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Rethinking the Growth Imperative
by Kenneth Rogoff of Project Syndicate,
Modern macroeconomics often seems to treat rapid and stable economic growth as the be-all and end-all of policy. But, while that is the message from graduate classrooms to central-bank boardrooms to newspapers front pages, is it true?
The New International Economic Disorder
A new economic order is taking shape in front of our eyes, as the old Western powers and the emerging worlds major new players converge. But the forces driving this convergence are not those that generations of economists envisaged when they pointed out the inadequacy of the old order.
Austerity and the Modern Banker
by Simon Johnson of Project Syndicate,
Santa Claus came early this year for four former executives of Washington Mutual (WaMu), a large US bank that failed in fall 2008. The Federal Deposit Insurance Corporation (FDIC) had brought a lawsuit against the four, actions that included taking huge financial risks while knowing that the real estate market was in a bubble. The FDIC sought to recover $900 million, but the executives have just settled for $64 million, almost all of which will be paid by their insurers; their out-of-pockets costs are estimated at just $400,000.
Fragile and Unbalanced in 2012
by Nouriel Roubini of Project Syndicate,
The outlook for the global economy in 2012 is clear, but it isnt pretty: recession in Europe, anemic growth at best in the US, and a sharp slowdown in China and in most emerging-market economies. Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition.
What Can Save the Euro?
It is increasingly evident that Europes political leaders, for all their commitment to the euros survival, do not have a good grasp of what is required to make the single currency work. Public-sector cutbacks today do not solve the problem of yesterdays profligacy; they simply push economies into deeper recessions.
Is Modern Capitalism Sustainable?
by Kenneth Rogoff of Project Syndicate,
In principle, none of capitalisms problems is insurmountable, and economists have offered a variety of market-based solutions. Will capitalism be a victim of its own success in producing massive wealth? For now, as fashionable as the topic of capitalisms demise might be, the possibility seems remote. Nevertheless, as pollution, financial instability, health problems, and inequality continue to grow, and as political systems remain paralyzed, capitalisms future might not seem so secure in a few decades as it seems now.
Another Asian Wake-Up Call
For the second time in three years, global economic recovery is at risk, with the crisis in 2008, triggered by subprime crisis made in America, now followed by Europe's sovereign-debt crisis. The alarm bells should be ringing loud and clear across Asia an export-led region that cannot afford to ignore repeated shocks to its two largest sources of external demand.
Does Europe Have a Korean Option?
by Simon Johnson of Project Syndicate,
On the surface, at least, the situation in the eurozone today and South Korea in the fall of 1997 look very different. Both are cases of severe economic crisis, to be sure. But the eurozones problems stem from high levels of government debt, while South Korea faced massive capital flight and a collapsing currency and almost all of the debt was in the corporate sector. Nevertheless, the eurozone could learn from the experience of South Korea, which came through its crisis more quickly than anyone expected, combining sensible reforms with a rapid recovery.
The Neuroeconomics Revolution
Economics is at the start of a revolution that is traceable to an unexpected source: medical schools and their research facilities. Neuroscience the science of how the brain, that physical organ inside ones head, really works is beginning to change the way we think about how people make decisions. These findings will inevitably change the way we think about how economies function. In short, we are at the dawn of neuroeconomics. Efforts to link neuroscience to economics have occurred mostly in just the last few years, and the growth of neuroeconomics is still in its early stages.
The Anatomy of Global Economic Uncertainty
The sense of uncertainty prevailing in the West is palpable, and rightly so. People are worried about their futures, with a record number now fearing that their children may end up worse off than them. Unfortunately, things will become even more unsettling in the months ahead.
Down with the Eurozone
by Nouriel Roubini of Project Syndicate,
The eurozone crisis seems to be reaching its climax, with Greece on the verge of default and an inglorious exit from the monetary union, and now Italy on the verge of losing market access. But the eurozone's problems are much deeper. They are structural, and they severely affect at least four other economies: Ireland, Portugal, Cyprus, and Spain. With Italy too big to fail, too big to save, the endgame for the eurozone has begun. Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to disintegration.
The Globalization of Protest
With globalization and modern technology, social movements can transcend borders as rapidly as ideas can. And social protest has found fertile ground everywhere: a sense that the system has failed, and the conviction that even in a democracy, the electoral process will not set things right at least not without strong pressure from the street.
A Gravity Test for the Euro
by Kenneth Rogoff of Project Syndicate,
Although I appreciate that exchange rates are never easy to explain, I find todays relatively robust value for the euro mysterious. Do the gnomes of currency markets seriously believe that the eurozone governments latest comprehensive package to save the euro will hold up? The new plan relies on a questionable mix of dubious financial-engineering gimmicks and vague promises of modest Asian funding. I can think of one very good reason why the euro needs to fall, and six not-so-convincing reasons why it should remain stable or appreciate. Lets begin with why the euro needs to fall.
