Showing papers in "PSL Quarterly Review in 2010"
TL;DR: The authors examines government policies aimed at rescuing banks from the effects of the great financial crisis of 2007-2009, focusing on the fiscal side of interventions and ignoring, by design, the monetary policy reaction to the crisis.
Abstract: This paper examines government policies aimed at rescuing banks from the effects of the great financial crisis of 2007-2009. To delimit the scope of the analysis, we will concentrate on the fiscal side of interventions and will ignore, by design, the monetary policy reaction to the crisis (in essence, we will ignore inflation as a possible crisis exit). The paper is organized in three parts. The first (Section 2) gives a description of the subprime crisis that fits many aspects of a creditboom-and-bust-cycle (CBB, for short) hypothesis. Crises, on the other hand, have idiosyncratic features. The distinctive characteristic of this crisis has been the creation of complex and opaque assets and the transfer of these assets from the balance sheet of banks to the markets. The subprime crisis, as is well known by now, has been big in terms of geographical coverage, number of failed and rescued banks, and real sector spillovers. Over a 19-month period starting at the end of July of 2007, a representative sample of 120 large banks from the United States, Western Europe and the Pacific region lost $3.23 trillion of market capitalization. The depth of the crisis cannot be explained only by deteriorating fundamentals; as predicted by the CBB hypothesis, the bust that followed the boom led to a sharply rising risk aversion of the investing public. The second part (Section 3) reviews the long list of government
30 citations
TL;DR: In this article, a critical analysis of the two models of financial reform being enacted and points to weaknesses, notably in respect of effective, coordinated crisis management procedures, is presented. But the analysis is limited to two models: macro and micro prudential.
Abstract: Since July 2007, the developed countries faced the most serious and disruptive crisis after the 1929 Great Depression. As the crisis unfolded, policy authorities stepped in to support troubled financial institutions with large bailouts. This prevented a meltdown of the system, but at the cost of largest ever moral hazard, huge losses for taxpayers, shocks to fiscal sustainability, with probabilities of distress going up across sovereigns. Repair of financial regulation and supervision was necessary to reduce systemic risk and to achieve financial stability. Both in the EU and in the USA new frameworks have been and are being established. They share a common approach, based on a new regulatory agenda, stronger coordinated supervision – macro and micro prudential – and crisis management procedures. This paper offers a critical analysis of the two models of financial reform being enacted and points to weaknesses, notably in respect of effective, coordinated crisis management procedures. JEL Codes: G01, G2, G28
26 citations
TL;DR: In this article, it is argued that Alexandre Lamfalussy, who was at the Bank for International Settlements from 1976 to 1993, played a crucial role in shaping the BIS approach.
Abstract: Among the international policy institutions, the Bank for International Settlements (BIS) is known for its sensitivity to financial stability issues. Typical for the BIS is a “macro-prudential” approach. In this paper, it is argued that Alexandre Lamfalussy, who was at the BIS from 1976 to 1993 , played a crucial role in shaping the BIS approach. Typical for Lamfalussy are a broad macroeconomic view and a focus on the systemically important institutions. In Lamfalussy’s view, there is thus very much an overlap between the micro- and macro-prudential dimensions of financial stability. The main reasons for his sensitivity to financial fragility were: a “Keynesian” Weltanschauung (that a market economy is not sufficiently self-correcting), the emphasis of Dupriez (his teacher) on cycles, Lamfalussy’s experience as a commercial banker, BIS involvement in financial stability issues, especially the Latin American debt crisis of 1982-83 and research on financial innovations. JEL Codes: A11, B22, B32, E3, F02, G10, N10
21 citations
TL;DR: The authors reviewed the evolution of Italy's historical national accounts and highlighted methodological issues of general interest for scholars that use historical time series, and most particularly for scholars engaged in their reconstruction, and concluded that their ongoing revision highlights methodological issues that should be considered.
Abstract: This paper reviews the evolution of Italy’s historical national accounts. Their ongoing revision highlights methodological issues of general interest for scholars that use historical time series, and most particularly for scholars engaged in their reconstruction. JEL Codes: C82, N01, N13 Keywords: National Accounts, Italy, Historical Reconstruction
18 citations
Journal Article•
TL;DR: In this paper, the authors argue that a prudential regulatory design necessarily leaves large discretionary powers to supervisors, who use them to shape the effective direction of regulation, and the current crisis has shown that the force of its first impact much depended on how supervisors had formerly utilised their discretion.
Abstract: The paper addresses two main points: the deficiencies of the past regulatory design and the additional dangers coming from financial reforms that increase the regulatory powers of supervisors. The first point is briefly dealt with reference to past experience and alternative theoretical approaches. For the second point I argue that a prudential regulatory design necessarily leaves large discretionary powers to supervisors, who use them to shape the effective direction impressed to regulation. The current crisis has shown that the force of its first impact much depended on how supervisors had formerly utilised their discretion. Recent reforms and proposals are not changing the basic design of prudential regulation, while give additional regulatory powers to supervisors. If, as a consequence, we will experience in the short-run some regulatory uncertainty, lobbying pressures and international regulatory arbitrage will most probably guide the final result towards few additional regulatory costs and an unchanged systemic fragility. As an alternative we could go back to the methodology, not the specific design, of the Glass-Steagall Act, shaping the financial system by means of structural rules aided by few simple prudential ones. JEL Codes: G18, G20, G28
13 citations
TL;DR: In this article, the authors argue that adopting a systemic perspective the crucial point is not just the nature of innovations but their quantitative dimension and dynamics, which are responsible for the endogenous creation of financial fragility.
