We are facing the prospect of global deflation and depression,
similar to but potentially worse than the 1930s. That said,
I believe the situation could be turned around by adopting
a bold and comprehensive program. Unfortunately,
Treasury Secretary Geithner did not present a convincing case.
I outline the basic elements of such a program in my forthcoming
Book, The Crash of 2008 and What it Means. I am
providing an excerpt here in the hopes that it will
stimulate discussion and help generate the necessary
political will for bold action.
The bursting of bubbles causes credit contraction, forced
liquidation of assets, deflation, and wealth destruction that
may reach catastrophic proportions. In a deflationary environment,
the weight of accumulated debt can sink the banking
system and push the economy into depression. That is
what needs to be prevented at all costs.
It can be done by creating money to offset the contraction
of credit, recapitalizing the banking system, and writing
off or down the accumulated debt in an orderly manner.
For best results, the three processes should be combined.
This requires radical and unorthodox policy measures. If
these measures were successful and credit started to expand,
deflationary pressures would be replaced by the specter of inflation,
and the authorities would have to drain the excess
money supply from the economy almost as fast as they
pumped it in. Of the two operations, the second is likely to
prove both technically and politically even more difficult
than the first, but the alternative--global depression and
world disorder--is unacceptable. There is no way to escape
from a far-from-equilibrium situation--global deflation and
depression--except by first inducing its opposite and then
reducing it.
The size of the problem is even larger than it was in the 1930s. This can be
seen from a simple calculation. Total credit outstanding was
160 percent of GDP in 1929, and it rose to 260 percent in
1932 due to the accumulation of debt and the decline of
GDP. We entered into the Crash of 2008 at 365 percent,
which is bound to rise to 500 percent or more by the time
the full effect is felt. And this calculation does not take into
account the pervasive use of derivatives, which was absent in
the 1930s but immensely complicates the current situation.
The situation has been further
aggravated by the haphazard and arbitrary way in which
it was handled by the Bush administration. The public
and the business community suffered a shock in the aftermath
of the Lehman Brothers default, and the economy
has fallen off a cliff. The next two quarters will show rapid
deterioration.
To prevent the economy from sliding into a depression,
President Obama must embark on a radical and comprehensive
policy package that has five major components:
1. A fiscal stimulus package
2. A thorough overhaul of the mortgage system
3. Recapitalization of the banking system
4. An innovative energy policy
5. Reform of the international financial system
I shall briefly discuss each of these elements.
1. A Fiscal Stimulus Package
This is conventional wisdom, and I have nothing original
to contribute. The fiscal stimulus package is already well
advanced, and it will be the first out of the gate, but it will
take time to implement and will serve merely to moderate
the downturn. In my view the next two items are indispensable.
To turn the economy around, the mortgage and
banking systems need to be thoroughly reorganized and
restarted.
2. A Thorough Overhaul of the Mortgage System
The collapse of the financial system started with the
bursting of the U.S. housing bubble. There is a real danger
now that house prices will overshoot on the downside and
put further pressure on the banks' balance sheets. To prevent
this, foreclosures must be reduced to a minimum and house
ownership facilitated both for new buyers and current owners.
But we ought to go even further than that. With the
mortgage financing industry in shambles, we ought to subject
it to a thorough overhaul and introduce a new system
that is free of the deficiencies that are responsible for our
current difficulties. It is rare that a systemic change is necessary
or even possible; the present is such an occasion.
I advocate adopting, with suitable modifications, the Danish
system, which has proven its worth since it was first introduced
after the Great Fire of Copenhagen in 1795. Our current system
has broken down because the originators of mortgages
have not retained any part of the credit risk. They are motivated
to maximize their fee income. As agents, their interests
are not identical with the interests of the ultimate owners. In
the Danish system, the service companies retain the credit
risk--they have to replace the mortgages that are in default.
In contrast to our reliance on government sponsored
enterprises (GSEs)--namely Fannie Mae and Freddie Mac--
the Danish is an open system in which all mortgage originators
participate on equal terms, and it operates without government
guarantees. Yet Danish mortgage bonds are traditionally very
highly rated; often they yield less than government bonds.
This could not be replicated in the United States at present
because of the demoralized state of the market, but it may be
achieved later.
