AAA updates on subCrimes

last UPDATE: 11.30 am GMT,  November 15

dogs can’t lie and know a recession is on, even before markets

picture: from naked capitalism, October 10, 2008

The current edition of our  SUBCRIME CRISIS ANALYSIS FULL REPORT is: subcrimebiosocialscience1

Here are some NEW relevant facts and analyses, before we release a new version of our subcrime report pdf. From July 2008 on.

MACROS: summary;  1. recession goes – inflation no stop; 2. Robin Hood policies; 3. bio-economic theory.

Korean Confederation of Trade Union Vice-President Ju Bong-hee takes part in a protest against the ongoing meeting of the Global Forum on Migration and Development (FGMD) as he is blocked by anti-riot police in Manila, Philippines, October 27, 2008. The number of undocumented migrant workers across the world is expected to rise in the face of the global financial crisis, trade unions and business leaders warned on Monday, urging governments to respect labor rights.  

REUTERS/Romeo Ranoco


Waiting for Obama and his New Deal, Bush’s G20 did not delivery anything reasonable.


Its Greenspan – Reaganite standard version is certainly dead forever, in the earthquake moved by the shadow finance meltdown. But – doing  their business as usual of collaborationist with Rentier Capital –  social-democrats “doc” à la Gordon Brown (followed willy nilly by neophites like Bush, Merkel and Sarkò) are desperately looking for a “financial socialist” escape from this cul-de-sac, meltdown and ruins of a Glorious Years past.  Most likely, they won’t succeed:

a. first of all since their analysis is wrong (it’s not based  on Keynes, Kalecki and Minsky),

b. therefore their cures are just palliatives;

c. they just use State muscles, not the brain (see a Lex editorial on this, on Oct. ).

 We can take these two Marx-Keynesian-Schupeterian axioms as granted. For sure:

1) By Bernd Debusmann

WASHINGTON (Reuters) – Capitalism as we used to know it is on its deathbed. And those who predicted that the old brand, the unfettered, American-promoted system, was a danger to the world, are being vindicated. They include Karl Marx … (our red-bold and underlining).

2) Giorgio Ruffolo, following but also updating Marx: “Il capitalismo ha i secoli contati  (its end is a matter of centuries)”. Now Financial Capitalism might be dead. But capitalism as such will not disappear soon, not before an evolutionarily fitter “mode of production and distribution” emerges – within the same social evolution and organisation, carrying the irreversible decline of Late Capitalisms (Ernst Mandel). 

3) Carlotta Perez (in sintonia with Wallerstein, in a LW perspective on deflation – see also Aglietta and Berrebi): behind the financial eltdown catastrophe, there are institutional and political nodes delayed for decades. An ICT-led long wave almost aborted as a result: 

4) Wallerstein concludes his Oct. 15 post on  badmatthew marxist blog in this way: 

 What happens when we reach such a point is that the system bifurcates (in the language of complexity studies). The immediate consequence is high chaotic turbulence, which our world-system is experiencing at the moment and will continue to experience for perhaps another 20-50 years. As everyone pushes in whatever direction they think immediately best for each of them, a new order will emerge out of the chaos along one of two alternate and very different paths.


We can assert with confidence that the present system cannot survive. What we cannot predict is which new order will be chosen to replace it, because it will be the result of an infinity of individual pressures. But sooner or later, a new system will be installed. This will not be a capitalist system but it may be far worse (even more polarizing and hierarchical) or much better (relatively democratic and relatively egalitarian) than such a system. The choice of a new system is the major worldwide political struggle of our times.


As for our immediate short-run ad interim prospects, it is clear what is happening everywhere. We have been moving into a protectionist world (forget about so-called globalization). We have been moving into a much larger direct role of government in production. Even the United States and Great Britain are partially nationalizing the banks and the dying big industries. We are moving into populist government-led redistribution, which can take left-of-center social-democratic forms or far right authoritarian forms.


As usual, the  brightest analyses come from coherent and uncompromising visions: hard right and left. Listen to the mythical Reagan thinker, Laffer (wsj,  Oct. 27)

The Age of Prosperity Is Over

This administration and Congress will be remembered like Herbert Hoover.


If you don’t believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they’ll do with Wall Str. (…)

Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.


Meanwhile Marx – as quoted above –  appears everywhere, even on top of Reuters, with a nice picture (I told you so),  in an Oct. 15 column by  Bernd Debusmann: 

Karl Marx and the world financial crisis

Those measures included buying stakes in major banks – in effect partial nationalization – and would make Marx smile if he could rise from his grave. In the Communist Manifesto he and his collaborator Friedrich Engels published in 1848, Marx listed government control of capital as one of the ten essential steps on the road to communism. Step five: “Centralization of credit in the hands of the state …”

… the control center of the financial market has already begun shifting from New York to Washington. (…)

Amid the gloom and anxiety of the worst financial crisis since the Great Depression, which started in the United States in 1929 and then spread to the rest of the world, there are hopes that Capitalism 2.0 (if it ever comes about) will result in a more equal society. “There is a tremendous opportunity now to narrow the income gap,” says Sam Pizzigati of the Institute for Policy Studies, a Washington think tank.

As we had predicted, together with the best and honest analysts (but at odds with most of the economic discipline, discovering the recession and financial collapse only now), in early autumn the credit crunch has imploded, pushing down all financial markets, even in Russia. At mid Sept., starting with the no.1 world insurance co. AIG, Lehman, Fannie and Freddie, both US and European banks have been under attack, and the US specialised financial system has disappeared in just one week (from 4 to 0 financial units), while the US Parliament first rejected, then approved a highly  controversial $1 tr. package (NB: 0.85 tr. is just the limit of debt in any time section, not any  total, cumulated expenditure flows ceiling), worth NOTHING without a re-regulation of finance (see rge-monitor, among others; BBC: “The financial sector bail-outs in the US this year are expected to total up to $1.8 trillion. That’s $15,000 per US household”).

The hard battle at the US Parliament has just made minor corrections to Paulson’s Wall St. bailout plan: some minor flows will go to the middle class,  not just  big finance. But Main Street is abandoned to itself, with no public expenditure left: 1st, Detroit will  just disappear, then ….

