Archive for October 22nd, 2010

Soros on state of economics

October 22, 2010

I had posted about Soros initiative to improve state of economic research.

In this paper, he sets out his agenda and also reviews the state of economics.

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54% of Americans Dissatisfied With Dodd-Frank Bill

October 22, 2010

This is not surprising. Financial Trust Index run by Paola Sapienza and Luigi Zingales present new findings of their survey.

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From a NICE decade to a SOBER decade

October 22, 2010

Though this Mervyn King speech has been discussed much.  Still for those who have missed it,  it is a decent read. In 2003, as his first speech as BoE Governor, King talked about the current and previous decade as NICE:

Of course, we were not alone in enjoying the 1990s. In the United States growth was so rapid that at least two authors wrote books entitled “The Roaring Nineties” and another chose the title “The Fabulous Decade”. In contrast, continental Europe  experienced slow growth and heart-searching over structural reforms. As with much else, our economic performance lay somewhere between the excited exuberance of the United States and the relative disappointment of continental Europe. So the UK experienced a non-inflationary consistently expansionary – or nice– decade; a decade in which growth was a little above trend, unemployment fell steadily, and, supported by the improved terms of trade,  real take-home pay rose without adding to employers’ costs, thus allowing consumption to grow at above trend rates without putting upward pressure on inflation.

 Will the next ten years be as nice? That is unlikely. The terms of trade will probably not rise as much in future as they have in recent years – about 10% since 1996 when sterling started to appreciate – not least because sterling’s effective exchange rate  has fallen by around 7% since the turn of the year. Moreover, there is no longer the margin of spare capacity that has provided a buffer for policy over much of the past decade. So when shocks, as they will, hit our economy it is almost inevitable that there will be somewhat greater volatility of both output and inflation than the remarkable stability to which we have become used in recent years.

This NICE became a nice buzzword and people lapped it up to explain how times are so good.

Now in this 2010 speech he recalls this speech. He says though he called the decade as NICE he also warned that it would not last forever. There would be some corrections but they have been much larger than he had expected. However, there is another thing he said in 2003 which is not commented in 2010 speech:

But the case for realism about what we should expect is not a case for pessimism; rather the opposite. The macroeconomic framework in this country is sound and proven. And the real benefit from Britain’s new-found position of macroeconomic stability is that it provides an opportunity to improve our supply performance – to boost productivity, education and enterprise in order to generate the resources needed to raise living standards.

Macroeconomic framework? Sound?

 

Anyways, so the buzzword for the next decade is SOBER:

So the next decade is likely to be a sober decade – a decade of savings, orderly budgets, and equitable rebalancing. Our prospects remain closely linked to developments in the rest of the world. But we can influence the outcome, with monetary policy still a potent weapon to ensure that the amount of money in the economy is growing neither too slowly, as in the recent past, nor too quickly so as to reignite inflation. With that, and the inspiration provided by the Black Country’s example of how to adapt to economic change, I am sure of one thing. A sober decade may not be fun but it is necessary for our economic health.

🙂 Apart from this there are some important issues which King highlights. The issue of global imbalances which continues to be prolonged:

So what needs to be done? Let me suggest two principles for the way ahead. First, focus discussion on the underlying disagreement about the right speed of adjustment to the real pattern of spending. Without agreement on this, policies will inevitably conflict. Once broad agreement is reached, it should be easier to agree on the instruments of policy. Second, in terms of policy instruments, put on the table many potential policy measures – not just the single issue of exchange rates. That should include, in addition to exchange rates, rules of the game for controlling capital inflows, plans to raise saving in the deficit countries, structural reforms to boost demand in the surplus countries, and even the role and governance of the international financial institutions.

What is needed now is a “grand bargain” among the major players in the world economy. A bargain that recognises the benefits of compromise on the real path of economic adjustment in order to avoid the damaging consequences of a move towards protectionism. Exchange rates will have to be part of such a bargain, but they logically follow a higher level agreement on rebalancing and sustaining a high level of world demand.

A natural forum in which to strike such a bargain is the G20. But to turn the regular round of international meetings into a real agreement will require a revolution, different in nature but no less significant, than that which put the Black Country on the map.

Rules to control capital inflows is an interesting point from King. For a country which relies so much on international financial centre, this is a nice coming to terms with reality.

Demystifying China’s growth story

October 22, 2010

Justin Lin, World Bank’s chief economist is the economist to read on China and its development.

In this paper, Lin gives a short and excellent review of China’s development since the last 30 years. Apart from this, he looks at other important questions as well:

In this paper I try to provide answers to five related questions: Why was it possible for China to achieve such extraordinary performance during its transition? Why was China unable to attain similar success before its transition started? Why did most other transition economies, both socialist and nonsocialist, fail to achieve a similar performance? And can other developing countries achieve a similar economic performance? 

All have very interesting answers.

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Crisis in Europe…what crisis?

October 22, 2010

Sometimes I am stumped by the interviews of ECB members.  Sometimes they give insights and blast the press for giving them negative coverage. EMU is a very complex arrangment and needs to be understood in that light. Other times they just sound so superfluous that it is unbelievable really.  Especially, all through this crisis the idea that Europe has faced a severe crisis is never really acknowledged.

Sample this recent interview of Jean Claude Trichet:

Mr President, is the crisis of the euro over?

I interpret your question as applying more to financial stability in the euro area than to the euro itself. I do not think there has been a crisis. The euro is the single currency of 330 million people and enjoys a high degree of confidence among investors and savers because it has delivered price stability remarkably well over the last 11½ years. What we had was a situation in which a number of countries had not respected the Stability and Growth Pact. These countries have now engaged in policies of fiscal retrenchment that were overdue. They have to implement vigorously these policies which are decisive for the preservation and consolidation of financial stability in Europe.

(Emphasis is mine)

After all this mayhem in Europe, it takes some courage to say there was no crisis.

Also notice how Trichet changes the track of answer from no crisis to ECB’s price stability mandate to fiscal irresponsibility by governments. There is no problem with ECB at all?


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