How to avoid the next financial crisis
Latest IMF data highlights the lasting damage done by the 2008 collapse
Martin Wolf
The financial crisis of 2008-09 and the resulting recession were a historical watershed. The pre-crisis world was one of globalisation, belief in markets and confident democracies. Today’s is a mirror image.
The economic impacts are certainly not the end of the story. But they are the beginning. The latest World Economic Outlook of the IMF provides a valuable empirical analysis of the effects. It brings out two big points: the impacts have been long lasting and have spread far beyond the countries that suffered banking crises.
The obvious way to measure the economic impact of crises is by comparing post-crisis performance with what would have happened if pre-crisis trends had continued. Yet pre-crisis trends were, to some extent, unsustainable. So, the IMF’s analysis adjusts pre-crisis trend growth for credit booms.
The IMF notes that “91 economies, representing two-thirds” of global gross domestic product in purchasing-power-parity terms, experienced a decline in output in 2009. This was the biggest negative shock in the postwar era. Moreover, the bigger the losses in the short run, the bigger they were in the long run, too. Countries with large immediate falls in output also showed larger increases in income inequality, relative to pre-crisis averages.
Which sorts of countries lost most and how much did they lose? To answer this question, the WEO divides its 180-country sample into ones that suffered banking crises and those that did not.
The former group contained 24 countries, 18 of which are high-income economies. It found that 85 per cent of them still show shortfalls of output relative to trend. For countries that suffered banking crises, the modal (most frequent) average shortfall of output between 2015 and 2017, relative to pre-crisis trends, was close to 10 per cent. But a number suffered losses of between 20 and 40 per cent. (See charts.)
Yet output also remains below pre-crisis trends in 60 per cent of countries that did not suffer banking crises. Modal losses here have been much the same as in crisis-hit countries, though the distribution is less skewed to the downside.
The pervasiveness of losses may not be that surprising: this crisis emanated from the core of the global economy and caused big declines in global demand. The results were deep recessions, which cast very long shadows into the future.
Again, while advanced economies were particularly hard hit, emerging economies did not do much better. This was a western financial crisis, but it was a global economic crisis. China’s stimulus programme of about 10 per cent of GDP greatly cushioned the impact.
The proximate explanations for the huge shortfalls in output were collapses in investment: by 2017, on average, investment was a quarter below pre-crisis trends. This weak investment must also help explain low rates of innovation, which is particularly visible in directly-hit countries. New technology is often embodied in new equipment: take robots, for example.
On average, countries that experienced banking crises suffered a four percentage point bigger loss in output by 2011-13 than ones that did not. Those with large pre-crisis macroeconomic imbalances, notably unsustainable current account deficits, also suffered relatively large losses. So did those with relatively inflexible labour markets. Again, those whose exports were more exposed to crisis-hit markets were hit harder. Countries that were more exposed to the global financial system also suffered larger losses. Lack of fiscal policy space proved costly, as well, as did a lack of exchange rate flexibility. The last is certainly an explanation, albeit not the only one, for the terribly poor performance of the eurozone.
The monetary actions taken by the high-income countries in the aftermath of the crisis have been controversial in many emerging markets. Many in high-income countries have also argued that the dramatic monetary easing was a mistake. Yet the evidence that output shortfalls are cumulative destroys the argument against strong and sustained policy support. However, stronger fiscal policy responses would have reduced the need for so long a period of unconventional monetary policies.
Equally controversial were the capital injections and guarantees provided to the financial sector in the crisis. Maybe, ways could have been found to rescue banks without rescuing bankers. But the greater the support for the damaged financial sector, argues the WEO, the stronger the rebound. This evidence gives no support to “liquidationism” — the view that banking collapses and depressions are benign purgatives.
Here are three tasks and a lesson.
The first task is that of monetary policy normalisation in a world that has so much debt. Higher US policy rates have already revealed the vulnerability of a number of emerging economies. More turbulence seems highly likely.
A second task is how to respond to another big recession, when the policy space is so diminished.
The final task is coping with the political aftermath of the crisis. The decline in western credibility and relative power and the rise of demagogic forces are real, powerful and dangerous.
The lesson is that big financial crises are — no surprise — very damaging. Once they have happened, it is too late. The analysis of regulation in the October Global Financial Stability Report suggests that we must ignore bankers’ bleating against regulation: above all we must keep capital requirements up.
Recoveries could have been stronger with sustained fiscal and financial action, notably in the eurozone. But the costs of crisis would still have been high. “Never again” must be the watchword.
THE PREDICTIVE POWER OF DEMOGRAPHY / GEOPOLITICAL FUTURES
The Predictive Power of Demography
By Jacob L. Shapiro
WHY BRAZIL´S ELECTION WON´T END ITS POLITICAL CRISIS / GEOPOLITICAL FUTURES
Why Brazil’s Election Won’t End Its Political Crisis
The results of the first-round vote confirm that the crisis is far from over.
