What’s at stake: The recent difficulty faced by Greece in rolling over its national debt has let some to blame hedge fund involvement in the market for credit default swaps. These contracts can be used to insure bondholders against the risk of default, but when purchased naked (without holding the underlying bonds), they can serve as highly leveraged speculative bets on a rise in the cost of borrowing faced by the sovereign states. Leaders of the G20 group of countries will consider a European initiative to crack down on speculative activity in derivatives trading, George Papandreou, Greek prime minister, said in Washington on Tuesday. Mr Papandreou was speaking after a meeting with Barack Obama where he outlined the initiative planned jointly with France, Germany… Read more
Bruegel blog
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Credit Default Swaps in the crosshairs
10th March 2010
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Don't joke with inflation
8th March 2010
Visiting scholar Ignazio Angeloni argues that the anti-crisis medicine proposed by the IMF- to raise inflation targets in good times- is worse than the illness and defends economic models from the accusation of irrelevance. Click here to download this comment in Italian. Read more
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Looking behind the core inflation numbers
2nd March 2010
What’s at stake: The prices of US goods and services, excluding food and fuel, fell last month for the first time since 1982. Headline inflation in January remained stable from the previous month at a 2 percent annual rate, a bit above most private forecasts, boosted by higher fuel costs. But the show was stolen by the core measure. Excluding food and energy, consumer inflation saw the largest monthly drop in more than 27 years and its third largest decline in 47 years. Laurel Graefe for the Atlanta Fed's macroblog writes that several factors were behind the decline in the core index (such as falling airline fares, a dip in new car prices, and ongoing declines in prices for household… Read more
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Capital controls are in again
2nd March 2010
What’s at stake: The International Monetary Fund has shifted its long-held stance against capital controls as it seeks to help emerging economies protect themselves from future economic crises. In a new staff position note, confirming the change of stance we reported in November, IMF economists wrote that capital controls could be used in some cases by emerging market governments as a shield from unwanted capital flows. The IMF staff position note argues that for both macroeconomic and prudential reasons there may be circumstances in which capital controls are a legitimate component of the policy response to surges in capital inflows. The note reviews the arguments on the appropriate management of inflow surges and focuses in particular on the conditions under… Read more
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Wirtschaftsregierung, mode d'emploi
27th February 2010
In this column Bruegel Director Jean Pisani-Ferry writes about European economic governance. Pisani-Ferry points out that the Greek crisis has highlighted the need to reinforce prevention and monitoring systems as well as to develop effective crisis management mechanisms. He concedes that the creation of the Euro had some mistakes, which were probably inevitable; however he emphasizes the need to learn from experience and to start proposing feasible solutions in the current European frame. La zone euro a passé, mieux qu’on aurait pu le craindre, l’épreuve de la crise financière. Avec la crise grecque et la contagion qui menace, elle en affronte maintenant une seconde, à certains égards plus redoutable.La crise grecque a tous les traits d’une tragédie annoncée : un… Read more
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Petition wars
23rd February 2010
What’s at stake: There’s an economists’ duel underway in several countries through petitions. In Britain, 60 leading economists backed the decision of Alistair Darling, UK finance minister, to delay spending cuts until 2011. They were responding to a letter published by another group of prominent economists saying that budget cuts should start more or less immediately. In the US, economists have petitioned for a hiring tax credit. Marginal Revolution wonders why institutions bother to generate petitions signed by economists. Is it to influence the world? To signal which economists are on their side? To cultivate better connections with economists and create an excuse to contact them and affiliate with them? He also reports that a team of researchers has just… Read more
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Disciplining the euro area
23rd February 2010
What’s at stake: The crisis in the euro zone continues, as European nations, EU institutions, world markets, and other players (among them the IMF) play an elaborate and dangerous game of financial chicken. The potential for a damaging default and significant stresses on the single currency is real, but as yet, no widely acceptable solution has come to the fore. The lack of consensus is particularly unfortunate given that many saw the possibility of this sort of crisis long ago, at the very inception of the euro area. In this week's print edition, The Economist published a guest Economics focus by Daniel Gros of the Centre for European Policy Studies and Thomas Mayer of Deutsche Bank. They give their interpretation… Read more
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L’affaire Goldman
22nd February 2010
What’s at stake: The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs for securities fraud on Friday, charging the bank with creating and selling mortgage-backed securities that were intended to fail. According to the complaint, Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that he wanted to bet against because they were most likely to lose value and packaged those bonds into the “Abacus” investments, which were sold to investors like foreign banks and pension funds. As those securities plunged in value, the Paulson hedge fund made money on the negative bets, while the Goldman clients who bought the investments lost billions of dollars. Meanwhile, other nations seem prepared to get in on the investigative action, and Goldman's board could… Read more
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Financial Regulation: A New Fortress Europe
20th February 2010
EU policy leaders are becoming increasingly aware that the necessary re-regulation of Europes financial system must not be allowed to lead to a damaging fragmentation of its internal market for financial services. However, they still seem oblivious of the risk of global financial fragmentation inherent in some of their regulatory initiatives, however well-intended. In his monthly column, Senior Fellow Nicolas Véron takes a brief look at the difficult and complex corresponding trade-offs. Cross-border integration of financial institutions and markets in Europe has been the major factor determining the shape of the European Union’s financial regulatory initiatives during the 2000s. A major legislative package rolled out after 1999, for example, contributed to the removal of barriers that until then had kept… Read more
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Reorienting macroeconomic policy
16th February 2010
What's at stake: The IMF, at the forefront in recommending the policy response to the global economic crisis, has entered the debate about how macroeconomic policy should be adjusted in the future, drawing lessons from the worst global recession in 60 years. Olivier Blanchard, the IMF's chief economist, and a couple of other Fund economists released a paper on Friday about how macroeconomic policy might be reoriented. Drawing lessons from the Great Recession Olivier Blanchard says economists and policymakers alike were lulled into a false sense of security by the apparent success of economic policy ahead of the crisis. In the piece, Blanchard and co. lay out some key questions about the design of macroeconomic policy frameworks and also develop… Read more