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.
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:
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.
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.)
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?
I spent most of the last two days teaching some special sessions on the global crisis at MIT and doing final preparations for a couple of courses that will start next week.
Three relevant points strike me from interacting with students, faculty and other members of the MIT community, which – as you might guess – is a very international set of people.
First, everyone now understands this is a truly global crisis. The ramifications are already apparent in places that, even a month ago, you would have thought quite distant from the US financial sector, such as small business in India or Australian real estate (the link is of course credit). There is very little that can, in some sense, shock any more: Chinese growth could stall, credit may tighten further, European medium-term prospects are already being be called into question, and so on.
Second, very few people yet see the complete picture. We all have some pieces clear in our minds, but it’s only when we talk – particularly in a free-wheeling classroom discussion – that we begin to see how it all fits together. It’s only when you engage with someone from Iceland, or a person with money in a UK bank, or a student whose income is in a depreciating currency, that you really begin to realize the scale and interconnectedness of the problem.
Third, I’m struck and encouraged by the calmness that follows a really open discussion. People are worried, but talking about the problems helps them get perspective and start thinking about strategies. How exactly are they going to cope, what should they do differently, and where will they see the impact on this or that business?
All of this makes me think that we can usefully contribute to each other’s understanding by talking (and arguing) through more dimensions of the crisis and its impact. In that spirit, we will open up our classroom over the next two months, to bring your views and questions to MIT and vice versa. We’re still working on the exact details of how best to do this (and we’re very open to suggestions), but as much as possible it will be through this website. Tell me if it helps.