Transcript Finance and Development

Mr. Massimo M Beber
Senior Tutor
College Lecturer in Economics
Sidney Sussex College
Cambridge CB2 3HU
[email protected]
http://people.pwf.cam.ac.uk/mb65
International Political Economy
In Historical Perspective
FINANCE 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” (19792007);
• 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 ROCK
13TH SEPTEMBER 2007
NY-LEHMAN BROTHERS HQ
15TH 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).
A TOAST TOO EARLY?
Lt. Gen. Mikhail Kalashnikov with vodka (20th September 2004)
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)
EXCEPTIONALLY “NICE”?
The “Non-Inflationary,
Consistently Expansionary”
1990’s were explained in terms
of smaller shocks, more flexible
markets, and better policies.
Source: Martin and Rowthorn (2004) “Will Stability
Last?”, UBS Global Asset Management.
LEVERAGE
Source: Obstfeld and Rogoff (2004).
GLOBAL INDUSTRIAL PRODUCTION
EQUITY PRICES
WORLD EXPORTS
MONETARY POLICY I: INTEREST RATE
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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