Zombie Economics: Financial crisis fails to kill discredited theories

Mark Blyth, Guest Blogger

As George Soros noted in his recent NY Review of Books piece, before the recent G20 meeting in Toronto, Germany’s deflationist stance was the minority position. By the end of the meeting the American reflationary stance was the minority position. Abruptly, and against the apparent ‘we are all Keynesians now (again)’ love-fest of 2008-2009, the G20 signed up to halve their budget deficits by 2013. Government spending, it seems, has to stop.

Now the G20 does have a point. There is too much debt in the system, from consumers, to corporations, banks, and sovereigns. But as I blogged in a recent piece for Foreign Affairs, the G20’s endorsement of “growth friendly fiscal consolidation” relies on the same fallacy of composition that brought on the banking crisis. Back in the glow of the ‘Great Moderation’ regulators assumed that by making individual banks safe you make the system as a whole safe. Unfortunately, as the world discovered through learning terms like ‘CDS daisy-chains’ and ‘serial correlation,’ that turned out to be a really bad assumption. Now, in a re-run worthy of Nick-at-Night, we are about to simultaneously retrench in the middle of a recession in order to restore growth.

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Recovering from Crisis: Dealing with a second dip

C.P. Chandrasekhar

August 2010 brings news on global growth which is disconcerting to say the least. Numbers from countries across the globe suggest that the incipient recovery characterising the world economy may already be losing steam. The US economy recorded a lower 2.4 per cent growth in GDP in the second quarter of this year compared to a much more comforting 3.7 per cent in the first quarter. This news followed the evidence that industrial production in Japan fell by 1.5 per cent in May. And finally, an (unusual) index of demand growth in China, which is being looked to as the driver of global growth, shows that demand is stabilising. The purchasing managers’ index (PMI) published by the China Federation of Logistics and Purchasing slipped from 52.1 in June to 51.2 in July, closer to the 50 point level that signals positive growth.

These changes may not be substantial or even indicators of a medium term shift in growth trends. But with the world sitting on worries of a potential second dip, they are receiving attention. The search for instruments to drive the recovery is still on. Yet the pressure to curtail public spending and reduce public debt is strong in most contexts. This leaves monetary policy as the alternative to generate a recovery.

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Public Banks and Development

Matías Vernengo

Over the last thirty years there has been a significant change in the role of public banks.  Neoliberal policies suggested that central banks should be independent of the Treasury, and should concentrate their efforts on inflation targeting.  Further, development banks, where they existed, were discouraged as tools for industrial policy, that is, they were precluded from providing subsidized credit for specific economic sectors.  On the other hand, the tendency was to use development banks as instruments of the process of privatization, providing credit for mergers and acquisitions.  Finally, the international financial institutions (e.g. IMF, World Bank, etc.) were used to spearhead the process of liberalization, and credit was only available to those that adopted the neoliberal policies.

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Development of crisis and crisis in “development”

Mehdi Shafaeddin

The recent global economic crisis has affected the poor in developing countries most, in part because they are the weakest to deal with such a crisis. Their weakness is partly due to the practices of neo-liberal ideas imposed on them by international financial institution (IFI) during the last couple of decades. The emergence of the crisis raises a fundamental question: is there any hope that the lessons learned will lead to a turning point in favour of “development”? It should, but I doubt whether it will, and the danger is that the next global crisis would emerge in the trading system.

The great depression of 1930s was a turning point as the Keynesian macroeconomic policies dominated the scene for a couple of decades. By contrast, Keynes’ ideas on international development policies, presented after the Second World War, were turned down. So was his proposal for the creation of ITO in favour of the Bretton Woods institutions and WTO.

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Who Pays for Agricultural Dumping? Farmers in developing countries

Timothy A. Wise

Brazil and the United States may have settled, for now, their long-running WTO dispute over U.S. cotton subsidies, but the issues it raised remain. After all, Brazilian producers were not the only ones hurt by U.S. dumping of its highly subsidized cotton on world markets, which not only took market share from competing producers, it depressed the international price for all producers.

