Enrique G. Mendoza, 12 February 2009 This column rehabilitates Irving Fisher’s debt-deflation theory to explain the current crisis. It suggests that fiscal stimulus will do little to prevent the crisis from becoming a protracted slump because the problem lies in finance. A cure will require reversing deflation and restarting the credit system. “…in the great booms and depressions, each of the above named factors (over production, underconsumption, over capacity, price dislocation, over confidence, over investment, over saving etc.) has played a subordinate role as compared with two dominant factors, namely, over indebtedness to start with and deflation following soon after;… where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two.” Crisis lessons from Irving Fisher
The credit crunch may cause another great depression | vox - Res The crisis is shaping up to be a perfect storm – a huge surge in uncertainty that is generating a rapid slow-down in activity, a collapse of banking preventing many of the few remaining firms and consumers that want to invest from doing so, and a shift in the political landscape locking in the damage through protectionism and anti-competitive policies. Back in June 2008 I wrote a piece for VOXEU predicting a mild recession in 2009. Over the last few weeks the situation has become far worse, and I believe even these pessimistic predictions were too optimistic. I now believe Europe and the US will sink into a severe recession next year, with GDP contracting by 3% in 2009 and unemployment rising by about 3 million in both Europe and the US. This would be the worst recession since 1974/75.
The crisis of 2008: Structural lessons for and from economics |
With just a few words in his Senate confirmation hearing, U.S. Treasury Secretary Timothy Geithner resurrected the long-held American accusation that China's penchant for money management is hurting the U.S. economy. President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency, Geithner wrote in his prepared remarks. As the argument goes, an undervalued Chinese currency makes the country's exports artificially cheap, giving Chinese goods an unfair competitive edge. Reduced demand for American goods hurts U.S. manufacturers and limits the size of the U.S. job market. China is taking jobs from the American heartland. Foreign Policy: Why China's Currency Manipulation Doesn't Matter
Macro and Other Market Musings: It Was the Saving Glut?
The paradox of thrift Or, how come you used to say that if consumers don’t save more, it will wreck the economy, and now you say, if consumers do save more, it will wreck the economy? For the record, I am certainly among those who had been suggesting that America’s low saving rate was a significant problem. Let me begin by reviewing why I said that.
Updated Feb. 3, 2009 12:01 a.m. ET Perhaps the Obama administration will be able to bring a surprisingly early end to the ongoing U.S. financial crisis. We hope so, but it is not going to be easy. Until now, the U.S. economy has been driving straight down the tracks of past severe financial crises, at least according to a variety of standard macroeconomic indicators we evaluated in a study for the National Bureau of Economic Research (NBER) last December. In particular, when one compares the U.S. crisis to serious financial crises in developed countries (e.g., Spain 1977, Norway 1987, Finland 1991, Sweden 1991, and Japan 1992), or even to banking crises in major emerging-market economies, the parallels are nothing short of stunning. Opinion: Expect a Prolonged Slump - WSJ.com - Mozilla Firefox
Mortgage Rates Likely Headed to 4.5%: Pimco's Gross - Economy * Pimco's Gross on the Current Financial Crisis The shift in economic growth has most of the world's connected economies and their citizens in shock, says William Gross, Pimco co-chief investment officer/founder In addition to driving down mortgage rates and stimulating home-buying, the government's efforts also could include a move to cap Treasurys rates to encourage investors to take more risk, Gross said during a live interview on CNBC.
by Bill McBride on 4/26/2009 11:57:00 AM Note: I took some short cuts to make this simple - think of this conceptually. I'm intentionally mixing financial institutions. For commercial banks, the FDIC stopped the bank run by upping the FDIC insurance. For investment banks, the Fed provided the liquidity. Please think of this conceptually or I'll have to write 100 pages ... Bank Balance Sheet: Liquidity and Solvency, Par
Economics and the crisis of 2008 The global crisis is a challenge to and an opportunity for the economics profession. Here one of the profession’s most innovative thinkers reflects on how and why economists failed to see the crisis coming, what they should tell governments to do about it, and what young economists should be working on to help us avoid future crises. The global crisis is also a critical opportunity for the discipline of economics – an opportunity to disabuse ourselves of notions we should not have so gullibly accepted.
Nick Rowe asks an interesting question: In 2003, Alan Greenspan argued that the Fed needed to set low interest rates to prevent falling into a liquidity trap and deflationary spiral... In 2008, Greenspan's critics argue that those same low interest rates caused an asset bubble, which burst, causing the economy to fall into a liquidity trap and deflationary spiral. Is it possible that Greenspan and his critics were both right? Was the US economy doomed either way? No, Greenspan Was Not Right
A New Depression? The Lessons of the 1930s | Jeff Frankels Weblo We often hear the question “isn’t this economic crisis becoming as bad as the Great Depression?” Economists can offer a variety of reassurances, but each of them is quite circumscribed: 1. First reassurance: So far, the downturn is at worst competing with 1981-82 for the title of worst post-war recession. True, it is too late for the large monetary and fiscal stimulus applied from Washington to prevent a major recession.
Richard Rorty and the efficient markets debat I use the efficient markets hypothesis in my research and in my blog. Once I started looking at the world through the EMH lens, I found it much easier to understand the relationship between policy and the financial markets—particularly in my research on the Depression. Here I’d like to do three things; indicate why I believe markets are more efficient than they seem, acknowledge that there are events that look like market inefficiency, and then argue that those perceived inefficiencies, even if real, don’t have the policy implications that many people assume they have. Last Sunday I discussed cognitive illusions, aspects of economic theory that are highly counter-intuitive. I regard the EMH as one such economic theory—strange, but (almost) true. Let’s start with all of the studies showing market inefficiency.
Floyd Norris writing in the NY Times reminds us that the problems in the U.S. financial sector are far from over: The loans went to borrowers who might never before have been allowed to borrow. When they found repayment difficult, they were permitted to refinance their loans, generating fees for the lenders and postponing the ultimate reckoning. Macro and Other Market Musings: Far From Over - Mozilla Firefox
The crisis and how to fix it: Part 1, causes | vox - Research-ba This is a financial crisis to remember. The financial losses are measured in trillions of dollars; elite financial institutions have fallen; fear and mistrust are widespread among investors and lenders; credit markets are not operating except for those with very short maturities; massive and unorthodox policy interventions are an every day occurrence; and we have been, and continue to be, on the verge of a global financial meltdown. How did we get into this situation? What should we do to get out of it and to prevent a relapse?
FOCUS ONLINE January 28, 2009 ARE BANKERS CHARLATANS? Sind Banker Scharlatane? (German Original) At blame for the financial crisis is the nature of man, say two renowned scientists: Nobel Prize winner Daniel Kahneman and bestselling author Nassim Taleb ( "The Black Swan"). By Ansgar Siemens, FOCUS online editor REFLECTIONS ON A CRISIS Daniel Kahneman & Nassim Taleb, Mo
Buffett's Letter to Shareholders by Bill McBride on 2/28/2009 08:27:00 AM Here is Buffett's Letter to Shareholders There are several interesting sections, but for housing I think the section on Clayton Homes (Buffett's manufactured home division) is especially interesting.
The First Global Financial Crisis of the 21st Century Part II: J
The crisis and how to fix it: Part 2, solutions | vox - Research
How We Were Ruined & What We Can Do - The New York Review of Boo
Empirical evidence on the monetary policy trilemma since 1970 |
An $800 Billion Mistake