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What Do Swiss Francs and Marking to Market Have in Common?
Over the past week, two seemingly unrelated policy initiatives may have revealed the true nature of authorities’ plans to fix the financial system. First, the Swiss National Bank intervened in foreign exchange markets to devalue the Swiss Franc. This move was followed by a proposal to suspend mark to market accounting in the US. What is the connection? Unbalanced and Unhinged
Treasury Secretary Hank Paulson attempted to soothe rattled markets on Sunday by making explicit the government’s guarantee of Fannie Mae and Freddie Mac’s securities. Unfortunately, Paulson’s vague plan to backstop the two mortgage giants didn’t seem to add much to what the markets had assumed was already there. Fannie and Freddie have always had an implicit government guarantee, and Paulson’s plan merely confirmed what the markets had already assumed: that Agency debt and guaranteed securities had the backing of the Federal government, but equity holders didn’t. So the trade that worked so well last week – going long GSE debt but short the equity, kept working on Monday. Fannie and Freddie stock finished off 5% and 8% respectively, while the much anticipated sale of Freddie Mac short-term notes went off without a hitch. Read More...Does the End of Bretton Woods Hold Lessons for Today?
by
Ben Carliner
- updated
Mar 17, 2008 14:55
US dollar weakness has been a fact of life recently, as the turmoil in US credit markets, Federal Reserve rate cuts, and the large US current account deficit weigh on investor sentiment. The dollar has been testing new lows against many of the world's freely floating currencies, but many countries that peg or manage their exchange rates against the dollar have been reluctant to allow significant revaluations. So perhaps it is time to take a look back at the end of the original Bretton Woods system and see if it provides any lessons for the management of our current international monetary regime. Read More...Can the Nordic Model Survive?
Modern Sweden is known for its elegant, cutting edge design, its skilled engineers, its stable of world class multinational corporations, and above all, its generous social services. Sweden is in fact the epitome of the modern social welfare state, enjoying one of the highest standards of living in the world while preserving a strong emphasis on egalitarianism, social justice and thrift. But there is increasing concern that the economic model upon which Swedish prosperity was built is fraying under the pressure of globalization. Swedish firms are expanding abroad, but at home the economy is failing to create enough new jobs, and there is a worrying lack of entrepreneurial activity. Read More...Dismantling the Washington Consensus
The Commission on Growth and Development, a blue-ribbon panel of policy makers, business leaders and academics chaired by Nobel Prize winning economist Michael Spence, has just released its report on creating and sustaining economic growth in developing countries. The Commission has spent the past two years researching and writing the report, and now that the final report is out, it is striking how much the state of the debate has moved away from the ‘Washington Consensus’ and towards a strong, constructive role for states in fostering and sustaining economic development. Read More... |
Making IMF Support More Palatable
While the attention of most economists and policy makers has been focused on the short term priority of forestalling a global depression through public stimulus packages, we should not lose sight of the need to restore stability to international capital markets. International capital flows have been a major transmission mechanism for both asset bubbles and financial crises, and any reforms of the international monetary and regulatory institutions should focus on enhancing the stability of international financial markets and monetary regimes. Read More...Comfortably Numb
OK, deep breaths everyone. Now that Secretary Paulson and Chairman Bernanke have floated a massive public rescue plan and financial Armageddon seems to have been averted (at least for the short term), it is time to take a step back and think hard about what we are doing here. Read More...Misallocation of Capital
The failure of the US financial sector to intermediate excess global savings into productive investments in the US is the proximate cause of the current financial turmoil. Financial markets were faced with a surge in the supply of investment capital, which in turn boosted demand for securities. This led to a fundamental mispricing of risk, as the search for high-yield assets drove investors into riskier instruments and promoted the use of excessive leverage to increase returns on low-yielding assets. These conditions led to a series of asset bubbles that are now unwinding, with expensive implications for taxpayers. Read More...Intermediate This
The recent turmoil in the financial markets has caused hundreds of billions of dollars in losses and now threatens to push the real economy into recession. Public officials and central bankers have already organized a slew of interventions to prop up the markets and bigger public bailouts are likely on the way. As the turmoil continues, the finger pointing has begun, and a number of suspects have been tagged as responsible for getting us into this mess: some blame Alan Greenspan and the Fed for keeping interest rates too low for too long; others point to fraudulent lending practices in the mortgage industry; and yet others argue that complex derivatives and trading techniques that relied on leverage are to blame. While all of these culprits have played a role in the financial turmoil, they are for the most part merely symptoms of our greater malaise – not the cause. Read More...Time to Take Our Medicine
The weekend’s extraordinary actions on the part of the Federal Reserve are evidence of the amazingly precarious state of the financial markets. If there was any doubt that the current financial crisis is one of historic proportions, Sunday’s takeover of Bear Stearns by JPMorgan for $2 a share (one-tenth of the value of Bear as of last week), backed by a $30bn guarantee of Bear’s suspect portfolio of securities from the Fed, the opening of the discount window to the prime dealers, and a further 25bp cut in the discount rate should put any remaining reservations to rest. Read More... |
