Mr. Massimo M BeberSenior TutorCollege Lecturer in Economics

Sidney Sussex CollegeCambridge CB2 3HU

mb65@cam.ac.ukhttp://people.pwf.cam.ac.uk/mb65

International Political Economy

In Historical PerspectiveFINANCE AND DEVELOPMENT

http://people.pwf.cam.ac.uk/mb65/mstir-2011

Institute of Continuing Education - Centre of International Studies

A Generational Perspective

The evolution of economic thinking can be illustrated through the experience of successive generations:

• Current undergraduates - “the return of depression economics” (2007-??)

• Their parents - “the end of history” (1979-2007);

• Their grandparents – “the managed economy” (1945-1973)

Two Hypotheses on finance

• Efficient Markets– Finance “oils the wheels” of the market– It speeds up income convergence at lower cost

in current consumption– Rational expectations ensure stability– Competition empowers rational expectations

• Financial Instability– Expectations intrinsically volatile– Volatility creates real economic damage– This damage can be long-lasting (hysteresis)– Prudential regulation must be strict

“GREED IS GOOD”

“YOU STUPID BOY!”

FROM INTERMEDIATION TO SECURITIZATION

A BRANCH OF NORTHERN ROCK13TH SEPTEMBER 2007

NY-LEHMAN BROTHERS HQ15TH SEPTEMBER 2008

PRUDENTIAL RATIOS IN BANKING

Assets Liabilities

Liquidity Reserves Deposit Liabilities

Government Securities Non-Deposit Liabilities

Loans

Equity (Shareholders’ wealth.

REGULATION: BETWEEN EMH AND FIH

Source: Committee of European Banking Supervisors Annual Report 2004.

Source: Goldman Sachs (2004).

Lt. Gen. Mikhail Kalashnikov with vodka (20th September 2004)

A TOAST TOO EARLY?

THE ECONOMIC OUTLOOK

• OECD recovery faster than feared– Governments running large deficits– Businesses re-building stocks– Resilience of growth in non-OECD Asia

• Large uncertainty factors remain– Long-term state of government finances– Long-term solvency of financial sector – Inflationary expectations

THE POLICY DEBATE (JULY 2010)

• Fiscal consolidation• Mopping up the emergency money• Re-regulation of the financial system• (Without forgetting) “structural reforms”

(employment legislation, competition policy, public services...)

• And the real question: which is the dog, and which is the tail?

CONCLUSIONS

• The biggest negative shock since the 1930’s• Was initially met by a much bolder

macroeconomic response• Leading to a faster recovery than anticipated• But “the markets”, missing “sound finance”, are

gunning for Greece and other Eurozone members;• Policy-makers may be losing their nerve:• Can Keynes still be the “defunct economist ...

academic scribbler” to enslave them/inspire you/revive public governance?

REFERENCES• Eatwell, John (2004) “International regulation, risk management, and the creation of instability”

(Lecture at the IMF, 1st October 2004)

• Eichengreen, Barry and Kevin O’Rourke (2010) “What do the new data tell us?” (vox.eu posting, accessed July 2010)

• International Monetary Fund (2010) Global Financial Stability Report (April).

• OECD (2010) Economic Outlook no. 87 (May): “General Assessment of the Economic Situation”.

• Rodrik, Dani and Arvind Subramanian (2008) “Why did financial globalisation disappoint?”

• Obstfeld, Maurice and Kenneth Rogoff (2009) “Global Imbalances and the Financial Crisis: Products of Common Causes”

• VOX.EU “The Global Crisis Debate” (various postings by academic economists and professional policy-makers)

OUTPUT VOLATILITY

The business cycle in the industrial world simmered down since the early 1980s (USA), or 1990s (Europe)

Source: Martin and Rowthorn (2004) “Will Stability Last?”, UBS Global Asset Management.

EXCEPTIONALLY “NICE”?

The “Non-Inflationary, Consistently Expansionary” 1990’s were explained in terms of smaller shocks, more flexible markets, and better policies.

LEVERAGE

Source: Obstfeld and Rogoff (2004).

GLOBAL INDUSTRIAL PRODUCTION

EQUITY PRICES

WORLD EXPORTS

MONETARY POLICY I: INTEREST RATE

and Ben Bernanke. The central bank response has differed globally.Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

                   

MONETARY POLICY II: QE

Source: OECD (2010a), p. 8.

MARKET CONDITIONS AND PERCEIVED RISKS

FISCAL POLICY

ASSESSING EU SOVEREIGN RISK

Caption: Editor to Charles Dickens: "I wish you would make up your mind Mr. Dickens. Was it the best of times or was it the worst of times? It couldn't possibly have been both."

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