Abstract: The official regulatory responses to the current crisis do not alter the laissez faire approach to the production and allocation of financial risks which characterises the existing regulatory framework. The stated goal remains that of maintaining the freedom for the private sector to introduce financial innovations, whose nature is consistent with the system design pursued by the official authorities. I argue that adopting a systemic perspective the crucial point is not just the nature of innovations but their quantitative dimension and dynamics, which are responsible for the endogenous creation of financial fragility. The new official proposals do not appear capable of changing this picture. A radical revision of the regulatory approach is necessary, of which an outline is presented. JEL Codes: G18, G20, G28
13 citations
TL;DR: In this article, the main macroeconomic developments in the German economy from national unification are traced, and a possible synthesis is proposed, based on an analysis of the formation of national income and the use of resources according to the national accounts system.
Abstract: This paper traces the main macroeconomic developments in the German economy from national unification. Its performance is compared with that of the rest of the euro area and its largest economies. The study documents as Germany’s modest growth in the later 1990s was due to the restrictive impact on domestic demand coming from the deep restructuring and modernization of the production system, followed by sweeping reforms after the turn of the century. Rapid productivity increases and prolonged wage moderation, especially in industry, fuelled a large and mounting current account surplus in Germany, that compares with the deficits registered in most European countries. The study retraces the recent debate on how to correct those imbalances, recalling the arguments for and against the thesis that the countries with a current payments surplus, above all Germany, must also play an active role in fostering the adjustment of the deficit countries. A possible synthesis is proposed, based on an analysis of the formation of national income and the use of resources according to the national accounts system. The implication is that Germany may contribute to the correction of imbalances within the euro area not so much by altering the wage formation mechanism as by creating incentives for domestic investment, hence fostering employment creation, in the service sectors that are currently lagging behind the extraordinary perfomance of a number of core activities in the industry. JEL Codes: E20, E61, O52
8 citations
Journal Article•
TL;DR: In the immediate aftermath of the current financial crisis in the United States the response has been to resolve small and medium size banks, while large banks experiencing financial trouble have been given both direct and indirect government support as mentioned in this paper.
Abstract: In the immediate aftermath of the current financial crisis in the United States the response has been to resolve small and medium size banks, while large banks experiencing financial trouble have been given both direct and indirect government support. This, however, has resulted in a number of larger banks absorbing smaller ones, creating an even smaller number of even larger banks that dominate the financial system. This article deals first with a comparison of the problems created by “too big to fail” financial institutions. The second section deals with the possible restoration of Glass-Steagall type legislation as a means of restoring single-function financial institutions. It concludes that alternatives to separation of functions will have to be found to deal with multifunction financial institutions since most lending activity requires securities markets activities. JEL Codes: E50, G01, G20, F30, N22
7 citations
Journal Article•
TL;DR: In this article, the authors argue that the disincentive approach is insufficient to deter financial managers looking for power, and some kind of segmentation needs to be introduced, as suggested by Paul Volcker.
Abstract: The article is a revised and updated version of that published on the March 2010 issues of Moneta e Credito. It was there claimed that, up to now, the G20 has supervised the process to revitalize the real economy affected by the Great Recession through fiscal stimuli and a very easy monetary policy, and to rescue the battered financial system by injecting capital into giant banks and firms. The G20 is now turning its attention to financial regulation, with the FSB as its main operational arm. The ideas that are being proposed stress the need for disincentives toward too much risk taking (more capital, higher liquidity, limits to remunerations and bonuses, etc.), particularly by big and complex financial institutions that are likely to entail systemic risks. The paper maintains that, as the disincentive approach is insufficient to deter financial managers looking for power, some kind of segmentation needs to be introduced, as suggested by Paul Volcker. JEL Codes: E44, G1, G18, G28 Keywords: introduction, financial crisis, rules
5 citations
Journal Article•
TL;DR: In contrast, consumer price indices in major OECD countries, a leading indicator for monetary policy, showed almost no inflation as discussed by the authors, which is a puzzle as the evolution of consumer prices were not responsive to record low interest rates, doubledigit commodity inflation, and a sharp depreciation of the dollar.
Abstract: Expansionary monetary policy in key industrial countries and a rapidly depreciating US dollar sent commodity prices soaring at unprecedented rates during 2003–2007. In contrast, consumer price indices in major OECD countries, a leading indicator for monetary policy, showed almost no inflation. This twin development is a puzzle as the evolution of consumer prices were not responsive to record low interest rates, doubledigit commodity inflation, and a sharp depreciation of the dollar. A common trend, identified as a monetary shock, drives commodity prices. Policymakers face a policy dilemma: maintain expansionary monetary policy stance with persistent commodity price inflation, subsequent severe world recession, and financial disorder, or tighten monetary policy with subsequent sustained economic growth and financial and price stability. JEL Codes: C10, C22, E31, E52, Q40 Keywords: Monetary Policy, Asset Inflation, Commodity Prices
3 citations
TL;DR: In this article, the authors provide an overview of the current economic and financial situation and summarise the main topics dealt with by the following articles: financial crisis, rescue plans, fiscal policy, monetary policy, supervision.
Abstract: The article is an introduction to the new issue of the Journal. It provides an overview of the current economic and financial situation and summarises the main topics dealt with by the following articles. JEL Codes: G01, G21, N20 Keywords: financial crisis, rescue plans, fiscal policy, monetary policy, supervision
Journal Article•
TL;DR: In this article, an overview of the current economic and financial situation and summarises the main topics dealt with by the following articles is provided. But, this constraint leaves various options open.
Abstract: The article is an introduction to the new issue of the Journal. It provides an overview of the current economic and financial situation and summarises the main topics dealt with by the following articles. Retrenchment of public expenditure is once again being called for by international agencies as well as by leading economists and politicians. The irony of this all is that by rescuing financial institutions the policy authorities, which up to now have totally ignored the problems posed by an excessive increase of private debt, focusing attention on public debt alone, have dealt with a crisis originating in the private debt area by shifting part of its weight to the public sector. This should call for some reconsideration of macroeconomic views. In any case, for any individual country considered in isolation, it is rather difficult to ignore the mainstream recommendations. Countries with already large public deficits and debt risk coming under attack on the side of financial speculation if they ignore the consensus recipes. Financial markets can then foresee a spiral of growing public expenditure for interest payments, growing deficits and growing public debt, further increasing the spread up to the point of collapse. Fiscal retrenchment then takes place, so to say, at gunpoint. There is little choice, thus, for many countries on the sign of their fiscal policies. However, this constraint leaves various options open. JEL Codes: G01, G21, N20 Keywords: financial crisis, rescue plans, fiscal policy, monetary policy, supervision
TL;DR: In this article, the authors investigated whether an improvement or deterioration in relations with the USA brings significant economic and financial benefits or costs, in areas such as, trade, capital flows, remittances, aid, military expenditures, and education.
Abstract: Relations of countries with the USA could be considered as helpful in their quest for enhanced economic performance. Does an improvement or deterioration in relations with the USA bring significant economic and financial benefits or costs, in areas such as, trade, capital flows, remittances, aid, military expenditures, and education? The results based on an event study are very preliminary. Nevertheless, this line of research could be fruitful and may enhance our appreciation of international political-economic relations and the ability to build more comprehensive theories of trade, capital flows and the like. JEL Codes: F50, F51, F59 Keywords: international political relations, international trade, international economic development
TL;DR: The authors provides a detailed analysis of the many factors that contributed to the international financial crisis and highlights the global imbalances, both financial and economic, that continue to pose significant threats to the stability of the world economy.
Abstract: This article provides a detailed analysis of the many factors that, over a period of several years, have contributed to the international financial crisis and highlights the global imbalances, both financial and economic, that continue to pose significant threats to the stability of the world economy. The examination goes beyond looking strictly at the case of the USA to include the positions of other relevant countries, and underscores the shifting relations between the USA and the rest of the world. The pertinent geopolitical aspects are covered, followed by a discussion on possible institutional changes in international financial agencies, prospective financial problems of the USA and their implications, monetary developments, external balances, and international economic problems. JEL Codes: E50, E60, F30, F42, G01 Keywords: Financial Crisis, Instability, Rules
TL;DR: Sarcinelli as discussed by the authors discusses the need for structural regulations on financial institutions in order to avoid a new systemic crisis, and discusses the limits of the official regulatory responses to the current crisis, while Hossein Askari and Noureddine Krichene discuss the inflationary pressures in world commodity markets stemming from expansionary monetary policy.
Abstract: The present issue of PSL Quarterly Review includes three articles: by Mario Sarcinelli, on the need for structural regulations on financial institutions in order to avoid a new systemic crisis; by Mario Tonveronachi, on the limits of the official regulatory responses to the current crisis; by Hossein Askari and Noureddine Krichene, on the inflationary pressures in world commodity markets stemming from expansionary monetary policy. In the aftermath of the world financial crisis, the immediate policy response was necessarily directed to re-establishing working conditions in national and international financial markets, and to set out cushions to the impact of the financial crisis on the real economy, especially on employment. Both objectives implied very strongly expansionary monetary and financial policies. It was clear from the outset, however, that such policies could not be maintained for an indefinitely long span of time. The way financial speculation operates on public and external debt imbalances – with sudden increases in risk spreads, hence increasing the cost and difficulty of debt financing – strengthens the already existing negative asymmetry in policy responses. That is, it puts strong pressure on deficit countries to adopt drastic readjustment policies which are clearly counterproductive for activity levels and employment, while surplus countries (especially those with external surpluses) do not stand equal pressure to adopt reflationary policies. JEL Codes: F3, G1, N1, B5