The latest policy debate on the euro area debt crisis concerns whether austerity has gone too far too soon, causing excessive recessions in some countries and making them less creditworthy rather than more so. The International Monetary Fund (IMF) has found that it had been underestimating the multiplier and therefore overstating projected output paths of […]
Note: The author thanks Jared Nolan for research assistance. In a recent policy brief, my colleague Joseph Gagnon (2012) argued that widespread currency manipulation by many countries in recent years has led to a reduction in the US current account balance by about 4 percent of GDP (about $600 billion annually). Subsequently C. Fred Bergsten […]
The bizarre development at the G-20 summit in Seoul this week was the swing from a relatively generalized coalition critiquing the undervalued renminbi in the run-up to the G-20 session in Toronto in June—which prompted China to make its rate “flexible” again—to the specter of Germany and Brazil united with the Chinese in critiquing the […]
As pressure mounts on China to let the value of its currency appreciate, a debate has occurred among some economists over the potential effect of such a revaluation on the US current account deficit—or on the number of jobs in the United States. In recent congressional hearings, C. Fred Bergsten (2010), director of the Peterson […]
Recent market volatility seems to reflect severe doubts that the Greek rescue package can work and, by extension, that serious contagion to other larger European debtors can be avoided. Yet a close look at the numbers in the IMF program for Greece suggests that although the fiscal adjustment needed to secure debt sustainability is daunting, […]
On February 19, 2010, the International Monetary Fund released a “Staff Position Note” on capital controls as a policy instrument.1 The paper concluded that, subject to four conditions, controls on capital inflows can be justified. The four conditions are: the economy is operating near potential, there is an adequate level of reserves, the exchange rate […]
The time-honored principle of public sector intervention to support banks is that of Walter Bagehot, who wrote in 1873 that the central bank should provide lender of last resort (LLR) lending to solvent banks in a panic, but should not lend to insolvent banks. However, because of the too-big-to-fail effect in which failures of large […]
Seventy-nine years ago the crash of Black Monday and Black Tuesday on October 28–29, 1929, cut stock prices by 23 percent. Economists now generally consider the misguided monetary and fiscal policies that followed (tightening on both counts) the cause of the Great Depression, not the stock market crash (which eventually cut stock prices 89 percent from their peak). Hopefully, we are not embarking at present on a controlled experiment to see whether they have been right. There could be a significant market recovery by end-2009 if mainstream earnings projections are achieved and price-earnings ratios return to more normal levels.
The United States government has now announced its plan to inject capital into the nation’s banking system, in parallel to similar recent actions in Europe. Although the press has reported the plan will "partly nationalize the nine major banks" (Washington Post), there will not be much nationalization at all in a meaningful sense of the word. The early signs are that this action can restore confidence, whereas the announcement of TARP’s (Troubled Asset Relief Program) purchase plan had failed to do so. The stock price surge on Monday (October 13, 2008), the fifth largest on record, reflected anticipation of a government plan to recapitalize banks and announcement of forceful similar measures in Europe. However, fundamental constraints on the capacity of the financial sector to expand credit seem likely to remain for some time.
The US financial sector has undergone a remarkable concentration as a consequence of the financial crisis. This consolidation potentially strengthens the resilience of the system by making its core institutions Really Too Big To Fail (no more Lehmans). The longer-term price, however, may be greater oligopoly power of the super-banks.