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Weekly Roundup from RGE Monitor


Source: Greetings from RGE Monitor!

Check out all the great contributions that were published during the past week on RGE’s Nouriel Roubini’s Global EconoMonitor, RGE Analyst’s EconoMonitor, Finance & Markets Monitor, Peterson Institute for International Economics Monitor, Global Macro EconoMonitor, U.S. EconoMonitor, Emerging Markets Monitor, Asia EconoMonitor, Latin America EconoMonitor and Europe EconoMonitor.

On Nouriel Roubini’s Global EconoMonitor, Nouriel argues that it is high time to pass legislation allowing this special insolvency regime to allow an orderly nationalization of large insolvent banks and the orderly wind-down of insolvent financial institution. If such insolvency regime had been in place a year ago the expensive bailout of the creditors/counterparties of Bear Stearns and AIG could have been avoided and the disorderly collapse of Lehman would have also been prevented. Similarly today – as soon as the stress test is done – some large and systemically important banks (and their holding companies and non-bank financial arms) will have to be taken over. To do it orderly we absolutely need a special insolvency regime like the one we have for the bank arms of bank holding companies and like the one we had for Fannie and Freddie. So to orderly takeover large insolvent banks and minimize the fiscal costs and financial collateral damage and systemic risk of this takeover we need to pass such legislation now. The time for Congress to act is now. Take a look at: “It is time for a special insolvency regime for systemically important financial institutions (non-bank financial firms and bank holding companies)”

In another piece, Nouriel argues that the Geithner plan is not an alternative to nationalization. In his view, insolvent banks should be nationalized and the Geithner plan should not apply to them. But solvent banks still need to have their toxic assets disposed of; and for these banks the Geithner plan provides a solution that – all in all – is better than the alternative. Those who don’t like the Geithner plan on the basis that they prefer nationalization are right that the insolvent banks should be nationalized. But they usually don’t give an explanation of how they would dispose of the toxic assets of solvent banks. Also, those who criticize the Geithner plan as a solution to the toxic assets of solvent banks should come up with an alternative that works and that is less costly to the government than the Geithner plan. Check out: “New York Times Deal Book: Dr. Doom Finds Promise in Obama’s Toxic-Asset Plan” and “Geithner Presents a Viable Plan to Dispose of the Toxic Assets…that Does Not Rule Out that Insolvent Banks Should be Taken Over” .

The light at the end of the tunnel may be the one of the recovery of growth after a long and ugly U-shaped global recession or that of the incoming train wreck of an L-shaped global near-depression. Avoiding the L is possible but it requires much more coherent and aggressive policy actions in the US, China and all over the world. So stay tuned for the details. Read: “Update on the Global Macro and Policy Outlook” and “Article summarizing the US and global economic outlook”

And don’t Miss “The Finalists of the 2009 TIME 100 World Most Influential People”

On the Finance & Markets Monitor, Satyajit Das discusses the numerous important dimensions of Credit Default Swaps (CDSs). The author goes over the Lehman default, as well as other cases, pointing out the various deficiencies and potentially significant problems that are currently plaguing the CDS market. Read: “CDS Markets – Through The Looking Glass”.

Then, James Hamilton analyzes the Fed’s latest decision and almost completely agrees with everything that the Fed has decided to undertake, differing only in the types of securities that he thinks it is best for the Fed to purchase. The author concludes that it would be unwise to bet against the Fed’s desire to avert deflation. Read: “Quantitative easing”.

Finally, David E. Altig describes the fundamental difference between quantitative easing and credit easing. The author then points out that the Fed’s recent action was equivalent to credit easing and not, strictly speaking, to quantitative easing. Read: “Careful with that language”.

On the Peterson Institute for International Economics Monitor, Trevor Houser argues in a testimony before the Commission on Security and Cooperation in Europe that the transition to a low-carbon economy must account for the development needs of low-income countries and address the leakage concerns of advanced economies. No single country was the ability to solve this problem on its own or the leverage to force other countries to act if they do not see it as in their interest to do so. Given the multilateral nature of the challenge, it is both appropriate and encouraging that the CSCE has decided to take up this issue. A common approach to climate change between OSCE countries, and the role of trade in meeting climate goals, will help support a politically viable and environmentally meaningful global agreement. Read: “Green and Mean: Can the New US Economy be both Climate-Friendly and Competitive?”.

Then Jacob Funk Kirkegaard has two pieces. The first one is: “What Comparing Healthcare Costs Really Reveals”. In brief, he argues that it is common knowledge that the cost of Medicare and Medicaid will grow to become an unsustainably large part of the US federal budget in coming decades. His point is that more than 80 percent of the projected increases derive from excess cost growth, unrelated to expansion in coverage or the effects of an ageing population. Excess cost growth refers to the fact that the cost of treating each beneficiary is growing faster than the growth in nominal US per capita GDP. The second piece is co-authored with Martin Neil Baily. The argument is that Social Security system, if left unreformed, will run out of money as the baby-boomer generation retires and lives longer than earlier generations. The number of workers paying contributions into the system is declining relative to the number of those receiving benefits, and as more baby-boomers retire and collect their benefits for a longer period, the current annual surplus of Social Security will turn to deficit over the next decade. Read: “US Pension Reform: Lessons from Other Countries”.

Also, Ted Truman has an interesting piece where he suggests that the IMF should make a commitment to an immediate, one-time allocation of $250 billion in special drawing rights (SDR) by the International Monetary Fund (IMF) to its 185 member countries. Read: “How the Fund Can Help Save the World Economy”.

Finally, Hufbauer, Charnovitz, and Kim examine whether the climate policy options policymakers are contemplating are compatible with core principles of the world trading system as set forth in the decisions of the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), and its Appellate Body. They argue that both import restrictive measures and export subsidies in the climate bills being considered by Congress stand a fair chance of being challenged in the WTO. Read: “Global Warming and the World Trading System”.

On the Global Macro EconoMonitor, Ricardo Caballero says Geithner’s Public-Private Partnership Investment Program (PPIP) is encouraging and should be supported. He says the Legacy Assets program is a well-conceived plan that seeks to resolve the discrepancy between the price at which banks are willing to sell their legacy assets and the price investors are willing to pay for them. He also adds that the Capital Assistance Program is the next step but it must protect investors against aggregate uncertainty. Read: “A Preliminary Reaction of the PPIP”.

Tim Duy dissects a recent joint statement by the Federal Reserve and Treasury which he interprets as the Fed asserting its independence. Concerned over of its increasing role in the financial crisis, he writes that the Fed wants to ensure that when the crisis abates, it will still be an independent decision-making body. Read: “Fed-Treasury Accord”.

Yves Smith takes issue with the idea that the Fed can easily back out of its current “support lending” initiatives. Instead, what are thought to be temporary programs could be around for a while even as the economy recovers. Yves sets this in context of the intensifying debate about the role of the Fed. Read: “Fed Rescue Programs: No Exit?”.

On the Emerging Markets Monitor, Farid Matuk writes two interesting pieces. On ‘How To Succesfully Lie To A President’ the author discusses the particularities of official GDP growth estimates for Peru in 2009, while on “We are in the same boat”. Matuk makes a comparison of some Latin American economies’ performance and the US put in a historical perspective. Finally, Martin Anidjar’s “Is EM Becoming a Barbell Trade of An Asset Class” questions which EM countries will fare the the global crisis better.

On the U.S. EconoMonitor, Lucian Bebchuk argues that fallout from an AIG implosion can be quarantined and that an all-or-nothing approach is not the only answer to untangling its derivative counterparties. Read: “AIG Still Isn’t Too Big to Fail” The middle path between “fear” and “greed,” Geither’s Treasury plan, according to Christopher Carroll, offers triage for zombie banks as well as a long-term curative for the finance and banking sector. Read: “Treasury Rewards Waiting”. Finally, Sylvain Raynes mulls AIG’s “double-cross” and its public lashing. Read: “The Hollow Men of the AIG Debacle”

On the Asia EconoMonitor, Michael Pettis discusses his views about whether or not “The dollar must be replaced – yet again” in light of the Chinese central bank’s proposal to replace the US dollar as the international reserve currency with a new global system controlled by the IMF. Pettis believes that such proposals are driven mainly by political considerations.

Brad Setser also examines “China’s call for a new international financial system” and how these proposals lead naturally to a discussion not just of reserve currencies, but exchange rates, exchange rate regime and reserve growth. Setser believes that this is a discussion that the G-20 ultimately needs to have.

David Smith highlights Mervyn King’s speech on “simple and robust” regulation where regulatory design should be based on an explicit identification of the market failures that regulation can hope to correct. Smith also draws attention to Japan’s move towards the 2001-6 policy of quantitative easing by stepping up bond purchases. Read: “King on regulation – Japan’s quantitative easing”.

On the Latin America EconoMonitor, Nicolas Magud raises the question of why is the Fernandez Administration in Argentina bringing forward Congressional mid-term elections to June 2009 rather than October, as stated by law. He argues that by having elections in June, the government increases the chances of winning because the dire economic performance would not be felt fully. Read: “Is Multiple Equilibria Possible in Argentina? “. Then, Farid Matuk analyzes the impact of economic growth and inflation on reducing poverty in Peru, and concludes that both variables have similar relevance. Please read: Growth, Inflation & Poverty by Farid Matuk . Finally, Vitoria Saddi, Italo Lombardi and Bertrand Delgado provide an insight on recent monetary policy decision in the region (Mexico and Colombia) and discuss the main economic events in Latin America in the current week. Please read: “Latam Week Ahead (3/23 – 3/27).

On the Europe EconoMonitor, James Daniel and Martin Schindler discuss how the benefits of the Italian labor market reforms of the mid-1990s are beginning to flag. In their column they highlight the reasons why Italy’s labor market outcomes remain among the worst in Europe and ways to make it more competitive. Read: “Improving the performance of Italy’s labor market.”.

Then, Gregory Connor outlines how the European Central Bank can rebuild confidence and boost liquidity in European financial markets by following the U.S.’s template in designing a toxic asset transfer scheme. He argues that the job is too great a burden for individual EU states, and that it is better suited to the ECB to act as a true regional central bank. Read: “A Geithner Plan for Europe”

Finally, Macro Man comments on the effects of quantitative easing in the U.S., U.K., and Swiss bond markets. He notes that bond markets in each country are down from last week when the quantitative easing strategy was announced, and puts blame on the lack of total public commitment to the process by central banks. Read:”QE: Shock and Awful”.

Also on the RGE Analyst’s EconoMonitor:


Also on the Finance & Markets Monitor:

Also Peterson Institute for International Economics Monitor:

Also on the Global Macro EconoMonitor:

Also on the U.S. EconoMonitor:

Also on the Asia EconoMonitor:

Also on the Latin America EconoMonitor:

Also on the Europe EconoMonitor:

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