News & Commentary:

June 2009 Archives


The Last Temptation of Risk Recommended!
Barry Eichengreen (National Interest) May/Jun 2009
The Great Credit Crisis has cast into doubt much of what we thought we knew about economics. We thought that monetary policy had tamed the business cycle. We thought that because changes in central-bank policies had delivered low and stable inflation, the volatility of the pre-1985 years had been consigned to the dustbin of history; they had given way to the quaintly dubbed “Great Moderation.” We thought that financial institutions and markets had come to be self-regulating—that investors could be left largely if not wholly to their own devices. Above all we thought that we had learned how to prevent the kind of financial calamity that struck the world in 1929.

Manchurian Paradox
Stephen S. Roach (National Interest) May/Jun 2009
The America-China symbiosis cannot be overstated. Beijing’s willingness to buy U.S. debt allowed us to live on credit, while our purchase of Chinese goods propelled their meteoric rise. But as the financial markets have soured, some in the United States are questioning the wisdom of this mutual dependence. With China heckling us over our fiscal policies and its U.S. debt holdings, America is threatening protectionism. Just as we both rise, so may we both fall: together.

Peace Through Development
Jeffrey D. Sachs (Project Syndicate) Jun 2009
American foreign policy has failed in recent years mainly because the United States relied on military force to address problems that demand development assistance and diplomacy. Young men become fighters in places like Sudan, Somalia, Pakistan, and Afghanistan because they lack gainful employment. Extreme ideologies influence people when they can’t feed their families, and when lack of access to family planning leads to an unwanted population explosion. President Barack Obama has raised hopes for a new strategy, but so far the forces of continuity in US policy are dominating the forces of change.

Will Global Imbalances Return?
Barry Eichengreen (Project Syndicate) Jun 2009
Future history books, depending on where they are written, will take one of two approaches to assigning blame for the world’s current financial and economic crisis.

Help the Poor Help Themselves
Pär Stenbäck (Project Syndicate) Jun 2009
One early result of today’s global recession is that many donor governments are trimming their foreign aid programs. Before taking office, President Barack Obama had promised a doubling of American foreign assistance, from $25 billion to $50 billion, but since then Vice-President Joe Biden has warned that this commitment will probably be achieved more slowly because of the downturn.

Green Shoots or Yellow Weeds?
Nouriel Roubini (Project Syndicate) Jun 2009
Recent data suggest that the rate of contraction in the world economy may be slowing. But hopes that “green shoots” of recovery may be springing up have been dashed by plenty of yellow weeds. Recent data on employment, retail sales, industrial production, and housing in the United States remain very weak; Europe’s first quarter GDP growth data is dismal; Japan’s economy is still comatose; and even China – which is recovering – has very weak exports. Thus, the consensus view that the global economy will soon bottom out has proven – once again – to be overly optimistic.

How to Regulate Systemic Risk Recommended!
Richard Bookstaber (II) Jun 2009
As policymakers look to establish systemic-risk regulators, information is the key to success. Monitoring financial products would allow us to understand the potential for crisis events to have systemic consequences and help us anticipate and prevent the course of a systemic shock.

Capitals of Capital
Ian Bremmer (Project Syndicate) Jun 2009
Recently, China’s government announced that it wants Shanghai to become a global financial capital equal to London and New York by 2020. An ambitious goal, which may or may not be achieved. But China’s aspirations also underscore a worrisome and increasingly pervasive new reality: political officials are making decisions normally left to markets on a scale not seen in decades.

The Hidden Purposes of High Finance
J. Bradford DeLong (Project Syndicate) Jun 2009
No one questions the usefulness of “low” finance: the ability to use checks, banknotes, and credit cards rather than having to cart around chests of silver, scales, and reagents to assay purity, and needing armed guards to protect the silver – and more guards to watch the first set of guards – has obvious efficiencies. So does the ability of households to borrow and lend in order not to be forced to match income and expenditure every day, week, month, or year.

The Private Sector and International Aid
Economist Jun 2009
Does the private sector help the poor more than official aid?

Understanding Special Drawing Rights (SDRs) Recommended! Adobe Acrobat Required
John Williamson (PIIE) Jun 2009
Special Drawing Rights (SDRs), the reserve asset issued by the International Monetary Fund (IMF), have lately reappeared in the news. The G-20 leaders, at their recent meeting in London, endorsed a proposal to issue $250 billion in SDRs to counteract the financial crisis, while the governor of the People's Bank of China has called for SDRs to gradually replace the dollar at the center of the international monetary system, a plan that would be facilitated by allowing countries to convert their dollar reserve holdings into SDRs. This paper reviews the history of the IMF's SDRs and provides an overview of these and other proposals that would increase this synthetic currency's role in the international monetary system. The SDR was originally created to resolve a recognized flaw in the structure of the postwar Bretton Woods monetary system, but the eventual breakdown of Bretton Woods and the subsequent evolution of the current dollar-centered system have relegated the SDR mostly to the minor role of serving as a unit of account for the IMF's transactions. Recent proposals would return the SDR to greater prominence and could help to create a financial system that is free from the imbalances that have plagued the world of late.

Rebalancing the US-China Economic Relationship
Kenneth Rogoff (Project Syndicate) Jun 2009
As the global economy stabilizes, there is a growing danger that the United States and China will slip back into their pre-crisis economic patterns, placing themselves and the rest of the world at risk. Despite Chinese official rhetoric about the need for a new global currency to replace the dollar, and US lawmakers’ flirtation with “Buy American” clauses (which scares everyone, not just the Chinese), no one will want to rock a boat that has almost capsized. So China continues to run a giant trade surplus, and the US continues to spend and borrow.

