Crisis Talk - The World Bank Group

Crisis Roundup

"It's Alive, It's ALIVE, It's ALLLIIIIVVVE!"

The economics profession may become more mathematical, and friendlier to women.

Unemployment in the US is going to be a problem for a long time.

Commodity prices aren't really based on fundamentals like weather and geopolitics.

Lords of Finance. Best business book of the year.

Brad DeLong ♥ Financial Times.

Surprise! Paul Krugman thinks that the stimulus is working, but wants it to be bigger.

China can't cool down its steel bubble.

There is a large gap between new and existing home sales in the United States.

People are eating out less frequently.

One bit of proof that the recovery is real.

Finally, the recession is taking its toll on California.

The Double-Edged Sword of Emerging Market Growth

The Economist has two interesting articles this week about capital flows in India. The Indian government is currently confronted with the a challenge of nurturing the growth of India's financial markets and multinationals, while mitigating the risks of excessive "hot money" flowing into the economy.

Proponents of capital controls point to India's success in avoiding the worst of the Asian financial crisis in the late 1990s and the current crisis, which was in part achieved by limiting the amount of money flowing in and out of the economy (for example, foreigners are limited in the amount of local bonds they can purchase).

Yet, India remains a sponge for foreign capital. The Economist notes that foreigners have invested $13.8 bn in India’s stockmarkets since April, having withdrawn $8.6 billion over the same period last year. The Sensex, India’s most widely watched stockmarket index, has surged by almost 100% since its March lows.

Advocates of a stricter capital controls are facing a strong resistance from the market...

What's New in Decoupling?

I recently wondered what the relationship between developed and emerging economies would look like during the recovery phase of the crisis:

Will a robust emerging market rebound boost OECD growth? Or, are we due to see a multi-speed global recovery?

John Authers points out that, thus far, the recovery has been quite heterogeneous:

The grand theory was that decoupling by emerging markets would be good for everyone- they would grow even if consumers in the developed world caught a cold, and help everyone through. The latest data suggest a decoupled world, but that does not seem so positive.

Authers highlights the Reserve Bank of India's recent decision to raise rates and the "stunning" recovery in South Korea. Meanwhile, consumer confidence in the US is awful. He concludes:

Asian economies are already at the point where overheating is the main danger, while US consumers, for all the money thrown at them, are still not feeling any better. This is not encouraging.

Meanwhile, equity indices are down and the dollar is up. Perhaps investors were a bit too sanguine, and are now sobering up?

More on bubbles

A few days ago I offered a series of bubble warnings from a German financial pundit, two academics, the man who broke the Bank of England, and the man who built Singapore. Today, we have a warning from the world's largest bond fund.

Free Exchange links to a discussion (via Buttonwood) about asset inflation, led by Pimco's Bill Gross.

Bottom line:

Cumulatively, asset values have risen twice as fast as GDP over the 50 year period. As Gross writes "you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce."

Nuff said.

Today in Bubbles

The editors of the Financial Times appear to be concerned about bubbles. Three out of today's four op-eds are dedicated to the theme.

First, George Soros argues that the implosion of 2008 was an aggregation of a series of bubbles over the past decades, creating, in his words, a "super-bubble":

The crash of 2008 was caused by the collapse of a super-bubble that has been growing since 1980. This was composed of smaller bubbles. Each time a financial crisis occurred the authorities intervened, took care of the failing institutions, and applied monetary and fiscal stimulus, inflating the super-bubble even further.

Weekend Reading

"Good news for investors who like to lose all their money". LTCM 3.0 is here.

The dangers of ultra cheap money.

Is US Government debt actually "risk-free"?

Historically, a weak dollar has been deflationary.

Great charts from Calculated Risk and Barry Ritholtz.

The average unemployment period in the US is at an all-time high.

Another take on why bankers make so much money.

Is Paul Krugman Panda-bashing?

"If you are going to be doing business in a foreign country, particularly China, it pays to do so legally and it pays to have the right visa."

The Case for Prudency: Latin America Edition

Bloggers at the IMF are looking at why Latin America fared better in this crisis than during previous episodes of financial duress. Their explanation: financial soundness mixed with enhanced credibility.

This improvement can be attributed to the fact that the region faced the crisis equipped with economic policy frameworks that were more solid and credible than in the past, and with smaller financial, external, and fiscal vulnerabilities. This allowed a number of countries of the region to implement countercyclical monetary and fiscal policies.