Here is how Alan Abelson at Barron’s summarises Roubini, the only one who told in advance the melting down was on. In his latest Barron’s column – aptly titled “Dead Stocks Rallying” he wrote:

The nub of his argument is that we’re suffering the worst financial crisis since the Great Depression, and he proceeds to give chilling chapter and verse. He predicts that hundreds of small banks loaded with real estate will go bust and dozens of large regional and national banks will also find themselves in deep do-do.

He reckons that, in a few years, there’ll be no major independent broker-dealers left: They’ll either pack it in or merge, victims of excessive leverage and a badly flawed and discredited business model.

The Federal Deposit Insurance Corp., after it gets through picking up the pieces of IndyMac, will sooner or later have to get a capital transfusion, Nouriel asserts, because its insurance premiums won’t cover the tab of rescuing all the troubled banks. He foresees credit losses ultimately reaching at least $1 trillion and anticipates a heap of woe for credit purveyors across the board.

The poor consumer, he contends, is shopped out and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation. The recession he anticipates will last 12 to 18 months. And the rest of the world won’t escape: He looks for hard landings for 12 major economies. As for the stock market, he hazards that there’s plenty of room left on the downside. In fact, he feels the bear market won’t end until equities are down a full 40% from their peaks.

Since they are 80% now at New York, this means that stock markets should fall another 50%. Housing markets will also fall until 2010, feeding the entire meltdown mechanism, the financial and real crisis. In sum, we live:

1) on the verge of a slowed-down, “frozen” recession: almost aborted, but not entirely stopped – he credit crunch smoothed and a consequent recession FREEZED by a massive State and CBs intervention in defense of banks. A “slow-mo” recession (P. Krugman).

2) Mid-way of a wealth loss in housing and stock markets.

3) An income loss due to oil (until mid July)  and AG-flation.

A linguistic analysis of the metaphors would throw light on the communication mechanisms of the crisis, ranging from a tropical meltdown to a Polar freeze! The last intervention by former (and best) Fed Chairman is interesting, even more than usual. A summary by Alphaville, August 5 (bold added):

Greenspan warns of more bank bail-outs

Posted at 05:26 by Gwen Robinson

More banks and financial institutions could end up being bailed out by governments before the credit crisis is over, Alan Greenspan, the former Fed chairman, warns in an article in Tuesday’s FT. However, he cautions that a heavy-handed regulatory response would do more harm than good because it would depress global share prices. He also warns that governments, already troubled by inflation, might try to reassert their grip on economic affairs. “If that becomes widespread, globalisation could reverse, at awesome cost,” he says. Describing it as a “once or twice-a-century event deeply rooted in fears of insolvency of major financial institutions”, Greenspan says the current crisis will end only when US home prices begin to stabilise.See this article online and view or leave comments.





1. The recession goes – and finally decelerates inflation in the 2008 Autumn

Nov. 14

In October, US retail sales were -2.8% down. This NEVER happened before, since when the index started in 1992. Roubini looks at perspectives and concludes that the recession is  on the verge of degenerating into a low consumption-led depression in the US. 

October 20


It’s a problem the rest of the world would love: economic growth of 9 per cent. But China’s third-quarter data mark a sharp deceleration from last year’s almost 12 per cent – and that is a problem for the rest of the world. China, after all, has been contributing about a quarter of global gross domestic product growth. Until a few months ago, the ripple effect of Chinese economic strength was evident across the board, from raging commodity prices to the proliferation of European designer stores in Shanghai.

Now the momentum is slowing. Prices of steel, a key material in the industrialisation of modern China, are crumpling as Chinese construction pauses. Auto sales, which surged by a quarter in 2007, are expected to be flat next year. Worse is to come. Seasonally adjusted month-on-month data for September show falling exports in a number of categories, including the dominant mechanical and electrical products. Nervous householders continue to squirrel more money away in the banks. 

October 17

The plunging of global financial markets in the first half of the current month, even in presence of a Gordon Brown’s lead WAVE OF BANKS QUASI-NATIONALISATIONS (emergency financial socialism à la Hood Robin – i.e. stealing from the middle class taxpayer for the rentiers), finally put an end to the idiocies and negations of the evidence:


Experts perceive it only one year later: but they are paid for that, for not being alarmists, bearish and pessimists as deeprecession, Krugman and Roubini.

The ft (less negationist than the wsj), returns to Keynes and goes for fiscal stimuli – the next step of economic policies finally addressing Mean Street, after the historic Wall Street and Euro-American banks bailout that puts October 2008 in History.

ft editorial

Saving the banks was just a first step

Published: October 17 2008 20:40 | Last updated: October 17 2008 20:40

The tide, finally, seems to have turned on the banking crisis. More financial institutions will run into trouble, but governments have moved ahead of the crisis and can – at long last – deal with it systematically. If banks now support the real economy by providing credit, more drastic steps – like full-blown nationalisation – ought not be necessary. Despite arguably the worst financial problems in a century, parallels to the Great Depression now seem hyperbolical. That is a serious step forward. We are, however, still heading into a vicious real economy slowdown.

Forecasters seem to have been competing in a reverse auction to cut their expectations for growth in the next two years. A prolonged period of stagnation and recession now seems likely for the US, UK and eurozone, likely to be the worst slowdown since the early 1980s.

October 6

As we had predicted, together with the best and honest analysts (but at odds with most of the economic discipline, discovering the recession and financial collapse only now), in early autumn the credit crunch has imploded, pushing down financial markets. At mid Sept. Starting with the no.1 world insurance co. AIG, Lehman, Fannie and Freddie, both US and European banks have been under attack, and the US specialised financial system has disappeared in one week (from 4 to 0 financial units), while the US Parliament approved a highly  controversial $1 tr. package (NB: 0.85 tr. is just the limit of debt in any time section, not any  total, cumulated expenditure flows ceiling), worth NOTHING without a re-regulation of finance(see rge-monitor, among others).

Meanwhile, this week end European 4 leaders failed to decide any cooperative, continental move, and Euro shares sink more and more, WITHOUT A US- STYLE BAILOUT:

An in-depth analysis of Lehman collapse, on today’s wsj:

The Two Faces of Lehman’s Fall

Private Talks of Raising Capital Belied Firm’s Public Optimism 

October 3

An optimistic diagnosis today, by Prof. Roubini

Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs

Nouriel Roubini | Oct 3, 2008

It is now clear that the US financial system – and now even the system of financing of the corporate sector – is now in cardiac arrest and at a risk of a systemic financial meltdown. I don’t use these words lightly but at this point we have reached the final 12th step of my February paper on “The Risk of a Systemic Financial Meltdown: 12 Steps to a Financial Disaster” (Step 9 or the collapse of the major broker dealers has already widely occurred).

Yesterday Thursday a senior market practitioner in a major financial institution wrote to me the following:

Situation Report: So far as I can tell by working the telephones this morning:

  • LIBOR bid only, no offer.
  • Commercial paper market shut down, little trading and no issuance.
  • Corporations have no access to long or short term credit markets — hence they face massive rollover problems.
  • Brokers are increasingly not dealing with each other.
  • Even the inter-bank market is ceasing up.

This cannot continue for more than a few days. This is the economic equivalent to cardiac arrest. Then we debated what is necessary to restart the system. (…)


And to confirm the near systemic collapse of the system of financing of both financial firms and corporate firms Warren Buffett declared yesterday, as reported by Bloomberg:

the U.S. economy is “flat on the floor” after a cardiac arrest as companies struggle to secure funding and unemployment increases.

“In my adult lifetime I don’t think I’ve ever seen people as fearful, economically, as they are now,” Buffett said today in an interview with Charlie Rose to be broadcast tonight on PBS. “The economy is going to be getting worse for a while.’ …The credit freeze is “sucking blood” from the U.S. economy, Buffett said.

We are indeed at the cardiac arrest stage and at risk of the mother of all bank and non-bank  runs as:

– The run on the shadow banking system is accelerating as: even the surviving major broker dealers (Morgan Stanley and Goldman Sachs) are under severe pressure (Morgan losing over a third of its hedge funds clients); the run on hedge funds is accelerating via massive redemptions and a roll-off of their overnight repo lines; the money market funds are experiencing further withdrawals in spite of government blanket guarantee.

– silent run on the commercial banks is underway. (…)

– A run on the short term liabilities of the corporate sector is also underway as the commercial paper market has effectively shut down with little trading and no issuance or rollover of such debt while corporations have no access to long or short term credit markets and they are therefore facing massive rollover problems (…).  

– The money markets and interbank markets have shut down as – despite the Senate passing the bail-out bill – yesterday USD Overnight Libor was still at 268bp after reaching an all-time high of 6.88%; the USD 3m Libor-OIS spread widened to record 270 basis points; EUR 3m LIBOR-OIS spread is at record 130bp; the TED spread is at record 360bps (TED was 11bps one month ago); Money and credit markets are dysfunctional also in emerging markets ; and agency bond spreads are also at highs again.

So we are now facing:

– a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

– a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds restrained only by a blanket government guarantee; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

– a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

– a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.

So what needs to be done? Even several hundreds of billion dollars in emergency liquidity support to the financial system by the Fed and other central banks in the last week alone have not been enough to stop the seizure of liquidity in interbank markets and the shut down of financing for the corporate sector as counterparty risk is now extreme (no one trusts any more in this crisis of confidence even the most reputable and trustworthy financial and corporate counterparties).

September 26

Washington Mutual wins the Guinness of the biggest US bank to  fail (bailed out by JP Morgan with the Fed support, as Bear Stearns), with $307 bn assets,  bigger than  the previous Guinness:  Continental Illinois in 1984.

September 21, Sunday

1 month later, bloomberg reveals what happened today at G. Sachs, in the middle of the Lehman Bros turmoil, that would shake the global financial markets and accelerate their collapse in the forthcoming weeks.

In the brief meeting in lower Manhattan that warm Sunday, according to a person familiar with the events, Blankfein told his lieutenants the firm would become a bank holding company, ending its run as the jewel of global investment banks.

So began the next chapter in the history of Goldman Sachs, a company founded in 1869 by a former street peddler that had weathered many crises. It survived what may have been the most serious threat in September, only to be thrust into a new landscape where Goldman will have to prove that old virtues–a vast alumni network, a fierce partnership culture, high levels of compensation and trading acumen–are still of value.

The contingency planning to become a commercial bank had been under way since March, after the collapse of Bear Stearns Cos. sent shivers through Wall Street. That’s when Federal Reserve inspectors set up camp at the firm’s 85 Broad St. headquarters, a sign of things to come.

September 8

The Lehman telenovela goes on, with no solution yet. Alphaville today:

Lehman in top management shake-up

Sep 08 05:40
by Gwen Robinson

The head of Lehman Brothers’ international operations is stepping down, triggering a broader shake-up of senior management at the embattled Wall Street bank. Jeremy Isaacs, the long-serving chief executive of Lehman’s businesses in Europe and Asia, More…

RBC pulled back from Lehman bid

Sep 08 05:37
by Gwen Robinson

Royal Bank of Canada considered buying Lehman Brothers in July, the FT has learnt, but decided against it amid doubts about Lehman’s ability to shore up its balance sheet and about what RBC “would have to promise the Lehman people”, More…


Lehman Brothers has shuffled some of the chairs in its senior management ranks as it braces for a big round of layoffs this week.



A Look At One Page Of What Lies Ahead In America’s History

Filed under: Post-WWII Geopolical Regime, End of — Tags:  — Fabius Maximus @ 12:00 pm

Summary::   This posts shows evidence of the difficult times that lie ahead for America.  This makes the November elections of unusual importance.  I suspect most of us know this, at some level, even if we collectively refuse to acknowledge it or prepare in any way. 

Here are two articles that peer ahead through the fog, looking at the future of one of our larger industries.  This is not a case of technological obsolescence, the buggy whip industry being replaced by computer manufacturers — but one facet of a massive social failure now in motion.  The list of industries going through the wringer is long and growing:  banks, brokers, airlines, automobile manufactures, construction (and the supporting businesses for each of these).

 It is too late for prevention — after decades of squandered warnings.  All we can do is mitigate the effects and move on.

Detroit’s Continuing Crisis“, Michael E. Lewitt, welling at weeden, 11 July 2008 — “No happy ending in sight; time to radically restructure the entire industry.”

