess he also said the bank was corrupt. Well, people have said that around here, too.

More broadly, the government is in crisis, with frequent popular protests, over allegations that Rodrigo Rosenberg was assassinated on the orders of the president because he uncovered evidence of murder and corruption by the government. 

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Can The US Save The World? (House Testimony)

Yesterday I testified to the House Subcommittee on International Monetary Policy and Trade (part of the House Financial Services Committee).  The hearing’s title was “Implications of the G-20 Leaders Summit for Low Income Countries and the Global Economy,” and the main topic was whether Congress should support an extra $100bn for the IMF that the Obama Administration agreed at the G20 summit in early April (witness list, webcast, and written testimony).

The committee was mostly in favor of the US continuing to play a leading role in supporting the IMF, but pressed the witnesses to explain whether the IMF could lose this money (highly unlikely), how this would protect American jobs (definitely, but hard to quantify precisely), and if the broader package of IMF reform should also be supported (e.g., the proposed gold sales are being reassessed, to see they could generate more resources for aid to developing countries).

Politico is reporting that US funding for the IMF is likely to be attached to the war supplemental spending bill.  The subcommittee’s chairman, Gregory Meeks, seemed positive – as did all the Democrats who spoke, along with Gary Miller, the Ranking Member/Senior Republican.  But, based on remarks made by at least two Republican members of the subcommittee, there is likely to be a big public fight at some point.  My guess is that the Democratic side will press hard for President Obama to more publicly explain why supporting the IMF (and the G20) is very much in the US interest.

The main points from my written testimony are below.  While Treasury represents the US vis-a-vis the IMF and traditionally has considerable scope for action, the views of Congress on IMF details are very important as both guidance and constraints.  In our advice on the wide range of IMF-related issues below, both I and the other witnesses laid out broadly similar views with varying emphasis – there was actually much more disagreement among committee members than at the witness table. Continue reading

Payback Time

Once upon a time there was a president named George. He liked to do things his own way, which annoyed some of his “friends” in Europe. But then a new president named Barack was elected, who not only promised to be nicer to his friends, but was actually very popular in most parts of the world. And the people of the world thought we would see a new era of international cooperation, at least between the U.S. and Europe.

Not so much.

On this side of the Atlantic, the Obama administration and the Fed have been working night and day in an attempt to turn around the economy: Fed funds rate reduced to zero, $800 billion stimulus package, new plan to aid struggling homeowners, new plan for buying toxic assets, new budget, decision by the Fed to buy long-term Treasury bonds, new domestic regulatory framework outlined this week, etc. We’ve been plenty critical of various aspects of the U.S. response, but at least they’re trying.

(Continental) Europe, by contrast, has decided they’ve done enough and it’s time to sit back and watch.

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Europe Is in Bigger Trouble than the U.S.

This is a theme that Simon in particularly has been sounding. Now, according to the Telegraph, a confidential European Commission memo confirms this. To review, the basic problems, relative to the U.S., are:

  • Disproportionately large banking sectors (the Iceland problem) in some countries, such as the U.K.
  • High exposure to U.S.-originated toxic assets (up to 50% of those assets, I have heard estimated).
  • Major exposure to emerging markets, primarily Eastern Europe and secondarily Latin America, which have been harder hit by this crisis than anyone else.
  • Higher pre-crisis national debt levels (for many but not all countries).
  • For countries that use the euro, no control over monetary policy.

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Meanwhile, Elsewhere . . .

All the hubbub about the new Obama Administration and the probably-impending bank rescue plan has diverted my attention a bit from goings-on in the rest of the world. I decided to spend a little time checking in, thanks to the magic of the Internet. And things do not look so good.

