The Global Crisis, class #4

Relevant links, including background material and tracking of all relevant developments available through http://BaselineScenario.com.

Update: Webcast for today’s class (RealMedia).

Summary of class content and structure:

1. Update on the global crisis

1. The latest news from around the world
2. What may be next?  Looking to Europe…

2. The case for and against bailing out Citigroup

1. Comparison with General Motors
2. Assessment of the bailout terms
3. Who was to blame?  And for what exactly?

3. The situation in Europe

1. Signs of pressure: financial sector and real economy
2. Policy responses: European Central Bank interest rate cuts, a more unified fiscal stimulus?
3. Specific country issues: Italy, UK, Spain and others

4. Prospects for global financial system reform.

a. Recap on likely strategy of President-Elect Obama’s team with regard to fiscal and monetary policy.  What is their likely global strategy, with or without the IMF?

b. How does this fit with what the rest of the G7 or emerging markets or any other influential players want?

c. Can we see a full overhaul of the global system coming soon?  If not, why not?

Final class is on Tuesday, December 9.  Discussion in the December 9 class will be off-the-record; it will not be broadcast or recorded.

This is the last class on the crisis that we will broadcast & record, at least for now.  (There will also be a class on Tuesday, December 9, which will review the crisis to date; I’ll post summary materials but that session will not be recorded.)

On December 2^nd, I plan for us to cover the following topics:

1. The Citigroup Bailout, including whether this is or is not good value for the taxpayer (search this website for Citigroup to see readings).  Robert Rubin’s interview with the Wall Street Journal on Saturday is also essential reading (the WSJ article requires a subscription; the blog naked capitalism provides a free summary and some reactions worth discussing.
2. The situation in Europe, which continues to worsen.  We’ll review the latest developments in the real economy and indications of various kinds of pressures (think: Italy, but the UK, Spain and other countries may well come up).
3. Prospects for global financial system reform.  We can see fairly clearly the strategy of President-Elect Obama’s team with regard to fiscal policy, and we can infer some implications for monetary policy.  But what is their likely global strategy, with or without the IMF?  How does this fit with what the rest of the G7 or emerging markets or any other influential players want?  Can we see a full overhaul of the global system coming soon?  If not, why not?  (Search for Global Reform on this website for readings.)

Feel free to post questions here or email to us, through this website.  We’ll cover as many as possible in the classroom discussion.

Details on the webcast and some potentially useful background follow:

The RealMedia stream for Tuesday afternoon will be:

http://web.mit.edu/webcast/sloan/2008/simon_johnson/sloan-financial_crises-simon_johnson-E51345-02dec2008-1630-350k.ram

RealPlayer version 8 provides all required functionality for viewing this webcast. Here’s a link that provides some verification resources for viewers of RealMedia content: http://web.mit.edu/smcs/help/realhelp.htm

A recording will be available to download later in the week, probably on Thursday.

And, in case it is helpful, here is a summary of our MIT Global Crisis class materials on the web so far:

#1, October 29: The slides I used are available on the web.  This session was not recorded.

http://baselinescenario.com/2008/10/29/mit-class-1-on-global-crisis/

#2, November 4: Video available, with summary of discussion:

http://baselinescenario.com/2008/11/06/downloadable-mit-class-on-the-global-crisis/

#3, November 18: Class outline is in the first link; video is in the second link

http://baselinescenario.com/2008/11/18/session-outline-mit-global-crisis-class-at-4pm-today/ http://baselinescenario.com/2008/11/21/video-of-tuesdays-mit-class/

#4, December 2: see materials above and postings to follow

Note: original course plan was posted at the end of October, but more than a few things changed in the world since then:

http://baselinescenario.com/2008/10/28/mit-global-crisis-class-outline/

If you read this far, hopefully you know that the readings for the class are the postings on this website in general: http://BaselineScenario.com.  Structuring and opening up a MIT course in this way is an experiment.  Based on your feedback (e.g., posted here or emailed to us or otherwise sent to MIT Sloan), we’ll either do something like this again or not.

1. Our conversation with Laura Conaway and Dan Costello, from Planet Money, which really emphasized how crisis of confidence in the financial system became a huge shock for consumers.  This both provided a human dimension and motivated our discussion of the economics around a potential fiscal stimulus and the finance around the G20 meeting.

2. Our interaction with Arvind Subramanian, from the Peterson Institute for International Economics, about what emerging markets could and could not aim to achieve at the fast-approaching G20 meetings.  This pushed us to look at the issues from a perspective other than that of the US or Western Europe.

3. The role-playing discussion, in which students argued (on behalf of a chosen country) what they would and would not offer at the G20 summit.  This really brought out how hard it will be to make substantial progress.  At the some time, it offered some glimmers of hope – the students were trying hard to find space in which they (and their countries) could cooperate.

Here is the link for the WindowsMedia stream:

http://web.mit.edu/smcs/sloan/2008/simon_johnson/sloan-simon_johnson-financial_crisis-E51345-04nov2008-1600.asx. (You may have to use Internet Explorer to use that link.)

Again, our technical advisers recommend WindowsMedia player version 9 or later (to provide all needed playback functionality).  MIT has a support page for Windows Media that should help if you have trouble: http://web.mit.edu/smcs/help/wmplayerhelp.html

Comments of all kinds are of course welcome.  We will repeat broadcast other crisis-related class sessions if there is sufficient interest (but not otherwise).

We went in the deep end.

1. The global crisis is having an impact everywhere – including, the students tell me, making conditions harder for microfinance in Africa or India (I asked: how far flung are the implications?).

2. The bank (and other) recapitalizations have helped, but they have also created additional vulnerabilities.  We talked a great about what is happening in the eurozone, and the kind of policies which can turn that situation around.

3. And right now the risks for emerging markets are serious.  Of course, many of them have sizable reserves and the IMF can help (and is helping).  But scale of this change of sentiment and capital movement out of emerging markets and into … mostly the dollar (and US Treasuries in particular) threatens to overwhelm all normal flood barriers.

If you have questions for the MIT students, please post them here.  We’ll discuss in class, and get back to you as effectively as possible.

TA: Amanda Peyton

One Page Summary of Syllabus for 15.976, Special Seminar in Management

Real-time Deep Dive into the Global Crisis as It Evolves

Tuesdays, 4pm-7pm; H2 of fall semester; in E51-345.  There will be a break around 5:30pm so people can go to other events as needed.  The first half of each class will be a lecture or structured interaction.  The second half will be a broad ranging set of discussions.  You are welcome to propose topics.

The world is entering a deep financial and economic crisis from which we are unlikely to soon emerge.  All of our preconceptions about the nature and location of growth around the world need to be reevaluated.  This course will build on what you know about macroeconomics and finance.  It will also engage you with the broader debate about these issues outside MIT.  No prerequisites.

All readings are available on: http://BaselineScenario.com.  Be sure to check there under the category of “Classroom”.  But also look at regular updates to our Baseline, our latest policy proposals and generally follow postings as they go up; you can sign up for updates or subscribe (all free).  Posting comments on the website is strongly encouraged.

Sloan Professional Standards apply.  Ask if you have any doubts about appropriate behavior.  Parts or all of some sessions may be recorded.  Official website: http://stellar.mit.edu/S/course/15/fa08/15.976/.  Also a good resource: http://www.iie.com/realtime/.

Tuesday, October 28: In the Deep End – Saving the Eurozone

Lecture: Latest developments

Discussion: Cracks in the global landscape.  Engaging with the world, through the web.

November 4: The Fiscal Stimulus and Other Policy Responses

Lecture: What can policy do?  [See my testimony to the Joint Economic Committee, Oct 30]

Discussion: Understanding how the crisis became global.

November 11: No class (MIT holiday)

November 18: The G20 Summit (which will be held November 14-15 in Washington, D.C.)

Lecture: Summit outcomes.

Discussion: After the US election, now what?

Tentative schedule is below here.  This will be revised as events warrant.  Suggestions for guests to invite, in person or by phone, are very welcome:

November 25: Europe in the Headlights

December 2: Emerging Markets (focus on India and China)

December 9: Developing countries (with Gates Foundation involvement)

December 16 (final session): What(ever) next for the global economy?

Update (November 30): Class was not held on November 25.