Survival of the Unfittest“, Michael Lewitt, Outside the Box, 4 August 2008 — Excerpt (bold and color emphasis added):

The slow motion death of the American automobile industry is almost too painful to watch. The flood of bad news coming out of Detroit has literally swelled into a tsunami in recent days, and there is no end in sight.

In a previous post, Fabius Maximus gives the right frame on oil inflation in the LT, as a proof that we are close to the HISTORICAL HUMBOLDT PEAK, generating oil scarcity forever:  blaming speculation is just blindness and ignorance. THIS POST IS A MUST, and rich as usual of good links:  

August 5 breaking news: Recession starts hitting the 2 resilient GIANTS, Germany and China

FT, August 5

GDP cut holds up German recovery

German output contracted by 1 per cent in the second quarter, twice as fast as economists were anticipating and the clearest sign to date that Germany’s robust recovery is coming to an end

Calculated Risk, August 5

This slowdown is reflected in the Shanghai SSE composite index that is off about 54% from the peak.

And this slowdown is probably impacting oil prices. And that will also help the U.S. trade deficit.

The danger is that China – and the rest of the global economy – will slow down too quickly, and U.S. exports will be negatively impacted.

RGE Monitor 

China: Manufacturing Contraction As Cost Pressures Catch Up?

Chinese Purchasing Managers Index (PMI) for manufacturing fell to 48.4 the lowest since the index began in 2005 and a 3.6pt fall from June. A level below 50 is generally seen as indicator of contraction in manufacturing. 6 of 11 indices including new orders, export orders and output indexes all saw record lows and fell below 50. 14 of 20 industries reported a contraction in output (see Li and Fung) 

Short-term pre-Olympics related shutdowns may contribute to lower manufacturing output but longer-term cost pressures and reduction of demand from key markets are thought to play a part also – labor and other input prices have risen sharply in recent months but input price index fell for the first time in months to 71.3 from 75.7 (on lower commodity prices) -> may suggest continued growth deceleration in Q3  

Click Here For Full Analysis


NYT, August 4: the epidemics moves from sub-prime to above-prime

Housing Lenders Fear Bigger Wave of Loan Defaults 
Homeowners with good credit are falling behind on their payments in growing numbers, just as the problems with subprime mortgages have begun to level off.

NYT, August 4. Paul Krugman:

The good news, I guess, is that we’ve been experiencing a sort of slow-motion meltdown, lacking in dramatic Black Fridays and such. The gradual way the crisis has unfolded has led to an angels-on-the-head-of-a-pin debate among economists about whether what we’re suffering really deserves to be called a recession.

Yet even a slo-mo crisis can do a lot of damage if it goes on for a year and counting.

Home prices are down about 16 percent over the past year, and show no sign of stabilizing. The pain from this bust is widely spread: there are millions of American families who didn’t buy mortgage-backed securities and haven’t lost their houses, but have nonetheless been impoverished by the destruction of much or all of their home equity.

Plus: jobs lost. Fear and mistrust on financial markets in a slow-mo but continuing credit crunch. No monetary policy tool left, but:

There is, however, a case for another, more serious fiscal stimulus package, as a way to sustain employment while the markets work off the aftereffects of the housing bubble. The “emergency economic plan” Barack Obama announced last week is a move in the right direction, although I wish it had been bigger and bolder.


Editorial Comment: Dip or decline for oil price?

Despite last month’s fall in cost of crude, a rapid plunge appears unlikely – Aug-01

Even Paul K. is optimist on inflation, on a Keynesian argument:

FT, July 28: a voice of moderation and optimism from prof. Mark Gertler, NYU.

America must not act rashly over inflation

The increase in the core CPI over the past year was just 2.4 per cent, slightly above the Federal Reserve’s comfort zone of 1 to 2 per cent. The feeding through of food and energy costs to core prices did produce an uptick this past month. Over the coming year, however, below-capacity output growth and softening oil and commodity prices are likely to push core inflation back towards the comfort zone.

We agree on the first argument (over-capacity), therefore on “core inflation”. Much less on oil and AG-flation, where there are structural DS unbalances at work, not just “speculation”: see, e.g.,  the clear analysis by Mark Wolf  below (FT, June 17 and 24, quoted here in Section 3). Finally: isn’t the “core versus headline” inflation a bit academic? Reality much more blurred: inter-industry liaisons, expectations, market powers allowing for seizing opportunities from inflation, etc.

NYT, July 23. US housing crisis no stop. As Soros predicted, prices might go down for long.

Woes Afflicting Mortgage Giants Raise Loan Rates
The troubles at Fannie Mae and Freddie Mac could deal another blow to the housing market, as higher interest rates make it harder to refinance existing debts.

FT, July 22. WORST STILL TO COME: a deflationary implosion of China?

Insight: The end of China’s ‘miracle’ story
Liquidity injections by central banks can only postpone the day of reckoning when the real problem is
bad assets and the insolvency of financial institutions, says David Roche, president of Independent Strategy, a London-based investment consultancy. With bank credit now contracting in the US, and soon to do so in the eurozone, bank credit is set to fall and, with it, global growth. The fallout will be a paradigm shift for emerging economies that are over-concentrated in investment, output and export of manufactured goods used to sate the bloated appetite of over-indebted consumers in rich countries. These export markets are about to dry up. Vast swathes of emerging market manufacturing capacity will lie idle. This is possibly the next big shock to the system: the end of the great China miracle story.

Is  the US recession taking a W-shape? This is suggested by Krishna Guha on he FT, July 17.

America braces itself for a second dip

Brad no.2: As in Guinness year 1979, oil export  revenues will reach 3.5% of world GNP this year (up from a “normal” 1% circa: see the graph in Brad Setser).

An average oil price of $120 a barrel would increase the export revenue of the oil exporters by about $900 billion. (…)  if oil ends up averaging $125 a barrel this year rather than $120 a barrel, the increase in the oil exporters revenues would be close to a trillion dollars.


Too Chinese (and Russian) to fail?

