Welcome to Growth & Development Bridge !
Sovereign bond investors are freaking out at the size of Greece’s sovereign debt, estimated to have reached 135 percent ratio to GDP, and no clear signs of debt reduction, by asking higher and higher risk premium to purchase it, at the risk of provoking what they actually fear, debt default by Greece.
(Jan. 28, 2010) Why shouldn't bankers pay for their own mistakes instead of taxpayers, in an unfair world where "I win, you lose" dogma prevails. Axel Leijonhufvud, Professor of Monetary Policy at Trento university and Emeritus Professor at UCLA, suggests a return to a 'double liability' game for bank managers to restore risk ethics among managers and not just 'Heads, I win, Tail, you lose' prevailing dogma among bankers. So far, most of the reform talks have been largely focusing on capital requirements and macro-prudential regulations, and very little attention has been focused on the structure of liability in banking. More on this issue on Voxeu here and Sinn, (2008), here.
(Jan. 28, 2010) Pinkovsky and Sala-i-Martin, (2010), present new estimates of world income distribution which suggests that world poverty ('less than $1 a day') is falling faster than previously (World Bank) thought. According to their new study, from 1970 to 2006, poverty fell most in South Asia, by 86%, followed by South America, 73%, then in the Middle East with 39% and last in Africa with 20%. The authors conclude that "Barring a catastrophe, there will never be more than a billion people in poverty in the future history of the world". The World Bank's current estimate stands at 1.4 billion. One of the Millenium Development Goal (MDG) goals was to halve poverty between 1990 and 2015. Moreover, the authors, by estimating world Gini coefficients, a measure of inequality, also reported that inequality had fallen recently, from 67.6% in 1970 to 61.2% in 2006, a slight but significant decrease. However, one should bear in mind that living on 'less than $1 a day' should be considered as extreme poverty. It would be useful as well as considering the rest of the income distribution and not just that of the poorest, to see how they fared all these years. The authors' paper can be found on the NBER website here and a presentation of their paper on Voxeu here.
(Jan. 22, 2010) US President Obama presented yesterday his draft plan to reform the banking system in a bid to reduce the risks of another great recession that taxpayers having to bail out and pay again for the folly of 'too big to fail' banks. What the proposed reform represents is not clear yet. Obama's reforms are calling on new rules that could restrict banks size, ban proprietary trading and banks running or even sponsoring hedge funds and private equity funds. A lot of details remain to be defined. Will Europe and other countries follow suit ? Reactions have been mixed. Bank stocks have lost 5% in Wall Street tradings, following Obama's speech. UK "The Guardian" titled 'UK considers Obama-style banking revolution'. David Prosser from the UK "The Independent" writes that 'banks pay for Obama's reversal in this week Massachussets special Senate seat election. Swiss "Le Temps" editorial called this 'a step in the right direction'. Big questions remains in full, inter alia, do these reforms address the real causes behind the financial crisis or not, such as why were banks allowed so much leverages, why did banks hold so much 'toxic assets' ? Do these planned reforms go far enough to stop big banks to threaten the entire financial system from collapse, bringing down the whole system to its knees ? Whatever the case, this will be long and protracted discussions in the US Senate and elsewhere in the world before these reforms are clearly defined and put in place.
(Jan. 19, 2010) Andrew Haldane, Executive Director, Financial Stability, Bank of England, and Piergiorgio Alessandri, presented a paper, "Banking on the state", last September at the Chicago Fed, 12th annual international banking conference on, what else ?, "The international financial crisis: have the rules of finance changed ?", where they highlight the historical link between bank and the state, although, historically private banks were lending to sovereign for a high price and now it is the reverse with central banks operating as lender-of-last-resort to failing banks which, increasingly, in order to increase their profits, take higher and higher risks, given the implicit state guarantee that if they fail, the state will save them at a greater cost to taxpayers, each time around. In order to solve this time-inconsistency problem, Haldane et al. suggest various solutions by (i) reducing leverage with higher capital ratios than is currently stated; (ii) recalibrating the risk weights, especially for securitised and re-securitised products; (iii) rethinking capital structure with contingent capital and retail deposit; (iv) reconsidering the whole industrial organisation of banks as well as redesigning the safety deposit net, imposing higher liquidity ratios for banks and self-insurance schemes to lower the probability of central banks having to bail them out. More details here.