By Allison Fedirka
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CRAZY RICH ASIA / PROJECT SYNDICATE
Crazy Rich Asia
Kenneth Rogoff
CAMBRIDGE – In the surprise hit movie “Crazy Rich Asians” (based on a 2013 Kevin Kwan novel), a New York University economics professor (Rachel), travels with her boyfriend to Singapore to meet his family. There, she learns, apparently for the first time, that her significant other (Nick) is heir to one of Asia’s largest fortunes and has a mother intent on making sure her son does not marry a commoner, Asian-American or not.
Partly because of its (terrific) all-Asian cast (an extreme rarity), and partly because it recalls earlier eras of great romantic comedies, the film has caused a lot of buzz. Perhaps there will even be a long overdue Oscar for Michelle Yeoh (from “Crouching Tiger, Hidden Dragon”), who plays the steely but loving mother.
But the film also stars Singapore, a place unfamiliar to most Westerners. For some, the real shocker in the movie will be just how crazy rich parts of Asia have become.
To get a sense of the island city-state’s meteoric rise, one need only compare the glittering metropolis depicted in “Crazy Rich Asians” with the hut-filled fishing village depicted in the 1940 classic comedy, “Road to Singapore,” starring Bing Crosby, Dorothy Lamour, and Bob Hope. The comparison makes it easy to understand how the fictional Young family became ultra-rich as early real-estate investors. With annual output of approximately $325 billion in 2017 and 5.6 million inhabitants, Singapore now ranks with Denmark economically (though its population is more diverse).
This is a flattering comparison, given that Denmark typically ranks at or near the top in global quality-of-life surveys. Singapore does not redistribute income as aggressively as Denmark, choosing instead to maintain lower taxes and concentrate transfers on low-income individuals. Nevertheless, all citizens have access to high-quality health coverage and schooling, and many are also eligible for heavily subsidized housing. In “Crazy Rich Asians,” poverty is depicted (rather ingeniously and hilariously) as a long-haul flight in economy rather than first class.
Although Asian Americans have embraced the film as a breakthrough for Asian actors in mainstream Hollywood productions, is hotly debated in Singapore itself. Although many Singaporeans are excited that “CRA” (as it is called in Singlish) will catalyze a tourist boom, complaints are rife. One is that the characters don’t use more Singlish phrases; another is that the city-state’s large Indian and Malay communities are invisible. Most of all, there is a populist backlash against the Young family’s outsize wealth, making some question why Singapore has no capital-gains or estate taxes. Why should Nick be allowed to inherit so much money?
But the backlash is perhaps less than an American or a European might expect. This may be because the middle class has done fairly under Singapore’s unique system, which is very much a market economy, but one where the government plays a big role in long-term planning and investment.
One might cynically say that the backlash would be much more visible if there were less restrictions on the media. But surely slowing growth, especially where it affects middle-class incomes, has been a major driver of populism in Europe and the United States, exacerbated no doubt by the financial crisis. Although Singapore’s growth has also slowed, it still compares favorably to Europe. The Monetary Authority of Singapore is forecasting that growth will exceed 3% in 2018, on par with the United States, which is now the envy of the advanced economies.
Singapore’s success is all the more remarkable given that proximity to the equator is usually associated with weak growth and poverty. Yet Singapore is situated virtually on top of it. (In one implausible scene in “Crazy Rich Asians,” Nick and Rachel are picked up at the airport in an open-air jeep.) Economists who study growth almost come to blows at conferences over whether “institutions” or “culture” are more important to growth, with both sides seeking to take credit for Singapore, which inherited English institutions and elements of Chinese culture.
And now, one hopes, Asia will become a bigger part of Hollywood culture, with more films featuring Asian locales and actors. Produced for just $30 million (compared to over $300 million for Disney’s “Avengers: Infinity War”), “Crazy Rich Asians” has already grossed over $200 million worldwide.
That’s impressive for any film, and perhaps especially for one that opens with a lesson in game theory. In the first scene, Rachel uses poker to illustrate a concept to a large class sitting in rapt attention, and she schools a graduate teaching assistant. Of course, most courses on game theory involve a lot of mathematics about strategic relationships, not playing actual games. But they can be fun all the same. Princeton University Professor Avinash Dixit famously uses clips from films such as “Dr. Strangelove” to illustrate key concepts.
Now perhaps Hollywood will use films like “Crazy Rich Asians” to illustrate key concepts about a region that is the biggest economic success story of the last several decades. There are many more stories about that story to be told.
Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. The co-author of This Time is Different: Eight Centuries of Financial Folly, his new book, The Curse of Cash, was released in August 2016.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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