The estimates here suggest that these countries were able to “save” about 4 percentage points of GDP during the crisis, thanks to their better preparations for confronting external shocks.

A key element of this preparedness was credibility. Those countries which had responsibly managed their monetary and fiscal policies before the crisis were able to quickly lower interest rates, while increasing public expenditure and fiscal deficits. Countries such as Brazil, Chile and Peru managed to store away enough revenues from the commodity booms of the previous years in order to enact the necessary mix of countercyclical policies. Mexico, which is suffering from dwindling oil reserves, had less of a cushion, and has in turn struggled more than most of its neighbors.

Update: Vox has an interesting paper on the policy responses of Latin America Central Banks during the crisis, written by the former governor of the Central Bank of Ecuador.

Crisis Viewing

Our friends at PBS have released a couple of interesting crisis-related television programs this week.

First, Charlie Rose has an excellent interview with Andrew Ross Sorkin (type Sorkin's name into the Charlie Rose search window to access the video). Mr Sorkin discusses his just-released book, Too Big to Fail, telling the story of last year's Wall Street meltdown through the window of Paulon, Blankfein, Geithner, and other members of Wall Street's ruling coterie.

Next, Frontline has a new program entitled The Warning, which traces the roots to the crisis back through the 1990s. Naked Capitalism has several posts that provide useful background information to the characters and themes of the show.

Both are well worth viewing, particularly if you don't have time to read through Sorkin's 600+ page monster.

East Asian Production Networks: Beggar Thy Neighbor?

There is an interesting article in Econbrowser by Willem Thorbecke of the Asian Development Bank, which looks at East Asian Production Networks, Global Imbalances, and Exchange Rate Coordination.

Thorbecke highlights the important relationship between exchange rates and production chains in East Asia, arguing for increased policy coordination between the two. The paper presents both good news and bad news regarding East Asia's crisis recovery. First, the good news:

Signs are emerging that East Asian production networks are reviving. Imports for processing and processed exports both collapsed earlier this year. Since then, however, imports for processing have recovered 85 percent of their losses and processed exports 75 percent. Thus trade within East Asian production networks is recovering.

Rising Reserves

One sign of crisis abatement is the downward slide of the US dollar. As the market rediscovers its appetite for risk, the dollar's appeal as a safe haven currency diminishes. Indeed, the dollar has become the de facto carry trade currency. 

The market has renewed its faith in emerging markets, and the US has more tools to repair its trade balance and begin a phase of export-led growth? Is this a win-win situation? Not quite.

Although the dollar may be weakening, this weakening hasn't stopped central banks from accumulating more dollar reserves. In fact, dollar weakness may be accelerating accumulation.

Last week, several emerging market countries intervened in currency markets in order to prop up the dollar (or, rather, to push down their own currencies).  This involves buying dollars: Russia recently picked up $1.4bn in a single day, and $4bn in the same week.  

What are central banks doing with these dollars? Most of them are tucking them away for a rainy day, having seen the benefits of such accumulation during the crisis.

Crisis Roundup

European exports declined by 5.8 percent last month, the biggest drop since last January.

Understanding the European Central Bank means looking at its individual members.

The economic blogosphere really is a remarkable resource.

Bloggers at the IMF's ask, Did Islamic Banks in the Gulf Do Better Than Conventional Ones in the Crisis?

Did economic theory actually do a good job of predicting the crisis?

Greg Mankiw ♥ VAT.

Thoughts on exit strategies from one of China's prominent market economists.

Does China have a dollar problem?

Still confused about the dollar? Why do many of Asia's currency remain weak? Why are the euro and yen so strong, when their respective economies look weak? Bilal Hafeez, global head of foreign exchange research at Deutsche Bank is fielding questions from readers, which he will answer on Monday October 19.

World Economic Forum Financial Development Report

The World Economic Forum has released its Financial Development Report 2009, which scores and ranks 55 of the world’s leading financial systems and capital markets according to their level of financial development. It analyzes the drivers of financial system development and economic growth in developed and developing countries to serve as a tool for countries to benchmark themselves and establish priorities for reform.

The United Kingdom replaced the US as this year's top performer. America's fall is largely due to lower financial stability scores and a weakened banking sector:

 

The report also highlights the impact of the financial crisis on the Millennium Development Goals. Erik Feyen, Financial Economist in the World Bank’s Financial and Private Sector Development Vice Presidency, has written a chapter in the report that highlights this impact.