Brad no.1 : he corrects official data, estimating that China holds NOT JUST $ 422, BUT $500-600 bn of Fannie and Freddie GSE (Gov. sponsored ent.s), i.e. 10% of the outstanding stock (5.2 trillions) and almost 15% of China’s GDP. Russia has $156 bn, more than 10% of its GDP. Bold added:

I would certainly expect that Vice Premier Wang is on the phone to Paulson this weekend, politely asking how exactly the US plans to backstop the Agencies. (…)

History, it is said, rhymes rather than repeats. Bretton Woods 1 broke down because some key governments weren’t willing to import inflation from the US. Bretton woods 2 has survived — even intensified — the subprime crisis because many emerging market governments have preferred importing inflation to currency appreciation. China seems more worried about textile job losses than inflation, negative real returns on household deposits or the risk of financial losses on its (large) holdings of Agencies.

The costs of a system that channeled huge sums of emerging market savings into the US real estate market — contributing to a bubble in US housing that is now collapsing, at a significant cost to all involved (private market players who bet that housing would only go up, the US government, and emerging market governments who bet on the dollar) and now a surge in inflation in the emerging world — are now quite apparent. It has produced a massive misallocation of resources on a global scale. Nouriel is right. Emerging market savers will get a negative real return on their dollars because of the currency risk, and the US has over-invested in housing.

But the hard work of shifting to a new system likely will have to wait until the crisis in the current system is resolved.

From comments-replies to a 14 July rejoinder, where Brad specifies that China is full of Agencies’ MBS – mortgage backed securities that the Agencies guarantee, as opposed to the debt the Agencies issue in their own name to finance their retained portfolio.

  1. Dave Chiang Says:
    July 15th, 2008 at 12:32 pmA default on Fannie Mae and Freddie Mac debt to the Chinese and Russians wouldn’t impact their respective economies significantly. Even a 20% haircut on Chinese GSE bond portfolio representing $80 billion is less than 2% of China GDP (ie. $3.5 trillion at current exchange rates). The Chinese economy has outgrown its financial dependence on the US market. American taxpayers should not bailout Fannie Mae and Freddie Mac.
  2. bsetser Says:
    July 15th, 2008 at 12:38 pmWow, DC — I assume you have thought through the implications of defaulting on China? I am not sure SAFE would see it as losses of only “2% of China’s GDP’ rather than a hostile act against the people of China. and presumably it would imply an end of China’s willingness to buy Treasuries as well as agencies (if the US can default on one, why not the other) – and, in practice, an end to BW2 [Bretton Woods 2]. If  China stopped buy US debt, it would have a hard time managing its currency v the $.

This China-F&F issue must be set in the frame of the key “Bretton Woods 2” relation of the US debt held by China (see Brad Setser’s blog, namely July 9 and  21):

Right now China has lent  (…) let’s say $1.3 trillion. The US data tends to undercount Chinese holdings of US assets.

That is a large sum by any measure — it is roughly 10% of US GDP, and it is more like 30% of China’s GDP. given the extraordinary pace of growth in China’s foreign assets — and its large current account surplus — China’s financial exposure to the US is set to increase rapidly. (brad setser, 9 july)

On Friday 11 July, while “Fannie and Freddie” shares precipitate, the FDIC Agency took the control of a bankrupt IndyMac bank, also a mortgage specialist: the 3rd largest bank failure in US history. Goto:

Lex: UK not OK

Published: July 8 2008 09:22 | Last updated: July 8 2008 20:48

When a country does not really make anything, watching its property, retail and financial sectors implode prompts the question: what’s left? The UK still has the odd drop of oil but, beyond that, the picture is deteriorating by the day. Another housebuilder, Persimmon, has announced falling sales and job cuts. To add to the gloom, the British Chamber of Commerce warns of a “serious risk of recession”. Nothing can halt the slide in bank stocks – Bradford & Bingley, for example, now languishes 21p below its planned rights issue price of 55p.

The consumer is reeling. Confidence in June was at its lowest since 1990 and last week’s profit warning by retailer Marks & Spencer was widely interpreted as a sign of things to come. Now the data on manufacturing – which still contributes 15 per cent to the UK’s gross domestic product – are looking sickly. Overall industrial production for May, just published, dropped a nasty 1.2 per cent year on year. That is worrying, given weak sterling was supposed to be helping exporters.

On Monday July 7, stock markets were falling. S&P 500 was 20% (a conventional threshold for “Bear” market) below its peak of 1565.15 hit on October 9. 2007. Fannie Mae and Freddie Mac shares dropped to their lowest levels in more than 14 years, as concerns about their capital position increased.

Ft comment by John Auters:

Monday demonstrated that market psychology is dominated by two fears: the dangers of an attack on Iran and of the collapse of a US regional bank. Thanks to prediction markets and credit derivatives, we can quantify those fears.

According to the Intrade market, the chance of a strike against Iran involving the US or Israel by the end of September this year is 18 per cent. [NOTE. Today,  July 9 it’s 20%] (…)

The US has more than 8,000 insured banks. Most are not big enough to expect a rescue. Collectively, their health looks terrible, with non-performing assets double their level of a year ago.

Hence the price of buying insurance against the default of large regional banks has more than doubled in two months, while the KBW banking index has dropped 36 per cent.

June 30, FT, Krishna Guha:

The risk of a very deep recession still looks smaller than it did in March, in part because of the impressive resilience of consumer spending. But it is not zero.

And the probability of a less disastrous but still painful long period of anaemic growth may have risen in recent weeks, partly because of the hit to real incomes from higher energy costs

And partly because of a coming  tighter monetary policy (see below).

June  30, FT, LEX: Bears in a  China shop

Chinese shoppers
Published: Monday 30 Jun 2008 09:40
Where are all the Chinese shoppers? Official numbers suggest domestic consumption is in fine fettle but cracks are appearing in discretionary spending-

Markers of ailing consumer sentiment point to: 1 inflation, 2 an announced tighter monetary policy.

Third, there is a bigger structural shift under way. Rural household incomes have been rising since 2000 and last year rose by 10 per cent, according to Macquarie. Discretionary spending at this level is more likely to mean a fridge rather than a smart new motor. China’s shoppers are far from down and out. But there is more fatigue than headline numbers suggest.


2. Robin Hood versus Hood Robin policies

G20, Nov. 14th

As expected, lame duck GWB did not get anything from the useless Sat. 14th G20 meeting:

– did not coordinate any fiscal stimulus, nor even monetary and credit policy guidelines; in such a way, national and (at most) regional policies are already ending up in “beggar your neighbour”;

– dealt only with the financial meltdown, with a a-historical, pseudo-ethical and superficial approach (ignoring the roots of today’s problems, as well as all the analytical body on the subject);

– pleaded for pursuing an “Open Global Economy”, AS IF it was not a dead walking.  