The Global Economy’s Dialogue of the Deaf
Raghuram Rajan (Project Syndicate) Jun 2009
As governments do more to try to coax the world economy out of recession, the danger of protectionism is becoming more real. It is emerging in ways that were unforeseen by those who founded our existing global institutions. Unfortunately, the discussion between countries on trade nowadays is very much a dialogue of the deaf, with countries spouting platitudes at one another, but no enforceable and verifiable commitments agreed upon. There is an urgent need to reform global institutions – and more dramatically than envisaged by the G-20 thus far.

Who is to Blame?
Harold James (Project Syndicate) Jun 2009
Now that the economic crisis looks less threatening (at least for the moment), and forecasters are spying “green shoots” of recovery, an ever more encompassing blame game is unfolding. The financial crisis provides an apparently endless opportunity for unmasking deceit, malfeasance, and corruption. But we are not sure quite who and what should be unmasked.

The Decoupling Debate Is Back!
M. Ayhan Kose & Eswar Prasad (FP) Jun 2009
But what on Earth does it really mean?

Crony Central Banking in Hong Kong
Sin-ming Shaw (Project Syndicate) Jun 2009
Joseph Yam, the head of the Hong Kong Monetary Authority (HKMA) and a career civil servant, is retiring. Ordinarily, that should not be a newsworthy event, yet it is, and for good reasons.

America’s Socialism for the Rich
Joseph E. Stiglitz (Project Syndicate) Jun 2009
With all the talk of “green shoots” of economic recovery, America’s banks are pushing back on efforts to regulate them. While politicians talk about their commitment to regulatory reform to prevent a recurrence of the crisis, this is one area where the devil really is in the details – and the banks will muster what muscle they have left to ensure that they have ample room to continue as they have in the past.

A Born-Again CAP
Rudy Rabbinge (Project Syndicate) Jun 2009
Born in 1957, the Common Agricultural Policy (CAP) is now more than 50 years old, and the European Commission is proposing what it calls a health check for its middle-aged child. But superficial repairs will not meet the European Union’s future needs. The CAP must be born again.

Spring Is Here, but Contain Your Excitement
Joseph E. Stiglitz (EV) Jun 2009
Optimism has returned with Spring, but the global economy has a long ways to go.

The Bumpy Road Ahead
Dani Rodrik (Project Syndicate) Jun 2009
If stock market and interest-rate spreads are to be believed, America’s economy has seen the worst and may be on its way to a slow recovery. But the troubles for the world economy are just starting. If globalization does not get the fix it needs, economic prospects will be dim for rich and poor countries alike.

Does Growth Have a Future?
Michael Spence (Project Syndicate) Jun 2009
What can we expect as the world’s economy emerges from its most serious downturn in almost a century? The short answer is a “new normal,” with slower growth, a de-risked and more stable core financial system, and a set of additional challenges (energy, climate, and demographic imbalances, to name a few) with varying time horizons that will test our collective capacity to improve management and oversight of the global economy.

Unlearned Lessons from the Housing Bubble
Robert J. Shiller (Project Syndicate) Jun 2009
NEW HAVEN – There is a lot of misunderstanding about home prices. Many people all over the world seem to have thought that since we are running out of land in a rapidly growing world economy, the prices of houses and apartments should increase at huge rates.

Financial Gain, Economic Pain
Nouriel Roubini (Project Syndicate) Jun 2009
In the past three months, global asset prices have rebounded sharply: stock prices have increased by more than 30% in advanced economies, and by much more in most emerging markets. Prices of commodities – oil, energy, and minerals – have soared; corporate credit spreads (the difference between the yield of corporate and government bonds) have narrowed dramatically, as government-bond yields have increased sharply; volatility (the “fear gauge”) has fallen; and the dollar has weakened, as demand for safe dollar assets has abated.

No Licenses to Kill
George Soros (Project Syndicate) Jun 2009
In the last year, we endured a remarkable experience; after the bankruptcy of Lehman Brothers in September 2008, financial markets actually collapsed and required artificial life support. Nothing like this had happened since the Great Depression of the 1930’s.

The Lost Continent
Robert Skidelsky (Project Syndicate) Jun 2009
Home to one-sixth of the world’s people, but contributing only one-fortieth of world GDP, Africa is the most conspicuous victim of the global recession. After a half-decade of 5% growth, the continent’s growth rate is expected to halve in 2009. Some countries, like Angola, are contracting. Elsewhere, the crisis has swept away the benefits of several years of economic reform. Many Africans will fall back into desperate poverty.

Implications of the Crisis for Eastern Europe
Anders Aslund (PIIE) Jun 2009
The current global financial crisis is the worst the world has seen since the Great Depression in 1929–33. It has hit Central and Eastern Europe harder than any other region of the world. The region's forecasted drop in GDP this year is about 4 percent, and at least Latvia and Ukraine are likely to face double-digit declines.

Board Stiff
James Surowiecki (New Yorker) Jun 1, 2009
In all the apportioning of blame that’s come with the financial crisis, corporate boards of directors have remained surprisingly unscathed

Making sure that aid reaches poor people
William Easterly (VoxEU) Jun 1, 2009
The debate on aid to Africa continues. This column argues that it is bad governments and institutions that cause poverty, not bad geography. Making sure aid reaches the poor will often mean not giving it to poor governments.

Geithner Tells China Its Holdings Are Safe
WP Jun 1, 2009
U.S. Treasury Secretary Timothy F. Geithner on Monday sought to reassure China, America's biggest creditor, that its hundreds of billions of dollars of holdings in U.S. government debt remain safe, even as investors dumped Treasurys amid signs that the global recession is easing.