Below is an excerpt:

Exchange Rate Movements in the Crisis and Beyond

Editor's note: Sebastian Weber and Charles Wyplosz are from the Graduate Institute in Geneva. They are the authors of a World Bank working paper on Exchange Rates during the Crisis.

A key leitmotiv as the financial crisis unfolded was to avoid a repeat of the policy mistakes of the Great Depression, including the beggar-thy-neighbour competitive devaluations which have had devastating effects causing rising protectionism and a collapse of international trade (Kindleberger, 1973).

Unlike in the 30s, only some 42% of countries are officially pegging their exchange rate today, implying that movements in the exchange rate do not necessarily reflect official decisions, but are rather market-driven. Furthermore, governments today have many more policy tools at hand, ranging from fiscal policy over labour markets to monetary policy measures, making them less reliant on measures that are perceived as beggar-thy-neighbour.

While exchange rates have moved a lot since the onset of the crisis, these movements have mostly been interpreted as a byproduct of expansionary policies and the move to ‘quality’. Sharp depreciations in countries like the UK or South Korea have not been welcomed by the authorities, at least not officially. Intentions, of course, are hard to detect and no one will argue that expansionary policies were not needed.

 

Local Bond Markets: From Strength to Strength

Most emerging markets are having a better crisis than their G7 counterparts. One sign of robustness in emerging markets is the growing importance of their local bond markets. A new paper from Vox by Ismali Dalla and Heiko Hesse (of the IMF) takes a look at how local-currency bond markets are becoming a viable funding alternative for many emerging market issuers.

Not surprisingly, many of the countries that have succeeded in weathering the worst of the crisis (China, India, Brazil, Poland) also have substantial local bond markets:

 

Global Monetary Architecture Matters

Editor's Note: Nadia Piffaretti is an assistant to the Chief Economist at the World Bank Group and a Special Assistant to the Senior Vice President. She is the author of an upcoming paper on Reshaping the International Monetary Architecture.

The crisis has taught us that economists ought to believe their own warnings about systemic vulnerability. If analysis points out that a system can fail, it probably will at some point. Knowing what we know today, having experienced – in a sort of “real-life economic laboratory” – how systemic vulnerabilities can transmit and amplify shocks, we cannot avoid turning a worried eye to the largely imbalanced growth of the global economy.

Before this crisis, many economists had warned about another crisis – a disorderly unwinding of global imbalances. It didn’t happen. It still may.

While most recently global imbalances have been narrowing, due to short term factors (like oil prices), the IMF is forecasting a widening again starting in 2010. At the same time, conditions do not seem to be reunited for a clear shift of growth engines at both sides of the global imbalances, especially at a juncture when governments attempt to calibrate exit-strategies from fiscal stimuli, walking the fine line between possible fiscal unsustainability, and the risk of too early withdrawal of stimulus.

It is against this backdrop, and the realization that the international monetary architecture looks vulnerable indeed, that I reminded myself of the almost forgotten “1941 Keynes’ Plan” which the “Master” had elaborated in view of the Bretton Woods negotiations.

The plan stemmed from the idea that monetary architecture matters.

Weekend Reading

Real Time Economics interviews: Hernando de Soto talks about the effects of the crisis on the world's poorest, while our Chief Economist Justin Lin discusses China, the IMF, and stimulus packages.

Paul Kedrosky praises venture capitalists.

One quarter of US jobs are offshorable. It might not matter.

Unemployment is high on Europe's frontiers.

In other unemployment news, Ryan Avent thinks that the stimulus is needed to fight joblessness. Tyler Cowen doesn't.

The US trade gap narrowed last month. It is down almost 50 percent from a year ago. Could it have anything to do with the dollar?

Larry Summers dismisses the idea of a low-growth America.

Our East Asia blog looks at 60 years of China's development, and asks, "Are China's banks having a good crisis?"

The Cost of Remittances

A few months ago I attended a World Bank conference on Diaspora for Development, which featured several discussions about the relationship between economic crisis and migration. An important component of this relationship is, of course, remittances.

The World Bank estimates that remittance flows will drop by 7-10 percent in 2009.  Yet, because of the fall in foreign direct investment caused by the crisis, remittances have become a more important source of external financing than ever.

If remittances have become an essential source of external finance for developing countries, then lowering the cost of sending remittances would serve as a de facto foreign currency stimulus.