Even if its imaginary financial and institutional (IMF and WB) plan had to be applied (it will not), this would not change a 1% of the current severe global recession, on the verge of degenerating into a low consumption-led depression in the US – on behalf of the irresponsibility and laissez faire of Pres. Bush and his staff, even after the subcrime bubble imploded in August 2007, i.e. 15 months ago: 15 months lost.

Wall Street and the global financial system are pro tempore nationalised in US and Europe.

The stock and credit markets historical BLACK WEEK  (6-10 Oct. 2008) has wiped out Paulson’s Plan B. Europe and the US hurried up to adopt Gordon’s Brown PLAN b – and the Labour Premier from a lame duck suddenly became the prophet of Financial Socialism, Hood Robin. As Lex (Brownian Motion in Europe. FT, Oct. 13) puts it

The lugubrious British premier, out of sorts at home and seriously adrift in the polls, has been styled as a swashbuckling conductor in the Spanish press, and a “magician” in France. Europe has apparently bought into Mr Brown’s conviction that this is a severe, but transient crisis of confidence that can be overcome by piling on more and more government debt.

While the wisdom of that strategy is questionable, it is clear that there is strength in numbers. If governments all muck in together, using taxpayers’ money to recapitalise banks

What about Mean Street, the middle,  lower and  under-classes?

There is no alternative (against the persisting risks of the severe recession to degenerate into a 2010s depression) than a Robin Hood policy for the poor and the middle class. As the historian Howard Zinn puts it, arguing in advance for an Obama New Deal (Beyond the New Deal, The Nation, April 7 – oL March 20),
We might wonder why no Democratic Party contender for the presidency has invoked the memory of the New Deal and its unprecedented series of laws aimed at helping people in need. The New Deal was tentative, cautious, bold enough to shake the pillars of the system but not to replace them. It created many jobs but left 9 million unemployed. It built public housing but not nearly enough. It helped large commercial farmers but not tenant farmers. Excluded from its programs were the poorest of the poor, especially blacks. As farm laborers, migrants or domestic workers, they didn’t qualify for unemployment insurance, a minimum wage, Social Security or farm subsidies.
Still, in today’s climate of endless war and uncontrolled greed, drawing upon the heritage of the 1930s would be a huge step forward. Perhaps the momentum of such a project could carry the nation past the limits of FDR’s reforms, especially if there were a popular upsurge that demanded it.


The Guardian’s Time to grasp the fiscal nettle, by Barry Eichengreen yesterday Oct. 9:

A MILESTONE PAPER, moving  along neo-keynesian lines (proposing aggressive, internationally coordinated fiscal policies; we agree 100%, and just add the redistributional dimension with much more stress, and with an open connection to a class struggle revival, from Milan to Mumbai and Shangai,  on technology appropriation, profits, rents and wages).

The Oct. 6 BLACK MONDAY, mainly but not only in  European stock markets (worst from 1987 Black Monday, and FOLLOWED BY A GLOBAL BLACK WEEK) confirms thet WE WERE RIGHT ON CONDEMNING THE PAULSON – BERNANKE  hurried up plan. Markets don’t care about it, and discount the recession is on and its size is much worst than they expected. Therefore the issue moves to the alternative between:

a) a financial (pseudo-) socialism: once failed again, the finance K party  moves to nationalisations and direct State and SWF recapitalisations- see the interesting morceau of the live blogging at the wsj on October 2 (4 days before the Black Monday, that followed and “rejected” as insufficient the final US approval of the Paulson $0.85 trillion plan). It is already on in  October 2008 for the emergency, but it would

         a1) eventually cure the financial meltdown (if and only if Wall Street socialism will succed: we doubt it),

         a2) not the risk of the recession giving rise to a long depression in the 2010s.

b) a Keynesian socialism: redistribute drastically  income and wealth  (through policies, rules and Robin Hood fiscal policies) in order to gradually sort out of the 1990s longrun global deflation (Aglietta and Berrebi, Chesnais).


Oct. 2, live blogging at  wsj

6:02: Now it’s Q&A time. The first question is why this bailout plan is so awful. Roubini suggests it was a rush job by Messrs. Paulson and Bernanke and that Congress is just in a hurry to get on the campaign trail.

6:05: Ritholtz suggests Paulson is running Treasury the way he ran Goldman, “with an iron fist,” without a lot of consultation. The Bush administration has operated in a similar fashion, he says. “It’s a mediocre plan, poorly sold and poorly managed. I don’t think this is a slam-dunk tomorrow. I expect it to pass, but it wouldn’t surprise me if it loses by a vote or two.”

6:06: The big, scary question: What if we pass the bill and it doesn’t help? What might happen, says Ritholtz, is that either one or both of the presidential candidates calls for emergency panel to figure out a better solution. They’ll probably end up deciding to recapitalize the banks after all.

Monday, Sept. 8 – LEX, ft

Fannie & Freddie: market reaction

Published: September 8 2008 09:29 | Last updated: September 8 2008 13:38

Investors had half the weekend to ponder the resuscitation of the toxic twins – Fannie Mae and Freddie Mac. It is fair to say, however, that nobody really knows what the implications for financial markets or the global economy will be. In baffling times, the wisdom of crowds – where the average response of many people can prove remarkably accurate – may prove a useful guide. So what are Monday’s markets telling us so far?

The conclusion seems to be that the bail-out is not a quick-fix for the credit crunch. If it were, bank stocks across the planet should have at least tripled. That share prices from Credit Suisse in Switzerland to Mizuho in Japan rose between 10 and 15 per cent was, in fact, a muted response – prices are only back to where they were mid-August. Ditto for currencies: the dollar’s rally versus the euro was short-lived while gains were surprisingly modest in the “carry-trade” currencies. If risk appetites had genuinely returned, the Aussie dollar would have bounded like a kangaroo.


Sunday, Sept. 7

In a historical move, even greater than the mid – March acquisition by JP Morgan and bailout of Bear Stearns, the US Fed. govt. has nationalised Fannie and Freddie, the two bankrupt housing agencies. 

