Was the global financial crisis really a “debt crisis”?

Alexandra Zeitz (St Antony’s College, Oxford)

Speaker: Anatole Kaletsky, Gavekal Consultancy
Chair: Adam Bennett, St. Antony’s College, Oxford

We are accustomed to analyses of the 2008-9 financial crisis that point to and dissect particular causes of the crisis, using these to call for post-crisis reform, regulation and rethinking. In a presentation at the PEFM seminar on January 25, Anatole Kaletsky instead gave a much wider-ranging and sweeping account of the causes of global financial crisis, and outlined the fundamental shifts in the relationship between governments and markets that he believes it has unleashed.

In 2010, Kaletsky published Capitalism 4.0: The Birth of a New Economy in the Aftermath of the Financial Crisis (Bloomsbury). In his presentation in early 2016, he argued that many of the false diagnoses of the crisis that he wrote the book to challenge continue to dominate post-crisis conversations. Rather than placing blame on individual bankers or on high pre-crisis debt levels, Kaletsky sees the global financial crisis as the demise of an entire theoretical and ideological view of the economy, collapsing in on itself as economic rules came to be applied dogmatically. 

Blind faith in the efficient market hypothesis led both regulators and market participants to make bad decisions – foremost among them the Henry Paulson’s decision to allow Lehman Brothers to fail – bringing down the intellectual consensus that had supported the previous structure of capitalism.

In Kaletsky’s view, the rupture the crisis provoked in both economic theory and practice will lead to a new practice and understanding of capitalism. In fact, he argues this reinvention of capitalism is just the latest in an ongoing process of evolution and adaptation. Kaletsky’s historical narrative begins with “Capitalism 1.0,” emerging in 1776 with the independence of the United States, and coincidentally also the publication of Adam Smith’s Wealth of Nations.

The IMF in the Balkans: Recent experience

Alexandra Zeitz, St. Antony’s College, Oxford

Speakers: Adam Bennett, St. Antony’s College, Oxford and Robin McConnachie, Oxford Analytica

Chair: Stewart Fleming, St. Antony’s College, Oxford

When the IMF is called in during a time of economic crisis, the programme agreed is often politically contentious. One of the defining questions in the aftermath of the IMF’s intervention is frequently: “did it work?” In late November, PEFM heard from Adam Bennett, formerly of the IMF, about the effectiveness of IMF programmes in a region where the Fund has played a prominent role in recent decades: the Balkans. Robin McConnachie, who has acted as an advisor to governments in the region, contributed his insights into what makes for successful reform programmes. 

How does one capture the impact of an IMF programme? Bennett explained that the Fund itself has grappled with the numerous measurement challenges of evaluating effectiveness. Simple measures comparing indicators before and after an IMF programme neglect the counterfactual of how the country would be faring in the absence of an IMF programme. Comparisons between countries with and without IMF programmes cannot account for the fact that countries with IMF programmes often faced worse conditions than those that received no programme.

The Fund has responded to these measurement concerns by building complex models that attempt to capture the impact of policy interventions. These models, however, can only be as accurate as the assumptions they are built on. For his evaluation of the IMF’s programmes in the Balkans, therefore, Bennett used simple comparisons between those Balkan countries with and without IMF programmes and contrasted countries’ actual performance with the targets set in the programme.

What is needed for EU competitiveness? The view from Croatia

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Speaker: Boris Vujčić, Governor, Croatian National Bank

Chair: Gillian Edgeworth, Wellington Management and St. Antony’s College, Oxford 

What will it take to boost the EU’s competitiveness and firm up a shaky economic recovery? In late November, PEFM hosted Governor Boris Vujčić of the Croatian National Bank, who presented his views on the roadblocks to productivity in the EU and argued for structural reforms to encourage convergence among different European regions and increase competitiveness.

There are many explanations for Europe’s competitiveness woes, particularly for why it lags behind the United States across indicators of productivity. Indeed, Jeffrey Franks’ PEFM presentation in October outlined how the IMF accounts for Europe’s flagging competitiveness.

In his account, Governor Vujčić stressed the importance of the revolution in information and communications technology, which has made huge contributions to private sector productivity in the US, but lagged in Europe. He also highlighted the problem of financing – without well developed equity markets and venture capital funders, young European entrepreneurs often lack the investment to get their ideas off the ground. Europe has also been slow, Governor Vujčić argued, to bring research and expertise from academia into the private sector. While Europe’s universities are well represented on global league tables, transfer of knowledge into business is still lacking.

More Europe, anyone?

Robin McConnachie (Oxford Anylitica; Former Senior Adviser, Bank of England) 

The PEFM seminar series at St Antony's continued last Monday evening with another look at the causes of the 2007 /08 financial crisis and the various attempts to deal with the consequences for Europe. What happens now to take this forward? The discussion was led by Lorenzo Codogno, currently a visiting Professor at the LSE , but at the time Chief Economist at the Italian Treasury, who represented Italy on a number of the key committees servicing European Finance Ministers.

Lorenzo's thesis was that contagion from the US sub – prime mortgage failure quickly infected a number of European financial sectors causing a number of different problems which were difficult to deal with simultaneously in the absence of Europe - wide bodies to produce an effective response. He showed a number of useful charts using Italy as an example – in fact Italy had been less severely affected than many other European countries. But there had been a collective deficiency in the European response to the spread of the crisis, which he called a crisis of governance. For the future the answer was to have more effective European institutions rather than a plethora of rules which could not be enforced. The macro imbalances procedures currently being developed should enable countries to see in advance and hopefully take action to avert crises but this approach was not agreed by all, with resistance to large fines being levied on non-complying countries with excessive deficits, the perversity of this throwback to the SGP being particularly objected to. What was agreed was the need for debt deleveraging but this had hardly begun. European growth should be stimulated by exploiting the opportunities created by the single market e.g. the proposed capital markets union but the existing European authorities apart from the ECB were in a state of collective paralysis: there was strong resistance in many countries on important issues like bailing in lenders or creating yet more (costly) European institutions. An agreed roadmap was required to revive the European project.

Waiting for the recovery: Europe’s financial crisis and the fragile recovery

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Presentation: Jeffrey Frank, Director, IMF Offices in Paris and Brussels

Blogpost: Alexandra Zeitz, St. Antony’s College

The numbers are striking and disheartening. Seven years on from the onset of the global financial crisis, Europe’s recovery remains shallow and vulnerable. Real GDP is ten percentage points higher in the US than it was in 2008. In the UK it is five percentage points higher. In Europe, by contrast, it is three percentage points lower than in 2008.

Unemployment in Europe remains extremely high. In August 2015, the average unemployment rate for the Eurozone was 11%. In Spain it was over 22%, having come down slightly from a height of 26.3% in early 2013.  Estimated potential output growth, already lower in Europe than the US prior to the crisis, fell sharply during the crisis, from 1.3% in 2006-2007 to 0.6% in 2008-2010. It has remained low, sparking fears of a European slide into stagnation.

Why has the recovery in the Eurozone been so much more sluggish than in the neighboring UK and in the US? And what tools are available to policymakers to encourage a more robust recovery, improving the livelihoods of Europeans still afflicted by the aftermath of the crisis?

Learning from Confucius? Lessons from Chinese law for rebuilding trust in the global economy

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Presentation: Nicholas Morris, Balliol College

Blogpost: Alexandra Zeitz, St. Antony’s College

What is the relationship between trust and law? And is it possible that some systems of law are better able to encourage trust than others? In a PEFM seminar in October, Nicholas Morris presented a research project investigating the role of Chinese legal traditions in cultivating trust, examining whether tenets of Chinese law can be adopted globally in order to rebuild trust in the economy, particularly in the financial sector.

Morris’ comparative work on Chinese legal traditions and trustworthy behavior is part of a larger research project, led by Morris together with David Vines, on rebuilding trust in the financial sector in the aftermath of the global financial crisis. Vines and Morris have presented their work at PEFM in the past (see discussions of their presentations in these two previous posts) and the circle of experts and academics linked to PEFM continue to engage with this promising interdisciplinary research endeavor.

In order to function equitably and effectively, financial markets require strong trust among participants. This was Morris’ starting point. Merely relying on individuals’ desire for approbation and maintaining their reputation is insufficient to ensure robust trust. Instead, he argued, moral and normative structures are necessary to set out accepted and approved patterns of behavior.

The Troika – Past and Future? A view from Washington

Alexandra Zeitz, St. Antony’s College, Oxford

Speaker: Russell Kincaid, PEFM Associate, Former senior IMF official
Chair: David Vines, Balliol College, Oxford

In late 2009, when the extent of Greece’s debt problems first became clear, there were no established rules for coordination between the IMF and the Eurozone institutions. While special mechanisms for surveillance of the Eurozone existed, there were no guidelines for lending to countries within the currency area, an event that was considered “extremely unlikely”.

And yet, over the course of the Eurozone crisis, four countries borrowed from the IMF (Cyprus, Greece, Ireland and Portugal). And with Greece’s future still uncertain, the Fund looks set to play a continued role in the Eurozone for the foreseeable future. In October 2015, Russell Kincaid, a former senior IMF official and current PEFM Associate, gave a rich and novel account of the cooperation and coordination among those three institutions that were at the forefront of stemming the crisis from 2009 onwards: the Troika.

Kincaid suggested that the groundwork for coordination among the IMF, the European Commission and the European Central Bank was laid during earlier programs in Hungary (2008), Latvia (2009) and Romania (2009). In these earlier programs, patterns appeared that would also characterize the later dynamics between the later institutions.