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  • Stephen Roach: 'Odds of a hard landing in China and India remain low'

    We find it hard to talk about China without talking about India. Sometimes, for the sake of economic comparison, we pit the two against each other. Other times we pit the two, often along with South American kindred spirit Brazil, against the developed economies of the West. india and China seemed to zag while the rest of the world zigged during the global economic crisis, and were able to grow while the US, China, and Europe stagnated. But as 2011 ends, the two growing powerhouse economies are showing some vulnerability. At Project Syndicate , Stephen Roach warns us not to carried away by concerns that China and India will struggle in the coming year. He is a little worried about India's ability to avert crisis. As for China, Roach says not to expect a "hard landing," as China's policymakers have taken necessary action to ward off any major downfall: That is particularly evident in Chinese officials’ successful campaign against inflation. Administrative measures in the agricultural sector, aimed at alleviating supply bottlenecks for pork, cooking oil, fresh vegetables, and fertilizer, have pushed food-price inflation lower. This is the main reason why the headline consumer inflation rate receded from 6.5% in July 2011 to 4.2% in November. Meanwhile, the People’s Bank of China, which hiked benchmark one-year lending rates five times in the 12 months ending this October, to 6.5%, now has plenty of scope for monetary easing should economic conditions deteriorate. The same is true with mandatory reserves in the banking sector, where the government has already pruned 50 basis points off the record 21.5% required-reserve ratio. Relatively small fiscal deficits – only around 2% of GDP in 2010 – leave China with an added dimension of policy flexibility should circumstances dictate. India, however, "is more problematic," Roach notes: India is more problematic. As the only economy in Asia with a current-account deficit, its external funding problems can hardly be taken lightly. Like China, India’s economic-growth momentum is ebbing. But unlike China, the downshift is more pronounced – GDP growth fell through the 7% threshold in the third calendar-year quarter of 2011, and annual industrial output actually fell by 5.1% in October. But the real problem is that, in contrast to China, Indian authorities have far less policy leeway. For starters, the rupee is in near free-fall. That means that the Reserve Bank of India – which has hiked its benchmark policy rate 13 times since the start of 2010 to deal with a still-serious inflation problem – can ill afford to ease monetary policy. Moreover, an outsize consolidated government budget deficit of around 9% of GDP limits India’s fiscal-policy discretion. Read Why India is Riskier than China here .

  • Lagarde: 'Global Risks Are Rising, But There Is a Path to Recovery'

    While those of us on the East Coast were watching the weather this weekend, top economists from around the globe were still at the Jackson Hole Economic Policy Symposium , listening to the new head of the IMF , Christine Lagarde give what Felix Salmon called "the most important speech of the meeting, by far." Lagarde gave her vision for what European and American leaders need to do to stave off a most damaging double-dip recession. From the speech: Two years ago, it became clear that resolving the crisis would require two key rebalancing acts—a domestic demand switch from the public to the private sector, and a global demand switch from external deficit to external surplus counties. On the first, the idea was that strengthened private sector finances would allow the engine of growth to switch back from the public to the private sector. On the second, the idea was that higher demand in surplus countries would make up for a lower spending path in deficit countries. But the actual progress on rebalancing has been timid at best, while the downside risks to the global economy are increasing. Those risks have been aggravated further by a deterioration in confidence and a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed. Developments this summer have indicated that we are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed. So we must act now. It is a matter of vision, courage and timing. Decisive action will bolster the confidence that is required to restore and rebalance global growth. We are not without options. We know what needs to be done to support growth, reduce debt, and prevent further financial crises. But we need a new approach—based on bold political action, with a comprehensive plan across all policy levers, implemented in a coordinated global way. Read the speech here .