America at Stall Speed?
Judging from the skittishness of both markets and consensus expectations, the United States economic prospects are confusing. One day, the country is on the brink of a double-dip recession; the next, it is on the verge of a turbo-charged recovery, powered by resilient consumers and US multinationals starting to deploy, at long last, their massive cash reserves. In the process, markets take investors on a wild rollercoaster ride, with the European crisis (riddled with even more confusion and volatility) serving to aggravate their queasiness.
The Instability of Inequality
by Nouriel Roubini of Project Syndicate,
This year has witnessed a global wave of social and political turmoil and instability, with masses of people pouring into the real and virtual streets. While these have no unified theme, they express in different ways the serious concerns of the worlds working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. Any economic model that does not properly address inequality will eventually face a crisis of legitimacy.
A Standby Program for the Eurozone
by Raghuram Rajan of Project Syndicate,
With luck, Italy may soon get a credible government of national unity, Spain will obtain a new government in November with a mandate for change, and Greece will do enough to avoid roiling the markets. But none of this can be relied upon. So, what needs to be done? First, eurozone banks have to be recapitalized. Second, enough funding must be available to meet Italys and Spains needs over the next year or so if their market access dries up. And, third, Greece, now the sickest man of Europe, must be treated in a way that does not spread the infection to the other countries.
To Cure the Economy
As the economic slump that began in 2007 persists, the question on everyones minds is obvious: Why? The prescription for what ails the global economy follows directly from the diagnosis: strong government expenditures, aimed at facilitating restructuring, promoting energy conservation, and reducing inequality, and a reform of the global financial system that creates an alternative to the buildup of reserves. Eventually, the worlds leaders and the voters who elect them will come to recognize this. But how much pain will we have to bear in the meantime?
The Wrong Tax for Europe
by Kenneth Rogoff of Project Syndicate,
Europe is already in pickle, so why not add more vinegar? That seems to be the thinking behind the European Commissions proposed financial transactions tax (FTT)-the Commissions latest response to Europes festering growth and financing problems. Ordinary Europeans have to pay value-added tax on most of the goods and services that they buy. so why not tax purchases of stocks, bonds, and all kinds of derivatives? Surely, such a tax will hit wealthy individuals and financial firms far more than anyone else, and, besides, it will raise a ton of revenue.
Chinas Landing Soft not Hard
China has no choice but to move quickly to implement the pro-consumption initiatives of its recently enacted 12th Five-Year Plan. Strategic transition is what modern China is all about. Thats what happened 30 years ago, when economic reform began. And it needs to happen again today. For China, a soft landing will provide a window of opportunity to press ahead with the formidable task of increasingly urgent economic rebalancing.
The Great Debt Scare
Most confidence indices today are based on survey questions that ask respondents to assess the economy today or in the near future. But what today's debt fears in Europe and the US really reflect and what is holding back consumption and investment is widespread anxiety about long-term economic prospects.
Countering the Contagious West
Despite their strong fundamentals, emerging countries still feel vulnerable in the face of the Wests economic weakness, policy shortfalls, and political paralysis. Moreover, they know from experience that there are no easy and immediate solutions to the Wests debt overhang and structural impediments to growth. And they have no illusions about the potential for effective global policy coordination. In such circumstances policymakers in emerging markets will eschew boldness for prudence. They will hope for a short winter for the global economy, but they will plan and position for a long one.
How to Prevent a Depression
by Nouriel Roubini of Project Syndicate,
The latest economic data suggests that recession is returning to most advanced economies, with financial markets now reaching levels of stress unseen since the collapse of Lehman Brothers. The risks of an economic and financial crisis even worse than the previous one-now involving not just the private sector, but also near-insolvent sovereigns-are significant. So, what can be done to minimize the fallout of another economic contraction and prevent a depression and financial meltdown? The best way to avoid the risk of repeating such a sequence is bold and aggressive global policy action now.
Thinking the Unthinkable in Europe
by George Soros of Project Syndicate,
Having in sight a solution to the eurozones sovereign-debt crisis would be a source of relief for financial markets. Even so, because any new treatys terms will inevitably be dictated by Germany, a severe economic slowdown would be almost certain. That might induce a further change of attitude in Germany, in turn allowing the adoption of counter-cyclical policies. At that point, growth in much of the eurozone could resume.
Europe on the Verge of a Political Breakdown
Europe is again on the precipice. The most recent Greek rescue, put in place barely six weeks ago, is on the brink of collapse. The crisis of confidence has infected the eurozones big countries. The euros survival and, indeed, that of the European Union hang in the balance. European leaders have responded with a cacophony of proposals for restoring confidence. There are several ways to recapitalize Europes weak banks. If these proposals have one thing in common, it is that they all fail to address the eurozones immediate problems.