Danish mortgage bonds are highly standardized, and their
distinguishing feature is that they are identical to and interchangeable
with the underlying mortgages. House owners
can redeem their mortgages at any time by purchasing the
equivalent mortgage bond in the market and exchanging it
for the mortgage. Since bond prices and house prices normally
move in the same direction, this feature--called the
principle of balance--reduces the chances of householders
having negative equity in their houses. The mortgage originators
are strictly regulated, and their interests are closely
aligned with those of the bondholders. They pass on only the
interest rate risk to bondholders, retaining the credit risk.
That is why the bonds are so highly rated.
When Mexico wanted to securitize mortgages in order to
promote house ownership, it opted, with my assistance, for the
Danish system. My proposal was supported by the U.S. Treasury,
which was then under the leadership of Paul O'Neill.
The Danish model is clearly superior to the GSE model.
The question is, how can you get there from here?
Originally, I proposed a grand scheme in which all mortgages
that are under water (i.e., whose principal amount exceeds
the current market value of the house) would be
replaced by a new mortgage, incorporating the Danish principle
of balance but being insured by a government agency.
This would have had the advantage of removing the incentive
to default in order to obtain the benefits of loan modification,
but it would have run into insuperable political and
even constitutional difficulties. The slicing and dicing of
CDOs has created such conflicts of interest amongst the
holders of various tranches that neither a voluntary nor a
compulsory scheme of reorganization is possible.
Abandoning the search for an optimal solution, I have
come to realize that a second best solution is readily available.
The GSEs have become effectively government owned, but
the government is not exercising its powers of control. They
are in limbo, torn between the interests of their shareholders
and the public. The prospect of the shareholders emerging
with a positive value is imaginary; nevertheless, the GSEs are
trying to make a profit from their quasi-monopolistic position,
charging heavy fees and imposing restrictive conditions
on both refinancing applications and new ones. This is aggravating
the housing problem, but it could easily be changed by a
newly established regulator asserting its authority and using
the GSEs as an instrument of public policy.
The GSEs could then introduce a new type of mortgage
contract based on the Danish model. It would be transparent
and uniform, and it would incorporate the principle of balance.
The GSEs would reduce their fees, extend the limit on
the size of mortgages they are willing to guarantee, and introduce
a new line of guarantees--up to 90 percent of appraised
value at a higher premium--effectively replacing the private
mortgage insurance companies that have become inactive.
They would then introduce a streamlined and cheap refinancing
process for existing mortgages. That would greatly
reduce the cost of conforming mortgages and create a powerful
incentive to convert nonconforming mortgages into conforming ones.
Owners of defaulting mortgages could avail
themselves of the provisions of the Help for Homeowners Act
and realize 85 percent of the appraised value. In most cases this
would be preferable to going through a costly foreclosure process.
If owners failed to choose that route, it could be imposed
on them by a judge in a simplified bankruptcy process. One way
or another, the number of foreclosures would be greatly reduced,
and with mortgages more freely available at lower cost,
house prices would stabilize at a higher level than would otherwise
be the case. Financial institutions would recover some of
their losses on residential mortgages and securities.
It is ironic that the GSEs, which are at the root of the
problem, should provide a route to the solution. In the long
run the GSEs should be phased out and their portfolios run
off. They would become a government agency in charge of
mortgage guarantees issued by the government. Eventually,
when the modified Danish model becomes firmly established,
even that function could be phased out. Under the
new system, mortgage origination companies would remain
responsible for the first 10 percent of any losses arising out of
default. They would be allowed to charge a fee that would be
determined by competition. As the system matures, service
companies may find it advantageous to accept the entire
credit risk and not pay a fee for government guarantees. The
system would then come to reflect the Danish model more
faithfully.
The sequence of the GSEs first becoming more important
and then fading away resembles the sequence that characterizes
the entire process--to escape deflation you first induce
inflation and then reduce it. In implementing it we should
never forget what went wrong with communism: the state
did not fade away. The fading away should be part of the plan
from inception.*
The whole process could be accomplished by using the
GSEs and the new bankruptcy law currently under consideration
by Congress. The government already controls the
GSEs; all it has to do is to exercise its powers. The cramdown
provisions of the proposed new bankruptcy law face
active opposition from many financial institutions holding
mortgages; it should be possible to persuade them that most
of them would benefit from the mortgage reorganization
scheme outlined here. The costs to the taxpayers would
manifest themselves through the eventual losses incurred by
the GSEs, but, considering the impact on house prices and
the economy, the net effect is likely to be positive.
