Klaus-Jürgen Gern, Nils Jannsen, Kiel Institute: Do we Face a Credit Crunch? The weakness of credit growth in the United States and Europe has given rise to concerns that the financial crisis has led to a credit crunch which has deepened the recession in the real economy and poses a serious threat to the recovery. We find that so far the development of credit aggregates and interest rates for loans does not provide strong evidence for a supply restraint that goes beyond what could be expected given the deterioration of the quality of borrowers. Still, the behaviour of interest rate spreads in the United States does indicate that the effectiveness of monetary policy is reduced for the time being as a result of distress in the financial sector, and we see some risks that inappropriate bank capitalization may restrain credit growth and threaten the current recovery.
Paul Krugman, NYT: That 1937 Feeling. The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder. But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.
Daniel Gross, Slate: No Pessimists Allowed! America's economic recovery will be twice as big as experts predict. The Great Panic of 2008 may have destroyed blind optimism. But if excessive optimism was the near-fatal pose in 2008, blind pessimism has emerged as the reflexive post-bust crouch. And it has led the economic establishment to miss yet another inflection point. While we were wringing our hands about America's financial and industrial crisis, we ignored a parallel narrative that was emerging: the repairing of balance sheets, an embrace of reality, a nascent recovery. The same folks who chased the recession down now are likely to chase the recovery up.
Carmen M. Reinhart, Kenneth S. Rogoff, AEA: Growth in a Time of Debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. Emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.
Olivier Blanchard, Gian Maria Milesi-Ferretti, IMF: Global Imbalances: In Midstream? Before the crisis, there were strong arguments for reducing global imbalances. As a result of the crisis, there have been significant changes in saving and investment patterns across the world and imbalances have narrowed considerably. Does this mean that imbalances are a problem of the past? Hardly. The paper argues that there is an urgent need to implement policy changes to address the remaining domestic and international distortions that are a key cause of imbalances. Failure to do so could result in the world economy being stuck in “midstream,” threatening the sustainability of the recovery.
Stephen S. Cohen, J. Bradford DeLong: The End of Influence: What Happens When Other Countries Have the Money. When you have the money--and "you" are a big, economically and culturally vital nation--you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debts and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly--though, hopefully, in quiet, nonconfrontational ways. An you lose influence--the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others. As with good parenting, you hope that by the time this happens those ideas and ways have been so thoroughly integrated that they have become part of what is normal and regular abroad as well as at home; sometimes, of course, they don't. In either case, the end is inevitable: you must become, recognize that you have become, and act like a normal country. For America, this will be a shock: American has not been a normal country for a long, long time
Phoebus Athanassiou, ECB: Withdrawal and expulsion from the EU and EMU: some reflections. Negotiated withdrawal from the EU would not be legally impossible even prior to the ratification of the Lisbon Treaty, and that unilateral withdrawal would undoubtedly be legally controversial; that, while permissible, a recently enacted exit clause is, prima facie, not in harmony with the rationale of the European unification project and is otherwise problematic, mainly from a legal perspective; that a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU
or EMU, would be legally next to impossible. This paper concludes with a reminder that while, institutionally, a Member State’s membership of the euro area would not survive
the discontinuation of its membership of the EU, the same need not be true of the former Member State’s use of the euro.
Jane Dokko et al, Fed: Monetary Policy and the Housing Bubble. We find little evidence that the setting of U.S. monetary policy could have directly accounted for a substantial share of the strength in U.S. housing markets between 2003 and 2006. In particular, the rise in house prices or housing activity during this period was much faster than the pace consistent with the overall macroeconomic environment at that time. But we also find that housing-specific developments were unusual in this period—and not only with respect to prices and activity. The form of mortgage finance, the role of other “new” or exotic mortgage features, and the role of different types of lenders and securitization paths—all shifted during this period. These shifts undoubtedly fed on each other, with strong demand for housing and rising house prices spurring unsustainable evolution in the nature and perceived risks associated with mortgage innovations and vice versa.
Deniz Igan, Prachi Mishra, Thierry Tressel, IMF: A Fistful of Dollars: Lobbying and the Financial Crisis. Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions’ lobbying and their mortgage lending activities to answer this question. We find that, during 2000-07, lenders lobbying more intensively on specific issues related to mortgage lending (such as consumer protection laws) and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing loan portfolios. Ex-post, delinquency rates are higher in areas where lobbying lenders’ mortgage lending grew faster. The results suggest that lobbying may be linked to lenders expecting special treatments from policymakers, allowing them to engage in riskier lending behavior.
Michael Mandel, McKinsey: Innovation and the strength of the dollar. Since 1997 we’ve seen three global financial earthquakes, with the current one being the biggest and most violent. Unfortunately, there’s no reason to believe we’ve come to the end of the string. The most likely suspect for the next financial crisis is, of course, a dollar crash, which many international economic experts have been predicting for the past two decades. But what will trigger it? I’m going to argue here that the odds of a dollar crash will go up if and when it becomes apparent that the United States has lost its premier position as the global innovation leader.
Pravin Krishna, Mine Z. Senses, VoxEU. Trade and labour income risk in the US: Evidence from longitudinal data. Public concerns regarding globalisation remain as economists still do not agree on trade’s effect on the labour market. This column focuses on the effect of increased trade on permanent income shocks experienced by workers in the US. It suggests that increased import penetration is associated with increased risk to worker incomes.
W. Michael Cox, Richard Alm, Justyna Dymerska, Dallas Fed: Labor Market Globalization in the Recession and Beyond. Technology-driven virtual immigration has held up better than traditional physical immigration during the global recession. The spread of computer and telecommunications technologies in recent decades allows workers to circumvent barriers of traditional physical immigration
Roger E. A. Farmer, VoxEU: Farewell to the natural rate: Why unemployment persists. Most policymakers subscribe to the existence of a natural rate of unemployment. This column provides a visual history of unemployment, vacancies, and inflation in the US and says there is no natural rate. It suggests the economy can rest in any equilibrium on the Beveridge curve, as decided by the confidence of households and firms that pins down asset values.
Peter Coy, Michelle Conlin and Moira Herbst, BusinessWeek: The Disposable Worker. Pay is falling, benefits are vanishing, and no one's job is secure. How companies are making the era of the temp more than temporary. The forecast for the next five to 10 years: more of the same, with paltry pay gains, worsening working conditions, and little job security. More jobs will be freelance and temporary, and even seemingly permanent positions will be at greater risk. "We're all temps now."
Andrew J. Oswald, Eugenio Proto, Daniel Sgroi, IZA: Happiness and Productivity. The paper provides evidence that happiness raises productivity. In Experiment 1, a randomized trial is designed. Some subjects have their happiness levels increased, while those in a control group do not. Treated subjects have 12% greater productivity in a paid piece-rate Niederle-Vesterlund task. They alter output but not the per-piece quality of their work. To check the robustness and lasting nature of this kind of effect, a complementary Experiment 2 is designed. In this, major real-world unhappiness shocks – bereavement and family illness – are studied. The findings from (real-life) Experiment 2 match those from (random-assignment) Experiment 1.
Justin Lahart, WSJ: Secrets of the Economist's Trade: First, Purchase a Piggy Bank. Academic economists gather in Atlanta this weekend for their annual meetings, always held the first weekend after New Year's Day. That's not only because it coincides with holidays at most universities. A post-holiday lull in business travel also puts hotel rates near the lowest point of the year. Economists are often cheapskates. Some of the world's most famous economists were famously frugal.
Barbara Ehrenreich: Bright-sided. How the Relentless Promotion of Positive Thinking Has Undermined America. Americans are a “positive” people—cheerful, optimistic, and upbeat: this is our reputation as well as our self-image. But more than a temperament, being positive, we are told, is the key to success and prosperity. In this utterly original take on the American frame of mind, Barbara Ehrenreich traces the strange career of our sunny outlook from its origins as a marginal nineteenth-century healing technique to its enshrinement as a dominant, almost mandatory, cultural attitude. The medical profession prescribes positive thinking for its presumed health benefits. Academia has made room for new departments of “positive psychology” and the “science of happiness.” Nowhere, though, has bright-siding taken firmer root than within the business community, where, as Ehrenreich shows, the refusal even to consider negative outcomes—like mortgage defaults—contributed directly to the current economic crisis
Benjamin Popper, Slate: Build-a-Bomber. Why do so many terrorists have engineering degrees? Engineering is not a profession most people associate with religion. The failed attack this Christmas by mechanical engineer Umar Farouk Abdulmutallab was a reminder that the combination has a long history of producing violent radicals. Diego Gambetta and Steffen Hertog, adds empirical evidence to this observation. The pair looked at more than 400 radical Islamic terrorists from more than 30 nations in the Middle East and Africa born mostly between the 1950s and 1970s. Earlier studies had shown that terrorists tend to be wealthier and better-educated than their countrymen, but Gambetta and Hertog found that engineers, in particular, were three to four times more likely to become violent terrorists than their peers in finance, medicine or the sciences (pointer Freakonomics Blog).
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