September 30, 2011
"International Policy Implications and Lessons From the Global Financial Crisis"
Last Friday and Saturday, the JIMF 4th Annual Conference at UC Santa Cruz took place, organized by Joshua Aizenman (UCSC & NBER), Robert Dekle (USC) & James Lothian (Fordham University & JIMF) and sponsored by JIMF, SCCIE-UCSC, and the FRBs of Atlanta and San Francisco. I didn't get a chance to go, which was unfortunate as the papers were relevant to thinking about how the international financial system is linked to the events of 2008.
Here are the links to the papers.
“Emerging economies in the 2000s: real decoupling and financial recoupling”
Eduardo Levy Yeyati, Universidad Torcuato Di Tella & Brookings Institution.
Discussant: Helen Popper, Santa Clara University
“Central Bank Announcements of Asset Purchases and the Impact on Global Financial Commodity Markets”
Reuven Glick and Sylvain Leduc, Federal Reserve Bank of San Francisco
Discussant: Yu-chin Chen, University of Washington
“A long-run view of financial crises and inequality” Michael D. Bordo, Rutgers University and Christopher M. Meissner, UC Davis
Discussant: James Lothian, Fordham University & JIMF
“Foreign reserve management during the global financial crisis” Kathryn M.E. Dominguez, University of Michigan and the NBER
Discussant: Michael Hutchison, UC Santa Cruz
“Adjustment patterns to commodity terms of trade shocks: the role of exchange rate
and international reserves policies” Joshua Aizenman, UCSC and the NBER, Sebastian Edwards, UC Los Angeles and the NBER, and Daniel Riera-Crichton, Bates College
Discussant: Michael Melvin, Black Rock and JIMF
“How resilient were emerging economies to the global crisis?” Tatiana Didier World Bank, Constantino Hevia, World Bank, and Sergio L. Schmukler, World Bank “Do unconventional financial sector interventions stop a heard of bears running? “Are Chinese trade flows different?” Yin-Wong Cheung, UC Santa Cruz, Menzie D. Chinn, University of Wisconsin and NBER, and Xingwang Qian, SUNY Buffalo State The papers will be published in a special issue of the Journal of International Money and Finance, subject to peer review.
Keynote Address by Olivier Jeanne, John Hopkins University and the NBER
“The Triffin Dilemma and the Saver's Curse"
Discussant: Mark Spiegel, Federal Reserve Bank of San Francisco
Evidence from UK bank-level panel data” Andrew K. Rose, UC Berkeley and Tomasz Wieladek, Bank of England
Discussant: Gerald Dwyer, Federal Reserve Bank of Atlanta
Discussant: Robert Dekle, USC
“How resilient were emerging economies to the global crisis?” Tatiana Didier World Bank, Constantino Hevia, World Bank, and Sergio L. Schmukler, World Bank
“Do unconventional financial sector interventions stop a heard of bears running?
“Are Chinese trade flows different?” Yin-Wong Cheung, UC Santa Cruz, Menzie D. Chinn, University of Wisconsin and NBER, and Xingwang Qian, SUNY Buffalo State
The papers will be published in a special issue of the Journal of International Money and Finance, subject to peer review.
Posted by Menzie Chinn at September 30, 2011 06:44 AMdigg this | reddit
Why no discussion of the central role of oil prices?
From Didier, et al:
This paper studies the cross-country incidence of the 2008-2009 global crisis and documents a structural break in the way emerging economies responded to the global shock. Contrary to popular perceptions, emerging market economies suffered growth collapses comparable, or
even larger, to those experienced by advanced economies during the crisis. With such large financial and real shock, most of the world economy came to a halt when the crisis hit, with most countries resuming their pre-crisis growth rates afterwards. While emerging economies were
not able to avoid the crisis collapse, they grew at a higher rate during the post crisis, relative to before and, as usual, to advanced countries. Moreover, emerging economies initiated their recovery sooner. Breaking with the past,emerging economies were able to conduct countercyclical
policies, and became more similar to developed countries in softening the impact of the crisis and in their ability to pursue expansionary policies.
From my 2009 paper "Peak Oil Economics":
When oil consumption exceeds the recession
threshold, which we estimate at the cost equivalent of 4% of GDP in the U.S., a recession ensues, and developed economies rapidly shed
large shares of oil demand. By rights, this share
of oil should be quickly seized by the emerging economies during and immediately following the recession. As a consequence, the developed
countries should anticipate being “locked out”
at lower levels of consumption.
The model predicts, for example, that U.S. consumption will top out at 19.0- to 19.5 million barrels per day,about 5% to 7% below earlier peaks, and never see 2007 levels again.
The lock-out can happen by two mechanisms:
Emerging economies can recover before developed ones (due, for example, to excessive debt incurred by developed economies in attempting to defend accustomed standards of living), leading to oil consumption increases in emerging economies and increasing the price of oil to levels exceeding the tolerance of developed countries...
Since the trough of the recession, US oil consumption has averaged 19.0 mbpd. August consumption was 19.43 mbpd. During the recession, 4 mbpd of oil consumption was transferred from the OECD to the non-OECD. Where are these numbers in the papers listed above? Understanding the role of oil is entirely central, I believe, in understanding why the OECD is struggling and why the non-OECD came through the recession is good shape. It is no coincidence. The relationship is causal. The oil supply is the anvil; China is the hammer; and the OECD is the ingot.
Posted by: Steven Kopits at September 30, 2011 10:06 AM
I would dispute the limited approach Olivier Jeanne took to valuing reserve accumulations. For example, I doubt that China would have grown anything like it did without its deliberate currency policy, which continues to steal AD from ROW, to its gain and to the detriment of ROW. If economic growth is demand-constrained, even if the reserves prove worthless after the fact, the act of amassing them will have left China with a much bigger economy and productive resources than it would otherwise have had.
