Mostly Economics

Thomas Hoenig , Kansas Fed President gives a real pessimistic account of US econ0my. The speech is full of interestin charts which points to the growing leverage in US banks and debt levels across US economy- government, private sector and households. Further he adds because of such high debt levels  Fed would be pressed to keep interest rates low for a long period of time.  The rising debt levels have coincided with a huge rise in money and CPI Inflation indices.

Crisis Talk Blog points to this paper from Christopher Hayes of New America Foundation which provides an interesting solution. It first points to the world’s scariest economics chart (US Total Debt as % of GDP).  Then it says best way is to embrace inflation. (I am still reading it)

There is another paper (see this summary) from Atif Mian and Amir Sufi of Chicago Univ who say household debt got us into this crisis. So we need to think about debt as a whole not just limited to government. The issues are plenty to address but are not understood well enough in public policy.

It is quite well known by now that bulk of central bank models/macro models don’t have a prominnent role for finance/financial frictions ( see this, this,this, this).

BIS econs Stephen G Cecchetti, Piti Disyatat and Marion Kohler have written a short paper explaining the thinking on models before the crisis and the challenges of reforming these models post crisis. The authors say there is an immediate need to bring the asymmetries in finance into models. The role of finance and intermediaries also needs to be analyses in depth. We need to move beyond rational agent model and bring heterogeneity.

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Bernanke in his recent speech reviewing one year of crisis said:

As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal, and financial policies around the world have been aggressive and complementary. Without these speedy and forceful actions, last October’s panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted.

WSJ Blog summarises the key points in the speech pointing to global cooperation in this crisis.

I was reading this paper from Fabrizio Saccomanni (Banca d’Italia) (presented at this conference , which I pointed here). He tells you about policy cooperation between Europe and US from a historical perspective. He points that both have cooperated on key issues for a while now and it is not as if they are on different planets.

In fact Americans and Europeans have always belonged in the same planet, although they have had their differences of views, interests and approaches ever since Giovanni da Verrazzano sailed through the Narrows into what is now called the New York Bay around 1525. The main source of difficulties in the relationship is, of course, the different political and institutional set-up of the two partners: Americans belong to one nation since 1776, while Europeans belong to sovereign and independent nations, some of which have embarked since 1957 on a process leading to an “ever closer Union”.

To find the appropriate partner for a transatlantic dialogue has never been easy, but I would argue that the Americans have a long history of attempts at establishing a cooperative framework with some willing European nation, sometimes – but not exclusively – to counter the hostility of other countries of the same Continent. France was the first European country to enjoy a “special relationship” with the American States in their early years as a British Colony and later as an independent nation. French political thinkers like Montesquieu exerted a strong influence on the ideas and actions of the “founding brothers” of the United States and it is not by chance that major American political figures, like Benjamin Franklin and Thomas Jefferson, thought it important to serve as American ambassadors to Paris.

This is also pretty neat:

When, after the banking crisis of 1907, the United States decided to establish a Central Bank, Congress conducted hearings with major European central banks in order to draw from their experience in the design of what became in 1913 the Federal Reserve System

Saccomanni then covers cooperation during WWII, post WW-II (that led to setting up of World Bank, IMF and GATT, Marshall Plan etc), Post collapse of Dollar Standard as a currency, etc etc. He also discusses the cooperation in economic/financial crisis which is also very insightful. He then reflects on the future and as he knows history well, has some good points.

Another historical perspective on a very important topic.