3. Recapitalization of the Banking System
I cannot present as clear a picture of what a reformed
banking system would look like as I can for the mortgage system
because there are no suitable models to invoke. The
Spanish banking system has weathered a bigger boom in
house construction better than the U.S. banking system, and it
has some desirable features, but Spain is even more adversely
affected by the Crash of 2008 than the United States. What
happened to the U.S. banking system after the Great Depression
certainly does not present a desirable model. Banks
were put into a straightjacket whose constraints began to be
loosened only in the 1970s. We are in uncharted territory.
I summed up the main lessons to be learned from the
current financial crisis in the previous edition of this book:
Financial markets do not tend toward equilibrium, and deviations
are not random. Credit creation and contraction
are reflexive and tend to occur in initially self-reinforcing
but eventually self-defeating boom-bust sequences. Therefore
it is not enough to regulate the money supply; it is also
necessary to regulate credit conditions. This involves reactivating
policy tools that have fallen into disuse: variable
margin and minimum capital requirements, and central
bank directives on bank lending to particular sectors. Not
only banks but all institutions involved in credit creation must
be subject to regulation. The objective is to maintain stability
and prevent mispricing and other excesses from becoming
self- reinforcing. The same applies to financial instruments:
They need to be licensed and supervised to ensure that they
are uniform and transparent and do not destabilize markets.
Leverage must be used cautiously: It is not enough to allow
for quantifiable risks; one must impose an additional safety
margin for the uncertainties inherent in reflexivity. Financial
engineering, structured finance, and other innovations are of
dubious value; insofar as they circumvent regulations or render
them ineffective, they can be harmful.
It is clear, in the light of these observations, that the financial
sector became far too big and profitable. In the future it
will have to shrink and remain within the control of the
authorities. While financial markets became global, the authorities
remained national. Since global markets are beneficial,
the authorities must also become more international
and the international financial institutions must serve the
interests of all their members more equitably.
Since the publication of the previous edition of this
book, financial markets have completely collapsed and had
to be put on artificial life support. Keeping them alive and
preventing the world economy from sliding into depression
has to take precedence over all other considerations. As we
have seen, the economy can be turned around only in two
steps. The first is to offset the collapse of credit by creating
money, writing off bad debt, and recapitalizing the banks.
Then, if and when that succeeds, the excess money supply
will have to be drained as fast as credit begins to flow. That
means the initial policy measures will take us in exactly the
opposite direction from our eventual destination. Nevertheless,
the ultimate destination ought to inform the design
of the initial step. Unfortunately, Treasury Secretary Henry
Paulson reacted in a haphazard and capricious manner.
That is how the situation spun out of control. After the
bankruptcy of Lehman Brothers, he forced through Congress
a $700 billion rescue package without any clear idea
how it should be used to adequately recapitalize the banks. I
explained how it should be done in an article published by
the Financial Times online on October 1, 2008, at the height
of the Congressional debate. This is what I proposed:
The Treasury secretary would give bank examiners clear guidelines
for how assets should be valued. For instance, it would be postulated
that commercial real estate will on average lose 30 percent of
its value. He would then ask the examiners to establish how much
additional equity capital each bank needs in order to be properly capitalized
according to existing capital requirements. If managements
could not raise equity from the private sector, they could turn to the
Treasury. The Treasury would offer to underwrite an issue of
convertible preference shares. The preference shares would carry a
low coupon (say 5 percent) so that banks would find it profitable to
continue lending, but shareholders would be heavily diluted by the
convertibility feature. They would be given the right, however, to
subscribe on the Treasury's terms, and if they exercised their rights,
they would avoid dilution. The rights would be tradeable, and the
Treasury would seek to set the terms so that the rights would have a
positive value. Private investors, including me, may be interested in
buying the shares of some banks on the same terms as the Treasury.
After recapitalization, minimum capital requirements would be
lowered to, say, 6 percent. This would encourage banks to lend because
they could suffer a further 25 percent depreciation of assets
without violating statutory limits. They would be eager to take advantage
of the rich margins currently prevailing. The economy
would be reactivated. With everyone sitting on a lot of liquidity and
suddenly eager to put it to work, there would be a sudden rush into
less liquid assets. Deflation would be replaced by the specter of inflation,
and liquidity would have to be drained as fast as it had been
pumped in. Minimum capital requirements would then be raised
first to 8 percent, then higher. In this way, the leverage of the banking
system would be reduced, which is a desirable long-term objective.
