What happened to the global economy and what we can do about it
Author: Simon Johnson
You can now download the video of our November 4th (Tuesday) class. The class covered a range of topics, as advertised (although I always like a class to jump around as students and guests make good points.) The highlights from my perspective were:
Continue reading “Downloadable MIT Class on the Global Crisis”
Sorry to interrupt your presidential election celebrations or commiserations, but it’s time to get back to work on the global crisis, which unfortunately is far from being over. The G20 summit is fast approaching (November 14-15th) and – to say the least – the agenda needs to focus more on some immediate problems. Reuters’ MacroScope has a piece from me today on arguably the most pressing issue: money.
November 4, 2008: below is the (rough) structure for today’s class, as handed out to students. Remember, you can watch a webcast live (4pm Boston time), and a recorded version should be available for download on Thursday.
Continue reading “MIT Global Crisis Class, #2 (Election Day Special)”
Hopefully (technology permitting), Tuesday at 4pm (Boston time) you will be able to watch class #2 of our special seminar on the global crisis, through this link:
http://amps-web.mit.edu/public/sloan/2008/simon_johnson/live/04nov2008/
The goal is to give you a sense of the discussion at MIT, and also to let you participate – you can post questions here either in advance or during the class (we’ll monitor the webpage); or you can send by email (baselinescenario at gmail dot com).
The topics will be:
1. Where do we stand in the overall crisis at this moment? (Including what central banks have been doing, particularly since last week)
2. What is the case for a fiscal stimulus in the U.S.? Here we’ll discuss my testimony to the Joint Economic Committee of Congress, posted here. If you can read one thing in advance of class, please look at this.
3. What will be (and should be) the agenda for the G20 meeting in Washington on November 14-15? On this, we will talk with Arvind Subramanian, a leading strategist on emerging markets’ economic diplomacy.
4. And there will plenty of time for an open discussion based on topics that students want to air.
Continue reading “Participate in MIT Global Crisis Class (Webcast)”
If there is a doctor in the house, or someone who knows where to track these kinds of statistics, please confirm or deny the following (which I got from two doctors, but the plural of anecdotes is not necessarily data…): visits to hospital emergency rooms in the U.S. are down sharply since mid-September?!
This strikes me as odd for the following reasons.
1. You would expect health (both actual and perceived) to worsen with the kind of stress that comes in economic crisis. This was definitely the experience in parts of East-Central Europe in the 1990s, and arguably it has happened elsewhere during similarly intense episodes.
2. Visits to the emergency room obviously can be expensive if you don’t have insurance, but the stories I hear sugggest that visits are down also for people with insurance.
Could it be that the fall in consumption, picked up in the 3rd quarter GDP numbers that came out last week, is not just about going out less, buying fewer clothes, and staying away from imported goods? Is it possible that we are actually taking less good care of ourselves and – quite likely – storing up more health problems for the not-too-distant future?
Comments on this important issue would most welcome.
Update (November 4): Laura Conoway, of Planet Money, has dug into this more – what she hears through the American College of Emergency Room Physicians is that visits are not down, but people are really struggling to afford insurance and medication.
Here is the written testimony I submitted to the JEC. In my verbal presentation this morning (5 minutes only, strictly enforced) I stressed the following.
1. The global economy is slowing fast, and likely faces an unprecedented (since 1945) recesssion. The pressures on emerging markets are intense, and inflexibility in Europe in both policy (Eurozone, I’m talking about you) and labor markets (for almost all the European Union) creates serious macroeconomic vulnerability at this stage.
2. In the US, significant (OK, also unprecedented) countercyclical policies have now been put in place. In particular, the Fed is running through its anti-deflation playbook (which Mr Bernanke was kind enough to publish back in 2002). We have no idea how to properly measure the scale, let alone the impact, of this increase in: liquidity, contingent liabilities, actual or potential direct lending to almost everyone in the US, and, via unlimited swap lines to some central banks and new $30 billion swap lines to four emerging markets, to many institutions around the world.
3. So deciding what to do with fiscal policy is very hard. In other industrialized countries, you can rely on “automatic stabilizers” to a greater degree than in the U.S., meaning that their government spending (and deficit) increases in recession because unemployment benefits and the like are more generous. In the U.S., we have to make a conscious decision. And that decision needs to be made soon, within a month or so, because any fiscal stimulus works only with a time lag – and the more you want to do things that definitely raised GDP (like infrastructure), the longer the time lag.
So my recommendation is… (well, read the testimony; the numbers are on the first page; detailed recommendations follow on how to spend, for both immediate impact and longer-term benefits).
Comments welcome – there is still a long way to go, in terms of legislation design and implementation.
Update: If you want to see the actual session courtesy of C-SPAN, go here. (Note there were 8 speakers and the session was two hours long.)
News sources are reporting more details on the possible mortgage restructuring plan for distressed homeowners first mentioned by Sheila Bair in her Congressional testimony last week. The basic outlines of the plan are:
This is roughly consistent with the principles we outlined earlier: the lender gets more than it would have gotten in foreclosure, the homeowner is better off than being on the street, the community benefits because there are fewer foreclosures. There are three key issues that still need to be negotiated.
There are also a couple of enhancements to the program that could be considered. First, shouldn’t the government – by which we mean the taxpayer – get something for its guarantee (besides the satisfaction of knowing that it’s doing what’s best for the country)? The homeowner and the lender are both better off than they would be otherwise (homeowner on the street, lender forced to foreclose), and the government is worse off (because some of these new mortgages will fail). The government could get a share in the future appreciation of the house, for example.
