What happened to the global economy and what we can do about it
Category: Commentary
Ben Bernanke spoke at length today on Capitol Hill. But did he say anything?
Over in The Guardian’s on-line comment page, James and I suggest an answer. There was nothing new on the big macroeconomic issues of the age. And on banking, we remain disappointed…
Hedge funds have been nominated as a prime culprit in the current financial disaster. European governments, in particular, seem keen to impose greater regulation on hedge funds, including more transparency and compliance requirements. In fact, this is will be one of the main deliverables they seek at the G20 summit on April 2nd.
I’m not opposed to stronger regulation, and hedge funds have obviously disappointed investors – especially with their illiquidity under pressure. But are hedge funds really responsible for the depth of the crisis? They were present at the scene of the crime, in terms of buying and trading what we now call “toxic assets,” but surely their role was minor relative to supposedly “regulated” US and European banks. Continue reading “Was It The Hedge Funds? (Diane Rehm Show at 11am)”
The debate on bank nationalization in the United States is off to an inauspicious start. Most of the arguing so far is framed in terms of: yes/no, or what kind of in-between strategy can be tried and for how long. This misses the point.
In some important and not good ways, we have already nationalized the financial system. Continue reading “Privatize The Banks Already”
You’ve seen it a thousand times. A country’s exchange rate used to make sense, but now it is hopelessly overvalued. And, consequently, your pegged exchange rate now looks like a one way bet. Every Financial Times subscriber starts to think about how to either get out of your currency or, if they are feeling aggressive, how to more actively speculate that the exchange rate will soon depreciate.
And the beauty of this situation – from a speculator’s point of view – is that the relevant authorities will never move quickly or decisively to the inevitable end point. Sooner or later, the currency will be devalued and, if the country’s citizens are lucky, sensible economic policies (and perhaps external financial support) will be put in place to support the new exchange rate. But, for a surprisingly long time, the government will make statements along the lines of, “we will defend our exchange rate,” “we have plenty of reserves,” “we will never devalue,” or – my favorite – “the fundamentals are fine.”
This analogy sprang to mind when I read this morning’s joint statement by Treasury, the FDIC, OCC, OTS, and the Fed. Continue reading “Defending A Peg: Lessons for the US Banking Authorities”
In major every crisis you have a choice. You cannot choose between inaction and action, because ultimately you will be forced to act. You do not really choose between bailout and no bailout, because very soon you find that all the reasonable options involve some sort of bailout for some people (and not for others). And, try as you might, there is no way to choose to let your neighbors fail completely – because that failure has such awful consequences for their citizens and, in all likelihood, for your banks, that you finally come across with the money.
But you do have a choice on when to come to help your neighbors and your friends, and you can definitely choose the form of this assistance. if you come in earlier and in a more systematic fashion, the cost for everyone is lower and the chances of a fast recovery are stronger.
The sensible decision might seems obvious from a distance or in retrospect, but it’s this exact choice that the richer and more stable countries in Western Europe are now struggling with. Continue reading “The Choice: Save Europe Now Or Later?”
Less than a week after pulling off the media coup of publishing his universal credit insurance proposal in both the FT and the WSJ on the same day, Ricardo Caballero has a new proposal for solving the banking crisis, this one in tomorrow’s Washington Post.
He should go back to the last one.
Why don’t all recessions seem to teeter on the brink of turning into a “lost decade” as President Obama described, accurately, our current predicament?
In a standard recession, some people (or firms or governments) cut back on their spending. But others either maintain their spending or actually buy more. A recession is typically a good time to invest in relationships and buy longer-lasting assets; for example, it’s a good time for private universities (with endowments) to hire faculty, build labs, and acquire the land for new buildings. Anyone with a long time horizon, deep pockets, and access to cash ordinarily thinks in these terms.
But instead of this kind of countercyclical private sector investment behavior, Drew Faust, the President of Harvard this week sent a downbeat message to her stakeholders, Continue reading “From Here To A Lost Decade”
If you think credit default swap (CDS) spreads are informative with regard to developing pressure points and issues that policymakers should focus on (or will likely spend hectic weekends dealing with), you should look at the latest CDS spreads for European banks. The Irish story we have already flagged. I’m also concerned that developments in East-Central Europe are starting to affect the prospects for West European banks, most notably in Austria. Continue reading “Dublin (and Vienna) Calling”
I don’t have a lot to add to Simon’s article about the housing plan in The New Republic – as you might imagine, we did talk about it – but I do want to take issue with the title, “Insufficient Boldness.” One quirk about writing for other publications is that you usually (not always) have complete control over the body of the article, but no control of the title (and often you don’t know what the title will be until you see it printed).
There is an old saying among experienced economic policymakers, “in a major crisis, do not err on the side of being insufficiently bold.” And we know that President Obama’s economic team are avowed proponents of this approach.
The housing plan unveiled yesterday is impressively comprehensive – I go through some of the details in a post this morning on The New Republic’s Site. But is it bold enough? Continue reading “President Obama’s Housing Plan”
In this brief interval before the new housing plan is announced, I’ll try to sneak in a comment on the auto bailout, and the plans submitted by GM and Chrysler yesterday. This may be an obvious question that many people have thought about, and got some discussion in December, but: Why does Cerberus (the private equity firm that owns Chrysler) need money from the government?
In the discussion over whether or not Ireland and other eurozone countries face serious economic issues (e.g., as suggested by the credit default swap, CDS, market), we have been joined by an unlikely ally: the German Finance Minister, Peer Steinbrueck. To avoid any misunderstanding, here is the exact wording from Bloomberg this morning: Continue reading “Germany Shows Leadership (?)”
The worst possible way to nationalize would be to assume responsibility for the liabilities of banks, at the same time as not putting in place adequate oversight and failing to ensure that the taxpayer gets any upside. Even worse, we could install managers with a proven track record of incompetence. Anyone who proposed such a scheme today – as we collectively kick the tires of plausible alternative approaches – would be dismissed as an ridiculous crank.
Yet it is exactly this kind of nationalization that we – or, more specifically, Hank Paulson – already did. Continue reading “Reprivatization After Paulson”
The prevailing consensus on any economic policy is a fascinating beast. For years it can stay put, seemingly immovable, and even – in some cases – becoming enshrined in legislation or central bank statute. One day it begins to shake, ever so slightly; under the pressure of events, a wider range of serious opinion develops. And then, all of a sudden, the consensus breaks and you are running hard to keep up.
We saw this last year with regard to discretionary fiscal policy – fiscal stimulus – in the US. Eighteen months ago, very few mainstream economists or other policy analysts would have suggested that the US respond to the threat of recession with a large spending increase/tax cut. The consensus – based on long years of experience and research – was that discretionary fiscal policy generates as many problems as it solves. To argue against this consensus was to bang your head against a brick wall, while also being regarded as not completely serious. Continue reading “Every Consensus Must End”
My Friday post on Irish credit default swap (CDS) spreads seems to have fed into a productive debate among experts on the Irish economy. Still, there is something of a puzzle here. Continue reading “The Irish Question”
The Baseline Scenario 