The world is in the midst of an unprecedented economic crisis – a global event unfolding at extraordinary speed and in unanticipated directions.
Born as the ‘subprime crisis’ in Fall 2007, the crisis metastasized in September 2008. Almost overnight, it transformed itself from a landmine, which threatened to do horrible but localised damaged, into a cluster bomb throwing explosive projectiles at a frightful pace in every direction.
Credit markets froze and equity prices plunged globally. Emergency measures by governments and central banks stabilised financial systems, yet credit markets continued to malfunction. Sharp credit contractions almost everywhere – combined with precipitous declines in business and consumer confidence – tipped the industrialised world into recession with unexpected speed. The crisis has spread to the emerging markets and developing nations – again at an unexpectedly abrupt pace and in unforeseen ways.
This is now a truly global economic event. Indeed, we are not far from the point where every form of economic activity on the planet will be touched in one way or the other.
A regime shift in global governance
From an international relations perspective, this crisis has moved the international system into new areas with unanticipated speed. Without ceremony, the G7 was “relieved of duty” and leadership responsibilities were placed in the G20’s untested hands. Its first action came with the G20’s November Summit in Washington, where leaders promised cooperation and coordination on many fronts. So far, deeds have not followed words, and the G20’s credibility is under threat.
The implications of this regime shift are poorly understood, but the shift is likely to change all manner of international relations for decades to come.
From a macroeconomic perspective, the crisis has thrown into question the standard models employed by academics, governments, central banks, and the private sector. Quite simply, this crisis could not have happened in the mainstream macro models. The world’s macroeconomy, it seems, is radically more interconnected than we thought. Macroeconomists need a new Keynes, or at least a new Phelps or Lucas, to provide a parsimonious model where financial sector disturbances can be transmitted globally, producing recession and disinflation in their wake.
On the trade side, the unexpectedly rapid decline of trade flows – both imports and exports (this is no standard Keynesian trade shock) – has reminded us how trade today is different. Things are no longer made in one nation and shipped to another. Nations make bits and pieces and ship them on to be combined with more bits and pieces. One fewer Japanese car exported to the US reduces trade volumes among a complex international supply chain in East Asia, Mexico, and beyond. And nations are starting to respond with new and worrying forms of protectionism. The WTO’s bulwark against 1930s style protectionism is proving its worth, but governments are getting inventive when it comes to policies that shift aggregate demand towards domestic firms and workers.
On the finance side, there is now almost universal recognition that the world needs a better regulatory framework. The nature of modern finance has changed – much of it in reaction to the last round of regulatory changes – and with it so has the nature of financial crises, systemic risk, and the macroeconomic consequences. Much more than their macro colleagues, the finance professors have taken up the intellectual challenge with great vigour and rigour (see Philippon 2009). Maybe it’s because they all know that this will be a once-a lifetime opportunity to make the world a better place using their highly specialised knowledge.
A generation-defining opportunity
This global crisis is undoubtedly the economic policy challenge of our generation. It is also one where academic economists are making a unique contribution. This is a crisis where the unthinkable happens monthly and the improbable is an almost daily event. It is no exaggeration to say that governments are making it up as they go along, and they know it. They are, consequently, unusually and extraordinarily open to outside analysis.
Vox’s Global Crisis Debate
In January 2009, Vox launched the Global Crisis Debate in partnership with the UK government’s own website devoted to what is sometimes called the G20 Summit that they are hosting on 2 April. The UK government is currently in the process of crafting the agenda for that summit – to be known as the London Summit. The partnership with Vox is helping them broaden the catchment area for economic thinking on the crisis beyond the usual suspects that dominate the main Western media outlets, the Financial Times, Economist magazine, and other major national papers.
One of the contributions to Vox’s Global Crisis Debate is featured every day on the front page of UK government’s site www.LondonSummit.gov.uk. (see screen shot).
The Global Crisis Debate has two types of contributions. “Lead Commentaries” are standard Vox columns, written by leading economists. “Commentaries” are shorter pieces, 200 – 1000 words, written by professional economists from a variety of nations, institutions, and schools of thought.
The Global Crisis Debate started with 5 themes and moderators: Development (Dani Rodrik), Macro (Philip Lane), Regulation (Luigi Zingales), Institutional reform (Francesco Giavazzi), Open Markets (Richard Baldwin). The Scientific Committee consists of Hadi Soesastro (Jakarta) and Barry Eichengreen (Berkeley).
The response has been great. During the two weeks since the Global Crisis Debate was launched, the contributions have been viewed a collective total of 55,000 times. At first, the Development theme took the lead in readership – perhaps reflecting the lack of a global platform for the sort of commentary that Dani Rodrik rounded up to launch the conversation, or the truly stellar line up of the ‘pump priming’ Commentaries. More recently, however, the Financial Regulation and Macro themes have surged ahead with 19,000 reads and 18,000 reads, respectively, reflecting their role at the heart of the crisis.
The number of contributors to the debates is still modest, with fewer than 200 authors across the five themes. I hope that more will join as the debate evolves. Vox, in partnership with the UK’s Foreign Office, has invited Commentaries from well-known economists from all G20 nations that were identified by local British Embassy officials. The response to these invitations has been modest to date, but of very high quality. A typical reply to these invitations suggested that these economists had their hands too full with “fire-fighting” the crisis to spend much time writing about it on public forums.
Call to the keyboards
Plans for the London Summit suggest that the main outlines of the world’s policy responses will be agreed in April 2009. After that, it will be much harder to influence the debate on, for example, the nature of financial regulatory reform or the role and shape of the IMF.
Vox readers around the world should leap to their keyboards and share their knowledge and insight. Now more than ever, the world needs research-based policy analysis i) to understand this global and insanely interconnected event, ii) to formulate plans for alleviating its worse effects, and iii) to fix the system so it doesn’t happen again.
Below are screen shots of Vox’s global readership at two points in a 24 hour cycle (you can follow this live here).