The End of the Globalization Debate?
Edward Gresser (YaleGlobal) Jun 2, 2009
Creeping protectionism lingers in the shadows if only for the moment

Rising government bond rates prove policy works
Martin Wolf (FT) Jun 2, 2009
Stanford's John Taylor and the Harvard historian Niall Ferguson have both argued in the FT that the US fiscal path is unsustainable. Martin Wolf's view is that there are powerful arguments against fiscal retrenchment right now and he welcomes recent moves in the bond markets.

Geithner's China Pitch
WSJ Jun 3, 2009
The Treasury Secretary's 'fiscal sustainabiility' tour.

News Release: Dollar Again Substantially Overvalued
PIIE Jun 3, 2009
A new study from the Peterson Institute for International Economics concludes that the dollar has again become seriously overvalued, principally though not exclusively, against the Chinese renminbi and some other Asian currencies. The "safe-haven effect" that caused a move into the dollar last fall resulted in a dollar appreciation of about 10 percent, which on top of an estimated overvaluation of about 7 percent a year ago made for an overvaluation of about 17 percent at the point of comparison (March 2009). Although the dollar declined about 5 percent from March to early June, it remains substantially overvalued. The principal counterpart to the overvalued dollar is the undervaluation of the Chinese renminbi, which would have needed to appreciate about 21 percent on a weighted average basis and about 40 percent against the dollar to achieve equilibrium.

Policy Responses to the Global Financial Crisis
Edwin M. Truman (PIIE) Jun 3, 2009
Serious financial crises proceed through seven distinct stages, from precrisis prevention to postcrisis analysis and reform. Edwin M. Truman estimates the present financial and economic crisis is now somewhere between the fourth and fifth stages, between containing the crisis and beginning to mop-up. As such, we can now begin to classify the various policy measures that have been employed in the United States and abroad to alleviate the economic turmoil. While it is still too early to draw concrete lessons for future policy and reform, Truman considers the political and economic factors that have shaped these responses so far and considers how we should think about these measures going forward.

US Export Subsidies Condemned by Developing Countries, Exporters
Bridges Weekly Trade News Digest, Volume 13, Number 20 Jun 3, 2009
The recent reintroduction of export subsidies on US dairy products has prompted a stinging response from developing countries and exporting countries at the WTO. The Cairns Group of agricultural exporters and the G-20 developing country group both issued statements last week condemning the move, which they said could harm producers and traders at a time of economic crisis.

WIPO Copyright Body Takes up Limitations and Exceptions, with a Focus on the Visually Impaired
Bridges Weekly Trade News Digest, Volume 13, Number 20 Jun 3, 2009
The recently concluded meeting of WIPO’s Standing Committee on Copyright and Related Rights (SCCR), 25-29 May, took up issues such as a new treaty for blind and visually impaired persons, in addition to its ongoing work on limitations and exceptions as well as on the protection of audio-visual performances and of broadcasting organisations.

Global: Bond Bubble Bursts - Benign or Malign?
Joachim Fels & Manoj Pradhan (MS GEF) Jun 4, 2009
The back-up in government bond yields is neither likely to derail central banks’ QE programmes nor the (tepid) economic recovery. We look for a further rise in yields over the medium term, mainly because we think inflation expectations have room to rise further as there is more QE to come and as we expect the global economy to bottom out.

A banking framework to secure single market
Marek Belka and Wim Fonteyne (FT) Jun 4, 2009
A system is needed that can credibly discipline Europe's large cross-border banks while protecting depositors.

Rising Interest on Nations' Debts May Sap World Growth
NYT Jun 4, 2009
Countries worldwide are paying higher interest rates on their expanding debt, which could translate into hundreds of billions of dollars more in spending for countries like the U.S., Britain and Germany.

The world economy is tracking or doing worse than during the Great Depression (update) Recommended!
Barry Eichengreen & Kevin H. O’Rourke Jun 4, 2009
This is an update of the authors' 6 April 2009 column comparing today's global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion -- today's crisis is at least as bad as the Great Depression.

Give the people their resource wealth
Martin Sandbu and Nicholas Shaxson (FT) Jun 4, 2009
Countries dependent on extractive industries should distribute revenues directly to all citizens, so politicians would have to bargain for tax revenues.

Politics and the Financial Crisis Slow the Drive to Privatize
NYT Jun 4, 2009
Despite some successes, deals involving state and local infrastructure are slowing, in part because of the financial crisis and the economic stimulus package.

An interview with William Buckley
Economist Jun 4, 2009
The president of the Federal Reserve Bank of New York speaks to The Economist about quantitative easing and exit strategies

Return of the grave-dancers
Economist Jun 4, 2009
Buy-out firms chafe under ownership restrictions, but pile in nonetheless.

Trade finance: G20 and follow-up
Marc Auboin (VoxEU) Jun 5, 2009
Trade finance, which supports the bulk of world trade, has deteriorated during the crisis and will continue to worsen in 2009. This column says that the response of public-backed institutions has been insufficient to cover the gap between supply and demand of trade finance worldwide. The G20 has adopted a wider package for injecting some $250 billion in order to further support trade finance.

It's Still Coming
Adam S. Posen (PIIE) Jun 5, 2009
It seems unfair for the euro area to be facing further banking problems. This was supposed to be a US-created crisis—and even some countries that had real estate booms, like Spain, were much more careful with their bank supervision. And green shoots of economic recovery are popping up everywhere, it seems. Yet, this assessment is misguided on two counts: First, many euro area banks got into serious trouble of their own, despite supposedly better regulation than in the Anglo societies; second, economic life is not always fair. The real banking mess is still coming for the eurozone.

Does climate change affect economic growth?
Melissa Dell, Benjamin Jones & Benjamin Olken (VoxEU) Jun 6, 2009
Hot countries tend to be poorer, but debate continues over whether the temperature-income relationship is simply a happenstance association. This column uses within-country estimates to show that higher temperatures have large, negative effects on economic growth – but only in poor countries. The findings are big news for future global inequality.

