Archive for January 28th, 2009

It wasn’t just the Swede Crisis of 1992, it was a Nordic region Crisis

January 28, 2009

Just like the crisis keeps coming back ,  the comparison to Sweden crisis of 1992 also keeps coming back. One keeps coming across the need to draw lessons from the crisis. I had posted about lessons from Sweden crisis of 1992  and realised how bad a job Fed/Treasury have been doing. I came across this post from Baseline Scenario where some research material is provided and also points a new article at NYT.

However, I also realised the crisis wasn’t just limited to Sweden but also engulfed Finland and Norway (Denmark avoided the crisis as the regulators tightened screws early on) . It is referred in crisis literature as Nordic Crisis of 1990s but somehow the focus is always on Sweden. Actually it is much more useful to study the Nordic crisis in totality.

  • It is always useful to study different approaches for crisis management
  • We need to look for situations where number of economies are facing the crisis as is the case now. Thew Nordic economies though smaller compared to US/UK etc would have faced similar constraints (as mentioned in the paper; though am yet to see any political economy literature of Nordic crisis management )

I came across this excellent speech (also as a working paper; check references as well) from Seppo Honkapohja, Bank of Finland Board Member (who is on sick leave now). The speech summarises in nut shell how the crisis started (it was financial deregulation, just like in this crisis) and how each country tried to resolve the crisis. He has some excellent graphs to show the impact of crisis on growth, employment, inflation, share prices, housing prices, credit markets etc.

Norges Bank also released a superb publication (check references) in 2004 on the crisis. The report focuses on Norway but its chapter 3 focuses on the Nordic Crisis.  Check out Table 1 for the impact of crisis on 3 countries (Finland worst effected) .

Table 2 has an excellent summary of the policy responses.  There is quite a bit of similarity on the policy responses except Norway not introducing asset management companies (bad banks/aggregator banks) and also issuing  a blanket creditor guarnatee.

I don’t know  whether the similarity in policy responses is because of countries imitating each other or coordinating with each other (coordination could be bothe xplicit and implicit). However, as they are quite similar I would believe what would work for Global distressed financial system is some kind of global coordination on bailouts and restructuring packages.

We can’t have a situation where one country promises much more and other simply bites time. This way the financial system in second would not be happy and would want a package similar to first one. This has indeed been the case as we have only seen TARP, auto sector plan etc starting from US to be applied elsewhere as well. Some economies like UK got first on a capital infusion plan which was praised and copied by US etc. However, as crisis got worse, UK also had to launch its own version of TARP. All this is also leading to a rise in protectionism. However,  if we have some kind of coordination may be we see private sector getting its act together. Till then expect more lobbying (for bailouts) and indirect protectionism rising and crisis simply going on and on.

UK’s auto bailout package; protectionism rising

January 28, 2009

Great Depression became a global event because of a couple of reasons : one Gold Standard and two rise in protectionism ( I am still reading on the subject and would post as I come across more evidence). We dont have a gold standard but some countries follow a fixed exchange rate system dubbed as Bretton Woods -II. I don’t really know whether the crisis has deepened in these economies because of sticking to exchange rates (if they are).

However, what is surely happening is rising of protectionism. The rise is not as straight as Smoot-Hawley Tariff Act that raised US tariffs on 20,000 products. However, it is happening indirectly

  • After US, Germany, France (see this report), UK has launched its auto bailout plan (see this as well). These plans protect their domestic industries leading to protectionism.
  • Increase in antidumping (mainly against China)- WTO reports a rise in anti-dumping cases in Jan-June 2008 period (85 cases) compared to 2007 period (61 cases). Max cases on China -37. WTO is investigating China’s retaliation
  • US Treasury Chief Geithner is supposedly working on Chinese currency suggesting stern measures would be taken against China for not appreciating its currency. (see NYT). If this is true China is sure to retaliate and protectionism soars. (Read Buiter’s criticismon Geithner move)
  • Financial Protectionism – Banks are getting nationalised everywhere. Buiter points to another indirect move which surfaced in Italy. The Italian central bank has just created a Collateralised Interbank Market. The Central bank will serve as the universal counterparty, guaranteeing settlement in case of default.  The arrangement is, however, only open to Italian banks (the statement is here, in Italian). Italy is a member of Euroarea and this facility should be extended to all the members. It beats me why Italy and not ECB is introducing this facility. The EU is simply getting more factitious as pointed in this report.  

Despite policymakers assertions that we would not repeat Great Depression and lessons have been learnt, the similar causes are being repeated. Let us just hope all this protectionism does not retort to direct measures as well.

Assorted Links

January 28, 2009

1. Krugman answers Fama and Cochrane

2. WSJ Blog points to key Fed members and their recent comments

3. CBO Blog pointsto its analysis on fiscal stimulus. Mankiw as well

4. Lusardi compares Alps to financial markets and how preliminary education in both helps

5. EAP summarises all the bad news in Asian region

6. ACB points how to fund public infrastructure?

7. Urbanomics has a fantastic post on Indian Banks. It points Public sector banks have managed  to hold up better with lower NPAs than private banks.

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