Which brings me to today's announcement that the World Bank has launched its latest remittance prices data series. The new website has a handy menu where you can insert different corridors and calculate the costs of sending money. It even lets you compare the prices of various banks. 

The database has been expanded to include 33 new corridors, and the following new sending countries: Australia, New Zealand, Brazil, Chile, Costa Rica, Dominican Republic, Ghana and Tanzania corridors.

The least expensive corridors are Singapore-Bangladesh and Singapore-Philippines. On the other side of the table are Netherlands-Indonesia and UK-Sierra Leone. 

Banks in Crisis: When Governments Take Temporary Ownership

Editor's Note: This is the ninth in a series of policy briefs on the crisis—assessing the policy responses, shedding light on financial reforms currently under debate, and providing insights for emerging-market policy makers.

About the author: David Scott is program manager in the Financial and Private Sector Development Vice Presidency of the World Bank Group.

The current financial crisis evolved quickly. In most of the developed countries affected, governments initially improvised solutions that eventually led to substantial investments in systemically important banks. Not all their actions are worth emulating, especially those undermining the ability of all shareholders to hold the banks’ board and management accountable. Lessons from earlier crises show that governments acting as temporary owners can minimize costs to taxpayers by sticking to sound commercial practices, good corporate governance principles, and competitive neutrality. Quickly developing and making public the exit strategy is also important.

Click here to read the full report. 

IFC Distressed Debt Update: China's On Board

Last week I discussed IFC's new plan to launch a vehicle to purchase toxic assets in emerging markets. The initial report indicated that much of the financing was expected to come from private sector banks. Reuters is now reporting that China's Sovereign Wealth Fund, China Investment Corp, is interested in participating in the project:

China has shown interest in investing in a new International Finance Corp program to acquire and restructure distressed debt in developing countries, World Bank President Robert Zoellick said on Monday.

Zoellick, speaking at a ceremony to launch the program that that aims to mobilize more than $6 billion to help banks and companies sell or restructure troubled assets, said he recently discussed the program with China Investment Corp, Beijing's sovereign wealth fund.

"They're interested in investing in distressed debt. They told us 'we can do it in the United States, but we're a little wary of doing it in the developing world because we don't want to be accused of anything'," Zoellick said. "To come in with us in a real restructuring program, they have some significant interest."

History Lessons

As the crisis enters its second year, the economic history books have already begun publishing an early account of first stages of the crisis. In particular, two articles have been released this week that serve as essential reading.

First, this month's Vanity Fair features an excerpt from Andrew Ross Sorkin's upcoming book, Too Big to Fail. Sorkin's piece gives a thrilling, minute by minute account of the chaos within the halls of Wall Street during the aftermath of the Lehman collapse. The article offers a view of the day's events through the perspective of the most important players in finance, including Timothy Geithner.

Tweets of the Day: Istanbul Edition

Here are the latest updates from the World Bank/IMF meetings from our Tweeter-in-Chief, Neil Gregory:

nfgregory: In Istanbul for World Bank annual meetings - focus this year on post-crisis economic recovery. First impressions - mood mostly bullish.

nfgregory: importance of developing local capital markets, local funding. Can still benefit from skills of international banks, but with local funding

nfgregory: Protectionism, restrictions on capital flows mean that economies like Egypt need to rely more on domestic demand, domestic capital markets

nfgregory: Entrepreneurship key to new job creation. Governments supporting through deregulation, venture capital, local equity market development.

You can follow all of Neil's Tweets here, or from our World Bank PSD Twitter page.

More Tweets after the jump...

Crisis Roundup

China has replaced the United States as South Africa's largest trading partner.

In other Africa news, the World Bank has released a report on Doing Business in Kenya.

Problems with America's fiscal exit strategy. With a rebuttal.

Is the Fed too hawkish? Maybe because it's easier to be a hawk than a dove.

A pessimist's case for optimism. Plus, the probability of a US recession is diminishing.

But unemployment is looking ugly.  

UC Berkeley Professor Brad DeLong posts his lecture notes on the Great Depression, Keynes, and World War 1.

Free Exchange is hosting an excellent discussion on incentives and public regulators. Guest authors include Simon Johnson, Mark Thoma, and Tyler Cowen.

Finally, a loyal reader of Crisis Talk makes the case for freedom from imprudent risk aversion.