Revenge of the Nerd
Matthew Phillips (Newsweek) Jun 8, 2009
Paul Wilmott is out to save Wall Street's soul—one dork at a time.

Why has Japan been so hard hit by the global crisis?
Kyoji Fukao & Tangjun Yuan (VoxEU) Jun 8, 2009
Though Japan has not suffered greatly from a housing collapse or toxic assets, its economy has been hit harder by the crisis than the US or EU. Japan’s contraction is almost entirely due to a steep fall in external demand. This column uses input-output analysis to show that the fall in US demand has had an amplified effect on Japan because it not only reduces Japanese net exports to the US but also net exports of intermediate goods to Asian countries, where they would have been assembled for final export to the US.

Wall Street is a willing partner in financial reform
Tim Ryan (FT) Jun 8, 2009
We do not know what the future holds, but with a few stable weeks behind us, we cannot assume the worst has passed.

Fed's Dollar Lie Called Out by Victorious Merkel
Amity Shlaes (Bloomberg) Jun 9, 2009
That's a point that must be reckoned with before the next “morning in America.”

Geithner's Last Laugh
David M. Smick (WP) Jun 9, 2009
The Chinese may be laughing now, but Tim Geithner may have the last laugh.

China discovers value in the IMF
Peter Lee (AT) Jun 10, 2009
China has long been at odds with the International Monetary Fund, not least over its Western domination and harsh prescriptions for countries that come to the fund cap- in-hand. Now Beijing sees the institution as offering an escape route for its own problem - how to get rid of its US dollars.

Iceland's Banking Crisis: The Meltdown of an Interventionist Financial System
Philipp Bagus and David Howden (Mises Daily) Jun 9, 2009
Icelandic Prime Minister Geir Haarde's resignation on January 23rd of this year marked the first political casualty of the current financial crisis. While the Icelandic situation has received scant attention relative to other calamities reverberating through the world's financial markets, the source of Iceland's woes can be found in many of the same locales. Unfortunately, while the events affecting Iceland's populous have been severe, the country's diminutive size — approximately 320,000 residents — has made it a target all too easy to miss. However, the repercussions on both the country's native Icelanders as well as global financial markets give reason to dedicate serious attention to the causes, and cures, of this unfortunate and wholly avoidable event.

It is in Beijing's interests to lend Geithner a hand
Martin Wolf (FT) Jun 9, 2009
If China wants its claims on the US to be safe, it must facilitate an adjustment in the global balance of payments. If it and other surplus countries wish to run huge surpluses and accumulate vast financial claims, they should expect defaults.

Beauty in markets is best judged by the beholder
John Kay (FT) Jun 9, 2009
John Maynard Keynes likened the processes of stock exchanges to a newspaper beauty contest. He anticipated that professionalisation of markets would drive out analysts who focused on fundamental value.

Fed’s Dollar Lie Called Out by Victorious Merkel
Amity Shlaes (Bloomberg) Jun 9, 2009
The capitalist U.S. is nationalizing its biggest automaker, even as it pretends not to do so. Europe, for its part, is moving right.

The Price Is (Usually) Right
Burton G. Malkiel (WSJ) Jun 10, 2009
The market can get it wrong, but there is no riskless way to make abnormal profits from wildly 'incorrect' valuations.

Doha Talks Get New Energy at Cairns Group Meeting
Bridges Weekly Trade News Digest, Volume 13, Number 21 Jun 10, 2009
Trade ministers meeting on the sidelines of a summit of the Cairns Group of agricultural exporters have breathed new life into the Doha Round of trade talks, which many had declared dead after a collapse in high-level negotiations in Geneva last summer. But officials emerging from this week's meetings, which brought together the top trade representatives from India and the US, as well as WTO Director-General Pascal Lamy, appear to have set themselves a new deadline for bringing the negotiations to a successful close: the end of 2010.

Trade Leaders Call for Fisheries Subsidies Reform on World Oceans Day
Bridges Weekly Trade News Digest, Volume 13, Number 21 Jun 10, 2009
Key trade officials marked the occasion of the first World Oceans day by calling for reform of global fisheries subsidies. Pascal Lamy, director-general of the WTO, and US Trade Representative Ron Kirk released separate statements recognising both the threat of overfishing and the role that subsidies play in contributing to the problem.

Latvia's currency crisis is a rerun of Argentina's
Nouriel Roubini (FT) Jun 10, 2009
As in Buenos Aires in 2000-01, a real exchange rate depreciation is necessary to restore competitiveness.

Daunting decisions on a new risk regulator
Emil Henry (FT) Jun 10, 2009
There is much political pressure for a quick solution, but the complexity and gravity of the subject matter suggest Congress should be particularly careful in its review.

An Exit Strategy for the Renminbi Recommended!
Qing Wang & Steven Zhang (MS GEF) Jun 10, 2009
The Chinese authorities launched the reform of the renminbi exchange rate regime on July 21, 2005, by de-pegging the renminbi from the US dollar and adopting ‘a managed float exchange rate regime with reference to a currency basket'. However, in practice, the USD/CNY trajectory resembled that under a typical crawling peg regime during July 2005-July 2008. Since July 21, 2005, the renminbi has already appreciated against the US dollar by slightly over 20% from the pre-reform USD/CNY level of 8.27. However, the USD/CNY rate has been kept in a very tight range between 6.81-6.85 since July 2008, the three-year anniversary of China's exchange rate reform. In fact, the renminbi appears now to have returned to a quasi-hard-peg to the US dollar - a new regime that we first identified in late November last year - after three years' practice of a crawling peg, which has resulted in about a 20% revaluation of the renminbi against the US dollar.

