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Gene Ellis

Why Germany Prefers Regulation to Stimulus - NYTimes.com - 0 views

economix.blogs.nytimes.com/...prefers-regulation-to-stimulus

germany regulation stimulus nytimes nytimes com com GDP

shared by Gene Ellis on 01 May 12 - No Cached
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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

Has the U.S. Economy Been Permanently Damaged? : The New Yorker - 0 views

www.newyorker.com/...ad-news-and-the-good-news.html

damage us economy

shared by Gene Ellis on 09 Jan 14 - No Cached
  • Although the study uses some sophisticated statistical methods, its basic point is straightforward: in the long term, economic output (G.D.P.) is constrained by the quantity and the quality of economic inputs (labor, capital, and technology). If the growth rate and quality of these inputs decline, the potential growth rate of G.D.P. will fall, too—it’s just a matter of arithmetic.
  • With hiring rates down, many workers have given up searching for jobs and have dropped out of the labor force.
  • With budgets tight, corporations and government departments have cut back on investments in new plants and machinery, computer hardware and software, and research and development.
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  • The authors come up with a variety of numbers, including one that has received a lot of attention: potential G.D.P.—broadly speaking, the level of G.D.P. consistent with stable inflation—“is currently about 7 percent below the trajectory it appeared to be on prior to 2007.” According to the latest figures from the Commerce Department, the G.D.P. is now close to seventeen trillion dollars, and seven per cent of that figure is $1.2 trillion. This is a lot of money to have gone missing, especially if it will never be recovered. Hence Krugman’s dire conclusion: “By tolerating high unemployment we have inflicted huge damage on our long-run prospects …. What passes these days for sound policy is in fact a form of economic self-mutilation, which will cripple America for many years to come.”
  • As well as figuring out the current level of potential G.D.P., the authors estimate its growth rate. This is the more important figure, because it’s what determines living standards over the long term
  • In the period from 2000 to 2007, the paper says the average potential growth rate of G.D.P. was 2.6 per cent.
  • For 2012, the authors estimate the potential growth rate at only 1.3 per cent.
  • In the nineteen-eighties, Larry Summers and Olivier Blanchard, who is now the chief economist of the I.M.F., resurrected the idea and gave it a new name, which they borrowed from engineering: hysteresis. Blanchard and Summers examined hysteresis in Europe, where high rates of unemployment have long been a problem.
  • The good news is that things aren’t quite as bad as the figures in the Fed paper might suggest. If we can get policy right and sharply increase the level of over-all demand in the economy, most of the damage done in the past five years is reversible.
  • At the moment, sadly, there is no prospect of any more fiscal stimulus, let alone a war-sized one, and the onus is falling on the Fed to gee up the economy.
Gene Ellis

Four rescue measures for stagnant eurozone - FT.com - 0 views

www.ft.com/...81-11e4-a882-00144feabdc0.html

shared by Gene Ellis on 18 Feb 15 - No Cached
  • Four rescue measures for stagnant eurozone
  • The EBA has a long record of stress tests that grotesquely underestimate the capital holes in EU banks.
  • Both the AQR and the stress test relied heavily on national regulators and supervisors – the very entities on whose watch the excesses that led to the financial crisis were allowed to fester and compound.
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  • They were in charge of the regulatory leniency that permitted the banks in their jurisdictions to engage in lender forbearance (extend and pretend/delay and pray) and to overstate the fair value of their assets.
  • To avoid the cyclical stagnation in the eurozone turning into secular stagnation, four policies are required.
  • he first is a proper AQR and stress test followed by a speedy recapitalisation of the capital-deficient banks and a wave of consolidation in the eurozone banking sector to bring higher profitability
  • The second measure is a temporary fiscal stimulus (say 1 per cent of eurozone GDP per year for two years, concentrated in the countries with the largest output gaps, that is, in the periphery), which is permanently funded and monetised by the ECB.
  • this will be a reminder that the most important asset of central banks – the present value of future seigniorage profits – is off-balance sheet.
  • Finally, to achieve debt sustainability for the eurozone sovereigns, radical supply side reforms are required that boost the growth rate of potential output to at least 1.5 per cent in Italy, Portugal and other sclerotic countries.
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