Washington Update

Although much of the Washington-based development community is headed to Istanbul, there is quite a bit of news coming from headquarters.

First, IFC is teaming up with several private sector banks to launch a vehicle to purchase distressed assets in emerging markets. IFC will commit $1.5bn to the fund and is hoping to raise an additional $4bn from the private sector. A particular emphasis will be on Eastern Europe, which was home to 40 percent of pre-crisis foreign capital flows. Further details of the project will be announced in Istanbul. In the meantime, the FT reports:

The idea is to mimic the functions of a "bad bank" at an international level through a number of platforms rather than a single global investment vehicle.

As part of the initiative...the IFC is teaming up with HSBC to purchase and restructure distressed assets, in what it hopes will eventually be  $900m scheme.

IFC's chief executive, Lars Thunnel, is known for having managed Sweden's "bad bank" during its banking crisis in the early 1990s.

Deposit Insurance, Blanket Guarantees and Exit Strategies

The World Bank held a discussion yesterday on the role of extraordinary deposit insurance schemes in the crisis. Fred Carns from the FDIC and David Walker from the CDIC (Canada) outlined the lessons learned, measures taken, and future policy recommendations for the world's deposit insurance schemes.

The main crisis driven deposit insurance arrangements include:

• More than one-third of deposit insurance programs around the world have adopted some form of enhanced deposit insurance protection during the crisis.
• Less than 20 percent of deposit insurance jurisdictions have provided blanket guarantees. Yet this minority is significant, and includes the United States. Some schemes apply only to selected categories of deposits, while a handful take the form of political promises as opposed to changes in law or regulations.
• Among jurisdictions that did not provide blanket guarantees but raised their coverage limits, the extent of the increases varies widely.

China Can't Do It Alone

As rich countries, led by the Untied States, prepare themselves for a tepid recovery, can the BRICs, led by China, pick up the slack?

In a new paper for Vox, Deutsche Bank's Markus Jäger discusses China's prospects for becoming the de-facto engine for global growth. His concussion: China already is the decisive engine for global growth. 

By 2014, assuming things are back to normal, China and the US will account for around 30% and a little over 10% of global growth, respectively – and this assumes relatively optimistically US growth of more than 3% per annum. In this sense, China will be the global growth “engine”. But this is nothing new. China’s contribution to global growth amounted to 20% during the better part of this decade, almost twice size of the US contribution.

The IMF's Medium-term Outook: Anything is Possible

The IMF released the latest chapters of its World Economic Outlook, which focuses on building a sustainable recovery. The first chapter addresses lessons for monetary policy from asset price fluctuations, while the second deals with the impact of the crisis on medium-term output.

The IMF believes that the crisis has not yet struck a dagger into the heart of medium-term growth prospects, but it does pose serious risks. Historically, the seven-year impact of banking crises reduces output levels by 10 percent of their pre-crisis trend. Things tend to improve afterwards, and a permanent decrease in medium-term output growth is rare.

Yet this has been an a-typical banking crisis, and as such, governments face a complex juggling act in shielding the global economy from acquiring a few scars:

China's Crisis Response Goes Global

China has been an essential player in fostering a global economic recovery. As one of the first countries to announce a massive stimulus package last November, China brought increased stability to markets when it was dearly needed. Today's conventional wisdom holds that in order to ensure a stable global recovery, Chinese consumers must increase their consumption patterns to fill the economic void left by their battered American counterparts (see previous post).

Can the Chinese government succeed in boosting domestic consumption? Are there other initiatives that China can take to put the global economy in motion?

The answer to both of these questions is a tentative 'yes'.

Emerging Market IPOs: Leading the way

Two years ago, as financial markets in the United States and Europe began to break down, there was much speculation over whether emerging markets would continue to grow in spite of the woes in the West. A year ago, this idea of decoupling was quickly dispelled.

As emerging markets rebound from the crisis, will there be a new decoupling, where they grow, and OECD economies struggle? It is probably too early to tell, but in one area, IPOs, developed economies are profiting from emerging market successes.

Pity the Pound

A few weeks ago I wondered if Britain was back. According to the Bank of England, it's not.

The Times reports:

In its Quarterly Bulletin, the Bank tried to explain the reasons for the collapse in value of sterling since the final quarter of last year. It said: "It is possible that sterling's depreciation may be part of a more prolonged process of rebalancing of the UK economy, generating a fall in the long-run sustainable real exchange rate."