The Crisis and How to Deal with It
Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, Robin Wells et al. (NYRB) Jun 11, 2009
Following are excerpts from a symposium on the economic crisis presented by The New York Review of Books and PEN World Voices at the Metropolitan Museum of Art on April 30. The participants were former senator Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, and Robin Wells, with Jeff Madrick as moderator.

Is Eastern Europe On The Brink Of An Asia-Style Crisis?
Nouriel Roubini (Forbes) Jun 11, 2009
The devaluation of Latvia's currency could mirror the collapse of Thailand's baht and the crisis it spawned.

WTO Will Not Limit Subsidies
Oxford Analytica (Forbes) Jun 11, 2009
Though subsidies arguably violate market-based ideals, preventing them could increase trade tensions.

Global: Coming to Terms with the Term Premium
Manoj Pradhan & Joachim Fels (MS GEF) Jun 11, 2009
We believe that rate hikes any time this year, from the Fed, the BoE or the ECB, are premature. By contrast, we continue to believe that the medium-term outlook is for higher yields. The path to higher yields, however, may not be monotonic.

The Devaluation Idea
WSJ Jun 11, 2009
It's back, with Latvia the new target.

Funding the Fund
WP Jun 11, 2009
Not long ago, the International Monetary Fund looked very much like an institution without a mission. Then came the global financial crisis, and a series of countries around the world found themselves flirting with national bankruptcy. The potential ripple effect for the world economy was grave, ...

Global imbalances and the accumulation of risk Recommended!
Daniel Gros (VoxEU) Jun 11, 2009
Why should the existence of current account “imbalances” provoke the biggest financial crisis in living history? This column says one has to take into account the way current account deficits are financed and how flow imbalances accumulated into large stock disequilibria. It explains the securitisation leading to the crisis as the product of a maturity mismatch between foreign savers seeking short-term assets and excess supply of long-term US mortgage debt.

The biggest bill in history
Economist Jun 11, 2009
The right and wrong ways to deal with the rich world’s fiscal mess.

Wall Street and the taxpayer
Economist Jun 11, 2009
Banks should be encouraged to pay back governments—but not to rewrite history.

Growth in emerging markets
Economist Jun 11, 2009
How will developing countries grow after the financial crisis?

Paul Krugman's LSE lectures
Economist Jun 11, 2009
The Nobel laureate speaks on the crisis in the economy and in economics.

The inefficiency of markets
Economist Jun 11, 2009
Economists believed that the market is rational and efficient. So much for that.

The IMF's search for funds
Economist Jun 11, 2009
Politics influences fulfilment of the G20's funding pledges.

Legal trade barriers must be kept in check
Jagdish Bhagwati and Arvind Panagariya (FT) Jun 11, 2009
To contain the indiscriminate spread of legal protectionism, let us encourage the prospect of retaliation.

Crisis? What crisis? The market confounds the left
Philip Stephens (FT) Jun 11, 2009
Pace the doomsayers who predicted imminent Armageddon, liberal market capitalism has survived: somewhat humbled and, in the case of the financial services industry under much tighter official supervision, but recognisably much as it was.

Weaning Africa Off Aid
Peter M. Robinson (Forbes) Jun 12, 2009
Dambisa Moyo believes foreign aid money only keeps the continent in poverty.

China's copper deal back in the melt
Peter Lee (AT) Jun 12, 2009
International Monetary Fund attempts to engineer renegotiation of China's US$9 billion resource agreement with the debt-burdened Democratic Republic of Congo are unlikely to endear the organization to President Joseph Kabila. Nor does it seem a friendly gesture to Beijing.

Simply holding more capital is not the answer
Avinash Persaud (VoxEU) Jun 13, 2009
There is a strong consensus that banks had insufficient reserves set aside for a rainy day and that they should be required to hold more capital. This column says we should differentiate institutions less by what they are called and more by how they are funded. Encouraging individual risks to flow to those who can absorb them would make the system safer and introduce new players with risk capacities.

Bad bank(s) and recapitalisation of the banking sector
Dorothea Schäfer & Klaus F. Zimmermann (VoxEU) Jun 13, 2009
Banking sectors worldwide are still suffering from the effects of the financial crisis. This column presents a plan of how governments can efficiently relieve ailing banks of toxic assets by transferring them into bad banks, an idea that is gaining popularity.

Optimism is not enough for a global recovery
Wolfgang Münchau (FT) Jun 14, 2009
Instead of solving the problems to generate a recovery, the political strategies have consisted of waiting for a recovery to solve the problem. As everybody expects the others to move first, nobody moves. In the meantime, the problems grow worse.

A New Financial Foundation
Timothy Geithner and Lawrence Summers (WP) Jun 15, 2009
Over the past two years, we have faced the most severe financial crisis since the Great Depression. The financial system failed to perform its function as a reducer and distributor of risk. Instead, it magnified risks, precipitating an economic contraction that has hurt families and businesses around the world.

How many jobs are onshorable?
Richard Baldwin (VoxEU) Jun 15, 2009
According to Alan Blinder, constant improvements in global communications will bring much more offshoring of “impersonal services’’, with an estimated 30 million to 40 million US jobs potentially offshorable. This column warns against taking these numbers at face value and recalls that the US is actually a net insourcer. With the advance of communication technologies, the US should see lots more service jobs “offshored” and lots more “onshored”

The Goodness of Globalisation
Lord Mandelson (Business Times/YaleGlobal) Jun 15, 2009
Resist protectionism by helping developing countries integrate into the global economy.

