Rolf Englund IntCom internetional
2007 - This time is different?
On Monday 13th May, I participated in a debate on austerity
As a result of heroic interventions by the monetary and fiscal authorities,
The evidence is clear. Fiscal contraction has, indeed, been contractionary.
When many countries contract simultaneously, the impact is far worse, of course,
since one country’s spending on imports is another country’s export demand.
Kenneth Rogoff - One of Us?:
How the Case for Austerity Has Crumbled
The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin
I have enormous respect for Martin Wolf, as he knows, and never miss a single one of his brilliant and indispensable columns.
Mr Wolf’s implicit point that this ECB de facto guarantee of eurozone sovereign debt has reduced the need for austerity is largely correct.
Roger Altman of Evercore partners is a friend of mine, a distinguished public servant and a respected financial expert.
I have written on the relevant points several times, most recently in a contribution to an IMF conference.
What explains this extraordinary divergence between the long-term interest rates of /Spain and the UK/ countries with very similar debt dynamics?
UK is a sovereign country, with its own finance ministry, central bank and floating currency, while Spain has a subordinate government inside a currency union that has no shared treasury and a super-national central bank
A central bank guarantees liquidity in the market for sovereign debt.That hugely reduces the risk of a sudden default. That, in turn, gives confidence to lenders.
The principal reason why interest rates in Spain are so much higher than those of the UK is that no such lender of last resort existed for the former. Spanish debt was subject to liquidity risk
Altman: ... markets triggered the Eurozone crisis, not politicians. The fiscal and banking restructuring that followed was the price of rebuilding market confidence.
Wolf again: The decline in yields on Spanish debt, shown so clearly in the chart, dates almost precisely to 26th July 2012, the date on which Mario Draghi, president of the ECB, told an audience in London that “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
This statement, in turn, led to the announcement by the ECB on August 2nd 2012 of “outright monetary transactions” which would be aimed “at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy”.
Rightly or wrongly, markets concluded that the risk of an outright default on Spanish bonds had largely disappeared.
Paul Krugman: Nobody has taught me as much about the euro crisis as Paul De Grauwe, Click
Martin Wolf och Rolf Englund om att den som har en sedelpress går inte i konkurs.
If you have a printing press you don´t go bankrupt
There is a view that implementing the public sector austerity drive
Short-term interest rates are set by the authorities at whatever level they choose.
Long term rates are determined by the market's willingness to hold the stock of debt.
Yet this is far from being a rigid or mechanistic thing.
To be clear, no one should be arguing to stabilise debt, much less bring it down,
No one fully understands why rates have fallen so far so fast,
For Europe any reasonable endgame will require a large transfer from Germany to the periphery.
Rogoff tycks mera ha varit intresserad av att odla sitt kändisskap
That Time - Trettiotalet - was different, i Tyskland
Austerity is hurting – but is it working?
Reinhart, Rogoff... and Thomas Herndon
"My heart sank," he says. "I thought I had likely made a gross error. Because I'm a student the odds were I'd made the mistake, not the well-known Harvard professors."
His professors were also sure he must be doing something wrong.
"I remember I had a meeting with my professor, Michael Ash, where he basically said, 'Come on, Tom, this isn't too hard - you just gotta go sort this out.'"
So Herndon checked his work, and checked again.
By the end of the semester, when he still hadn't cracked the puzzle, his supervisors realised something was up.
Charge of the Right Brigade
The austerian position has imploded
The dominance of austerians in influential circles should disturb anyone who likes to believe that policy is based on, or even strongly influenced by, actual evidence.
Part of the answer surely lies in the widespread desire to see economics as a morality play, to make it a tale of excess and its consequences. We lived beyond our means, the story goes, and now we’re paying the inevitable price.
The average American is somewhat worried about budget deficits,
You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences,
Correspondents in Germany, France, Italy and Portugal, look at
Market veteran Art Cashin, the director of floor operations at UBS,
"As the rebuttal made headlines, markets rallied — especially in Europe — as cries that austerity had seen its day came from leader after leader," Cashin said.
It's true that the market is no shrinking violet when it comes to government debt.
In fact, it has thrived as the U.S. and other governments have amped up debt loads.
Worries of asset bubbles and inflation wait for another day.
"We are all Keynesians now"
In 1816, the net public debt of the UK reached 240 per cent of gross domestic product.
Professors Reinhart and Rogoff, their work and that of others supports the proposition that slower growth is associated with higher debt.
Slow growth could cause high debt, a hypothesis supported by Arindrajit Dube, also at Amherst.
Consider Japan: is its high debt a cause of its slow growth or a consequence? My answer would be: the latter.
Usually, one can ignore the macroeconomic consequences of fiscal austerity: either private spending will be robust or monetary policy will be effective. But, after a financial crisis, a huge excess of desired private savings is likely to emerge, even when interest rates are very close to zero.
In that situation, immediate fiscal austerity will be counterproductive. It will drive the economy into a deep recession, while achieving only a limited reduction in deficits and debt.
Baltikum ger hopp till Europa
Let me highlight a passage from the "Understanding Our Adversaries" evolution-of-economists'-views talk that I started giving three months ago, a passage based on work by Owen Zidar summarized by the graph above:
This is the most live argument today. So let me nibble away at it.
First: note well: no cliff at 90%.
Second, RRR present a correlation - not a causal mechanism, and not a properly-instrumented regression.
Let us answer that question.
This week three economists at the University of Massachusetts at Amherst revealed problems with
This has been presented as a blow to the case for austerity, of which Profs Reinhart and Rogoff have been prominent proponents.
Why Austerity Works and Stimulus Doesn’t
A dose of reality for the dismal science
For a few years, advocates of rapid fiscal austerity have argued as though public debt is like a black hole – once it reaches a certain size, it collapses in on itself under its own weight and pulls the economy down with it.
A 2010 academic paper by Carmen Reinhart and Kenneth Rogoff, two eminent economics professors, provided many pundits and politicians with the desired evidence for this instinctive view. They seemingly found that economic growth fell off sharply when national debts reached 90 per cent of gross domestic product.
A new study that has attracted lots of attention, however, shows that no such sharp fall-offs occur.
Put aside the details of Excel coding errors and statistical weights. In fact, forget that specific paper. The claim that there was a clear tipping point for the ratio of government debt to GDP past which an economy’s walls caved in never made any sense.
An American economist on the Bank of England’s monetary policy committee,
Harvard economists, Carmen Reinhart and Kenneth Rogoff
At the beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff, circulated a paper,
“Growth in a Time of Debt,” that purported to identify a critical “threshold,” a tipping point, for government indebtedness.
Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired earlier book on the history of financial crises, and their timing was impeccable.
Reinhart-Rogoff quickly achieved almost sacred status among self-proclaimed guardians of fiscal responsibility;
As soon as the paper was released, many economists pointed out that
Finally, Ms. Reinhart and Mr. Rogoff allowed researchers at the University of Massachusetts to look at their original spreadsheet — and the mystery of the irreproducible results was solved.
First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error.
Correct these oddities and errors, and you get what other researchers have found:
In a new working paper, co-authored with Thomas Herndon, we found that these results were based on a series of data errors and unsupportable statistical techniques.
Debunking austerity claims makes no difference to Europe's monks and zealots
Empirical Economics Isn’t Yet as Smart as Dentistry
If economists could manage to get themselves thought of as humble,
The academic evidence on Keynesian growth effects of fiscal deficits is thoroughly inconclusive.
The writer is professor of economics at Harvard University and co-author, with Carmen Reinhart, of This Time is Different: Eight Centuries of Financial Folly
Aggressive fiscal stimulus in the run-up to the financial crisis was reasonable as part of an all-out battle to avoid slipping into a depression.
Importantly, governments that emphasise long-term fiscal sustainability are likely to have an easier time inducing their central banks to maintain highly supportive monetary conditions.
If a double-dip recession does threaten, then monetary policy, including aggressive measures to combat deflation, remains by far the most reliable first line of defence.