If TARP (the Troubled Asset Relief Program) had been
implemented in this way originally, the banking system
could have been recapitalized with $700 billion, or perhaps
even less. Unfortunately, half that money has already been
spent, and most of the second half of TARP will also be
needed to plug the holes that have already developed. What
would have been possible then is no longer realistic. That is a
distinguishing feature of financial crises and other far-from-equilibrium
conditions: What is appropriate at one point in
time is no longer valid at the next one.
Adequate recapitalization of the banking system now faces
two seemingly insuperable obstacles. One is that Treasury
Secretary Henry Paulson has poisoned the well by the arbitrary
and ill-considered way he forced through and implemented
the $700 billion TARP program. The Obama
administration feels that it cannot ask Congress for more
money. The other is that the hole in the banks' balance
sheets has become much bigger since TARP was introduced.
The assets of the banks--real estate, securities, and consumer
and commercial loans--have continued to deteriorate, and
the market value of banks' stocks has continued to decline.
It is estimated that something in the neighborhood of an
additional trillion-and-a-half dollars would be required to
adequately recapitalize the banks. Since their total market
capitalization has fallen to about a trillion dollars, this raises
the specter of nationalization, which is politically--and even
culturally--unpalatable.
Consequently, the administration is constrained to do
what is possible even if it falls short of what is necessary. It
plans to carve out up to $100 billion from the second tranche
of TARP in order to set up an aggregator bank that would acquire
toxic assets from the banks' balance sheets. By obtaining
10:1 leverage from the balance sheet of the Federal
Reserve, the aggregator bank could have a trillion dollars at
its disposal. That is not sufficient to cleanse the balance
sheets of the banks and restart lending, but it would bring
some welcome relief. The aggregator bank could serve as a
useful interim measure except for the fact that it is liable to
make it more difficult to obtain funding necessary for a
proper recapitalization in the future. It will encounter all
kinds of difficulties in valuing toxic securities and even if
these could be overcome it will still end up as a covert subsidy
to the banks by bidding up the price of their toxic assets.
There will be tremendous political resistance to any further
expenditure to bail out the banks. This will make it much
more difficult to mobilize additional funds in the future. It
would be a pity to take the aggregator bank route, especially
when there is a way to adequately recapitalize the banks with
the currently available resources.
Let me spell out how it could be done. The trick is not
to remove the toxic assets from the balance sheets of the
banks but to put them into a "side pocket" or "sidecar" as
hedge funds are now doing with their illiquid assets. The
appropriate amount of capital--equity and subordinated
debt--would be sequestered in the side pocket. This would
cleanse the balance sheets and create good banks, but leave
them undercapitalized. The same trillion dollars that is currently
destined to fund the aggregator bank could then be
used to infuse capital into the good banks. Although the hole is
bigger, a trillion dollars would be more than sufficient because
it would be possible to mobilize significant amounts
from the private sector.
In the current environment a good bank would enjoy
exceptionally good margins. Margins would narrow as a result
of competition but by then the banking system would
be revitalized and nationalization avoided. The situation is
analogous to a devastating hurricane depleting the capital
of property insurance companies, raising insurance premiums,
and attracting additional capital into the industry.
The scheme I am proposing would minimize valuation
problems and avoid providing a hidden subsidy to the banks.
Exactly for that reason it is likely to encounter strong resistance
from vested interests. Losses would first accrue to
shareholders and debenture holders; only if they exceed a
bank's capital would the FDIC be liable for the deficiency, as
it is already. Shareholders would be severely diluted, but they
would be given tradable rights to subscribe to the good bank,
and if there is a positive residue in the side pocket, it would
also revert to the good bank as of the date of the new issue,
giving shareholders the benefit of any subsequent appreciation.
The fact that debenture holders may lose money will
make it more difficult to sell bank debentures in the future.
But that is as it should be: Banks should not be as highly
leveraged as they have recently been. Pension funds would
suffer heavy losses; but that is preferable to taxpayers taking
over those losses.
In addition to restarting bank lending, my scheme would
resolve the moral hazard issue for a long time to come. The
banking industry is accustomed to turning to the state in a
crisis and effectively demanding a bailout on the grounds
that financial capital has to be protected to ensure the proper
functioning of the economy. Given the aversion to state
ownership of banks, the blackmail has always worked. That is
how the bubble grew so large. The Obama administration
ought to resist the blackmail and adopt the scheme outlined
here as a prelude to building a better financial system. Our
future depends on it.