How much does agricultural dumping cost farmers in developing countries? I recently completed a study for a Woodrow Wilson Center project that highlights just how high the cost of dumping can be. I benefited from the somewhat controlled experiment represented by U.S.-Mexico agricultural trade under the North American Free Trade Agreement (NAFTA). I call it a controlled experiment because NAFTA liberalized agricultural trade dramatically over a short period of time, Mexico imports most basic grains and meats almost exclusively from the United States, and Mexican farmers grow many of the crops that compete with the imports. In such a case, one can easily see the increase in U.S. exports, the drop in Mexican producer prices, and it is reasonable to assume that the U.S. export price is the reference price for these products in Mexico.

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China and Africa: A new approach to development

In the Western press the conventional wisdom holds that China is emerging as a new colonial power in Africa.  American University professor Deborah Brautigam has written a provacative new book, “The Dragon’s Gift: The Real Story of China in Africa,” that challenges that view.  Indeed, Brautigam contends that China’s “idea” of development may in the end prevail over the often fadish Western approaches to aid and development in Africa.  Triple Crisis blogger Kevin P. Gallagher interviewed professor Brautigam on China’s role in Africa.



We Must Go Beyond Microeconomic Regulation to Stabilize the Financial System

Responding to Jeff Madrick’s recent post on the US financial regulation legislation, Triple Crisis guest blogger Robert Wade argues for the need to consider “external” causes of the global financial crisis.

I agree with and admire the lucidity of Jeff Madrick’s post — as far as it goes. But (for understandable reasons) it keeps the spotlight trained on microeconomic financial regulation, as does most of the debate. My concern is that the focus on financial regulation obscures the important role of “external” causes in contributing to financial instability (external to national financial systems), and obscures the pressing need for policy reforms to curb these external causes. I highlight two external causes: (1) national income inequality; and (2) international payments imbalances. I argue that if high income inequality and large international payments imbalances are not curbed, we run a serious risk of repeat crises – because the microeconomic efforts to re-regulate and re-structure national financial systems will be eroded or swamped by the force of these more macroeconomic external causes.

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US Financial Regulations: Plugging holes in a faulty dam

Jeff Madrick

Paul Volcker says the financial reregulation bill passed to much hoopla by Congress in mid-July deserves only a grade of B.  Sheila Bair, head of the Federal Deposit Insurance Corporation, says the Basel committee of the Bank for International Settlements is already backing off stern capital requirements for banks that the bill was supposed to establish. Michael Mandel, the former chief economist of Business Week, says he cannot even tell you what the financial regulation bill is trying to accomplish.

To most people, the new financial reregulation package must look like the work of a bunch of Congressmen, along with the President’s economic team, plugging holes in a dam.   The Obama Treasury got the nation off on the wrong track when it issued its June 2009 white paper. It basically listed a series of problems that had to be dealt with. Does anyone have a sense which are the biggest holes, how many there are, and whether we’ve really plugged them?   Or why there were holes in the first place?

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Essentials of Smart Climate Policy

James Boyce

Triple Crisis blogger James Boyce published the following commentary on E3’s Real Climate Economics blog.

“In one of the more memorable moments of the 2008 presidential campaign, candidate Barack Obama explained why he rejected John McCain’s call to postpone their September debate in Oxford, Mississippi, during the negotiations on the first financial bailout package. “It’s going to be part of the president’s job,” Obama declared, “to be able to deal with more than one thing at once.””

“Something similar can be said about climate policy. A variety of proposals – for public investment, carbon pricing, regulatory standards – are cooking in Washington’s political stew. Sometimes the proponents of specific policies are tempted to oversell their merits, while dismissing other policies as unnecessary or even counterproductive. But if Congress and the Obama administration are going to get smart on climate change, part of their job is to deal with more than one policy at once…”

Read the full commentary on E3’s Real Climate Economics blog

Post-Crisis Economics: Are We All Structuralists Now?

Kevin P. Gallagher

In the immediate aftermath of the global financial crisis even the deepest market fundamentalists embraced the core Keynesian insight that when in deep recession, monetary policy will be ineffective and fiscal stimulus is required.  They have now abandoned that view as calls for fiscal austerity abound regardless of the increasingly fragile nature of the global recovery.

While economists and policy-makers debate the short and medium-term remedies to the crisis, there is an incredibly surprising and under-discussed consensus emerging for the longer run.  From the Financial Times to the South Centre there is agreement that the United States and East Asia (notably China) have to change the ‘structures’ of their economies.

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