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Gene Ellis

No ordinary recession: There is much to fear beyond fear itself | vox - 0 views

www.voxeu.org/...e-much-fear-beyond-fear-itself

shared by Gene Ellis on 18 Jul 12 - No Cached
  • Richard Koo (2003) coined the term “balance sheet recession” to characterise the endless travail of Japan following the collapse of its real estate and stock market bubbles in 1990. The Japanese government did not act to repair the balance sheets of the private sector following the crash. Instead, it chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency. At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.
  • At the time, a majority of forecasts predicted that the economy would slip back into depression once defence expenditures were terminated and the armed forces demobilised. The forecasts were wrong. This famous postwar “forecasting debacle” demonstrated how simple income-expenditure reasoning, ignoring the state of balance sheets, can lead one completely astray.
  • The lesson to be drawn from these two cases is that deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled.
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  • The present administration, like the last, would like to recapitalise the banks at least partly by attracting private capital. That can hardly be accomplished as long as the value of large chunks of the banks’ assets remains anybody’s guess.
  • When the entire private sector is bent on shortening its balance sheet and paying down debt, the public sector’s balance sheet must move in the opposite, offsetting direction. When the entire private sector is striving to save, the government must dis-save. The political obstacles to doing these things on a sufficient scale are formidable.
  • The Swedish policy following the 1992 crisis has been often referred to in recent months. Sweden acted quickly and decisively to close insolvent banks, and to quarantine their bad assets into a special fund.2 Eventually, all the assets, good and bad, ended up in the private banking sector again. The stockholders in the failed banks lost all their equity while the loss to taxpayers of the bad assets was minimal in the end. The operation was necessary to the recovery but what actually got the economy out of a very sharp and deep recession was the 25-30% devaluation of the krona which produced a long period of strong export-led growth.
  • So the private sector as a whole is bent on reducing debt.
  • Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes.
  • now that they know how dangerous their leverage of yesteryear was.
  • Fiscal stimulus will not have much effect as long as the financial system is deleveraging.
  • er self-imposed constitutional balanced budget requirements and are consequently acting as powerful amplifiers of recession with respect to both income and employment.
  • Almost all American states now suffer und
Gene Ellis

The euro is in greater peril today than at the height of the crisis - FT.com - 0 views

www.ft.com/...28-11e4-91b1-00144feabdc0.html

shared by Gene Ellis on 18 Feb 15 - No Cached
  • The euro is in greater peril today than at the height of the crisis
  • Two years ago forecasters were hoping for strong economic recovery. Now we know it did not happen, nor is it about to happen.
  • Today the eurozone has no mechanism to defend itself against a drawn-out depression. And, unlike two years ago, policy makers have no appetite to create such a mechanism.
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  • Both Ms Le Pen and Mr Grillo want their countries to leave the eurozone.
  • Unlike two years ago, we now have a clearer idea about the long-term policy response. Austerity is here to stay. Fiscal policy will continue to contract as member states fulfil their obligations under new European fiscal rules.
  • And what about structural reforms? We should not overestimate their effect. Germany’s much-praised welfare and labour reforms made it more competitive against other eurozone countries. But they did not increase domestic demand. Applied to the eurozone as a whole, their effect would be even smaller as not everybody can become simultaneously more competitive against one another.
  • hese serial disappointments do not tell us conclusively that the eurozone will fail. But they tell us that secular stagnation is very probable. For me, that constitutes the true metric of failure.
Gene Ellis

Hello, Young Workers: One Way to Reach the Top Is to Start There - New York Times - 0 views

www.nytimes.com/...25scene.html

long-term effects of crisis

shared by Gene Ellis on 09 Jan 14 - No Cached
  • is the mounting evidence produced by labor economists of just how important it is for current graduates to ignore the old-school advice of trying to get ahead by working one's way up the ladder. Instead, it seems, graduates should try to do exactly the thing the older generation bemoans — aim for the top.
  • starting at the bottom is a recipe for being underpaid for a long time to come.
  • A recent study, by the economists Philip Oreopoulos, Till Von Wachter and Andrew Heisz, "The Short- and Long-Term Career Effects of Graduating in a Recession" (National Bureau of Economic Research Working Paper 12159, April 2006. http://www.columbia.edu/~vw2112/papers/nber_draft_1.pdf), finds that the setback in earnings for college students who graduate in a recession stays with them for the next 10 years.
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  • These data confirm that people essentially cannot close the wage gap by working their way up the company hierarchy.
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