Posted by: don at September 30, 2011 11:52 AM
I have been asking Prof. Chinn in the comments to "What Predicts a Credit Boom Bust?" to explain how he deduced from Box 1.2 that net capital inflows were a signficant factor in creating the credit boom in the United States. Box 1.2 states clearly (and this is shown in Figure 1.2.1) that net capital inflows were the main factor in emerging economies but that increases in productivity were the predominant predictor of credit booms in advanced countries.
One thing that impressed me in the back and forth was the amount of jargon that was used. Although I did not understand it much, I was still left without a convincing answer, so I decided to turn to one of the coauthors of the IMF study. I asked: Is there anything in the data from 2008 onward that points to an marked increase of large capital inflows as a triggering factor for credit booms in advanced countries? Or are the data from 2008 onward consistent with the bar graph?
His answer was clear. I did not ask permission to quote him, but I will paraphrase. He and others are updating the 2008 analysis of credit booms, and he does not expect the main message of Figure 1.2.1 to change much.
Several back-and-forths derived from Prof. Chinn's incorrect concluaion, for example:
W.C. Varones: By convention, in reporting statistical results, we usually use the 10%, 5%, 1% marginal significance levels, denoted by some symbol. You will notice that the real interest rate coefficients do not exhibit any statistical significance, at the conventional levels.
Since the specification is a reduced form one, we don't know what causes the net capital inflow. But if you want to blame the folks who pushed the Commodity Futures Modernization Act (like Phil Gramm), and the policy-level folks put in place by the Bush Administration at the Office of Thrift Supervision [a], and the policy level appointees at the SEC who in 2004 allowed the investment banks to leverage up well, please do.
But since the authors specifically said that there is a weak correlation between net capital inflows and credit booms in advanced countries, this entire exchange and others along the same line can be discounted.
Posted by: colonelmoore at September 30, 2011 12:47 PM
Anyone can buy up a supply of something high priced if they have enough credit. China has extended far more domestic credit relative to GDP than the OECD and has probably allocated it less wisely. With export demand falling, will China have the cash flow to bail out its insolvent banks and to rescue its state governments? Will it have to restrain its raw materials acquisition spree to deal with bad loans?
Copper prices are a proxy for how China is doing. How is copper doing?
Posted by: colonelmoore at September 30, 2011 01:04 PM
Interesting choice of words in the conclusion of the paper by Bordo et al :
"...Our results are consistent with the wide variety of studies that find the financial crisis hurt the poor harder than the rich. The burden of adjustment seems to be borne by wage earners. This
finding, suggests that financial crises might have serious political consequences if the
poor are allowed to voice dis-satisfaction in the wake of such crises..."
"if the poor ARE ALLOWED to voice dis-satisfaction" ???
The alternative , in the U.S. at least , seems to involve pepper spray and billy clubs.
Posted by: Goldilocksisableachblonde at September 30, 2011 06:24 PM
An entire conference devoted to "lessons from the global financial crisis" and no one even thought to ask why we allow central banks to manipulate interest rates, flood markets with easy money, create asset bubbles, and destroy economies.
Posted by: W.C. Varones at September 30, 2011 10:25 PM
Absolutely. No country ever defaulted before we had central banks. We never had economic crises before they existed. No asset bubbles without central banks.
Posted by: Anonymous at October 1, 2011 06:00 AM
I cannot claim to be an expert in China's internal financing. Surely there must be bubbles which will pop from time to time. I can, however, say that China has posted an amazing string of 10%+ GDP growth years, and unless the stats are untrue, China is doing very well overall. And China is funding US deficits, not vice versa. But you're right to say that at some point, we'll see a nasty correction. I'm not the guy to tell you when.
As for copper prices. You may recall that I commented, on several occassions since April, that our models suggested recession "by the end of summer". I haven't changed my view (since it involves a re-work of our entire understanding of certain relationships), although I personally think the odds of Jim's more modest slowdown have increased recently.
Now, copper is more peaky than oil, and so its price should be more volatile. That copper is falling is supportive of our thesis. It should be quite sensitive to the business cycle. But I don't consider copper prices decisive.
If we don't see initial unemployment claims in the 500-600k range, then Jim is quite likely to be right. We have been stuck around 400k, breaking below that for the first time in five months just this week. Meanwhile, oil prices are now in the sustainable range in the US (just). Thus, if the economy does not fall over in the next 60 days, we will probably have escaped a formal recession this time around, at least based on historical relationships between oil prices and the economy.
Posted by: Steven Kopits at October 1, 2011 09:22 AM
I had an interesting chat with the head of strategy for a large oil company yesterday. He stated that the Marcellus is producing more propane than they know what to do with.
Propane, ethane and butane are natural gas liquids, a by-product of natural gas production from hydrofracking and horizontal drilling. I believe we need to get this propane into play as a transportation fuel. By rights, it should cost about $1 less per gallon than gasoline. Lower priced fuel would have the potential to provide breathing room to a lot of lower income folks who have to drive. If Obama wants jobs and to stimulate the economy, putting the needed legislation and regulatory framework into place would be a constructive start.
Posted by: Steven Kopits at October 1, 2011 09:33 AM
Steve or Anonymous -- I suggest you actually read some US economic history. You will find that the US suffered from regular credit bubbles and economic crises throughout the 19th century prior to the establishment of the federal reserve.
Posted by: spencer at October 1, 2011 09:49 AM
spencer: I think Steve/Anonymous was being ironic. At least I hope so...
Posted by: Menzie Chinn at October 1, 2011 09:58 AM