Category: Beginners

Participate in MIT Global Crisis Class (Webcast)

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)” →

IMF Creates Special Boarding Lane for 1st-Class Countries

One of the subplots of the global financial crisis has been the return of the IMF to center stage: $15.7 billion for Hungary, $16.5 billion for Ukraine, and $2.1 billion for Iceland, with talks continuing with Pakistan and other countries. The Hungary bailout, for example, looks a bit like the old IMF, which insisted on higher interest rates and fiscal austerity in exchange for loans. These conditions attached to past bailouts have made many countries reluctant to turn to the IMF; in South Korea, for example, domestic hatred of the IMF (the emerging markets crisis of 1997-98 is known as the “IMF crisis” in Korea) makes accepting money from it politically impossible.

In order to loan money quickly to countries that need it, the IMF today announced a new $100 billion Short Term Loan Facility offering three-month loans to countries that are deemed to be financially sound (public and private debt at sustainable levels) but are being buffeted by the financial crisis anyway. These loans will have essentially no conditions, and can be used to bolster foreign currency reserves to protect against currency crises, to recapitalize financial institutions, or for other purposes.

This should be a step in the right direction, but raises two issues. First, the IMF only has about $200 billion in lending capacity, and with over $30 billion allocated to Iceland, Hungary, and Ukraine, and $100 billion for “healthy” countries, it could be approaching that limit fast. G7 countries have already committed trillions of dollars to their domestic economies; $200 billion for the rest of the world could run out quickly, and raising more money from member nations would be politically difficult right now. (The US in particular is never keen to help out international organizations.)

Second, the new lending facility draws another line between the haves and the have-nots of the global economy. (The first line was drawn by the Federal Reserve in deciding who got swap lines – and, by the way, the Fed just made $30 billion each available to Brazil, Mexico, South Korea and Singapore.) Countries with the IMF’s seal of approval get loans with no conditions; other countries get the conditions that have been so unpopular in the past. This is more than a normative issue: in a financial crisis, falling on the wrong side of the line can exacerbate the problems faced by a country or a bank, because it saps confidence further and accelerates capital flight. The IMF has promised not to reveal the names of countries that are rejected for its no-condition loans in order not to destabilize them further, but speculators will speculate. And countries that do not qualify will harbor the same resentments of the IMF (and the perceived global economic order) as ever.

(IMF for Beginners, by The Big Money (from Slate).)

Currency Crisis for Beginners

(One of our objectives is to help non-specialist readers understand what they are reading in the news. Instead of appending everything onto the very long Financial Crisis for Beginners page, I’m going to start doing individual posts and linking from that page to the posts. Advanced readers can choose to skip the “beginners” posts – or they can help improve them through comments.)

In honor of Paul Krugman, recent Nobel Prize winner and “inventor” of the currency crisis, we seem to be experiencing a global currency crisis. This may prompt the question: what is a currency crisis?

Different countries (or regions, like the Eurozone) use different currencies. These currencies generally float against each other, meaning that their relative prices are set by traders on foreign exchange markets, although sometimes they are fixed (meaning just that the central bank acts on the market to keep its exchange rate where it wants it). Changes in exchange rates are normal and are driven by a number of factors, such as interest rates in different countries: a higher interest rate creates demand for a currency, and as with most things higher demand leads to a higher price (meaning that currency has greater value). More generally, a currency’s value should be related to the long-term attractiveness of the economic opportunities available in that currency.

Continue reading “Currency Crisis for Beginners” →

Financial Crisis 101 … by Paul Krugman

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.

Financial Crisis for Beginners

Our goal is to provide analysis and commentary that are valuable not only to economists and policymakers, but also to a general audience. This is especially important today now that the workings of our financial system have become vitally important to, well, everyone. But I realize, as a couple of readers have noted, that our posts often assume familiarity with a specialized vocabulary. To some extent this is unavoidable, because we want our posts to be short, and we don’t want to explain what a credit default swap is every time we use the term. But it’s a problem.

So we’re introducing a page called Financial Crisis for Beginners that includes information and resources for people who want to get up to speed on mortgage-backed securities, collateralized debt obligations, bank balance sheets, and the other concepts that people toss around all the time these days. It doesn’t presume any prior knowledge, and it even includes links to episodes of This American Life. So if you’re at all confused, check it out.