Tag Archives: GFC

THIS TIME IS NO DIFFERENT. IMF’s dire warning on global economy – Liam Dann * Why a New Multilateralism Now? – David Lipton.

Merry Christmas and happy new financial crisis.

History suggests we are due for another financial crisis and right now the world is in no shape to cope with one.

With ingenuity and international cooperation, we can make the most of new technologies and new challenges, and create a shared and sustained prosperity.


With interest rates still low, central banks simply don’t have the firepower they did in 2008 to deal with a deep recession.

The official outlook for New Zealand’s economy remains solid with GDP growth expected to stay safely north of 2.5 per cent.

But these kind of forecasts will mean little if the world heads into a serious financial crisis.

NZ Herald

Why a New Multilateralism Now

David Lipton, IMF First Deputy Managing Director

Good morning.

Thank you for the introduction.

I appreciate the invitation to speak here today. This conference is tackling issues that have a great bearing on the stability of the world economy. Having just passed the 10th anniversary of the start of the Global Financial Crisis, and now looking forward, I’d like to address what I see as this morning’s key topic: the next financial crisis.

History suggests that an economic downturn lurks somewhere over the horizon. Many are already speculating as to exactly when, where, and why it might arise. While we can’t know all that, we ought to be focusing right now on how to forestall its arrival and how to limit it to a “garden variety” recession when it arrives, meaning, how to avoid creating another systemic crisis. Over the past two years, the IMF has called on governments to put in place policies aimed at just that goal, as we have put it, “fix the roof while the sun shines.” But like many of you, I see storm clouds building, and fear the work on crisis prevention is incomplete.

Before asking what should be done, let’s analyze whether the international community has the wherewithal to respond to the next crisis, should it occur. And here I mean both individual countries, and the international organizations tasked to act as first responders. Should we be confident that the resources, policy instruments, and regulatory frameworks at our disposal will prove potent enough to counter and contain the next recession? Consider the main policy options.

Policy Options for the Next Recession

On monetary policy, much has been said about whether central banks will be able to respond to a deep or prolonged downturn. For example, past U.S. recessions have been met with 500 basis points or more of easing by the Fed. With policy rates so low at present in so many places, that response will not be available. Central banks would likely end up exploring ever more unconventional measures. But with their effectiveness uncertain, we ought to be concerned about the potency of monetary policy.

We read every day that for fiscal policy, the room for maneuver has been narrowing in many countries. Public debt has risen and, in many countries, deficits remain too high to stabilize or reduce debt. Now to be fair, we can presume that if the next slowdown creates unemployment and slack, multipliers will grow larger, likely restoring some potency to fiscal policy, even at high debt levels. But we should not expect governments to end up with the ample space to respond to a downturn that they had ten years ago. Moreover, with high sovereign debt levels, decisions to adopt stimulus may be a hard sell politically.

Given the enduring public resentments borne by the Global Financial Crisis, a recession deep enough to endanger the finances of homeowners or small businesses would likely lead to a strong political call to help relieve debt burdens. That could further stress already stretched public finances.

And if recession once again impairs banks, the recourse to bailouts is now limited in law, following financial regulatory reforms that call for bail-ins of owners and lenders. Those new systems for bail-ins remain underfunded and untested.

Finally, the impairment of key U.S. capital markets during the global financial crisis, which might have produced crippling spillovers across the globe, was robustly contained by unorthodox Fed action supported by Treasury backstop funding. That capacity is also unlikely to be readily available again.

The point is that national policy options and public financial resources may be much more constrained than in the past. The right lesson to take from that possibility is for each country to be much more careful to sustain growth, to limit vulnerabilities, and to prepare for whatever may come.

But the reality is that many countries are not pursuing policies that will bolster their growth in a sustainable fashion. The expansion actually has become less balanced across regions over the past year, and we are witnessing a buildup of vulnerabilities: higher sovereign and corporate debt, tighter financial conditions, incomplete reform efforts, and rising geopolitical tensions.

Five Key Policy Challenges

So, let me turn to five key challenges that could affect the next downturn, areas where governments face a choice to take proactive steps now, or not, and where inaction would probably make matters worse.

The first challenge is the simple and familiar admonition: “First, do no harm.” This is worthy advice for doctors and economic policymakers. Let me mention some examples.

In the case of U.S. fiscal policy over the past year, the combination of spending increases and tax cuts was intended to provide a shot of adrenalin to the U.S. economy and improve investment incentives. However, coming at a time when advanced recovery meant little need for stimulus, this choice runs the three risks of increasing the potential need for Fed tightening; raising deficits and public debt; and spending resources that might better be put aside to combat the next downturn.

Another example is the recent escalation of tariffs and trade tensions. Fortunately, the U.S. and China agreed in Buenos Aires to call a ceasefire. That was a positive development. There certainly are shortcomings in the global trading system, and countries experiencing disruption from trade have some legitimate concerns about a number of trade practices. But the only safe way to address these issues is through dialogue and cooperation.

The IMF has been advocating de-escalation and dialogue for some time. That is because the alternative is hard to contemplate. We estimate that if all of the tariffs that have been threatened are put in place, as much as three-quarters of a percent of global GDP would be lost by 2020. That would be a self-inflicted wound.

So it is vital that this ceasefire leads to a durable agreement that avoids an intensification or spread of tensions.

Now to the second challenge, which is closely tied to the trade issue: China’s emergence as an economic powerhouse. In many ways, this is one of the success stories of our era, showing that global integration can lead to rapid growth, poverty elimination, and new global supply chains lifting up other countries.

But as Winston Churchill once said of the U.S. during World War II, “the price of greatness is responsibility.”

China’s Global Role

Chinese policies that may have been globally inconsequential and thus acceptable when China joined the WTO and had a $1 trillion economy are now consequential to much of the world. That’s because China now is a globally integrated $13 trillion economy whose actions have global reverberations. If China is to continue to benefit from globalization and support the aspirations of developing countries, it will need to focus on how to limit adverse spillovers from its own policies and invest in ensuring that globalization can be sustainable.

Moreover, China would likely gain at home by addressing many of the policy issues that have been contentious, for example through stronger protections for intellectual property, which will benefit China as it becomes a world leader in technologies; reduced trade barriers, especially related to investment rules and government procurement procedures, which will produce cost-reducing and productivity enhancing competition that will benefit the Chinese people in the long run, and an acceleration of market-oriented economic reforms that will help China make more efficient use of scarce resources.

This notion of global responsibility applies to Europe as well, and this is the third challenge. Our forecasts show growth in the euro area and the UK falling short of previous projections, and modest potential growth going forward.

The future of the European economy will be shaped by the way the EU addresses its architectural and macroeconomic challenges and by Brexit. The recent EMU agreement on reforms is welcome. Going forward, the Euro area would gain by pushing further to shore up its institutional foundations.

The absence of a common fiscal policy limits Europe’s ability to share risks and respond to shocks that can radiate through its financial system. And crisis response will be constrained because too much power remains vested in national regulators and supervisors at the expense of an integrated approach across the continent.

All of this prevents Europe from playing a global role commensurate with the size and importance of the euro area economy.

The Task for Emerging Markets

The fourth challenge is in the emerging markets. For all of their extraordinary dynamism, we have seen a divergence among emerging markets over the past year: between those who have not shored up their defenses against shocks, including preparation for the normalization of interest rates in the advanced economies; and those that have taken advantage of the global recovery to address their underlying vulnerabilities.

Capital outflows over the past several months have shown how markets are judging the perceived weaknesses in individual countries. If global conditions become more complicated, these outflows could increase and become more volatile.

The fifth and final challenge is the topic you will take up this afternoon: the role of multilateral institutions.

We know that these institutions have played a crucial role in keeping the global economy on track. In the nearly 75 years since the IMF was set up, our world has undergone multiple transformations, from post-war reconstruction and the Bretton Woods system of fixed exchange rates to the era of flexible rates; the rise of emerging economies; the collapse of the Soviet Union and transition to market economies; as well as a series of financial crises: the Mexican debt crisis, the Asian Crisis, and the Global Financial Crisis.

At each stage, we at the IMF have been called upon to evolve and even remake ourselves.

Now, we see a rising tide of doubt about globalization and discontent with multilateralism in some advanced economies. Just as with the IMF, it is fair for the international community to ask for modernization in its institutions and organizations, to seek reforms to ensure that institutions serve effectively their core purposes.

This applies to groupings such as the G20, as well as international organizations.

So, it was heartening to see the G20 Leaders to call for reform of the WTO when they came together in Buenos Aires. This reform initiative, which has the potential to modernize the global trading system and restore support for cooperative approaches, should now go forward.

The policy challenges we face are clear. As I have suggested, governments have their work cut out for them and may have to contend with less potent policy tools. It is essential they do what they can now to address vulnerabilities and avoid actions that exacerbate the next downturn.

The Multilateral Response

But we should prepare for the possibility that weaker national tools may mean limited effectiveness, and thus may result in greater reliance on multilateral responses and on the global financial safety net.

The IMF’s lending capacity was increased during the global financial crisis to about one trillion dollars – a forceful response from the membership at a time of dire need. One lesson from that crisis was that the IMF went into it under-resourced; we should try to avoid that next time.

From that point of view it was encouraging that the G20 in Buenos Aires underlined its continued commitment to strengthen the safety net, with a strong and adequately financed IMF at its center. It is important that the leaders pledged to conclude the next discussion of our funding, the quota review, next year.

But the stakes are bigger than any one decision about IMF funding. IMF Managing Director Christine Lagarde has called for a “new multilateralism,” one that is dedicated to improving the lives of all this world’s citizens. That ensures that the economic benefits of globalization are shared much more broadly. That focuses on governments and institutions that are both accountable and working together for the common good. And that can take on the many transnational challenges that no one government alone, not even a few governments working together, can handle: climate change, cyber-crime, massive refugee flows, failures of governance, and corruption.

Working together, we will be better able to prevent a damaging downturn in the coming years and a dystopian future in the coming decades. With ingenuity and international cooperation, we can make the most of new technologies and new challenges, and create a shared and sustained prosperity.

Thank you.

TIGHTEN BELTS AND SLAM ON THE BRAKES. Fads and fashions in economic policy – Bryan Gould.

Austerity, as a response in 2008, to what threatened to be the worst recession for decades, was the very worst step that could have been taken.

Since the “haves” tend to have louder voices and more influence than the “have nots”, it is often the interests of the former that prevail when economic policy is formulated.

The great economist, John Maynard Keynes, had shown in the Great Depression that the only cure was to spend more, not less, that a depression or recession occurred because there was not enough demand (or, in other words, spending power) and that the proper remedy was to inject more money into an economy that was about to close up shop altogether.

It is only now, after nearly a decade or more of such policies, that a consensus has begun to emerge, supported by agencies like the Word Bank and the IMF, that austerity was a mistake, and had done much unnecessary economic and social damage.

. . . Bryan Gould

Austerity Kills Economies

By Narayana Kocherlakota, Bloomberg View. Professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

The planet’s wealthiest and most powerful countries face a slow-moving but potentially devastating political and economic crisis. It now falls to Donald Trump to find a way to combat it. (I think it’s safe to say: We Are Screwed!)

Over the past few years, voters in much of the developed world have rebelled against the establishment. In the U.S., millions of voters supported an avowed socialist in the Democratic primary. (An avowed Socialist? Shock Horror. It’s not a disease! Social means people helping people. Something Americans like to beat themselves on the chest about but it’s all bullshit.) And this week, Americans elected a new president who has essentially no support from mainstream politicians or media.

Across countries, these dissatisfied voters vary wildly in terms of their preferences for (or opposition to) societal change. What they have in common is anger at the existing economic order.

The well-off often treat this anger as something of a mystery. Actually, it can be traced directly to what Christine Lagarde, managing director of the International Monetary Fund, has termed a global low-growth trap. (Christine came around to intelligent economic thinking in the end.) 

Over the last nine years, economic growth has been slow throughout the world, and particularly in developed nations. The U.S. is a prime example: Output is about 12 per cent to 15 per cent lower than was expected nine years ago.

(Like every respectable economist predicted in 2008. AUSTERITY KILLS ECONOMIES!  But no, most governments once again chose to ignore common sense and the lessons of history and followed a Neoliberal, ‘we must balance the books’ policy.

Economics 101: A Government Is Not A Household. It Does Not Have To Balance The Books.

Modern Money Theory: Money the government hogs is money taken out of the economy. Government debt is good. The government controls the currency, the government IS the currency. It’s deficit is owed to itself. Is just a simple case of adjusting a few numbers in the right place.) 

The primary culprit, in my view and in Lagarde’s, is a shortage of consumer demand for goods and services, (No, Really?) which has left businesses with little motivation to invest, hire or innovate. As a result, there aren’t enough jobs to go around, and the people who are working aren’t very productive.

The demand shortage creates some perverse incentives for economic policy makers. To stimulate the economy, they want to convince consumers that prices are heading upward, so that buying something today will be more attractive than waiting.

In such an environment, policies that increase the cost of doing business — such as raising minimum wages or increasing the regulatory burden — can reap larger-than-usual benefits.

More alarmingly, the cost reductions associated with globalization appear much less desirable in a low-demand world. Restrictions on trade, immigration and all kinds of international economic interactions become more attractive.

The unwinding of economic linkages, in turn, can increase the incentives for transnational armed conflict — a danger that came to such disastrous fruition in the 1930s.

Guiding the world out of this quagmire will require determined leadership, which the U.S. is uniquely well placed to provide. It is by far the world’s largest economy, with a government that still has plenty of capacity to borrow — as the low interest rates on its debt indicate.

It could employ its vast resources in many ways.

(It could but unfortunately American foreign policy has a consistent track record of spending those resources on war. Why? If nobody is fighting, nobody is buying bullets.) 

For example, the president-elect has spoken of his desire to undertake a complete overhaul of American infrastructure and to cut taxes. Such a program, combined with appropriate support from the Federal Reserve, would both generate much-needed jobs for Americans and be a great first step toward leading the world out of its low-growth trap. I look forward to seeing this plan implemented in his first hundred days in office, and I hope that he is able to persuade other nations to join the U.S. in this vital effort.

(Cut taxes for who? The 1%, so they can invest and create jobs? Making extra stuff for who to buy? The 1%? Nobody else has any cash. Companies don’t spend money on productivity when nobody’s buying. Which is why Austerity Kills Economies.) 

Come on now people. Can you not learn from experience and admit you’ve been pushing a stupid Neoliberal policy for the last eight years? 
Christine ate humble pie and adjusted her thinking to new information.  Clever Eh?  You can do it too. 

Hans

He manipulated and massaged Adam Smith’s message to suit his own, sometimes brilliant but often delusional, economic theories. 

A cautionary tale for New Zealand. We are ripe for our own ‘NZ Financial Crisis’.

The cause of the Global Economic Crisis: The collapse of the housing bubble in the U.S.

Dean Baker, from his book: The End of Loser Liberalism 2011

The picture of banks collapsing and a chain reaction of defaults and bankruptcies made for exciting news stories and provided the basis for several bestselling books, but this panic was secondary to the collapse of the housing bubble.

The housing bubble drove demand in the years since the 2001 recession, and when the trillions of dollars of bubble-generated housing equity disappeared, there was nothing to take its place.

The bubble in housing led to near-record rates of residential construction over the years from 2002 to 2006. Builders rushed to build new homes to take advantage of record-high home prices. The boom also generated an enormous amount of employment in the financial industry, which issued mortgages not just for new homes but also to refinance homes people already owned, as tens of millions of homeowners sought to take advantage of the run-up in prices and low interest rates to take equity out of their homes. This “housing wealth effect” is well-known and is a standard part of economic theory and modeling. Economists expect households to consume based on their wealth. At its peak, the housing bubble generated more than $8 trillion in home equity on top of what would have been generated had home prices continued to rise at their historic pace. Recent estimates of the size of the wealth effect put it at 6 percent, meaning that homeowners will increase their annual consumption by 6 cents for every additional dollar of home equity.

A bubble in nonresidential real estate led to a building boom in that sector that followed on the heels of the boom in housing; as construction of housing began to trail off at the end of 2005 and into 2006, construction of nonresidential projects like office buildings, retail malls, and hotels exploded. This boom led to enormous overbuilding in the nonresidential sector, and so when the recession kicked in, and especially after the financial crisis in the fall of 2008, nonresidential construction plummeted.

The impact of the collapse of these two bubbles on the demand for goods and services in the economy was enormous.

Consumers are spending in line with their wealth. Now that their wealth has been hugely reduced by the collapse of the bubble, they have adjusted their spending accordingly. The overbuilding and collapse of the bubble in nonresidential real estate led to a further loss in annual demand of roughly $250 billion. Adding together the $600 billion in lost residential construction demand, the $500 billion in lost consumption demand, and the $250 billion in lost demand in nonresidential construction gives a total drop in annual demand of $1.35 trillion.

The collapse of the real estate bubbles as the cause of our continued economic weakness stands in contrast to the financial crisis stories we keep reading and hearing about in the news. These stories hinge on the idea that the problem in the economy is the improper working of the financial system following the financial crisis of the fall of 2008. This story has an obvious problem: the reason we have a financial system is to allocate capital, and it doesn’t seem that anyone is having difficulty getting capital.

Elizabeth Warren DESTROYS Wells Fargo CEO

YouTube

It’s touching to see economists talking about the problems of men without jobs. 

Most economists believed that we would see a quick bounce back from the crash, even without any exceptional amounts of government stimulus. This was the excuse for the austerity that was imposed across the world in 2011. As a result, we have seen an incredibly slow recovery in the United States, and an even slower one in Europe. TruthOut

The Anniversary of Lehman and Men Who Don’t Work. 

“No more Lehmans”

former Treasury Secretary Timothy Geithner.  TruthOut