Awakening ahead on bond delusion
W Joseph Stroupe (AT) Jun 16, 2009
The hitherto success of US Treasury auctions fosters the delusion that all this debt is still alright - and that Chinese and other central banks have little option but to stick with the US dollar. A rude awakening lies in store.

Principles that must guide financial regulation
Duncan Niederauer (FT) Jun 15, 2009
It is time to overhaul the financial regulatory structure. What principles should frame a truly modern and proactive regulatory architecture of the 21st century?

Did rising oil prices trigger the current recession?
James D. Hamilton (VoxEU) Jun 16, 2009
Past oil price spikes associated with Middle East conflicts and OPEC embargos were each followed by a global economic recession. This column argues that the onset of the current economic downturn of is also partly attributable to a sharp increase in the price of oil. Moreover, the interaction of high oil prices and housing problems contributed to the severity of the downturn.

Supply chains and financial shocks
Hubert Escaith & Fabien Gonguet (VoxEU) Jun 16, 2009
How do firm linkages transmit shocks? This column discusses the real and financial transmission mechanisms in the supply chain and financial system that can create troublesome cascades. It applies its logic to the Asia Pacific production chain.

Moral Hazard and the Crisis
WSJ Jun 16, 2009
Volcker: Hedge funds don't need to be regulated like banks.

IMF Asked to Aid G-8 With Exit Strategies For Crisis Policies
IMF Survey Jun 16, 2009
Amid signs that the global economic crisis is stabilizing, the G-8 advanced economies have asked the IMF to do the necessary analytical work to help governments prepare "exit strategies" to unwind the huge stimulus packages that have been deployed to combat the crisis.

The recession tracks the Great Depression
Martin Wolf (FT) Jun 16, 2009
The great likelihood is that the world economy will need aggressive monetary and fiscal policies far longer than many believe. That is going to be make policymakers – and investors – nervous.

The three steps to financial reform
George Soros (FT) Jun 16, 2009
While markets are imperfect, regulators are even more so. Not only are they human, they are also bureaucratic and subject to political influences, therefore regulations should be kept to a minimum.

Tax Policies Made Countries More Vulnerable to Crisis
IMF Survey Jun 16, 2009
Tax policies in the advanced economis are likely to have contributed to the global economic crisis by favoring debt financing and encouraging the use of complex financial instruments and arrangements, an IMF study argues.

The Global Financial Crisis: Lessons Learned and Challenges for Developing Countries
Edwin M. Truman (PIIE) Jun 16, 2009
Almost two years ago, the world economy and financial system entered a severe crisis that quickly spread worldwide from its origin in the advanced economies, particularly the United States, through trade and financial channels. Today, the ultimate causes of the crisis and its eventual outcome remain a topic of intense debate, but it is clear that the crisis is the most severe since the end of World War II. It is not too early, however, to begin assessing the major factors that led to the crisis and to draw policy lessons from these assessments. Most importantly, the rapid global spread of the crisis shows that future crises cannot be prevented entirely or safely contained. Ongoing globalization means that incidents of economic turbulence will reoccur and spread, and countries, both advanced and developing, should ensure that their policies will allow them to respond when future crises inevitably develop.

Way Forward on IP Issues at the WTO Still Unclear
Bridges Weekly Trade News Digest, Volume 13, Number 22 Jun 17, 2009
Last week's WTO Council for Trade-Related Aspects of Intellectual Property Rights saw very little, if any, progress towards resolving TRIPS issues in the context of the Doha negotiations.

Emerging Economies Push for Global Influence at First-Ever BRIC Summit
Bridges Weekly Trade News Digest, Volume 13, Number 22 Jun 17, 2009
BRIC leaders signalled their interest in becoming major players in global economic policy at the group's first summit meeting on Tuesday. Leaders of Brazil, Russia, India, and China called for a larger role in global financial infrastructure, but steered clear of addressing the future of the dollar as the world's reserve currency.

Why Rescue Big Banks?
Roger M. Kubarych (Foreign Affairs) Jun 17, 2009
Are the bank bailouts a reward for bad behavior? Maybe. But keeping large financial institutions in business still makes sense.

BRIC group plans own revolution
W Joseph Stroupe (AT) Jun 17, 2009
Russia announced on June 10 that it will purchase US$10 billion of the new SDR-denominated International Monetary Fund bonds. It also announced that it will further diversify its $140 billion of US dollar holdings. Brazil will also buy $10 billion worth of the new bonds, and China will buy $50 billion of the new bonds. India will likely announce its own purchases very soon.

The world is now changed
W Joseph Stroupe (AT) Jun 18, 2009
Even US Treasury Secretary Timothy Geithner conceded the issue in China this month - global economic power is already being rebalanced, with the strategic rise of emerging economies and the simultaneous decline of developed nations. That will only accelerate as the financial crisis fades.

The yuan lies in waiting
Francesco Sisci (AT) Jun 18, 2009
Volatility in the US dollar, reflecting uncertainty over America's economic prospects, would be no problem if the euro, yen or sterling were its competitors as reserve money rather than being even more volatile. If the Chinese yuan, backed by a strong domestic economy, comes to the fore, the whole game is bound to change.

Estimating the magnitude of excessive international imbalances
William R. Cline & John Williamson (VoxEU) Jun 18, 2009
Large external imbalances persist and remain a significant concern. This column estimates a set of medium-run “fundamental equilibrium exchange rates” compatible with moderating external imbalances that might guide international policy efforts. It says that the US dollar is overvalued and the Chinese renminbi is undervalued.

Fund management: Wasting assets
Economist Jun 18, 2009
Firms merge, fees stay high.

What is needed for a lasting recovery
Olivier Blanchard (FT) Jun 18, 2009
The world is more risky than US consumers thought. Stock and housing prices can go down, and go down a lot.