  • Roubini Calls for Swift Action to Stop Depression

    In an op-ed for the Financial Times , Nouriel Roubini calls S&P's decision to downgrade the US credit rating "misguided," and he worries that it is making an already dangerous economic situation worse. Between the US economy's inability to add jobs, and the economic stagnation and debt struggles in Europe, Roubini is expecting another global recession. And he fears that this one might be significantly worse than the last. So can we avoid another severe recession? It might simply be mission impossible. The best bet is for those countries that have not lost market access - the US, UK, Japan, and Germany - to introduce new short-term fiscal stimulus while committing to medium-term fiscal austerity. The US downgrade will hasten demands for fiscal reduction, but America in particular should commit to look for significant cuts in the medium term, not an immediate fiscal drag that will worsen growth and deficits. Most western central banks should also introduce further QE, even though its effect will be limited. The European Central Bank should not just stop rate hiking: it should cut rates to zero and make big purchases of government bonds to prevent Italy or Spain losing market access - the outcome of which would be a truly major crisis, requiring doubling (or tripling) of bail-out resources, or debt workouts and a eurozone break-up. Read Mission impossible: stop another recession here .

  • John Taylor on Teaching the Crisis

    Earlier this month, the American Economic Association hosted its first Teaching Economics and Research in Economic Education conference. Stanford economist John Taylor was among the speakers. He spoke about how the financial crisis changed his approach to teaching economics. He noted that how one teaches economics post-crisis depends on one's view of the crisis--its causes, its impact, and the impact of government policy pre and post-crisis. Taylor: In my view the problem was that economic policy deviated from basic economic principles which had worked well. The result was a great recession, a financial panic, and now a very weak, nearly nonexistent, recovery. The deviations included a monetary policy which set interest rates too low for too long and a regulatory policy which failed to enforce existing rules. The deviations from sound principles continued when government responded with an ad hoc bailout process and temporary fiscal stimulus programs. The good news for the economy is that economic growth and stability can be restored by adopting policies consistent with basic economic principles. The good news for teaching is that the crisis has left us with many examples where teachers can illustrate basic economic principles including that incentives matter, the permanent income hypothesis, regulatory capture, and the money multiplier. Moreover, the heated disagreement among economists about the crisis presents another opportunity to make the subject more interesting to students. The AEA has made the slides from Taylor's talk available online. For example, Taylor shares this slide as an example of how to illustrate the importance of incentives: Access all the slides from Taylor's talk and from talks by Vernon Smith and B. Douglas Bernheim here .

  • David Wessel on Three Years of Fighting Economic Collapse

    David Wessel outlines what we have learned since the start of economic collapse in August of 2007 in his weekly column (subscription required), and in this short video from the Wall Street Journal . Among other key points, Wessel says that the efforts to avert major economic meltdown will likely end up costing taxpayers less in actual dollars, but that long term political and economic costs will be much greater.

  • Liaquat Ahamed Wins Pulitzer for 'Lords of Finance'

    The 2010 Pulitzer Prize winners were announced yesterday, and an investment manager won in the History category. Liaquat Ahamed , director of Aspen Insurance Holdings, won for his book Lords of Finance , a compelling look back at the economics of World War I and the Great Depression that Janet Maslinm in a New York Times review, said "easily connects the dots between the economic crises that rocked the world during the years his book covers and the fiscal emergencies that beset us today." Ahamed made some of those connections in an interview last year in an interview with David Kurtz of Talking Points Memo: You can also watch a longer talk from Ahamed at Johns Hopkins here .

  • Greenspan Offers His Take on 'The Crisis' In Brookings Paper

    Alan Greenspan spoke at the Brookings Institution on Friday. The former Federal Reserve chair delivered a paper on the root causes of the financial crisis, and argued that monetary policy was not the cause. He defended the Fed's decision to keep the short-term interest rate low in during the height of the housing bubble: The funds rate was lowered from 6½% in early 2001 to 1¾% in late 2001, and then eventually to 1% in mid-2003, a rate that held for a year. The Federal Reserve viewed the 1% rate as an act of insurance against the falling rate of inflation in 2003 that had characteristics similar to the Japanese deflation of the 1990’s. The Fed thought the probability of deflation small, but the consequences, should it occur, dangerous. But we recognized that a funds rate held too low for too long might encourage product price inflation. I thought at the time that the rate decrease nonetheless reflected an appropriate balancing of risks. I still do. To my knowledge, that lowering of the federal funds rate nearly a decade ago was not considered a key factor in the housing bubble. Indeed, as late as January 2006, Milton Friedman, historically the Federal Reserve’s severest critic, in evaluating the period of 1987 to 2005, wrote, “There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind.” Read Greenspan's paper, The Crisis , here .