4. An Innovative Energy Policy
Energy policy could play a much more innovative role in
counteracting both recession and deflation. The American
consumer can no longer act as the motor of the global economy.
A new motor is needed. Alternative energies and energy
savings could serve as that motor, but only if the price of conventional
fuels is kept high enough to justify investing in
them. That might also help to moderate price deflation. A
high price on conventional fuels would be beneficial on both
counts, but it would be hard to sell to the public. Until now,
no politician dared to do so.
President Obama would need great courage and great skill
to do the right thing. This would involve putting a floor under
the price of fossil fuels by
a) imposing a price on carbon emissions by (a) a carbon
tax or (b) auctioning pollution licenses (the former would
be more efficient, the latter is politically more acceptable)
and
b) imposing import duties on oil to keep the domestic
price above, say, $70 per barrel.
The anticipated income from carbon emissions should
then be distributed to households in full and in advance.
This would compensate them for the higher cost of energy
and hopefully make the scheme politically acceptable. It
would also act as a temporary fiscal stimulus at a time when
it is most needed, although most of it can be expected to be
saved rather than spent. Gradually the price of carbon
emissions would have to be raised to a level where it would
pay to remove carbon from coal. This is indispensable for
bringing climate change under control because there is no
adequate substitute for coal-fired power plants except
clean coal.
It is essential to convince the public that the cost of energy
will remain high for some time in order to encourage investment
in alternative energy and energy-saving devices. Eventually
the cost of energy may decline as new technologies
travel down the learning curve. We cannot depend on the
price mechanism alone to ensure the development of new
technologies. Tax concessions, subsidies, vehicle emissions
standards, and building codes are also needed. Even so, neither
energy security nor the control of global warming can
be achieved without putting a price on carbon emissions.
The United States cannot do it alone, but it cannot be done
without the United States taking the lead.
5. Reform of the International Financial System
The fate of the United States is intimately interconnected
with the rest of the world. The international financial system as
it has evolved since the 1980s has been dominated by the
United States and the Washington consensus. Far from providing
a level playing field, it has favored the United States,
to the detriment of the countries at the periphery. The
United States exercises veto rights over the international
financial institutions (IFIs)--the International Monetary
Fund (IMF) and the World Bank. The periphery countries
are subject to the market discipline dictated by the Washington
consensus, but the United States is exempt from it. This has
exposed the periphery countries to a series of financial
crises and forced them to follow pro-cyclical fiscal policies,
and it has allowed the United States to suck up the savings
of the rest of the world and maintain an ever-increasing
current account deficit. This trend might have continued
indefinitely because the willingness of the United States to
run a chronic current account deficit was matched by the
willingness of other countries to run current account surpluses.
It was brought to an end by the bursting of the
housing bubble, which exposed the overindebtedness of the
household sector.
The current financial crisis has revealed how unfair the system
is because it originated in the United States, but it is doing
more damage to the periphery than to the center. This damage
to the periphery is a recent development, following the bankruptcy
of Lehman Brothers, and its significance has not yet
been fully recognized. The countries at the center have effectively
guaranteed their bank deposits, but the periphery countries
cannot offer similarly convincing guarantees. As a result,
capital is fleeing the periphery, and it is difficult to roll over
maturing loans. Exports suffer for the lack of trade finance.
The IFIs are now faced with a novel task: to protect the
countries of the periphery from a storm that has emanated
from the center, namely the United States. The IFIs' future
depends on how well they cope with that task. Unless they
can provide significant assistance, they may become largely
irrelevant. Global, multilateral arrangements are in danger
of breaking down, turning the financial crisis into global disorder
and depression.
Assistance is needed to
- protect the financial systems of periphery countries,
including trade finance, and
The former requires large contingency funds available at
short notice for relatively short periods of time. The latter
requires long-term financing.
When the adverse side effects of the Lehman bankruptcy
on the periphery countries became evident, the IMF introduced
a new short-term liquidity (STL) facility that allows
countries that are otherwise in sound financial condition to
borrow five times their quota for three months without any
conditionality. But the size of the STL is too small to be of
much use, especially while a potential stigma associated with
the use of IMF funds lingers. Even if it worked, any help for
the top-tier countries would merely aggravate the situation
of the lower-tier countries. International assistance to enable
periphery countries to engage in countercyclical policies has
not even been considered.
