 Restoring financial stability: How to repair a failed systemViral Acharya, Matthew Richardson, 7 February 2009How did global finance become so fragile that a collection of bad mortgages in the US could bring the entire system to its knees and the global economy along with it? How can this fragility be eliminated? This column describes the answers provided in an important new book which has been written by a team of world-class scholars from NYU’s business school. Why should we believe the market this time? Correcting eurozone sovereign debt spreadsPaul De Grauwe, 7 February 2009Spreads of sovereign debt within the eurozone have increased dramatically during the last few months, largely as a result of panic in the financial markets. When it engages in quantitative easing, the ECB should privilege the buying of Irish, Greek, Spanish and Italian government bonds to eliminate the distortions and the externalities that these spreads create. The Fed, the Eurosystem, and the Bank of Japan: Similarities and differencesDieter Gerdesmeier , Francesco Paolo Mongelli, Barbara Roffia, 7 February 2009This column systematically compares the US Federal Reserve System, the Eurozone central banking system, and the Bank of Japan’s institutional structures and monetary policy frameworks. Votes and violencePaul Collier, Pedro C. Vicente, 6 February 2009Recent research shows that anti-violence informational campaigns can increase voter turnout, suggesting that voter intimidation has large effects on turnout. This column summarises results from a nationwide field experiment during the 2007 elections in Nigeria revealing that illicit tactics were rife. Incumbent politicians often used vote buying and fraud, while opposition candidates used intimidation and violence. Buy American is bad for America (and everyone else)Gary Clyde Hufbauer, Jeffrey J. Schott , 5 February 2009The “Buy American” provision in the US stimulus package would violate US trade obligations, damage the US' reputation, and have almost no real impact on US jobs. Moreover, the provisions will be read as an Obama trade policy that leans toward protectionism – with severe consequences abroad. European recovery plans: Sound principles, but not enoughSylvester Eijffinger, 5 February 2009This column outlines the Netherlands’ economic recovery plans and compares them to those of other EU members. The Dutch and German plans are sound, as they focus on inducing investment rather than assisting consumers and avoid picking winners amongst industries. But their efforts may not be enough, given recession forecasts. “Bad banks” must be big and mandatoryDaniel Gros, 5 February 2009Uncertainty over losses from toxic assets is blocking the resumption of bank lending – thus prolonging and deepening the recession. Governments should take over these assets to kick-start credit markets, but to avoid the “market for lemons” problem, the bad bank should be big, and banks should be forced to transfer their entire portfolio of toxic assets. Musicians are leaving money on the concert floorPascal Courty, Mario Pagliero, 4 February 2009Is the music business doing business well? This column shows that offering multiple seating categories at concerts raises revenues by about 5%. But a quarter of concerts do not price discriminate, and most only offer two ticket types. The music industry seems to be leaving money on the concert floor. The government should target the stock marketRoger E. A. Farmer , 4 February 2009This column proposes a new paradigm to reconcile Keynesian economics with general equilibrium theory. It suggests that, just as it sets the fed funds rate to control inflation, the Fed should set a stock market index to control unemployment. This would not let every manufacturing firm and every bank fail at the same time “as a result of speculative movements in markets that serve no social purpose.” How to help the auto sector: Looking beyond bailoutsJohannes Van Biesebroeck, 4 February 2009This column proposes ending six policies that hamper the US automotive industry. It suggests replacing discretionary environmental policies with a CO2 tax, addressing legacy costs, ending the distinction between right-to-work and other states, levelling the investment subsidy playing field, resolving uncertainty surrounding the future powertrain, and allowing direct sales to the public. Reforming the financial supervision architectureDonato Masciandaro, Marc Quintyn , 3 February 2009Central banks that have historically been involved in financial supervision often resist reforms that would unify supervisory powers in an agency other than the bank. This column argues that regulatory innovation is necessary to keep pace with financial innovation. Policymakers should be open to changes, including unification, and adopt reforms needed in their circumstances. What’s triggering subprime mortgage defaults?Patrick Bajari, Sean Chu, Minjung Park, 2 February 2009This column presents empirical evidence identifying the factors triggering mortgage defaults in the US. Both deterioration of borrowers’ net equity and liquidity constraints have been important. Policy remedies will have to address both concerns – the authors recommend write-downs on loan principal amounts as one such measure. Are bankers paid too much?Thomas Philippon, 2 February 2009Evidence from a new century-long dataset suggests that the key factors driving relative wages in the financial sector have been regulation and corporate finance activity, followed by financial innovation. Over the past decade, however, “rents” account for 30% to 50% of the sector’s wage differential. In this sense, financiers are overpaid. International economic cooperation and the home frontJeffry A. Frieden, 2 February 2009If the crisis turns into a new Great Depression, it will most likely be due to a breakdown of cooperation among the major economies. But sustaining international cooperation requires domestic support; ignoring the demands of poor and middle-class citizens for relief will inflame more extreme anti-globalisation views, making international cooperation much more difficult. On Paul Krugman’s Nobel PrizeJota Ishikawa, 31 January 2009This column reflects on the Nobel Prize awarded to Paul Krugman, whose solo win surprised some. It comments on the relevance of Krugman’s contributions to new trade theory and new economic geography. The latter have been of particular interest to European economists. Financial regulation built on sand: Today’s microprudential regulation rules need macroprudential complementsHyun Song Shin, 31 January 2009Today’s financial regulation is founded on the assumption that making each bank safe makes the system safe. This fallacy of composition goes a long way towards explaining how global finance became so fragile without sounding regulatory alarm bells. This column argues that mitigating the costs of financial crises necessitates taking a macroprudential perspective to complement the existing microprudential rules. Currency “manipulation” and world trade: Three reasons for cautionRobert W. Staiger, Alan O. Sykes, 30 January 2009Many critics argue that Chinese currency undervaluation amounts to an export subsidy and import tariff responsible for global trade imbalances. This column cautions against that equivalence. In the long run, currency devaluation does not alter export volumes, and in the short run, its effects depend on firms’ invoicing decisions. Policymakers should take care before turning to trade sanctions as a remedy. Venture capital isn’t crucial to innovationMasayuki Hirukawa, Masako Ueda, 30 January 2009Venture capitalists are casualties of the current crisis, as they have lost their ability to cash out their investments in the stock market. Should we worry that innovation and long-run growth are in trouble? This column summarises the evidence on venture capital and innovation, arguing that the current VC woes are unlikely to significantly dampen economic prospects. Will the crisis wipe out small carry traders in Central and Eastern Europe?Raphael Auer, Martin Brown, Andreas Fischer, Marcel Peter, 29 January 2009Some policymakers are worried that Central and Eastern European firms and households that recently joined the carry trade are unprepared for the financial crisis’s macroeconomic shocks. This column presents micro-level evidence that the currency exposure is concentrated in households and firms that are better equipped to bear the risks, suggesting that aggregate risks may be smaller than feared. Keeping borders open during the global downturn: What are the options?Simon J Evenett, 28 January 2009The current crisis raises serious challenges to the maintenance of open-markets but many policy makers and analysts remain complacent in defending trade openness. This column calls on these actors to defend their convictions, and proposes further debate on the policy options required to get out of the current predicament while protectionism in its many forms. Subprime 'crisis': FAQs (revised & updated)Stephen Cecchetti, 15 August 2007A revised and updated version of the 13 August column on the basic how's and why's of what the Fed has been doing to calm financial markets. Views 36733Educated in America: College graduates and high school dropoutsJames J. Heckman, Paul A. LaFontaine, 13 February 2008Official statistics for US high school graduation rates mask a growing educational divide. This column presents research showing that a record number of Americans are going to university – while an increasing number are dropping out of high school. This poses major social challenges for the United States. Views 36369The euro could surpass the dollar within ten yearsJeffrey Frankel, 18 March 2008One of the world’s leading international economists explains how the euro could surpass the dollar as the premier international currency and examines the geopolitical implications of such a shift. Views 29831Subprime ‘crisis’: FAQsStephen Cecchetti, 13 August 2007Here are the basic how's and why's of what the Fed has been doing to calm financial markets. Views 29384Krugman’s view on the dollarRichard Baldwin, 2 October 2007As the dollar has started to slide, the question is: how far, how fast? This column, which is based on Paul Krugman’s recent Economic Policy article suggests the answers are: pretty far and pretty fast. Views 23437Mother of all bailouts and what it means for EuropeDaniel Gros, Stefano Micossi, 20 September 2008The radical moves in the US have direct implications for European banks and indirect implications for European governments. This column discusses the likely channels and notes that several European banks are both too big to fail and may be too big to be saved by their national governments alone. Views 22422Subprime crisis: causes, consequences and curesCarmen M. Reinhart, 15 March 2008We may just have started to feel the pain. Asset price drops – including housing – are common markers in all the big banking crises over the past 30 years. GDP declines after such crises were both large (-2% on average) and protracted (2 years to return to trend); in the 5 biggest crises, the numbers were -5% and 3 years. This column, based on the author’s testimony to the Congress, picks through the causes and consequences. It argues that when it comes to ‘cures,’ it would be far better to get the job done right than get the job done quickly. Views 20781Rescuing our jobs and savings: What G7/8 leaders can do to solve the global credit crisisBarry Eichengreen, Richard Baldwin, 9 October 2008Without rapid and coordinated action by G7/8 leaders, this financial crisis could turn into a jobs crisis, a pension crisis and much more. This column introduces a collection of essays by leading economists on what the G7/8 leaders should do this weekend. The dozen essays present a remarkable consensus on a few points: we need immediate, coordinated global action that includes recapitalisation of the banks. Views 19426Tennis, pressure and the gender wage-gapM Daniele Paserman, 26 June 2007Female tennis players play more conservatively and commit more unforced errors when playing critical points. Does this explain the upper-echelons wage gap? Views 18641How bad could the crisis get? Lessons from IcelandJon Danielsson, 12 November 2008Iceland’s banking system is ruined. GDP is down 65% in euro terms. Many companies face bankruptcy; others think of moving abroad. A third of the population is considering emigration. The British and Dutch governments demand compensation, amounting to over 100% of Icelandic GDP, for their citizens who held high-interest deposits in local branches of Icelandic banks. Europe’s leaders urgently need to take step to prevent similar things from happening to small nations with big banking sectors. Views 18492Trade and inequality, revisitedPaul Krugman, 15 June 2007It’s no longer safe to assert that trade’s impact on the income distribution in wealthy countries is fairly minor. There’s a good case that it is big, and getting bigger. I’m not endorsing protectionism, but free-traders need better answers to the anxieties of globalisation’s losers. Views 18478Is the LIBOR-OIS spread due to predatory behaviour?Francesco Giavazzi, 2 June 2008There has been a persistent spread between the rate at which banks lend each other money and government-backed securities yields in recent months. This column describes hypotheses explaining the spread – including the possibility that banks aren’t lending in order to bankrupt acquisition targets. Views 18304Open Letter to European leaders on Europe’s banking crisis: A call to actionAlberto Alesina, Richard Baldwin, Tito Boeri, Willem Buiter, Francesco Giavazzi, Daniel Gros, Stefano Micossi, Guido Tabellini, Charles Wyplosz, Klaus F. Zimmermann, 1 October 2008This is a once-in-a-lifetime crisis. Trust among financial institutions is disappearing; fear may spread. Last week’s US experience showed that saving one bank at a time won’t work. A systemic response is needed and in Europe this means an EU-led initiative to recapitalise the banking sector. Unless European leaders immediately unite to address this crisis before it spirals out of control, they may find themselves fighting over how best to salvage the aftermath. Views 17827The dangerous protectionism of Barack ObamaWillem Buiter, Anne Sibert, 26 February 2008Barack Obama, the likely Democratic presidential candidate, has proposed tax breaks for US corporations that invest at home rather than abroad. This column argues that his proposal is protectionist, reactionary, and economically unsound. Views 17701Why Paulson is wrong: Saving capitalism from the capitalistsLuigi Zingales, 21 September 2008This weekend’s decisions will shape the type of capitalism we live with for the next fifty years. Here one of the world’s leading financial scholars, Chicago Business School Professor Luigi Zingales, argues that bailing out the financial system with taxpayers’ money is wrong. He discusses an alternative – forced debt-for-equity swap or debt-forgiveness. Views 17676Exploding commodity prices signal future inflationGuillermo Calvo, 20 June 2008Here, one of the world’s leading macroeconomists argues that the explosion of commodity prices is the result of a very real global financial storm associated with excess liquidity in several non-G7 countries and nourished by the low interest rates set by G7 central banks. The commodity price explosion is a harbinger of future inflation. Views 15897Slave trade and African underdevelopmentNathan Nunn, 8 December 2007Slavery, according to historical accounts, played an important role in Africa’s underdevelopment. It fostered ethnic fractionalisation and undermined effective states. The largest numbers of slaves were taken from areas that were the most underdeveloped politically at the end of the 19th century and are the most ethnically fragmented today. Recent research suggests that without the slave trades, 72% of Africa’s income gap with the rest of the world would not exist today. Views 15746An Explanation for Soaring Commodity PricesJeffrey Frankel, 25 March 2008The standard story for high commodity prices is rapid growth by China, India and company. But world growth is slowing, while commodity prices still hit new highs. This column suggests that the key may be low real interest rates. Views 15234Subprime 'crisis': What Central Bankers should do and whyWillem Buiter, Anne Sibert, 13 August 2007Last week's actions by the ECB, the Fed and the Bank of Japan were not particularly helpful – a classic example of trying to manage a credit crisis or liquidity squeeze using the tools suited to monetary policy-making in orderly markets. Monetary policy is easy; preventing or overcoming a financial crisis is hard; managing the exit from a credit squeeze without laying the foundations for the next credit and liquidity explosion is harder still. Central bankers should earn their keep by acting as market makers of last resort. Views 15045Good news at last? The recession will be over sooner than you thinkNicholas Bloom, Max Floetotto, 12 January 2009A key source of the today’s economic weakness is uncertainty that led firms to postpone investment and hiring decisions. This column, by the authors whose model forecast the recession as far back as June 2008, report that the key measures of uncertainty have dropped so rapidly that they believe growth will resume by mid-2009. This means any additional economic stimulus has to be enacted quickly. Delaying to the summer may mean the economic medicine is administered just as the patient is leave the hospital. Views 14520 Why should we believe the market this time? Correcting eurozone sovereign debt spreadsPaul De Grauwe, 7 February 2009Spreads of sovereign debt within the eurozone have increased dramatically during the last few months, largely as a result of panic in the financial markets. When it engages in quantitative easing, the ECB should privilege the buying of Irish, Greek, Spanish and Italian government bonds to eliminate the distortions and the externalities that these spreads create. Restoring financial stability: How to repair a failed systemViral Acharya, Matthew Richardson, 7 February 2009How did global finance become so fragile that a collection of bad mortgages in the US could bring the entire system to its knees and the global economy along with it? How can this fragility be eliminated? This column describes the answers provided in an important new book which has been written by a team of world-class scholars from NYU’s business school. “Bad banks” must be big and mandatoryDaniel Gros, 5 February 2009Uncertainty over losses from toxic assets is blocking the resumption of bank lending – thus prolonging and deepening the recession. Governments should take over these assets to kick-start credit markets, but to avoid the “market for lemons” problem, the bad bank should be big, and banks should be forced to transfer their entire portfolio of toxic assets. Buy American is bad for America (and everyone else)Gary Clyde Hufbauer, Jeffrey J. Schott , 5 February 2009The “Buy American” provision in the US stimulus package would violate US trade obligations, damage the US' reputation, and have almost no real impact on US jobs. Moreover, the provisions will be read as an Obama trade policy that leans toward protectionism – with severe consequences abroad. Reforming the financial supervision architectureDonato Masciandaro, Marc Quintyn , 3 February 2009Central banks that have historically been involved in financial supervision often resist reforms that would unify supervisory powers in an agency other than the bank. This column argues that regulatory innovation is necessary to keep pace with financial innovation. Policymakers should be open to changes, including unification, and adopt reforms needed in their circumstances. International economic cooperation and the home frontJeffry A. Frieden, 2 February 2009If the crisis turns into a new Great Depression, it will most likely be due to a breakdown of cooperation among the major economies. But sustaining international cooperation requires domestic support; ignoring the demands of poor and middle-class citizens for relief will inflame more extreme anti-globalisation views, making international cooperation much more difficult. Are bankers paid too much?Thomas Philippon, 2 February 2009Evidence from a new century-long dataset suggests that the key factors driving relative wages in the financial sector have been regulation and corporate finance activity, followed by financial innovation. Over the past decade, however, “rents” account for 30% to 50% of the sector’s wage differential. In this sense, financiers are overpaid. Financial regulation built on sand: Today’s microprudential regulation rules need macroprudential complementsHyun Song Shin, 31 January 2009Today’s financial regulation is founded on the assumption that making each bank safe makes the system safe. This fallacy of composition goes a long way towards explaining how global finance became so fragile without sounding regulatory alarm bells. This column argues that mitigating the costs of financial crises necessitates taking a macroprudential perspective to complement the existing microprudential rules. Can the G20 reform the international economic system?Charles Wyplosz, 28 January 2009A product of the confused reaction of politicians to the crisis, the G20 forum must prove its usefulness. Rather than striving to coordinate fiscal policy responses, leaders should use the G20 platform to strike common ground on long-term reforms to global financial regulation and supervision, starting by recapitalising the IMF and reforming its governance structures. Ending the crisis without starting another: A “green” global recoveryTrevor Houser, 28 January 2009A range of fiscal programs yield both economic stimulus and sustained environmental benefits. This column argues that Washington and Beijing should lead the way, improving their energy efficiency and building faith in the stability of the global economy. Vox’s Global Crisis DebateThe Editors, 28 January 2009VoxEU.org today launches the Global Crisis Debate. The aim is: 1) To broaden the discussion into a truly global debate, and 2) To make the Global Crisis Debate the dominant intellectual forum on the crisis. Thanks to the partnership with the UK government, analysis on the Global Crisis Debate feeds into preparations for the April Summit via the UK Government's web site LondonSummit.gov.uk. Reflections on Americans’ views of the euro ex anteMartin Feldstein, 26 January 2009This column presents Marty Feldstein’s views on the euro. He suggests that tough economic conditions in Europe may cause substantial economic policy disagreements among the Eurozone countries and that one or more countries might actually withdraw from the Eurozone. The crisis and how to fix it: Part 2, solutionsRicardo Caballero, 23 January 2009Here is an unconventional view of what governments must do. Frozen credit markets prolong the recession and keep us on the edge of financial meltdown. The ineffectiveness of existing policy to kick-start credit markets and bank lending is due to investors’ fear of “unknown unknowns”. Ordinary restructuring-and-liquidation recipes won’t work until the government provides insurance against such systemic events. Recent actions by the US and UK get it partially right. Was the euro a mistake?Barry Eichengreen, 20 January 20092008 was the year of asymmetric financial shocks for the Eurozone, but 2009 will be the year of the symmetric economic shock. All of Europe is slipping simultaneously towards recession and the threat of deflation. Here one of the world’s leading international economists explains that a common monetary policy response is optimal. Euro interest rates should be cut to zero and quantitative easing undertaken, all complemented by fiscal expansion by Eurozone nations that can afford it. What started as the euro’s greatest challenge could be its salvation, but only if policy makers act swiftly. Yes we can, Mr GeithnerLuigi Zingales, 19 January 2009This Wednesday Mr Geithner will be confirmed as the new Secretary of Treasury. Never before in US history has this position been so important. Mr Geithner’s decisions in the next few weeks will have a dramatic impact on the length and the depth of this recession and will shape the financial sector for decades to come. This column offers the new arrival a few suggestions. Multilateral free trade: The Obama letdownJagdish Bhagwati, 9 January 2009In this column Jagdish Bhagwati sounds the alarm on Obama’s eloquent silence on key trade issues and his failure to balance his protectionist appointments with powerful trade proponents that would produce a “team of rivals”. Multilateral free trade is being dangerously let down. Vox's Holiday BreakTeam Vox, 24 December 2008Team Vox thanks the 5.2 million visitors who have stopped by since Vox started in June 2007, viewing 15.2 million pages. We wish you all a healthful and restful holiday break. Vox will start posting again on 2 January 2009. Fiscal policy and the credit crunch: What will work?Daniel Gros, 21 December 2008Most countries need a fiscal stimulus, but how should it be implemented? This column assesses fiscal policy's potential to increase demand and argues that any meaningful boost must come from transfers to the private sector, not infrastructure investments. Tax cuts will be most effective in countries where households are net borrowers. The crisis and protectionism: Steps world leaders should takeRichard Baldwin, Simon J Evenett, 4 December 2008VoxEU.org has just published another Ebook in our “What leaders should do in the Crisis” series; this one focuses on trade. Unless world leaders strengthen trade cooperation, new tariffs and competitive devaluations could trigger a protectionist spiral of WTO-consistent trade barriers. To rule this out, world leaders should: 1) Reduce protectionist pressures by fighting the recession with macroeconomic polices; 2) Translate APEC and G20 leaders’ words into deeds by agreeing a framework for concluding the Doha Round; and 3) Establish a real-time WTO/IMF surveillance mechanism to track new protection. Unorthodox monetary policy: Central banks as “stabilising speculators”John N Muellbauer, 27 November 2008This column explains the logic behind a radically new form of monetary policy – a new central-bank tool for stabilising the credit cycle. By buying bank stocks and credit instruments at the bottom of the cycle and selling at the top, the new policy could moderate the boom-and-bust credit cycle independently of interest rate policy. The Fed action on 25 November is a good step in this direction.
Social comparisons, perceptions of fairness and wellbeing
Armin Falk , 6 February 2009
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The Fundamental Principles of Financial Regulation
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