Zoellick's Pittsburgh Prescription

World Bank President Robert Zoellick has given his policy suggestions for this week's G20 summit in Pittsburgh. In an interview with the Financial Times, Zoellick urged world leaders to focus on adopting a responsible approach to global economic growth:

I would like the G20 to talk about responsible globalisation. That would capture balanced global growth, financial stability, climate change, help for the poorest including our proposal for a new facility to help countries cope with economic shocks not of their own making.

Zoellick also called for prudence, warning that a sustained economic recovery is far from certain, even in the brightest patch of the global economy, Asia:

China has expanded credit rapidly. As credit growth is moderated there is a risk that China could turn down again. Conversely, the strong rebound so far in east Asia could lead to increased interest rates that draw in a lot of capital – then what will the governments do in terms of currency policies, inflation policies, interest rate policies?

Sage, rather than sanguine, needs to be the running theme this week.

Weekend Reading

The European Central Bank's crisis efforts are laudable. The current account surplus is back in the black, and the euro is hitting one-year highs against the dollar.

Meanwhile, sterling continues to suffer.

An explanation of the new dollar carry trade.

The American manufacturing sector is rebounding.

The jobless recovery has been kind to those with jobs. Wages are up.

California is investigating the ratings agencies.

Speaking of California and the ratings agencies, Moody's forecasts that California's real estate sector won't return to normal until 2030.

Finally, where is Paul Volcker?

Plus: In case you get lost in the thicket of financial jargon, the Devil's Dictionary is here to help. A taste:

STRESS TEST, n. 1. A measure of arterial blood flow to the head. 2. Alchemic process by which struggling, undercapitalized banks are transformed into paragons of modern finance. (See BANKS, GOOD.) Also known as the "Timothy F. Geithner Seal of Approval," which some bankers insist is good until it isn't anymore. (See BANKS, BAD.)

The Sino-American Economy: Mutually Assured Destruction

This week's New Republic has two interesting articles about China's economic rise, and its implications for the global economy.

In the first piece, This Giant Isn't Sleeping, Zachary Karabell argues that Chinese growth is both sustainable and here to stay, and that doubts about the Chinese economic model are overblown: 

China has produced more growth over the past 25 years than any country, ever (averaging more than 9 percent a year). And after stalling in the fall of 2008 and in the early months of 2009 along with the rest of the world, China has been growing at an astonishing rate in the past six months--manufacturing has been expanding, exports have been surging (more than $20 billion a month to the United States alone), property prices and activity have soared, and stocks are on fire. Interior cities have replaced the coastal provinces as the engine of growth, and that process has barely begun.

Karabell goes on to say that rising commodity prices (the price of copper has doubled over the past six months) mean that the Chinese economic engine is alive and well. 

The Fed's Next Move: Hibernation

Yesterday I commented on the role of inflation in the crisis, which was explored at length during a symposium on Dealing with America's Debt Overhang. Any good conversation about inflation has to be followed with a discussion about the Federal Reserve.

Liaquat Ahamed, author of Lords of Finance: the Bankers Who Broke the World, gave a summary of the Fed's exceptional role during the crisis, which can be broken down into three key areas:

1. Acting as a lender of last resort
2. Aggressively cutting interest rates
3. Lending against assets that would normally be considered unacceptable collateral

The Bernanke Fed has been lauded for having prevented another Great Depression, and many, including Barack Obama, consider Bernanke to have been the right man for the right job at the right time.

But times are changing, and now that we are no longer looking into the abyss, what's next for the Fed? What role should it play in the recovery?

The Case for Inflation; or, The End of Orthodoxy

I attended a symposium this morning on America's Debt Overhang, hosted by the non-partisan New America Foundation (NAF). There were several interesting discussions about the present and future implications of America's ballooning public, private and household debts. I will return to these debates in greater detail tomorrow.

One presentation in particular stood out: Christopher Hayes, a fellow at NAF, presented a controversial paper entitled Overcoming America's Debt Overhang: The Case for Inflation.

