Archive for October 14th, 2008

Understanding all the European Restructuring Plans

October 14, 2008

Eurointelligence has an excellent post summarizing the plans issued by various European Governments to rescue their financial systems.

In the same post, it says the crisis has moved to credit cards

Ignore financial instability at your own peril

October 14, 2008

A recent Brookings report puts restoring financial stability as the number one concern for the next US President. It is written by Eswar Prasad who has written numerous papers on capital flows and financial globalisation; always stressing both are beneficial and we need more of them.

Yeah restoring financial stability is a concern but am sure with such dollies being thrown by central banks and Treasuries, it will eventually happen. A bigger concern is a reality check on financial markets and the massive damage it can bring if things are not kept on a check. A revisit to financial globalisation should also be done.

Interestingly (and obviously), in its 2007 report didn’t have financial stability mentioned anywhere.

This reminded me of the Copenhagen Consenus 2004 which listed financial instability as one of the 10 challenges facing world economy. However, in its final analysis it said there was no conclusion on whether financial instability is a challenge.  And they ignored it. In 2008 consensus, the list was expanded to 30 but obviously financial instability was not included.

Most Central Banks especially the inflation targeting ones issue financial stability reports. IMF also has a bi-annual report on financial stability.

So, pretty mixed fortune and financial stability is either not seen as a challenge or is revisited in times of crisis. Why should this be?

Financial stability (or instability) should always be in such lists as it has substantial costs. The amount of money being doled out to have stable financial markets is for all to see. Chris Blattman points what USD 700 billion could do for development:

  • Would clear the accumulated debt of the 49 poorest countries in the world ($375bn) twice over
  • Is almost 5 times the annual amount of extra aid needed to achieve all the Millennium Development Goals on poverty, health, education etc ($150bn a year)
  • Is about 7 years of current global aid levels ($104bn in 2007)
  • Is enough to eradicate all world poverty for over two years (UNDP calculates it would take $300bn to get the entire world population over the $1 a day poverty line).
  • And we know it is already many times over USD 700 billion. There is a $2.5 trillion plan for Europe, some 800 billion for UK and a separate $ 250 billion plan for recapitalising US Banks etc. And add all that Central bank liquidity. When I see how much poverty could be eliminated as pointed by Blattman, I also wonder which is a bigger crisis –  Letting so many people die every year because of poverty as there is little financial help or helping billion dollar firms survive? It is an irony of sorts.

    Financial stability is one of the most important challenges and should remain in all challenges list. Just because markets are stable now we shouldn’t sit and relax. Infact only when markets are stable, is there a case for some instability building in some corner.

    Assorted Links

    October 14, 2008

    1. WSJ Blog points to working of TARP

    2. Cowen points to the recap deal in US

    3. Krugman on the nobel moment. Cowen has loads of stuff on Krugman. Tabarrok as well. Mankiw congratulates. Rodrik gives four cheers. Menzie Chinn also has a useful post

    4. TTR on bank nationalisation in UK.

    5. Nudges points Sunstein on fin crisis

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