Nouriel Roubini had forecasted this crisis of F&F exactly 2 years ago: see NY, Aug. 15 down here  in Section 3

August 5, Dany Rodrik

Don’t cry for Doha, Argentina 

It is hard to square these fears with the view that the Doha trade round could lift tens, if not hundreds, of millions out of poverty. The best that can be said is that farm reform in rich countries would be a mixed blessing for the world’s poor. Clear-cut gains exist only for a few commodities, such as cotton and sugar, which are not consumed in large quantities by poor households.

The big winners from farm reform in the US, the EU, and other rich countries would be their taxpayers and consumers, who have long paid for the subsidies and protections received by their farming compatriots. But make no mistake: what we are talking about here is domestic policy reform and an internal redistribution of income. This may be good on efficiency and even equity grounds. But should it have become the primary preoccupation of the World Trade Organization?

In early August, Mr Tremonti supposed (it’s a bluff) “Robin Hood” taxes on windfall oil profits are popular: Obama has just proposed, while LAME DUCK Brown rejected them:

Brown to rule out windfall energy tax

matthew rotschild,

ExxonMobil Should Get Slapped with a Windfall Tax

July 31st, 2008

But that’s not happening. Quite the contrary. ExxonMobil and other charter members of the oiligopoly are getting off scot-free on many leases that are on your public lands

The WSJ’s  “Real Time Economics” makes a useful comment on the SR and LR effects:

August 1, 2008, 4:30 pm

Is Windfall-Profits Tax a Green Proposal in Disguise?

Barack Obama continues the drum on a windfall-profits tax on oil companies again as a way to offset high energy prices immediately, but it could be more effective as a long-term way of dealing with the problem than a short-term fix.

The windfall-profits tax has been criticized by many economists as being counterproductive. When a similar tax was imposed in the 1980s amid the Iran-Iraq war, the results weren’t exactly spectacular. The tax raised far less than projected, and an evaluation by the Congressional Research Service, a think tank that provides reports to Congress, concluded that the tax significantly reduced domestic oil output. The Obama camp insists that its proposal has taken the mistakes of the 1980s law into account, and shouldn’t have the same effects.

However, in the current environment any decrease in production is likely to put pressure on prices by reducing the amount of supply in world markets. In addition, by transferring the money collected from the tax directly to consumers, it artificially boosts demand, pushing prices up further.

Such a scenario could keep energy prices high, but also increase U.S. dependence on foreign oil. However, there is one potential upside to sustained higher prices and pinched domestic oil companies: more incentive to find alternative sources of energy. –Phil Izzo

What we can do in this dangerous moment By Lawrence Summers

Published: June 29 2008 18:10

on paper: FT Europe June 30, p.13

It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August. (…) With housing values still falling and growing evidence that problems are spreading to the construction and consumer credit sectors, there is a possibility that a faltering economy damages the financial system, which weakens the economy further. (…)

The only important policy actions of the past several months have been those forced on the Fed by the Bear Stearns crisis. It would be a mistake to overstate the extent to which policy can forestall the gathering storm. But the prospects for a more favourable outcome would be enhanced if four actions were taken promptly.

First, the much debated housing bill should be passed immediately by Congress and signed into law. It provides some support for mortgage debt reduction and strengthens the government’s hand in its troubled relationship with the government-sponsored enterprises – Fannie Mae and Freddie Mac. (…)

Second, Congress should move promptly to pass further fiscal measures to respond to our economic difficulties.(…)

Third, policymakers need to make a clear commitment to addressing the non-monetary factors causing inflation concerns (…) oil, food and other commodities. (…)

Fourth, it needs to be recognised that in the months ahead there is the real possibility that significant financial institutions will encounter not just liquidity but solvency problems as the economy deteriorates and further writedowns prove necessary.

Krishna Guha: Inflation limits Fed room to act

FT Europe on paper  p.4; on line 03.00. June 30.

The paper is very detailed and equilibrated, on the impasse of the Fed (as well as other CBs, by the way): worth reading.

Our comment: following Chesnais (January 2008), we had maintained that all the mainstream policies are becoming entropic in a deflationary world régime, and after their abuse in the ups and downs. But ag-flation and oil-flation add new elements:

a) acceleration of the recession, with elements of stagflation;

b) CBs close to impotence. The “Fed put” of the last months (monetary policy pro-growth) is over.

Guha concludes:

The US central bank is very aware of the risks to growth; that is why it is not minded to raise interest rates imminently.

But it could be forced to abandon its balancing act and raise rates anyway if more measures of inflation expectations or core inflation break higher.

In that case Fed officials have made it very clear that they would choose stagnation rather than stagflation – the combination of economic weakness and sustained higher inflation.

Indeed, even as things stand, heightened inflation risk requires the US central bank to either induce or tolerate a longer period of below-trend growth in order to create the economic slack that guards against a pick-up in trend inflation.

If the Fed gets it wrong on inflation, the underlying rate of price increases could rise – a terrible outcome for markets. But even if the Fed reacts appropriately to higher inflation risk, the price is almost certainly lower growth for longer.


3. Bio-economic theory, political economy


Does Income Concentration Cause Bubbles?

Bubbles – the devastating kind – seem to occur during a period of time when income is becoming increasingly concentrated at the top.

That then raises a question. Do large bubbles cause income to become more concentrated, or does the concentration of income cause the bubbles?

We’ve had two bubbles since the distribution of income began changing in the 1970s, with the second verse worse than the first, and that leads me to think it might be that income concentration causes bubbles and not the other way around

Honest observations of facts lead even a mainstream economist to marxian-kaleckian conclusions.

Meanwhile, the wsj continue its interesting  line of inquiry and information on the difference of ECONOMIC PHILOSOPHY between Bernanke and Greenspan, naely on BUBBLES:

wsj, 0ct. 19

Econ: Bernanke and the Famous Helicopter

Interview: Anna Schwartz on the Credit Crisis

Rethinking Wisdom of Popping Bubbles

The Fed and its academic advisors are rethinking the proposition that it cannot and should not try to prick financial bubbles.