Second, to protect against default by the homeowner on the new mortgage, the government could secure the loan against his or her future earnings, because the government already has an enforcement mechanism it can use: the IRS. This would protect the taxpayer’s interests.
Finally, one note of caution. Loan modifications should work for some proportion of delinquent homeowners, but there are probably millions of homeowners who have no chance of paying any mortgage on their houses that would be acceptable to their lenders. People with option ARMS who made minimum payments and then saw their mortgage rates reset upward by several percentage points will not be able to pay anything close to what lenders will require not to foreclose. In conjunction with any mortgage restructuring plan, there also has to be a plan to manage the flow of properties onto the market, because a flood of foreclosures will only cause prices to plummet further. It seems like there are so many things to do, but that is the price of the situation we are in.
Update: Here’s another proposed solution to the securitization problem.
Here are the slides I used in the first class, which ran from 4pm to 7pm yesterday. Tell me if anything about them is unclear.
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.
Note: pasted below is the material I am handing students at 4pm today (Tuesday, October 28), as a guide to what to expect from this class. We hope to webcast the second class, next week, Tuesday, November 4; details to follow. Other forms of interaction will depend on interest expressed by you and by the students.
Continue reading “MIT Global Crisis Class: Outline”
The G7 did speak on major exchange rates, over the weekend, as expected. But they only spoke about the yen’s “recent excessive volatility.” This was about the least they could say under the circumstances, and it is not clear that it will do anything – other than encourage further flows into the dollar.
Why did they not mention the dollar, the euro, and the British pound? One possibility is that they are happy with the appreciation of the dollar and the depreciation (falling value) of the euro and the pound. This would be a bit strange, given that dollar depreciation – from 2002 through the summer – was considered by the G7 to be a reasonable component of the global adjustment process that would put current accounts onto a more sustainable path (yes, notwithstanding “strong dollar” statements from the US.) The dollar was getting close to what the G7 (and the IMF, who do a lot of the technical work in this regard) saw as a plausible “medium-term” value, at least as measured against a broad basket of currencies. Now the dollar has taken off (i.e., rising in value against almost all currencies). How does that help with anything?
It could be the case that the Europeans like the depreciation of their currencies, as this will help cushion the recession. The falling value of the euro makes interest rates cuts in the eurozone less likely, because the European Central Bank (ECB) will see the depreciation of the euro as helping the real economy and also increasing (their) fears about inflation. But given the ECB’s obsession, even today, with inflation – and thus its unwillingness to cut interest rates, come what may – it might be that depreciation is the eurozone’s best short term hope (as well as its likely medium term future, as sovereign risks materialize for smaller countries).
Still, it would be odd if no one at the G7 table isn’t already raising the dangers of deflation (falling prices), particularly in the US – I’m looking at the representative of the Federal Reserve at this point. Commodity prices are falling worldwide and now the price of imports into the US will decline sharply. If this feeds into low prices (i.e., a lower price level, not just slower inflation) then short-term, of course, US consumers benefit. But if lower prices lead to lower wages, then just think what that does to anyone’s ability to pay their mortgage or any other debt – these are almost always fixed nominal amounts.
When people talk about avoiding the mistakes of the Great Depression, they mean in large part not allowing prices and wages to fall. And the faster and further that the dollar appreciates, the more likely we are to worry about deflation.
What then are the internal G7 dynamics? Based on what we saw, and didn’t see, this weekend, I would guess that recriminations and nonconvergent policy views prevail. The spirit of cooperation we saw around bank recapitalizations, just two weeks ago, must have evaporated. We may not want to rely on the G7 to lead the way. Can I interest anyone in a G20 summit?
The global picture continues to worsen and Friday was a pretty bad day. I took part in a good summary discussion hosted by Jeff Brown on the Lehrer NewsHour last night. The topics ranged from the rising dollar to falling oil prices to Treasury’s investments in insurance companies to loan modifications for homeowners.
But I don’t think anyone should throw up their hands, abandon their personal strategies, or think that any part of the sky is falling. Here’s why. Continue reading “Worry Global, Talk Local”
I try to read four newspapers before the day really starts, and also look through a couple of on-line sites. I skim the lead economic stories and randomly dig all the way through the paper to the end of some business/financial stories.
Sometimes the news jumps off the page, and sometimes it seeps through. Now, about two hours after looking at today’s weekend papers, I realize that something is stuck in my mind, rather like a tune that you can’t get rid of. Continue reading “Hedge Funds, An Impression”
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.
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”
In the various measures of vulnerability for emerging markets (middle income countries open to capital flows) that are now being examined and re-examined carefully, Argentina does reasonably well. Its banking system does not appear to be highly exposed to problems in the US and Europe, and its macroeconomy – while not in great shape by any means – is far from being among the most dependent on continued capital inflows from abroad.
Argentina does produce and export a lot of commodities, and these prices are falling, so this creates a potential difficulty for government finances. Still the government’s proposed response is a stunner: President Cristina Fernandez de Kirchner announced Tuesday that she plans to take over (i.e., nationalize) 10 private pension funds (the Argentine Congress would have to approve this; we’ll know soon how that will go). The pension funds hold a great deal of government debt, so grabbing them would presumably get the government off the hook for that debt. But what about people’s pensions?!?
Most importantly, does this indicate that governments around the world feel they can break contracts and expropriate property freely just because all economies have encountered some sort of trouble and many industrialized countries are “recapitalizing” something? If the global crisis is becoming a smokescreen for confiscation, then our problems just got a lot worse.
The Baseline Scenario 