The Great Bank Robbery
For the US economy and other developed economies the elephant in the room is the amount paid to bankers over the last five years. Investors, and the rest of us, would be better off if these funds flowed to productive companies, perhaps with an amount equivalent to what would be transferred to bonuses directed to well-managed charities.
Will the IMF Stand Up to Europe?
by Kenneth Rogoff of Project Syndicate,
Until now, the IMF has sycophantically supported each new European initiative to rescue the over-indebted eurozone periphery, committing more than $100 billion to Greece, Portugal, and Ireland so far. Unfortunately, the Fund is risking not only its members money, but, ultimately, its own credibility. Now that the Fund has squarely acknowledged the huge capital holes in many European banks, it should start pressing for a comprehensive solution to the eurozone debt crisis, a solution that will involve either partial breakup of the eurozone or fundamental constitutional reform.
One Number Says it All
The average annualized growth of US consumer spending over the past 14 quarters-calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011 is 0.2%. Never before in the post-WWII era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US-and in the global economy. The US economy-as well as the global economy-cannot get back on its feet without the American consumer. Its time to look beyond ideology-on the left and right-and frame the policy debate with that consideration in mind.
Chinas New Currency Policy
Chinas government may be about to let the renminbi-dollar exchange rate rise more rapidly in the coming months than it did during the past year. The exchange rate was frozen during the financial crisis, but has been allowed to increase since the summer of 2010. The dollar is likely to continue falling relative to the euro and other currencies over the next several years. As a result, the Chinese will be able to allow the renminbi to rise substantially against the dollar if they want to raise its overall global value in order to decrease Chinas portfolio risk and rein in inflationary pressure.
Europes Central Bank at Sea
My sense is that politicians will opt for a weak variant of greater fiscal union, but that, ultimately they will fail to execute it for the eurozone as we know it today. After some considerable volatility, a smaller and more robust currency union will emerge; and, importantly, Europe will avoid the euros demise and a total breakdown of the eurozone. No matter how you view it, the coming endgame will be neither simple, nor orderly. Had the ECB known this at the start of Europes debt crisis, it might have resisted taking so many risks with its balance sheet and reputation.
Is Capitalism Doomed?
by Nouriel Roubini of Project Syndicate,
The massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession. A financial and economic crisis caused by too much private-sector debt and leverage led to a massive re-leveraging of the public sector in order to prevent Great Depression 2.0. But the subsequent recovery has been anemic and sub-par in most advanced economies given painful deleveraging.
A Contagion of Bad Ideas
There has been much concern about financial contagion between Europe and America. After all, Americas financial mismanagement played an important role in triggering Europes problems, and financial turmoil in Europe would not be good for the US-especially given the fragility of the US banking system and the continuing role it plays in non-transparent CDSs. But the real problem stems from another form of contagion: bad ideas move easily across borders, and misguided economic notions on both sides of the Atlantic. The same will be true of the stagnation that those policies bring.
Washington and the Art of the Possible
by Raghuram Rajan of Project Syndicate,
The big necessary decisions on curbing entitlement growth and reforming the tax code will probably have to wait until after the next election, giving the divided electorate an opportunity to reflect on its own inconsistency and send a clearer message. In the meantime, US politicians might have done just about enough to convince debt markets that Americas credit is still good. For that, Americans and others around the world should stop pillorying them and give them their due credit.
The Second Great Contraction
by Kenneth Rogoff of Project Syndicate,
Why is everyone still referring to the recent financial crisis as the Great Recession? The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy. The phrase Great Recession creates the impression that the economy is following the contours of a typical recession, only more severe. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong.
Read Chinas Lips
China, the largest foreign buyer of US government paper, will soon say, enough. Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of outsize government deficits. It is no longer willing to risk financial and economic stability on the basis of Washingtons hollow promises and tarnished economic stewardship. The Chinese are finally saying no. Read their lips.
Debt and Delusion
The problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios and demanding fiscal-austerity programs too soon. They are asking governments to cut expenditure while their economies are still vulnerable. Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures. The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial and often irrelevant constructs that they are.
The Eurozone?s Last Stand
by Nouriel Roubini of Project Syndicate,
The eurozone crisis is reaching its climax. Greece is insolvent. Portugal and Ireland have recently seen their bonds downgraded to junk status. Spain could still lose market access as political uncertainty adds to its fiscal and financial woes. Financial pressure on Italy is now mounting. By 2012, Greek public debt will be above 160% of GDP and rising. Alternatives to a debt restructuring are fast disappearing. A full-blown official bailout of Greece?s public sector would be the mother of all moral-hazard plays: extremely expensive and politically near-impossible.
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