Piroska Nagy-Mohasci, 12 Feb 2018
Starting off with a bit of scolding of financial sector regulators and professionals, Piroska Nagy-Mohacsi asserted that, in the wake of the financial crisis, financial institutions and individuals who manage them have been prone to congratulate themselves on their success on returning the market to its pre-2008 levels, rather than taking responsibility for the crisis which they, in fact, caused. To be fair, there have been significant advances in regulation during the crisis and post-crisis period. A new layer of micro-prudential policies, affecting individual banks, was instituted, along with macro-prudential policies, and the identification of international and domestic banks whose central place in a given economy necessitated higher capital requirements.
Overall, studies show that post-crisis banks are both better capitalized and more liquid than before. The benefit of this achievement should not be underestimated. Domestically, macro-prudential policy has arguably avert crises in the cases of Iceland, Croatia, and Spain. Additionally, in 2013, with the economic shock created by the US’s “taper tantrum” it was the countries with the strongest macro-prudential policy which were least affected. Notwithstanding this success on the part of financial regulators, Nagy-Mohacsi points to several “elephants in the room” which are not being properly addressed by the financial community.
Friday, 16 February 2018
Friday, 9 February 2018
A monetary history of the euro area
Christopher Marsh, 5 Feb 2018
Chris Marsh begins his talk by looking at the US Great Depression in order to draw parallels to the economic crisis in Europe. The Depression began with a massive movement of capital from independent, country banks, to large, central, city banks. This mass movement was sparked by the inability of banks to provide cash to all those who wished to withdraw. The panic of insufficient currency created an unfavorable balance of payments as loss of money supply in country areas encouraged debt holders to liquidate debt held and to cease to invest in these areas. It is not hard to see that this behavior is self-reinforcing; this is just the sort of economic behavior that monetary policy was created to prevent.
The EU saw a similar decrease in currency levels during 2010. Marsh focusses on Latvia and Greece to tell the story of the crisis. Prior to the crisis Latvian banks had borrowed heavily from abroad and lent domestically, so when the crisis hit it saw a great contraction in its currency supply. Domestic demand and real GDP fell sharply in 2009, prompting the IMF to step in. The IMF decreased reserve requirements in order to allow Latvia to begin to pay off debt.
Friday, 2 February 2018
Economic convergence in the Euro area: coming together or drifting apart?
Jeff Franks, 29 January 2018
Jeff Franks began his talk with the good news that, since the crisis, all members of the EU have been experiencing some degree of economic growth. The first caveat, of course, is that this growth is in many cases a mere recovery to pre-crisis levels, but this news is certainly better than the alternative and shows that the EU is able to stabilize after a severe shock. A closer look at European growth shows us, however, that although all countries have experienced growth, the levels of growth between countries are diverging meaningfully. The concept of divergence, and its opposite, convergence is central to how Franks analyses the effectiveness of the European Union.
For Franks, there are four key types of convergence: nominal convergence, which measures variation in inflation levels and interest rates between EU states; structural convergence, which looks at variation in government regulation of the economy; real convergence, which measures income levels; and cyclical convergence, which measures not the current level of economic activity but the current stage an economy finds itself in, assuming a natural pattern of boom and bust. An ideal EU would see convergence by all these measures between all its component states.
Jeff Franks began his talk with the good news that, since the crisis, all members of the EU have been experiencing some degree of economic growth. The first caveat, of course, is that this growth is in many cases a mere recovery to pre-crisis levels, but this news is certainly better than the alternative and shows that the EU is able to stabilize after a severe shock. A closer look at European growth shows us, however, that although all countries have experienced growth, the levels of growth between countries are diverging meaningfully. The concept of divergence, and its opposite, convergence is central to how Franks analyses the effectiveness of the European Union.
For Franks, there are four key types of convergence: nominal convergence, which measures variation in inflation levels and interest rates between EU states; structural convergence, which looks at variation in government regulation of the economy; real convergence, which measures income levels; and cyclical convergence, which measures not the current level of economic activity but the current stage an economy finds itself in, assuming a natural pattern of boom and bust. An ideal EU would see convergence by all these measures between all its component states.
Friday, 26 January 2018
Price and financial stability: rethinking financial markets
David Harrison, 22 Jan 2018
According to David Harrison, since the start of the Bretton-Woods system every few years an economic crisis of some sort occurs. He considers that under the current system these crises are inevitable, and can be compared to the occurrence of earthquakes in areas located on tectonic faults. Harrison attributes this catastrophic nature to the fact that the markets include two separate price systems.
The first is pricing based on current output of a given good or service. This is the real market. The second is the value placed on future asset flows, known as the financial market. One can understand the difference between these two markets by considering the expectations which drive price changes in each of them. In the real market, the output of a given asset is measured often and sales are made frequently so a given good or service’s price can gradually change with the reality of its output. In the financial market the value of a given investment can only be predicted, not measured. As a result of this, speculators are left guessing what the average other speculator expects a given stock to do and thereby feedback loops can result in grossly overvalued assets.
Tuesday, 23 January 2018
Friday, 24 November 2017
Ireland: The case for an adaptive approach to macromanagement
Gillian Edgeworth, 20 Nov 2017
Gillian Edgeworth of Wellington Management starts out with the story of how Ireland’s economy was able to converge with the rest of the EU in the period from the 1980s to the present. From 1990-2006 Ireland’s economy converged four times faster than did comparable emerging markets. It did this by taking advantage of the large increase in global trade which was seen during this period. With a corporate tax rate of only 12%, in this period Ireland became the base for many international corporations. Though this reliance on foreign cash flows allowed Ireland’s economy to grow, it also contributed greatly to Ireland’s vulnerability to the forces of the 2008 economic crisis.
The fact that Ireland had so much international economic involvement also meant that when it came time to handle its debt crisis, the Irish government had little say as the majority of the debt was owed to foreign creditors. Because Ireland is so heavily dependent on foreign cash flows experts worry that although it is currently successful it is particularly exposed to destabilizing changes in the international market.
Gillian Edgeworth of Wellington Management starts out with the story of how Ireland’s economy was able to converge with the rest of the EU in the period from the 1980s to the present. From 1990-2006 Ireland’s economy converged four times faster than did comparable emerging markets. It did this by taking advantage of the large increase in global trade which was seen during this period. With a corporate tax rate of only 12%, in this period Ireland became the base for many international corporations. Though this reliance on foreign cash flows allowed Ireland’s economy to grow, it also contributed greatly to Ireland’s vulnerability to the forces of the 2008 economic crisis.
The fact that Ireland had so much international economic involvement also meant that when it came time to handle its debt crisis, the Irish government had little say as the majority of the debt was owed to foreign creditors. Because Ireland is so heavily dependent on foreign cash flows experts worry that although it is currently successful it is particularly exposed to destabilizing changes in the international market.
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