Hayes argues that America's debt burden has become crippling. Indeed, household debt has risen from 48 percent of GDP in 1981 to 97 percent today. Meanwhile, corporate debt has grown from 22 percent in 1981 to 120 percent in 2009. The federal government is borrowing and spending at unprecedented peacetime rates. This toxic cocktail may spiral out of control:

One Year On

On the one-year anniversary of the Lehman Crisis, the biggest names in financial punditry have been voicing their thoughts and concerns on the most important issues facing the world economy.  Let's take a look:

Martin Wolf, who spent most of the crisis bringing attention to global imbalances, has become a China bull:

China has emerged as the most significant winner from the global financial and economic crisis. At the end of 2008, many questioned whether China would achieve its growth target of 8 per cent in 2009. Who now dares to do so?

Crisis Roundup: Anniversary Edition

Is another boom around the corner?

Or has the real pain only begun?

Fedex can't find any green shoots in the US...

...and American consumers can't find any more credit.

Is the end near for the dollar? Probably not.

Hank Paulson doesn't use email. Can he be trusted?

The upside to rising foreclosures.

Trade Finance and the Curse of Soft Commodities

There is a fascinating article in this month's Africa Investor on the difficulties many African commodity exporters face in securing sufficient trade finance. The IMF estimates that, as a result of the crisis, there is a trade finance shortfall of $100-$300 billion, with Africa being the most affected by this dearth in funds.

Soft commodity products, such as cocoa and flowers, typically require advance financing to fund cultivation and production, which is repaid once crops are harvested and exported. Most African producers prefer dollar loans, as their costs are primarily denominated in dollars. Yet, because Europe is Africa's largest export market, most export revenues are denominated in pounds and euros. This creates a currency mismatch, which discourages lenders.

The situation is further complicated by an overall shortage of dollars, and Africa's dependence on commodity exports:

Declining Consumer Credit + Weaker Dollar = Time to Export

There are two noteworthy stories in the economic blogosphere, aside from the exciting news coming out of the World Bank.

The first has to do with the sharp decline in consumer credit in the United States. Buttonwood reports:

While governments round the world clock up more debts, American consumers are finally cutting back. The volume of consumer credit fell by $21.6 billion in July, the sixth monthly decline in a row. According to Lombard Street Research, this was the second largest percentage decline since World War Two. The 3-month annualised rate of decline is now running at 7%.

It appears that the recession has actually succeeded in frightening the American consumer into saving. This is not an insignificant feat.

Doing Business 2010: Reforming through Difficult Times

The World Bank Group has released its annual Doing Business Report, which provides quantitative measures of regulations of the life cycle of a small or medium-size enterprise. Regulations related to registering property, employing workers, dealing with construction permits, and paying taxes are measured. Getting electricity and worker protection were added to this year's metrics.

In spite (or because) of the crisis, governments worked hard at improving the business climates within their borders:

In 2008/09 more governments implemented regulatory reforms aimed at making it easier to do business than in any year since 2004, when Doing Business started to track reforms through its indicators. Doing Business recorded 287 such reforms in 131 economies between June 2008 and May 2009, 20% more than in the year before.

Reformers focused on making it easier to start and operate a business, strengthening property rights and improving the efficiency of commercial dispute resolution and bankruptcy procedures.

Crisis Roundup: Financial Bureaucrats Edition

Tim Geithner wants tougher capital requirements...

...and seven of his European counterparts want to end banks' bonus culture.

Claude Trichet has a plan. So does Geithner.

Bernanke is the dollar's new father.

Volcker and Soros discuss innovation.

Finally, did miscommunication between the US and UK Treasuries push Lehman over the edge?

Wall Street's Premature Exuberance

I've been wondering lately if investment banks are experiencing a bout of irrational exuberance with respect to a recovery. Bullish advice on China comes to mind in particular.

There is growing momentum behind the idea that many banks are getting the recovery wrong. From Bloomberg: 

Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.

The US Dollar: The worst choice (except for every other option)

Barry Eichengreen has written a piece in this month's Foreign Affairs outlining the difficulties of replacing the dollar with an alternative reserve currency (subscription required).

Professor Eichengreen sets the stage with the usual talking points over the dollar's weaknesses:

• Confidence in the US-championed global financial system is waning
• The US government will continue to issue staggering amounts of debt
• In order for central banks to acquire dollars, the US must run a current-account deficit, which aggravates global imbalances and puts further downward pressure on the dollar
• The political logic for supporting the dollar has weakened, as the US is no longer seen as the military protector of Europe and Asia

In spite of this cocktail of structural weaknesses, there is an "inconvenient truth" to the dollar: its global importance hasn't changed as a result of the crisis. Based on the Federal Reserve's holdings of US Treasuries on behalf of its foreign counterparts, "foreign authorities have continued to accumulate dollars, and even accelerated their purchases in the first half of the 2009."

