We are in the throes of what is almost certainly the most serious economic and financial crisis of our lifetimes. The crisis is no longer a US crisis, or even a US and European crisis; it is a global crisis. It has spread from the financial sector to the real economy. It is not just investment portfolios and retirement accounts at risk, continued turmoil will soon start to destroy jobs.
There is a need for urgent action. The policy response needs to be decisive. It needs to be global.
With this sense of urgency in mind, we have assembled a group of leading economists to offer priorities for crisis response. This is not a homogeneous collection of experts. The contributors are from different continents and different schools of thought.
The G7/8 finance ministers meeting: An opportunity
Global economic and financial leaders are convening this weekend in Washington DC for the annual meetings of the IMF and World Bank. G7/8 finance ministers will meet Friday on the sidelines of the Fund/Bank meetings to craft their response. The global financial community will assemble the next day at IMF headquarters. This is a golden opportunity for agreeing a coordinated plan.
The authors of the thirteen essays do not agree on every point (there was little or no coordination among them as this initiative was launched on mid-morning of 8 October). Nevertheless, there is a remarkable degree of consensus on what must be done.
Policy makers must move boldly to stabilise the financial system. The basic elements are:
- A quick bank recapitalisation with global coordination
- A guarantee of deposits and/or loans with global coordination
- Further, coordinated macroeconomic stimulus.
All the authors agreed on the first, many on the second and a good number on the third.
Download the essays
Here is the link to the short booklet entitled “Rescuing our jobs and savings: What G7/8 leaders can do to solve the global credit crisis.” It is only 38 pages long.
The authors are: Alberto Alesina, Michael Burda, Charles Calomiris, Roger Craine, Stijn Claessens, J Bradford DeLong, Douglas Diamond, Barry Eichengreen, Daniel Gros, Luigi Guiso, Anil K Kashyap, Marco Pagano, Avinash Persaud, Richard Portes, Raghuram G Rajan, Guido Tabellini, Angel Ubide, Charles Wyplosz and Klaus Zimmermann.
Comments
Disclosure and transparency: the true story
Submitted by Massimo GIANNINI on Sun, 10/12/2008 - 12:16.There is something that is missing from all suggested approaches to solve problems. Before doing something we should invite banks, particularly those in favor of which any intervention is made, to publicly disclose their positions and make their balance-sheets fully transparent. There is no point in recapitalizing and restarting inter-banks lending, forcing or guaranteeing confidence, if no disclosure is made of mutual positions and off balance sheets operations. How can we expect confidence to be back if nobody starts to tell the true story and make an effort to admit mistakes? I think this is what markets and people are expecting before confidence is restored and thus liquidity and solvability.
WHY A TWO-STEP APPROACH?
Submitted by madimarc on Fri, 10/10/2008 - 12:53.I do not agree with the “two-step” approach envisaged in the main passage of the booklet: “There must be regulatory reform and, more than that, a fundamental rethinking of the financial architecture [...]. But these are tasks for tomorrow. Today, the contributors to this volume agree, the urgent task is to contain the panic and staunch the bleeding in the financial system.”.
In few words, the authors’ message is: “save the banks now and leave regulatory reform for tomorrow”. How can it work? Without regulatory reform, how long will the effects of the big re-capitalisation be with us? The booklet does not even mention speculative bubbles and their effects on the stability of the financial system. We should, at least, advice the G8 to put an end to speculation on commodities and assets in parallel with the rescue of banks.
Marco Di Marco
Recapitalization....
Submitted by gb99 on Fri, 10/10/2008 - 02:40.Banks do need recapitalization... but... for main street and the economy... it is
the regular household debter that needs to be recapitalized.... until then
there will be no long term recovery. Recovery will start once people have
lowered their own personal credit card and mortgage debt... I suggest
the governments right off.... I mean invest in their people by righting off
25-50% of their mortgage debt, credit card debt... and fix their payments...
this is a better way to recap.. the system... imo... yes it will be inflationary...
but so is their current direction..
gb99
Endorsing recapitalization
Submitted by phonohan on Thu, 10/09/2008 - 21:47.Congratulations on a timely compilation which correctly identifies the weaknesses and points to possible solutions. Despite the Irish government's go it alone blanket guarantee, sentiment among economists in Dublin is in line with the shared perspective of your authors. Indeed an op-ed by myself very much along the same lines appeared in the Irish Times of October 8 (http://www.irishtimes.com/newspaper/opinion/2008/1008/1223335466453.html).
But there remain several differences of detail, but which could prove important.
-- I wonder do we really mean "blanket" guarantee: the Irish government's hasty scheme runs into difficulties by having guaranteed all past and future subordinated debt: thereby opening the door to on-the-cheap recapitalization of the banks with no upside for the taxpayer.
-- Also, most of the authors seem to be satisfied with injection of preference shares, but unless these are accompanied by warrants or other features bringing them closer to common equity, they will only perform very imperfectly in altering risk-taking in the desired direction.
Instant reaction from the Vox community is what was needed this week; in the coming weeks something more considered may be necessary to ensure that the solutions adopted by policymakers do not contain hard-to-remove flaws (as have so many of the rescue packages implemented so far in this crisis).
Patrick Honohan
Trinity College Dublin and CEPR