[O]bviously, the last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the economy, and there is no doubt that as we emerge from the financial crisis, we will all be looking at that issue and what can be done about it,” Fed Chairman Ben Bernanke said this week. (…)

The Fed’s view on bubbles helped fuel what became known as “the Greenspan put” — the conviction among investors that the Fed would let them take excessive risks and step in as custodian if the bets they made went awry. By giving market participants an incentive to assume greater risk than they would have otherwise, the Fed’s laissez-faire position on bubbles may have contributed to the surge in credit that helped push housing prices skyward in the first half of this decade. (…)

Once authorities identify a bubble, the next step is figuring out how to deal with it. Fed officials appear uncomfortable with the idea of raising interest rates to prick a bubble, because rates affect a wide swath of economic activity, and a bubble may be confined to just one area.



THE NYT PAYS TRIBUTE TO “DR DOOM” ‘s foresight, a clever move much before the 2nd October week, the BLACK WEEK confirmation that Roubini IS AN OPTIMST:

N. Roubini: Here is the text of the New York Times profile of me:


Dr. Doom

Two years ago, Nouriel Roubini predicted the current economic crisis. Now he sees things becoming far worse.


Published: August 15, 2008, New York Times Sunday Magazine

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions likeFannie Mae and Freddie Mac.



August 7. Even The Economist celebrates this week:

The credit crunch one year on

Mission creep at the Fed

Aug 7th 2008 | WASHINGTON, DC
From The Economist print edition

In a special section marking the anniversary of the credit crunch, we start with the Federal Reserve. Its creative response to the crisis may have staved off catastrophe, but may also have put its independence at risk


WHEN he was still in academia, Ben Bernanke once argued that Franklin Roosevelt’s greatest contribution to ending the Great Depression was not a specific policy, but his “willingness to be aggressive and to experiment…to do whatever it took to get the country moving again.” That would fairly describe how Mr Bernanke has battled perhaps the biggest financial crisis since FDR’s time, which erupted one year ago this week.

The chairman of the Federal Reserve has cast aside any notion that central bankers should be boring. He has slashed interest rates; rolled out a dizzying array of new lending programmes; backed the debt of Bear Stearns, a failing investment bank; agreed to lend to Fannie Mae and Freddie Mac, America’s troubled, quasi-private mortgage agencies; argued for fiscal stimulus and mortgage write-downs; and proposed an expansion of the Fed’s regulatory domain. (…)

The risk, though, is that one day Mr Bernanke will have to take a view more at odds with the party in power. And that could happen when the economic circumstances are particularly testing. For the next year or two, the Fed is unlikely to achieve either full employment or price stability, if its forecasts are correct (…).

The Fed’s creativity in the past year was justified; it stepped in when no other agency or political body could or would. But it should not ignore the risks it runs as a result. Among Roosevelt’s actions during the Depression was an overhaul of the Fed’s governance, making it more responsive to Washington. Mr Bernanke would no doubt prefer that this is one aggressive experiment that will not be repeated.


A neoclassical, but interesting argument (also because it bridges with herd behaviour anti-neocalssic arguments). The harmful and price distorting speculation is only that of the herd, bandwagon and critical mass type:  posted by mark thoma, 5 August 11:25 AM

Gillian Tett is on leave from the FT to write a  Book. In the meanwhile, she published no.1 of a  4-part series on the credit crunch (see the funny game of words on this series title “freezy crunching squeeze”, between Paul Krugman and  Tanta, at Calculated Risk). Here is PART 1, August 3:

Analysis: A year that shook faith in finance

In Part I of a four-part series, the FT examines the reasons for the credit crisis – which began in the US suburbs and overturned the assumptions of bankers.

The big freeze: A year that shook faith in finance

PART 2 by John Gapper: BANKING.

PART 3 by Chris Giles: The economy.

PART 4 …

*  *  *

Martin Wolf, the FT chief economics commentator, is in full form and has just filed three weekly papers not to be lost (dates oL, day after in press: on Wednesdays):

July 1st. Lessons to be learnt from the financial crisis.

The aim of this year’s report by the Bank for International Settlements is clear: it is to reduce the frequency and severity of crises. It is not enough to say that we can clear up afterwards. That is too complacent and too one-sided.


Lewis Alexander: I enjoyed your piece on the BIS Annual Report. The Annual Report is always worth a read, but I have a somewhat different reaction to this report, and to some of their previous work.

In the run up to the current crisis, some at the BIS argued that key central banks were underestimating how stimulative policy was because policymakers did not take into account signals coming from the financial sector. The BIS analysis focused on quantity measures, such as rapid credit growth. I believe that other indicators – such as the level of long-term interest rates and of credit spreads – were more meaningful, but the basic point about excessive stimulus still stands. To me, the most telling point was Chairman Greenspan’s testimony in February 2005, when he described the low level of long-term interest rates as a “conundrum”. Essentially Chairman Greenspan was saying that financial conditions had not tightened although the Federal Reserve had been raising policy rates for more than six months. With 20-20 hindsight, I would argue that the FMOC should have put more weight on the market signals that their policy actions were having little impact on financial conditions and the economy.

I suspect that the BIS is now making a similar mistake in reverse. Monetary policy should always be consistent with the objective of maintaining long-term price stability and stable inflation expectations. But the signals coming from financial markets suggest that the effective stance of monetary policy in key countries now is restrictive. In the United States, for example, financial conditions are as adverse today as they have been at any time since this crisis began, with the exception of the worst days of the Bear Stearns episode. The same analytic approach that viewed credit spreads as too narrow before the current crisis now would say that credit spreads are too wide. Moreover, credit growth has decelerated if one takes into account the collapse of various channels of the so-called “shadow banking system”, such as asset-backed commercial paper. Of course, policymakers in many countries, particularly those that are benefiting from strong terms of trade and rapidly growing emerging economies, need to tighten policy to contain domestically-propelled overheating. But I think the Fed, ECB, and the Bank of England face a very different set of risks.

June 24. How to see world economy through two crises

In the short term, the biggest monetary policy requirement is a tightening in emerging economies, many of which have strongly negative real interest rates. As important is letting jumps in energy prices pass through, forcing adjustments in energy use, writes Martin Wolf

June 17. How imbalances led to credit crunch and inflation

What explains the combination of a ‘credit crunch’ in the US with soaring commodity prices and rising inflation across the globe? Are these related events? So far this is not a return to the 1970s. But action is needed to keep this true, writes Martin Wolf

Published on July 9, 2008 at 7:37 am  Comments (1)  

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