  • Japan, in what looks like sign of desperation, announced a plan to buy shares directly in companies (not just banks) that are having trouble raising capital. The idea seems to be that, since companies are having trouble borrowing money from banks, they should get it from the government instead. This looks like a much broader and more direct intervention – deciding who gets capital and who doesn’t – than anything that has been contemplated in the U.S.
  • Germany, the largest economy in the EU and one once thought to be relatively safe in the current crisis (as compared to the U.S. or the U.K., with our overgrown financial sectors), is now projected to see a contraction in GDP of over 3% (composite Bloomberg forecast) – but still struggled to pass a stimulus package of $65 billion – or 2.5% of GDP – over 2 years.  And despite an annual government deficit under 3% of GDP (ours is over 8% by comparison), the political pressure is to reduce the deficit and return to a balanced budget out of fear of inflation. This only highlights the tensions within the Eurozone between countries with different economic situations and priorities.
  • The Institute for International Finance projects that net private sector capital flows (investments, whether direct investment, equity, or debt) to emerging markets will be $165 billion in 2009, a staggering 65% drop from 2008. Commercial banks are expected on balance to withdraw $61 billion from the region. As a result, regions such as Eastern Europe whose recent growth was dependent on foreign lending are likely to contract for some time to come, as companies are unable to refinance their debt.
  • Robert Zoellick, head of the World Bank, estimates that the economic crisis has pushed 100 million people around the world into poverty.

One of the themes of this crisis has been that whatever problems we have here in the U.S., countries with weaker borrowing power, currencies, social safety nets, and financial sectors face much bigger problems. That isn’t changing.

A Short Break

I will be taking Saturday through Monday off to spend some time with my family. Hopefully it will be a slow weekend on the economic front.

In the meantime, The New York Times has some overview articles on a few topics we’ve raised recently:

We Are All in This Together

Dani Rodrik has a short, clear post on (a) why countries are tempted to engage in protectionism during recessions and (b) why they shouldn’t. It only uses 1st-semester macroeconomics. The bottom line is that the preferred outcome is for all countries to engage in fiscal stimulus at the same time. The hitch is that most of the developing world can’t afford to. The implication is that it is in the interests of the wealthy countries to find a way to support the developing world.

The Quest for Global Balance

Even with all the chaos in the US economy these days, the G20 summit approaching this weekend is bringing the global financial system to the top of the agenda, at least for the few days. One of the issues of the past few weeks has been volatility in currency prices as (most) countries with overvalued currencies and large current account deficits see their currencies fall. The flip side of this situation is countries with undervalued currencies and large current surpluses – most notably, China. Arvind Subramanian presents one solution in the Financial Times: treat undervalued currencies as a form of trade barrier and manage them through the WTO.

Financial Crises, Political Consequences

Hard economic times have political consequences, many of them unfortunate.

In Argentina, we’ve already seen the government nationalize the private pension system in what many believe to be a naked grab for cash with only a distant relationship to the rule of law.

In Russia, a central government with a war chest of over $500 billion in foreign currency reserves (at least when the crisis started) now has the power to determine which of the billionaire oligarchs will survive and which will be bankrupted. Yesterday the government provided $2 billion (WSJ, subscription required) to the Alfa Group, Mikhail Fridman’s conglomerate, to avoid save him from giving up his 44% stake in a cellular carrier to Deutsche Bank. On Friday, another billionaire will have to come up with $4.5 billion to avoid giving up 25% of the metals company OAO Norilsk Nickel to Western banks including Merrill Lynch and Royal Bank of Scotland, and will likely turn to the government.

Arguably the government’s power in this situation is analogous to the powers the US has granted to the Treasury Department to choose winners in the financial sector. Still, given the other things we know about Russian politics, it is not too far-fetched to see government money used to protect Vladimir Putin’s political allies, impoverish his opponents or nationalize their assets, and keep Russian assets out of Western hands. (Whether the government will have enough money for the job is another question.)

Another likely reaction of governments faced by financial and economic crisis is a return to (or, in many cases, an increase in) protectionism. Richard Baldwin describes how the current state of global trade agreements makes this not only possible but likely, further hurting the global economy.

Finally, there’s (still) Zimbabwe, forgotten by the world, where power-sharing talks are still going nowhere.

Bank Recapitalization Monday

Those of you reading the news may be having trouble keeping all of this morning’s events straight. Here’s a quick summary:

  1. The UK announced specific plans to recapitalize three of its largest banks – RBS, HBOC, and Lloyds TSB – with up to 37 billion pounds of government money. Separately, Barclays announced plans to raise money independent of the government. This seems to be the implementation of a plan that was announced last week.
  2. Mitsubishi finally closed its deal to invest $9 billion in Morgan Stanley, gaining a 10% dividend on its shares (similar to Buffett’s investment in Goldman). This deal, which had been pending for weeks and some had given up for dead, will help boost confidence in Morgan Stanley. Note that unidentified sources have claimed that the US government promised to protect Mitsubishi’s investment; it’s not clear if that’s part of the final deal.
  3. The Federal Reserve and several of its counterparts announced an expansion in the supply of credit to banks around the world in US dollars. The Fed said it will make available as many dollars as the other participating central banks need. They will then lend the money out to their banks against whatever collateral is appropriate under their rules. This is another move to increase liquidity in the financial system; however, for several weeks now it’s been apparent that liquidity alone is not enough to solve the problem.
  4. Following yesterday’s agreement in principle, major Eurozone countries are announcing their rescue plans today, including both bank guarantees and recapitalization. Germany announced 400 billion euros to guarantee bank loans and 80 billion euros for recapitalization; France announced 320 billion for loan guarantees and 40 billion for recapitalization; Spain passed legislation providing 100 billion for loan guarantees and allowing the government to recapitalize banks by buying shares. I believe Italy is expected to make an announcement soon.

In summary, governments are taking the kind of steps that are necessary to halt the crisis. Loan guarantees and bank recapitalization are two of the steps we have been advocating. However, the jury is still out on whether they are coordinated and decisive enough. The much-followed TED spread (a measure of banks’ willingness to lend to each other) is only down by 7 basis points, although that may in part be due to the fact that the bond market is closed in the US today due to a holiday. All eyes are now on Washington, where a more definitive bank recapitalization plan is widely expected. Neel Kashkari, Paulson’s point man on the crisis, said today only that “We are designing a standardized program to purchase equity in a broad array of financial institutions.” (He said a lot of other things on a broad range of other topics.) Finally, this burst of support for wealthy countries’ banks could have unintended effects on emerging markets, as we discussed previously.

Update: Austria, the Netherlands, and Italy are also on board.

Zimbabwe and the Financial Crisis

Or, yet another reason why the financial crisis matters

In Zimbabwe, site of some of the deepest suffering in the world today, Robert Mugabe reneged on a power-sharing deal with Morgan Tsvangirai and the opposition party. Sure, he might have done it anyway, but it’s a lot easier when the world’s attention is elsewhere and every major power has other things to worry about. We rarely comment on non-economic issues, but in hard times, you can watch for more and more behavior like this.

Please comment if you’ve seen other cases of politicians using the crisis as cover for things they might not try otherwise.

Global Crisis: Latest Analysis and Proposals

Our latest analysis and proposals have been published by the Washington Post (print edition Sunday) in an article by Peter and Simon entitled “The Next World War? It Could Be Financial.” If the world’s leading financial powers cannot agree on a coordinated response, it could be “every nation for itself” – a repeat, on a larger scale, of the emerging markets crisis of 1997-98.  We propose six concrete steps that policy makers – beginning with the G7 and IMF meetings this weekend – can take to limit the risks of such an outcome.

Feel free to comment with criticisms or suggestions.

More Economists for Coordinated Recapitalization and Debt Guarantees

The Center for Economic and Policy Research has rushed out, and I mean that in the best sense of the term, a survey of economists’ recommendations for the world’s economic policymakers and, specifically, for the meeting of G7 finance ministers this week. The economists who contributed to the 40-page report (once there, click on the title to download the PDF), while presenting a range of views, generally agree on the need to recapitalize the banking sector and, with some dissent, to guarantee short-term bank liabilities in order to calm fears in the financial markets. They also agree on the urgent need for coordinated action across countries. These are positions we have been advocating on this site, and we are glad to see many other people on the same page.