The fact is that the IMF simply does not have enough
money to offer meaningful relief. It has about $200 billion
in uncommitted funds at its disposal, and the potential
needs are much greater. What is to be done? The simplest
solution is to create more money. The mechanism for issuing
Special Drawing Rights (SDRs) already exists. All it
takes to activate it is the approval of 85 percent of the membership.
In the past the United States has been the holdout
opposing it. Creating additional money supply is the right
response to the collapse of credit. That is what the United
States is doing domestically. Why not do it internationally?
Ironically, SDR would not be of much use in providing
short-term liquidity, but it would be very helpful in enabling
periphery countries to engage in countercyclical policies.
This would be done by rich countries lending or, preferably,
donating their allocations to poor countries. The scheme has
the merit that the IFIs would retain control over the disbursement
of the lent or donated funds and ensure that they
are spent in accordance with the poverty reduction programs
that have already been prepared at the behest of the World
Bank. This would especially benefit poorer countries that are
liable to be hardest hit by the worldwide recession.
If it were implemented on a large scale--say $1 trillion--the
SDR scheme could make a major contribution to both fighting
the global recession and fulfilling the United Nations' Millennium
Development Goals. This seemingly selfless act by rich
countries would actually serve their enlightened self-interests
because it would not only help turn around the global economy
but also reinforce the market for their export industries.
Since the SDR scheme is not of much use in providing
short-term liquidity to periphery countries, that task would
have to be accomplished by other means, notably the following three:
a) Chronic surplus countries could contribute to a trust
fund that supplements the new STL facility. This would
greatly enhance the value of that facility by removing the
five-times-quota limitation. For instance, under STL Brazil
can draw only $23.4 billion, while its own reserves are over
$200 billion. A more flexible supplemental fund would give
the STL facility more heft. Japan held out the promise of
$100 billion. Other chronic surplus countries probably
would not contribute unless the quota issue was reopened.
Holding out the prospect of higher quotas could serve as an
inducement to put together a supplemental fund that would
be large enough to be convincing.
b) The central banks of the developed world should extend
additional swap lines to developing countries, and they
should accept assets denominated in local currencies to make
them more effective. The IMF could play a role by guaranteeing
the value of assets denominated in local currencies.
c) In the longer term, international banking regulations
should facilitate credit flows to periphery countries. In the
short term, the central banks of the developed countries
should exert pressure on commercial banks under their
aegis to roll over credit lines. This could be perhaps coordinated
by the Bank for International Settlements.
With regard to enabling periphery countries to engage in
countercyclical policies:
1. The major developed countries should, in addition to
donating their SDR allocations, jointly guarantee, within
agreed limits, longer-term government bond issues of periphery
countries. Regional arrangements should be encouraged,
provided they are within an international framework. For instance,
the European Investment Bank and the European
Bank for Reconstruction and Development should finance
public works in Ukraine in conjunction with the IMF package.
China's interest in Africa and other raw material-producing
areas should be encouraged, provided China observes the
Extractive Industries Transparency Initiative and other international
standards.
2. The chronic surplus countries could be induced, by offering
them additional voting rights, to invest a portion of
their currency reserves or sovereign wealth funds in longerterm
government bonds of less developed countries. This
could be connected with the proposed trust fund supplementing
the STL facility.
None of these measures is possible without opening up
the vexed question of quota redistribution. This would be in
the enlightened self-interest of both the United States and
the European countries that would give up some of their voting
rights, because in its absence the newly rich countries
would have no interest in cooperating with the IMF. They
would turn to bilateral or regional arrangements, and the
IMF would become largely irrelevant. The question probably
cannot be avoided anyhow, but it will take a long time to
settle. The best course would be to obtain support for a
large-scale SDR scheme by agreeing to open negotiations.
President Obama would be fulfilling the world's expectations
by championing this course. The main opposition is likely to
come from Germany, but with U.S. leadership and broad
international support it could be overcome.
In addition, many other international arrangements are
needed:
- Banking regulations need to be internationally coordinated.
This would be the task of a Basel Three accord.
(Basel Two has been discredited by the financial crisis.)
policies in order to avoid wide currency swings
and other disruptions.
They could be particularly helpful for commodity dependent
periphery countries and in counteracting the
This is a condensed, almost shorthand, account of what
needs to be done to turn the global economy around. It
should give a sense of how difficult a task it is. It remains to be
seen whether any of ideas laid out here are adopted as policy.
"The Crash of 2008 and What It Means " will be available in paperback on March 30th.
The eBook edition is available now at this link and wherever eBooks are sold.