“Everyone wants to think they’re smarter than the poor souls in developing countries, and smarter than their predecessors,” says Carmen M. Reinhart
THE advertisement warns of speculative financial bubbles. It mocks a group of gullible Frenchmen seduced into a silly, 18th-century investment scheme, noting that the modern shareholder, armed with superior information, can avoid the pitfalls of the past. “How different the position of the investor today!” the ad enthuses.
The cruel irony of the euro area’s predicament is that, in many ways,
Lower interest rates, in turn, helped fuel greater borrowing, especially in the countries of the eurozone periphery. Thus, the spreading debt crisis is as much a product of the “success” of the euro as of its failure. The euro was designed to be a superior debt financing machine and, to a considerable extent, it has delivered. Unfortunately, it should have come with a warning sign: Europe’s leaders were far too quick to admit members who might have been better served with a much longer probation period. The Maastricht treaty and, more importantly its implementation, was simply too forgiving, especially for countries with chequered financial histories.
Economists have only a limited understanding of why sovereign nations ever repay their external debt, given the lack of any supranational legal authority that might force them to do so.
It is going to be extremely difficult for some of the peripheral eurozone economies to escape without large-scale defaults on their massive private external debts, public external debts, or both.
The writer is professor of economics at Harvard and co-author with Carmen Reinhart of ‘This Time is Different’
---The IMF should impose default on Greece to end the charade
I just had lunch with Carmen Reinhart, author of `This Time is Different: Eight Centuries of Financial Folly” and a world authority on sovereign defaults.
Ambrose Evans-Pritchard Economics April 2nd, 2010
Rogoff varnar för fler bankkonkurser
"USA har inte klarat krisen. Jag tror att finanskrisen kanske har nått halvvägs. Jag skulle till och med gå ännu längre och säga att det värsta återstår, sade Harvardprofessorn Kenneth Rogoff vid en konferens.
The global financial crisis is set to get worse, with a large US bank likely to collapse in the next few months, a former IMF chief economist has warned.
Kenneth Rogoff's comments came as shares in Fannie Mae and Freddie Mac sank on a report that the home lenders would, in effect, be nationalised.
The world cannot grow its way out of this slowdown
The writer is professor of economics at Harvard University and
In the light of the experience of the 1970s, it is surprising how many leading policymakers and economic pundits believe that policy should aim to keep pushing demand up.
In the US, the growth imperative has rationalised aggressive tax rebates, steep interest rate cuts and an ever-widening bail-out net for financial institutions.
If all regions try expanding demand, even the short-term benefit will be minimal. Commodity constraints will limit the real output response globally, and most of the excess demand will spill over into higher inflation.
For a myriad reasons, both technical and political, financial market regulation is never going to be stringent enough in booms. That is why it is important to be tougher in busts, so that investors and company executives have cause to pay serious attention to risks.
If poorly run financial institutions are not allowed to close their doors during recessions, when exactly are they going to be allowed to fail?
Of course, today’s mess was many years in the making and there is no easy, painless exit strategy.
This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, NBER Working Paper 13882, March 2008
Same as it ever was
At the AEA conference, it fell to Alan Taylor of the University of California to make the case that things might not turn out quite as badly
Comment by Rolf Englund:
Is the 2007 US Sub-Prime Financial Crisis so Different?
That there was a link between the savings glut and the financial fragility was evident. The former, I argued, generated the global imbalances and the monetary policy that drove household borrowing to the level required to absorb the capital inflow. Soaring house prices and rising household indebtedness were the vehicles through which policy worked.
As Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard note in a brilliant new paper*, this had similarities to the recycling of petrodollars to developing countries that preceded the debt crisis of the 1980s.
*Is the 2007 US Sub-Prime Financial Crisis so Different? An International Historical Comparison?
This time, surplus savings were, in their words, “recycled to a developing country that exists within the US”: the subprime borrowers. The consequences for banks also look disturbingly similar.
The question that matters is whether the US will experience a lengthy period of weak growth in private demand. The chances that it will are high. This is the conclusion I draw from the paper by Professors Reinhart and Rogoff.