What gives? Why stick to a currency that is so clearly flawed? Why buy into a system that many respected economists warn is destined to fail?

Crisis Roundup: Debt Edition

Lessons from Japanese borrowing 

The pros and cons of financial innovation...

...with a rebuttal

Meanhwile, Paul Krugman and Jim Hamilton duke it out over the dangers of government debt... 

...while Menzie Chinn and Jeffry Frieden are unambiguous in their views of consumer debt. Quite simply, it created the crisis

Lastly, sometimes pictures are better than words

Spain's Real Estate Blues

Last week, I questioned whether the good news coming out of the eurozone's core economies, France and Germany, would be enough to drive the continent towards a recovery. One of the biggest obstacles to such a recovery is the Spanish real estate sector, which some are dubbing, "a hole in Europe's balance sheet." A new report by Variant Perception, an economic consultancy, paints a grim picture of the Spanish housing market (emphasis mine):

Spain had the mother of all housing bubbles. To put things in perspective, Spain now has as many unsold homes as the US, even though the US is about six times bigger. Spain is roughly 10% of the EU GDP, yet it accounted for 30% of all new homes built since 2000 in the EU. Most of the new homes were financed with capital from abroad.

The value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That's almost 50% of Spanish GDP. Most of these loans will go bad.

Bernanke's Challenges: Look North

Now that we are due for at least four more years of a Bernanke Fed, what will Act Two look like? The New York Times invited several economists to forecast the challenges lying ahead for Mr Bernanke.

Chief among these challenges is unwinding the massive stimuli and support mechanisms that the Fed introduced in order to "prevent another Great Depression" (in the words of Barack Obama). This will involve a deceleration of monetary easing as the Fed balances growth and recovery with inflation and the credibility of the dollar.

Iceland may be an interesting case study of what's ahead. Just as Iceland was a precursor to the severity of the credit crunch, it may be the first to feel the withdrawal symptoms of diminishing government stimulus policies. Robert Wade argues:

Credit Suisse: Where's the Asian Bubble?

Credit Suisse has released a new report (Asia: Show me the bubble) claiming that concerns of an Asian bubble are overblown:

It has become fashionable to argue that Asia’s monetary conditions are too loose and that too much domestic liquidity is creating asset price bubbles. Reflecting prevailing “wisdom” among market analysts, The Economist last week declared that (1) “Asia’s monetary conditions are too loose,” (2) “capital is already rushing in,” (3) “[central bank] foreign exchange intervention to hold down their currencies causes domestic liquidity to swell,” and (4) “the obvious solution is to let exchange rates rise.”

There is nothing “obvious” about any of the above, in our view. The entire region is being painted with a China-brush, which does not wholly apply.

Crisis Roundup

The end of an era for the rich?

The view from Jackson Hole; or, the case against Bernanke. 

Is the United States following in the footsteps of Japan? Michael Mandel believes we are in the midst of a lost decade:

I think we need to wrap our minds around the fact that we’re not having a boom followed by a bust…we’re having a bad decade followed by a slow digging-out process.

Sobriety Checkpoint

Today's Crisis Talk is dedicated to a visual tour of the crisis.  Enjoy.

US housing (c/o Economist)

IMF Weighs in on Recovery; World Bank Discusses Finance in Africa

The IMF and World Bank have both released reports discussing their latest thoughts on the global and regional effects of the financial crisis. 

Olivier Blanchard, the IMF's chief economist, has published his views on Sustaining a Global Recovery, arguing that the path out of the crisis for emerging markets is much simpler than in developed economies:

If past is prologue, the world economy likely will return to its past growth rate. But, especially in advanced countries, the period of above-average growth, characteristic of normal recoveries, may be short-lived or nonexistent.

Blanchard exposes two caveats to recent good news about growth:

Today in China: Panda Put or Cliff Dive?

In light of yesterday's 6 percent drop in the Shanghai composite, there is increasing speculation about the sustainability of the buildup in Chinese equity markets (see recent post).

China’s stimulus efforts, led by increased bank lending, have caused the economy to look more and more frothy:

Is there a China bubble brewing?  If so, will the Chinese government intervene to avoid a crash (the panda put option)? Or are we in for a sharp correction?  Let's see where the market pundits stand: