Toronto, the ghost of Keynes and the future of the international monetary system
By Michael Prowse
If Lord Keynes were alive today how would he have reacted to last weekend’s G20 meeting in Toronto?
Like President Obama, he would probably have accepted the consensus view that fiscal deficits should be halved by 2013, while worrying that too much fiscal consolidation too soon could derail the global recovery. He would also have accepted the logic of delaying the implementation of more stringent rules on bank capital until the recovery is better established.
Tuesday, June 29, 2010
Wednesday, June 23, 2010
Austerity versus growth: why can’t Europeans be more like Americans?
By Michael Prowse
Debate at this weekend’s G20 meeting in Toronto is likely to focus on the rift that has opened between the US and Europe on macroeconomic policy. The US view is that governments should spend now, so as to create jobs and sustain economic growth, and save later. The European view is that fiscal consolidation is the urgent priority: governments must spend less, now and in the future.
Debate at this weekend’s G20 meeting in Toronto is likely to focus on the rift that has opened between the US and Europe on macroeconomic policy. The US view is that governments should spend now, so as to create jobs and sustain economic growth, and save later. The European view is that fiscal consolidation is the urgent priority: governments must spend less, now and in the future.
Friday, June 18, 2010
The significance of leverage in financial crises: what Shakespeare can teach economists and regulators
By Michael Prowse
Who remembers the interest rate that Shylock charged Antonio in the Merchant of Venice? Nobody – but everyone remembers the pound of flesh that was agreed as collateral.
John Geanakoplos, the James Tobin professor of economics at Yale, argues – only half in jest – that Shakespeare had a better understanding of finance 400 years ago than do most regulators today. Shakespeare understood that most loan contracts involve negotiations over two variables, rather than one. The borrower must worry not just about the interest rate demanded but also about the collateral that he has to put up to get a loan at all. Sometimes the collateral demanded is far more significant than the interest rate – as in Antonio’s case.
Who remembers the interest rate that Shylock charged Antonio in the Merchant of Venice? Nobody – but everyone remembers the pound of flesh that was agreed as collateral.
John Geanakoplos, the James Tobin professor of economics at Yale, argues – only half in jest – that Shakespeare had a better understanding of finance 400 years ago than do most regulators today. Shakespeare understood that most loan contracts involve negotiations over two variables, rather than one. The borrower must worry not just about the interest rate demanded but also about the collateral that he has to put up to get a loan at all. Sometimes the collateral demanded is far more significant than the interest rate – as in Antonio’s case.
Monday, June 14, 2010
The G20 and global finance: 20 ministers in search of a policy
By Michael Prowse
In Luigi Pirandello’s famous play there were six characters in search of an author. Each had a story to tell but as yet nobody to relate it. The situation in global finance today is somewhat similar: a rather larger number of presidents and finance ministers are just as desperate for a script. They have the best opportunity in decades to redraw the ground rules of international finance. But so far they have no long-term strategy worth talking about.
In Luigi Pirandello’s famous play there were six characters in search of an author. Each had a story to tell but as yet nobody to relate it. The situation in global finance today is somewhat similar: a rather larger number of presidents and finance ministers are just as desperate for a script. They have the best opportunity in decades to redraw the ground rules of international finance. But so far they have no long-term strategy worth talking about.
Wednesday, June 9, 2010
Incomplete globalization, human nature and the problem of current account imbalances
By Michael Prowse
One of the striking aspects of today’s global economy is a distribution of external surpluses and deficits seriously at variance with what textbook theory leads us to expect.
The advanced economies ought to be running current account surpluses and the emerging economies current account deficits. As the counterpart to their trade surpluses the rich nations ought to be lending to, and investing in, the poor developing world. Why? Because returns on investment ought to be much higher in regions of the world where capital is scarce and labour abundant. In effect, young workers in emerging economies ought to be paying the pensions of the ageing populations of the developed world.
One of the striking aspects of today’s global economy is a distribution of external surpluses and deficits seriously at variance with what textbook theory leads us to expect.
The advanced economies ought to be running current account surpluses and the emerging economies current account deficits. As the counterpart to their trade surpluses the rich nations ought to be lending to, and investing in, the poor developing world. Why? Because returns on investment ought to be much higher in regions of the world where capital is scarce and labour abundant. In effect, young workers in emerging economies ought to be paying the pensions of the ageing populations of the developed world.
Friday, June 4, 2010
Soros, bad economic theory and the origins of the financial crisis
By Michael Prowse
Writers of detective fiction typically waste little time describing the murder. They reserve their ingenuity for the part that grips their readers. Who did it and how? Once the shock of the ghastly event has worn off, the focus naturally shifts to causes and motives.
It is much the same with the financial crisis of 2007-09. We are no longer so much interested in what happened as in why it happened. Who or what caused it? Broadly speaking there are four competing views.
Writers of detective fiction typically waste little time describing the murder. They reserve their ingenuity for the part that grips their readers. Who did it and how? Once the shock of the ghastly event has worn off, the focus naturally shifts to causes and motives.
It is much the same with the financial crisis of 2007-09. We are no longer so much interested in what happened as in why it happened. Who or what caused it? Broadly speaking there are four competing views.
Wednesday, June 2, 2010
EU financial regulation: Michel Barnier’s chance to outshine Tim Geithner and Larry Summers
By Michael Prowse
Don’t worry: I don’t expect Michel Barnier, the top European financial regulator, to come up with startlingly bold proposals this summer – proposals that would prove his critics wrong. But there is little doubt that the EU could, if it chose, take a tougher line than the US Treasury against what it calls “systemically important financial institutions” (SIFIs) – the likes of Goldman Sachs, Citibank, J P Morgan, Barclays and UBS.
Don’t worry: I don’t expect Michel Barnier, the top European financial regulator, to come up with startlingly bold proposals this summer – proposals that would prove his critics wrong. But there is little doubt that the EU could, if it chose, take a tougher line than the US Treasury against what it calls “systemically important financial institutions” (SIFIs) – the likes of Goldman Sachs, Citibank, J P Morgan, Barclays and UBS.
Subscribe to:
Posts (Atom)