European Central Bank
Steven Pearlstein has a good column today explaining that Germany, not Greece, is Europe's real problem: While European governments surely have long-term structural budget problems, the immediate fiscal challenge comes from the decline in tax revenues and the increase in transfer payments that result from slow growth and high unemployment. The right policy response to that -- along with the very real threat of price deflation in Europe -- isn't to put the entire continent in a fiscal straitjacket that makes the recession even worse.
Shortly after Greek Prime Minister George Papandreou took office last fall, he learned that he’d inherited a massive booby prize: a budget deficit that was twice the amount the previous government had disclosed. But, when Papandreou came clean and promised to address the problem, the financial markets reacted violently. Interest rates soared, adding billions in debt-service costs to an already dire budget picture.
Otherwise-obscure central bankers spent an unprecedented amount of time in the global limelight last year. As the crisis brought down not only banking behemoths, but also macroeconomic axioms, the expansionary measures enacted by the Fed’s Ben Bernanke, the European Central Bank’s Jean-Claude Trichet, and the Bank of England’s Mervyn King have been credited, at least for now, with preventing a second coming of the Great Depression.
The latest round of fretting in global debt markets is focused on Greece (WSJ; Greece). This is misplaced. To be sure, there will be a great deal of shouting before the matter is formally resolved, but the Abu Dhabi–Dubai affair shows you just where Greece is heading. The global funding environment (thanks to Mr.
Here's a nice illustration from the European Central Bank's Jacob Ejsing and Wolfgang Lemkeon of how markets interpreted government rescue packages for banks across Europe: The chart shows how the premia on credit default swaps for governments (i.e., the cost of insurance on government debt) shot up while premia for banks dipped over a tumultuous week in October 2008 when a host of rescue measures were introduced. After the crisis's peak, sovereign CDS were much more responsive than bank CDS to news about the health of financial markets.
Simon Johnson is a professor at MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is co-founder of the global economy website, BaselineScenario.com. Expectations were low for this weekend's G20 meeting of finance ministers and central bank governors. Despite that, we should be disappointed with the outcome. There was no substantial progress on any policies that will help pull us out of a severe recession. The U.S.
Some of us have been alarmed by the European Central Bank's apparent refusal to acknowledge that deflation (and its really, really bad economic consequences) is a genuine possibility. So it's reassuring to see the ECB start to follow the Fed's lead and move more aggressively to prevent it. According to today's Wall Street Journal, the bank is cutting its benchmark interest rate half a point to 1.5%, its lowest level ever.