Think small to tackle the world's problems
Moises Naim (FT) Jun 18, 2009
The defects of minilateralism pale in comparison with the stalemate characterising modern multilateralism.

Adnan Yousif, an Islamic banker with global ambition
Economist Jun 18, 2009
Adnan Yousif wants to build the first truly global Islamic bank.

Tax havens under pressure
Economist Jun 18, 2009
Britain's offshore financial centres race for respectability.

Russia and Western clubs: No thanks, Geneva
Economist Jun 18, 2009
Why Russia is turning its back on the World Trade Organisation.

Up and down
Economist Jun 18, 2009
How food prices have changed in different countries.

Global: After the Deepest Recession, the Weakest Recovery
Joachim Fels (MS GEF) Jun 19, 2009
Two months ago, we argued that a bottom for the global economy was in sight. Our global team’s read of the data released since then suggests that the bottom now seems to be in place and has thus arrived a bit earlier than expected.

Post-crisis riches ahead for East Asia leaders
R Taggart Murphy (AT) Jun 19, 2009
The purchasing power of China, Japan and South Korea will only increase as Western economies recover, with attendant inflation, from this financial crisis. That does not mean those Asian countries will seek to drop the use of the weakening US dollar - quite the reverse.

From EU-15 to EU-27: The impact of enlargement
Marco Buti, Filip Keereman & István P. Székely (VoxEU) Jun 20, 2009
This column says that the enlargement of the EU from 15 to 27 members made the EU more competitive and it is therefore better placed to face the current crisis. It says that both old and new member states enjoyed major benefits from eliminating trade barriers, gradually allowing higher cross-border labour mobility, promoting financial integration, strengthening institutions, and significantly reducing political risk.

The macroeconomic benefits of mortgage-backed securities
Mathias Hoffmann & Thomas Nitschka (VoxEU) Jun 20, 2009
Mortgage-backed securities have played a major role in the financial crisis and aren’t very popular as a result. This column documents macroeconomic benefits of these instruments, showing that economies with more developed markets for securitised mortgage debt share more consumption risk with other economies.

The next global reserve currency
Helmut Reisen (VoxEU) Jun 20, 2009
If history is any guide, the Chinese renminbi will soon be due to overtake the US dollar, just as the dollar replaced the pound sterling last century. But will the renminbi be ready for reserve currency status? This column discusses the issues at hand and explains why some experts would prefer the IMF’s Special Drawing Rights as the next global reserve currency.

The euro’s financial integration of Europe
Elias Papaioannou (VoxEU) Jun 20, 2009
What was the payoff to adopting the euro? This column says that financial integration, measured as bilateral bank holdings and transactions, increased by 40% more amongst eurozone members than countries that stayed out. It attributes that growth to the euro’s introduction eliminating exchange rate risk and coinciding with financial regulatory harmonisation.

Europe cannot ignore its financial trilemma
Lorenzo Bini Smaghi (FT) Jun 21, 2009
For supervisory powers to remain at the national level, a common set of regulations and agreed practices – a so-called single rulebook – is required.

How should Latvia exit its currency peg?
Eduardo Levy-Yeyati (VoxEU) Jun 22, 2009
Latvia has been hard hit by the global crisis and faces an unsustainable currency peg. Should the country float its currency, adopt the euro, or try a contained devaluation? This column assesses the options and says that the latter is most realistic, in that it will address the concerns of the EU, IMF, and Latvia.

1979: The Great Backlash Recommended!
Christian Caryl (FP) Jun 22, 2009
What do Ayatollah Khomeini, Margaret Thatcher, Pope John Paul II, and Deng Xiaoping all have in common?

Dallying Democrats Should Outsource Trade Office
Amity Shlaes (Bloomberg) Jun 23, 2009
At a time when the government can't afford to fulfill its tasks, why continue to fund an office that has none?

Bernanke at the Creation
WSJ Jun 23, 2009
What the Fed Chairman said at the onset of the credit bubble, and the lesson for today.

Reform of regulation has to start by altering incentives
Martin Wolf (FT) Jun 23, 2009
Bubbles and crises cannot be eliminated from capitalism. Yet it is hard to believe the risks run by institutions had nothing to do with incentives. The unpleasant truth is that incentives for risky behaviour are, if anything, even bigger than before the crisis.

Obama needs to be bold on trade
Fred Bergsten (FT) Jun 23, 2009
The president must act to re-energise US trade policy, for trade is one of the few areas where the world contemplates the new administration with apprehension rather than hope.

Lessons from the Jazz Age for creditor nations
James Macdonald (FT) Jun 24, 2009
Like the Chinese of today, most 1920s Americans refused to see the connection between the repayment of their loans and the underlying imbalances.

Asia will struggle to escape its export trap Recommended!
David Pilling (FT) Jun 24, 2009
Despite the dazzling retail emporia of its up-and-coming cities, the region has become more, not less, dependent on foreign demand.

Taking macro-prudential regulation seriously
Avinash Persaud (VoxEU) Jun 24, 2009
Policymakers embraced the rhetoric of macro-prudential regulation in response to the crisis, but most of their proposals have just suggested more micro-prudential regulations of the sort that already failed. This column criticizes those proposals and outlines what real macro-prudential approaches would look like.

EU, US Target Chinese Export Restrictions
Bridges Weekly Trade News Digest Volume 13, Number 23 Jun 24, 2009
After months of speculation, the EU and the US on Tuesday launched a WTO case against Chinese export restrictions on a range of raw materials, saying that they intend to level the playing field for their domestic manufacturers. Beijing countered that the export curbs are justified on environmental grounds and that it intends to contest the accusations.

Gust of Optimism Lifts Geneva Ag Talks: Sudden Squall or Steady Breeze?
Bridges Weekly Trade News Digest Volume 13, Number 23 Jun 24, 2009
The new chair of the WTO agriculture talks has told Members that he will restart consultations with a selected group of negotiators in July, following signs of re-engagement from major trading powers such as the US and India. Geneva-based officials welcomed the move, although many privately queried whether progress could be achieved without ongoing involvement at a more senior level.

New Issues Arise in EU-US Beef Trade Dispute
Bridges Weekly Trade News Digest Volume 13, Number 23 Jun 24, 2009
In May, the US and the EU struck a deal promising to end a long-standing feud over trade in beef. But that agreement came under fire last week, when several other beef-producing countries said that the deal would unfairly discriminate against their exports.

When corruption boosts trade
Pushan Dutt & Daniel Traça (VoxEU) Jun 25, 2009
Would reducing corruption increase trade? While corrupt customs officials extorting bribes from exporters may impede trade, those who take bribes to circumvent formal trade barriers may help it. This column estimates that when tariffs exceed 25%, the pro-trade effects of corruption may dominate.

Asia's consumers to the rescue Recommended!
Economist Jun 25, 2009
Can they replace American shoppers as the engine of the world economy?

Co-ordination falls away as the global crisis abates
Philip Stephens (FT) Jun 25, 2009
There was a surprising degree of co-operation on the international response to the crisis in financial markets. But the restoration of calm has been the signal for cracks to appear about what to do next. The danger is that, without the glue of shared adversity, governments will fall to bickering again.

Inflation - the real threat to sustained recovery
Alan Greenspan (FT) Jun 25, 2009
For the best chance for worldwide economic growth we must continue to rely on private market forces to allocate capital and other resources. The alternative of political allocation of resources has been tried; and it failed.

Coping with global greying
Economist Jun 25, 2009
The world has never seen population ageing before. Can it cope?

Friction in world trade
Economist Jun 25, 2009
A row with China over world trade

All Those Arrows Recommended!
Donald MacKenzie (LRB) Jun 25, 2009
Credit derivatives are ways of separating out the “credit risk” involved in lending (the risk that borrowers will default on their obligations, failing to make the required interest payments or not repaying their loans) and turning that risk into a product that can be bought and sold. They’re also one of the major causes of the financial crisis. The risk was divided into different tranches: higher-risk, higher-return junior tranches, and lower-risk, lower-return senior tranches. If borrowers defaulted down the line, the junior tranche would be hit first. It was considered more or less inconceivable that the senior tranches would ever be hit. The system of packaging corporate debt into CDOs seemed to working so well that from 1999 banks started repackaging mortgage-backed securities in the same way. The problematic issue was correlation, which is at the core of evaluating a CDO. Low correlation means that defaults are essentially idiosyncratic events, with the consequence that only the bottommost tranche of a typical CDO is at significant risk. High correlation means that if defaults happen they tend to cluster, and the clustering of defaults puts investors in the higher, apparently safer, tranches at risk of loss.’ Most people thought that a correlation of 0.3 – on a scale of 0 to 1 – was about right for CDOs based on corporate debt, and reckoned it would be safe to apply it to those based on mortgages too. Unfortunately it turned out to be much too low. ‘The credit crisis has inured us to gigantic numbers – losses measured in billions or trillions of dollars – but we need to pay attention to its small numbers as well if we’re going to understand it properly.

Rating agencies and the logic of regulatory license
Marc Flandreau & Norbert Gaillard (VoxEU) Jun 26, 2009
How did the rating agencies come to have such a prominent role in the regulation of securities? This column traces their history back to the Great Depression. Ironically, the agencies became a regulatory instrument to address concerns about securities originators’ conflicts of interest, the very problem plaguing the agencies today. The lesson may be that no fixed regulatory solution is durable in the long run.

Basic rules helped China sidestep bank crisis
Liu Mingkang (FT) Jun 28, 2009
Chinese regulators want firewalls between commercial banks, their controlling shareholders and their non-banking subsidiaries, in order to prevent risk contagion.

Obama Warns Against Trade Sanctions in Climate Bill
NYT Jun 28, 2009
President Obama on Sunday spoke out against a provision in the energy bill that would impose trade penalties on countries that do not accept global-warming pollution limits.

How bad are bubbles for welfare?
Guillermo Calvo & Rudy Loo-Kung (VoxEU) Jun 29, 2009
The financial sector is prone to crises, which are typically associated with serious effects on output and employment. This column weighs the costs and benefits of financial deregulation that spurs temporarily high growth that then collapse and suggests that bubbles may be socially efficient.

Buying land in developing nations
Denis Drechsler & David Hallam (VoxEU) Jun 29, 2009
Foreign acquisitions of farmland in Africa and elsewhere have become a cause of concern. This column says that international investments are inevitable – the question is how to reconcile the objectives of land purchasers with the investment needs of developing countries.

Reading Paul A. Volcker
Edwin M. Truman (PIIE) Jun 29, 2009
Paul Volcker is always a rewarding read. He is a balanced straight-thinker. With the Internet, the cost of reading Volcker is only the time it takes to read plus the necessary additional effort to think about what he has said. A recent example is Volcker on the economy, the international monetary system, and financial reform in Beijing on June 11. I found the following points interesting.

Financial sector pro-cyclicality: Lessons from the crisis, Part I
Francesco Columba, Wanda Cornacchia & Carmelo Salleo Jun 30, 2009
The current crisis has made obvious the power of the financial sector to amplify business cycle dynamics. This column, the first half of a series, focuses on how leverage, capital regulation, and managers’ incentives contributed to the crisis.

Debt is capitalism's dirty little secret
Ben Funnell (FT) Jun 30, 2009
We should redouble our efforts to increase productivity through innovation and the creation of new markets.

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