(Jan. 13, 2010) Following Fed's Governor Ben Bernanke's speech at the annual meeting of the American Economic Association, Atlanta, Georgia on Jan. 3, 2010, today's WSJ surveys a number of NBER economists on their views on the relationship between interest rates and the housing bubble. Most economists interviewed gave a clear 'no' and blamed lax regulations; it's the sub-prime lending, it's wreckless lending, lax regulations, inappropriate business regulations, said some, we get what we ask for, if we ask for no regulations, we get no regulations, said others; the most sanguine blamed the 'Greenspan put' for the crisis, the assurance previous Fed governor Alan Greenspan gave markets that whatever might happen, the Fed had the ability and willingness to clean up the mess which encouraged excessive risk-taking. You find the WSJ article here and Bernanke's speech here. Mark Thoma and 2002 Nobel economist laureate Vernon Smith here blame the bubble on too much "cash slopping around", like fuel on fire, that originated from several sources, the Fed being one with too low interest rates, the regulatory failures being another but also global imbalances, being a third, and of course, excessive leverage, allowing the fire to spread more rapidly and getting out of control. Another Nobel economist laureate, Paul Krugman, basically agrees to Fed Chief Bernanke's arguments in his speech about the links between monetary policy and the housing bubble, as being one element to consider but not its main cause. However, Krugman squarely blames both Bernanke and Greenspan here for utterly failing to have spotted a housing bubble and seen the dangers when others had spotted it, without properly imagined entirely, we should add, all the potential mess it would bring about to the world economy. And clearly now what is needed to focus on is how to make the system less fragile. GD Bridge believes that (a) it is far from clear how to make the system less fragile; and (b) we are far from having done it and (c) we are also far from the end of the tunnel. The system has been saved from complete wreck and paralysis by huge government bailouts which have extinguished the fire but have not tackled whatsoever the root causes of the systemic problems. And noone agrees what they are, let alone how to cure the system and last but not least, the total impact and cost of growing budget deficits and sovereign debt for having to bail out banks.
(Jan. 12, 2010) Nobel laureate Paul Krugman believes that contrary to what some Americans believe, the European-style of social democracy does not make Europe more stagnant, compared to the free-market US economy. In productivity terms, Europe is equivalent to the US, if not more productive, given that Europeans work, on average, less than their American counterparts. Krugman concludes in his blog page that the European experience shows that social justice and progress can go hand in hand. Read the full story here.
On the question of the euro, Krugman believes that maybe, Europe is not an optimal currency area. Faced with asymmetric shocks, Europe cannot react adequately as it lacks both a centralised fiscal system and a high labor market mobility. So, was the euro a mistake, asks Krugman. There were benefits, he believes, though costs prove much higher than the optimist claimed. As history cannot be changed, Europe will have to make ways to make it work, Krugman concludes. You can read Krugman's blog here.
(Jan. 12, 2010) The WSJ, (Jan. 11, 2010), ran a commentary by Princeton Professor Alan Blinder entitled: "When Greed Is Not Good". Blinder's fear is that 'once-in-a-life-time opportunity to build a safer and sturdier financial system is slipping away. Wall Street has mounted ferocious lobbying campaign against every meaningful aspect of the reform, and their efforts seem to be paying off, comments Blinder. Adding to this with the salt and pepper of American Senate politics and bickering will probably kill off any remaining substantive regulation. BIS has recently made a failed attempt to convince investment bankers to tame their greed and their bonuses. For unashamed bankers, it is business as usual.
Bankers assumed that 'greed was good', making a parallel with Adam Smith's 'Invisible Hand' ideas. In Smith's vision, according to Blinder, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call "asymmetric information" (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and—when relevant—protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.
Blinder comments, that, 'Plainly, they all failed in the financial crisis. Compensation and other types of incentives for risk taking were badly skewed. Corporate boards were asleep at the switch. Opacity reduced effective competition. Financial regulation was shamefully lax. Predators roamed the financial landscape, looting both legally and illegally. And when the Treasury and Federal Reserve rushed in to contain the damage, taxpayers were forced to pay dearly for the mistakes and avarice of others. 'If you want to know why the public is enraged, that, in a nutshell, is why', says Blinder. Here is the reference to the WSJ article and another reference in the Economist's view here.
(Dec. 16, 2009) Following the GFC and even after the 2001 dotcom asset bubble, economists have weighed in whether asset prices should enter into a monetary policy rule, (Genberg, 2001; Cecchetti et al., 2002). Adam Posen does not think monetary policy should respond to asset price bubbles by adjusting its policy interest rate. He likens this approach to a using a hammer to fix a leaky shower, (read excerpts here). All of this attention on asset prices is a distraction says William White in a recent paper. Asset bubbles are but a symptom of a deeper problem, an unleashed credit cycle. "To favor leaning against the credit cycle is not at all the same thing as advocating “targeting” asset prices. Rather, they wish to take action to restrain the whole nexus of imbalances arising from excessively easy credit conditions. The focus should be on the underlying cause rather than one symptom of accumulating problems. Thus, confronted with a combination of rapid increases in monetary and credit aggregates, increases in a wide range of asset prices, and deviations in spending patterns from traditional norms, the suggestion is that policy would tend to be tighter than otherwise", say White in his 2009 paper. More on this issue here.
(Dec. 10, 2009) Of all people, Former US Federal Reserve Chairman Paul Volcker, between 1979 and 1987, and now chairman of president Obama's Economic Recovery Advisory board, struck a surprise note to high-level bankers at a conference organised by the Wall Street Journal in Sussex, U.K. on the future of finance, the Future of Finance Initiative, (FFI). According to the Times Online (09.12.09), Volcker criticised bankers for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms. Volcker was quoted as saying that: "I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence". As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine, as quoted by the Times article. Volcker went on to attack the rise of complex products such as credit default swaps (CDS). Meanwhile, the billionaire financier Georges Soros echoed Volcker as he was quoted as saying that CDS should be banned. The billionaire investor likened the widely traded securities to buying life assurance and then giving someone a licence to shoot the insured person. “They really are a toxic market,” Soros said. “Credit default swaps give you a chance to bear-raid bonds. And bear raids certainly can work.” More on the FFI conference here.
(Dec. 10, 2009) M. Schularik and A. Taylor, (2009), present long-run historical data, 1870-2008, for 12 developed countries, showing that, over the years, episodes of financial crises were often credit booms gone bust. The authors show that credit growth could be a powerful predictor of financial crises and that maybe ignoring it in a monetary policy rule could be risky. Schularik and Taylor present new evidence that leverage in the financial sector has increased strongly in the 2nd half of the 20th century, and a decoupling of money and credit aggregates. The authors also find a decline in safe assets on banks' balance sheets. The authors also show how monetary policy responses to financial crises have been more aggressive post-1945, but how, despite these policies, output costs of crises have remained large. One could say that central banks were more successful at bailing out failed financial sector, but failing to protect the real economy, although one would need the counterfactual to prove it. The NBER paper summary can be found here and a paper review in voxeu here.
(Dec. 10, 2009) Market distress has eased since the height of the crisis, which suggest that some government policies, monetary, financial and/or fiscal policies have been successful, but which ones ? Voxeu has a paper by Y. Aït-Sahalia, J. Andritzky, A. Jobst, S. Nowak and N. Tamarisa that analyses which policies were succesful in easing market uncertainties. Aït-Sahalia et al. (2009) paper show that policies that formed part of a strategy versus those that were ad-hoc, were more successful in easing market tensions, reflected by spreads between LIBOR and Overnight Index Swaps (OIS) for the US$. Announcements of monetary easing, recapitalisation and liability guarantees were associated with the most significant reductions in interbank risk premia. By contrast, ad-hoc measures such as bailouts of individual financial institutions not accompanied by announcements of systematic financial sector restructuring, tended to exacerbate market fears. Moreover, announcements of both policy initiatives and policy inaction had significant international repercussions, which intensified as the crisis developed. More on this paper in voxeu here and IMF paper here.
(Dec. 8, 2009) U.S. Fed's Chairman Ben Bernanke dampened market upbeat expectations over last week stronger than expected U.S. November employment figures by saying that there was "some way to go before the recovery could be self-sustaining". In a speech on Monday, Dec. 7th, 2009, to the Economic Club of Washington, Bernanke said it remained unclear “whether the recovery will be strong enough to create the large number of jobs that will be needed to materially bring down the unemployment rate”. Meanwhile, the Fed's chief appeared to signal that he will keep rates at “exceptionally low” levels for an “extended period”. More on this story in FT, (07.12.09) here. Global stock markets opened lower after Bernanke's comments. GD Bridge believes that historically high unemployment figures worldwide, low consumption demand, low bank loans and high mortgage-related risks puts global economies to formidable tests.
(Dec. 8, 2009) Daniel Gros, Stefano Micossi, Jacopo Carmassi in (Vox-EU) say that lax monetary policy and excessive leverage are to blame for the crisis. It argues that many alleged causes of the crisis are symptoms of these policy errors. If that is correct, then the remedies are remarkably simple. By and large, there is no need for intrusive regulatory measures constraining non-bank intermediaries and innovative financial instruments. A repeat of this instability could be avoided in the future by correcting those two policy faults.
(Dec. 8, 2009) RGE analyses the risk-taking channel of monetary policy: whether low interest rates fuel low-quality lending ? Low interest rates reduce the relative cost of debt and therefore fuel leverage, including through structured products and financial innovation. Leverage, in turn, is an important ingredient of contagion, through falling collateral valuations and fire sales, once an asset bubble bursts. (RGE Briefings)
BIS's Leonardo Gambacorta, (BIS QR, Dec. '09) investigates the link between low interest rates and bank risk-taking. Monetary policy may influence banks’ perceptions of, and attitude towards, risk in at least two ways: (i) through a search for yield process, especially in the case of nominal return targets; and (ii) by means of the impact of interest rates on valuations, incomes and cash flows, which in turn can modify how banks measure risk. Using a comprehensive dataset of listed banks, Gambacorta finds that low interest rates over an extended period cause an increase in banks’ risk-taking.
(Dec. 7, 2009) The forced restructuring of Dubai World's debt is just the latest example of more debt default to come in the next three years or so, the tip of a huge mortgage-related toxic assets iceberg of the order of nearly $ 5 trillion of property debt outstanding in banks in the US and Europe, when debt comes to maturity and needs to be repaid, restructured or face debt default. More on this story in the FT, (07.12.09), here.
(Nov. 24, 2009) “The good news is that the recovery – albeit a weak one – is underway", said OECD Secretary-General Angel Gurría, with China leading the global recovery, the US recovering with the help of government stimulus measures, with the Euro area benefitting from the same growth drivers as the US and Japan from strong growth in the rest of Asia. But the OECD SG added that, “With millions of jobs lost and public budgets under strain, governments will have to tread carefully in the months ahead. Removing stimulus measures is imperative but such action has to be carried out gradually to avoid undermining the recovery.” (Read statement here). In a speech in London, reported by the FT here, IMF Managing-Director, Strauss-Kahn, (DSK), said the global economy stood at the cusp of recovery but remained vulnerable to shocks and policy mis-steps. Fiscal and monetary stimulus programmes should not be stopped too soon, he said. DSK added: “It is too early for a general exit. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late.” (FT article here)
(Nov. 20, 2009) Hamilton's Econbrowser recession indicator index is now down to 84.6% (describing 2009:Q2), from a 99.5% peak in 2008:Q4. James Hamilton (UC San Diego) together with (UC Riverside) Marcelle Chauvet, have, in parallel to the official National Bureau of Economic Research (NBER) late but authoritative announcements for start and ends of recession cycle dates, constructed their own recession index tracking recession cycles, using Bayesian inference probabilities. Hamilton et al. determined the most recent U.S. recession to have begun in 2007:Q4. More on the Econbrowser recession index at www.econbrowser.com/archives/rec_ind/description.html.
(Nov. 18, 2009) Some time ago (Summer 2009), we reported Eichengreen and O'Rourke piece on the comparison between the 1930 Great Depression and 2008 Great Recession via the synoptic analysis of world industrial production, trade, and stock market, which can be found here. Their main conclusion was that the most recent crisis remained dramatic on 1 September 2009 by the standards of the Great Depression. Favero of Bocconi University carries the argument further, comparing market volatilities during the 1930's Great Depression and the 2008 Great Recession, using the Aaa-Baa corporate bond spreads and finds a striking difference between the situation now and in the early 1930s. The evolution of uncertainty suggests that the current situation is much less dramatic by the standards of the Great Depression. You can find the article in voxeu here.
(Nov. 18, 2009) The debate over the effectiveness of stimulus rages on. There is one important source of information on the effectiveness of monetary and fiscal stimulus in an environment of near-zero interest rates, dysfunctional banking systems and heightened risk aversion that has not been fully exploited: the 1930s. Almunia et al. gather data on growth, budgets and central bank policy rates for 27 countries covering the period 1925-39 and show that where fiscal policy was tried, it was effective. Monetary policy in the 1930s was also not powerless, when tried. More on this in voexeu here.
(Nov. 16, 2009) Why are commodity prices on the rise again in a world economy that seems to remain weak, asks James Hamilton on his Econbrowser blog. World commodities have risen, ytd, on average, 37.4 percent. Hamilton cites 3 explanations: (i) a weak and weakening dollar; (ii) resurging real economic growth outside the US, namely in Asia; and (iii) speculation, increasingly using commodities as an investment instrument and a hedge against US inflation. More on this at www.econbrowser.com/archives/2009/11/commodity_infla.html. GD Bridge believes the real and simple explanation is that commodities are increasingly used for carry trades when the real interest rate in the US is not zero but negative ! It makes borrowing in US$ very enticing, especially when the Fed is promising zero interest rates for still quite some time, at least until 2010, even if the US economy picks up again, maybe a new bubble in the making by lax monetary policy in the US and elsewhere. Liu Mingkang, China’s chief banking regulator, quoted by the FT here, said that the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”. But the artificially-kept low Chinese currency may also be fuelling another real-estate bubble in its own turf (more on this in the previous news item). More on the dangers of the dollar carry trades here.
(Nov. 16, 2009) Global imbalances are shrinking at a fabulous rate. Baldwin and Taglioni argue that these improvements are mostly illusory – the transitory side-effect of the greatest trade collapse the world has ever seen. A global recovery will almost surely return the US, Germany, China and others to their old paths. More on this at http://www.voxeu.org/index.php?q=node/4209. A stronger Chinese renminbi, as well as other Asian currencies, is needed for global imbalances to ease and increase Chinese domestic consumption, says IMF managing-director Strauss-Kahn, although GD Bridge believes that more than a renminbi appreciation would be needed to boost domestic consumption. With its large trade surplus and many investors desire to purchase Chinese assets, the renminbi would automatically appreciate if the Chinese authorities let the national currency float as most of the world's major currencies do. See also Krugman's NYT op-ed piece at www.nytimes.com/2009/11/16/opinion/16krugman.html. The artificially-kept low Chinese currency may also fuel a new bubble in the Chinese real estate market when investors cream the excess US money supply, by borrowing in US$ at zero interest rate, not to invest it in the real production, but instead, invest it in the Chinese real estate market, kept low due to the low Chinese currency policy rate, or in other emerging markets or in stocks or whatever that provides, supposedly, safe and higher return.
(Nov. 12, 2009) Retiring Swiss National Bank (SNB) Governor Jean-Pierre Roth said in an interview to the Swiss French daily 'Le Temps' that Switzerland had no "positive incentives to join the euro zone". What would Switzerland gain, in Roth's view, if it joined the euro zone, would be a higher interest rate, thus, a higher mortgage rate, and a higher inflation rate, higher by 1 point, on average, than the present one. More on this at http://www.letemps.ch/Page/Uuid/104f2316-cf12-11de-84d0-2b6eb35c5cae/Jean-Pierre_Roth_confessions
(Oct. 8, 2009). Morgan Stanley Asia's chairman Roach wrote in the FT (Oct. 7, 2009) that the macro imbalances -- both within and across -- as well as financial regulatory practices and policies, that brought the world to its worst economic crisis since the 1930 Great Depression, may again hit us hard if we fail to adjust them. Roach cites the US consumption-driven growth economy with the share of consumption to the real GDP remains at 71 percent and the Chinese investment-driven growth with the fixed investment share to GDP has surged beyond the 45 percent in mid-2009. More on Roach's analysis at http: http://www.ft.com/cms/s/0/9cd2e03e-b2d9-11de-b7d2-00144feab49a.html.
(Aug. 10, 2009). Less synchronised business cycles would be good news for the world economy, allowing for more stable global growth and opportunities for risk-sharing across countries. Is decoupling fact or fiction? Andrew Rose notes that the world’s countries seem to be moving more closely over time, not less. That is, there is little evidence of “decoupling,” the idea that business cycles are becoming more independent and less synchronised across countries. Wälti (2009) also seems to favor this thesis. More on this issue here http://www.voxeu.org/index.php?q=node/3829 and here http://www.voxeu.org/index.php?q=node/3814
(Aug. 6, 2009). Andrew Rose and Mark Spiegel believe that few of the characteristics suggested as potential causes of the crisis actually help predict the intensity and severity of this crisis across countries. That bodes poorly for the performance of future early warning models. More on this story and Early Warning models on voxeu at http://www.voxeu.org/index.php?q=node/3834
(Aug. 5, 2009). Roubini's RGE Monitor found that all economies were affected by the crisis but some more than others. A combination of policy responses and strong fundamentals have given some countries, especially some emerging countries, a relative edge. These same strengths could lead those countries to perform better in 2009. In Latin America, Brazil and Peru. In Asia Pacific, Australia, China, India, Philippines and Indonesia. In Europe, Poland, Norway and France. Canada in North America. In Middle East and North Africa, Egypt,Qatar and surprisingly, Lebanon. What have these countries in common ? RGE cites lower financial vulnerabilities due to more restrictive regulations and less developed financial markets as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in counter-cyclical fiscal and monetary policies. In contrast, countries that borrowed heavily to finance domestic consumption when money was cheap, are now facing sharp economic contractions. More on this story on RGE Monitor (though you need a subscription to read it) at http://www.rgemonitor.com
(July 6, 2009). IMF predicts that the global economy is beginning to pull out of the global recession thanks to some more energetic emerging economies but stabilisation is uneven and recovery expected to be sluggish. IMF revised its global growth for 2009 downward since April 2009 from -0.1 to -1.4 but revised its forecast for 2010 upward from 0.6 to 2.5. More on the IMF update at http://www.imf.org/external/pubs/ft/survey/so/2009/RES070809A.htm;
(July 5, 2009). In its July 2nd monthly meeting, ECB kept its main refinancing rate unchanged at 1%, something that was anticipated by market participants. ECB expects very low or slightly negative inflation due to ongoing sluggish demand in the euro area. ECB stressed also that indicators about inflation expectations remained firmly anchored for the medium to longer term.
The new KOF Monetary Policy Communicator for the Euro Area (KOF MPC) provides a quantitative measure of ECB communication. It translates the ECB president’s statements concerning risks to price stability as made during the monthly press conference into an index. By aggregating forward-looking statements concerning price stability, the KOF MPC contains information about the future path of ECB monetary policy. It anticipates changes in the main refinancing rate by two to three months. More about the KOF MPC index at http://www.kof.ethz.ch/publications/indicators/communicator/en
(July 4, 2009). The European Commission's Quarterly Report on the Euro area says the current financial crisis will cause long-term damage to the euro area and turn its feeble growth prospects into something more sinister, says eurointelligence. The financial crisis affects both component of productivity - capital accumulation through lower investment rates and total factor productivity. In the short tun, the effect on potential output growth is a fall of 1.6% in 2007 to 0.7% in 2010. After the crisis, potential output growth should grow again but below its pre-crisis level that it will not reach again before soon.
GDBridge also believe that similar findings would be found for the US potential output which should reach a post-crisis level that would be lower than the pre-crisis level for quite some time. more on the European Commission's report at the eurointelligence website at http://www.eurointelligence.com/article.581+M5d03adac278.0.html
World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. Barry Eichengreen of UC, Berkeley and Kevin O'Rourke of Trinity College, Dublin, in a paper soon to be published, show that today's crisis is at least as bad as the Great Depression. For more on that, check the voxeu webpage at http://www.voxeu.org/index.php?q=node/3421
Carmen Reinhart and Kenneth Rogoff, in a new paper entitled, "The aftermath of Financial crises", (Dec. 2008), find that, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. Reinhart and Rogoff show that advanced economies have much in common with developing economies when financial crisis unravel. Their paper can be downloaded at http://www.economics.harvard.edu/files/faculty/51_Aftermath.pdf.
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