  • Simon Johnson: Beware the Loop

    Simon Johnson has become one of the most active public economists since the global economic crisis. Professor of economics at MIT , a member of the Panel of Economic Advisers for the Congressional Budget Office , former chief economist for the IMF --Johnson's has a long list of credentials to back his writing at Calculated Risk and elsewhere. And he has been sounding warning about the fragility of the financial sector post-crisis. In his speech at the Roosevelt Institute 's Make Markets Be Markets conference, Johnson implored the audience to recognize the difference between a downward slide caused by "a series of unfortunate events," and a "loop" caused by systemic changes: Simon Johnson on the Doom Cycle (MMBM) from Roosevelt Institute on Vimeo .

  • Bruce Bartlett on The Great Depression and the Recent Recession

    On the day that America's highest ranking Great Depression scholar is getting all the attention, we're going to let Bruce Bartlett weigh in on what he sees as the parallels between the current fiscal crisis and the Great Depression. Here's Bartlett--former Treasury official in the Bush 41 administration and author of The New American Economy: The Failure of Reaganomics and a New Way Forward -- speaking last month as part of a panel at NY Salon : Bartlett was . joined for that panel discussion by Justin Fox , James Matthews , Alan Miller , and Robert Samuelson . You can watch the full discussion, billed as The Recession, Obama, and the Future: Where to go from here? at Fora.tv.

  • Bernanke Named Time's Person of the Year

    The Federal Reserve enters its second day of the end-of-year policy meeting today with the news that Chairman Ben Bernanke is Time Magazine 's Person of the Year for 2009. Something tells us that Bernanke and the members of the Federal Open Market Committee will be able to keep their minds on the business at hand, as most economists and policy analysts expect the Fed to stick to what Reuters calls the current "super loose monetary policy stance." But as readers wait for a pronouncement later today, Time has a series of articles online about Bernanke and the Fed that are worth reading (and a photo gallery of Bernanke going back to his childhood as "the nerd from Dillon, South Carolina"). And this is not one of those "Person of the Year" selections based on the winner's sheer publicity. Time's editors are clearly crediting Bernanke with preventing the recession from getting worse. As Richard Stengel , Time's managing editor, writes: One scholar has written that the Great Depression of the 1930s could have been averted if the Federal Reserve at the time hadnt constricted the money supply, let a third of American banks go under and told Americans to tighten their belts. That scholar, Ben Bernanke, just happened to be chairman of the Federal Reserve when the economy this year appeared to be headed for a repeat performance. We've rarely had such a perfect revision of the cliché that those who do not learn from history are doomed to repeat it. Bernanke didn't just learn from history; he wrote it himself and was damned if he was going to repeat it. Bernanke decided to do the opposite of what the Fed did back in the '30s: he would loosen the money supply as far as it would go, he would save as many banks as he could, and he wasnt going to hector the American public about pulling up their socks. Read the full tribute to Bernanke here . And also be sure to read the Q&A between Time editors and Bernanke here .

  • George Soros Speaks with Reuters Staffers

    In his new book, The Crash of 2008 and What it Means , George Soros calls for an overhaul of the global financial system, proposing a set of policies to reframe regulatory systems and make sure that the mistakes that led to this "once in a lifetime event" are not repeated. Earlier this week, in speaking with Reuters staffers, he shared his concern that people might be too quick to ignore the lessons of the past, saying "There is a real danger that people don't understand the system was fundamentally flawed and there is no return to where we come from." Here are excerpts from that conversation: