Economists' Forum

Why Putin's rule threaten's Russia and the west

By Martin Wolf

At least he made the trains run on time. That was said of Benito Mussolini, Italy’s fascist dictator from 1922 to 1943. Much the same is now said of Vladimir Putin, Russia’s authoritarian president. He may have crushed the fragile shoots of democracy, but he has at least restored the economy, the state and his country’s place in the world.

This view is shared by Mr Putin himself. He stated only last week that: “We have worked to restore the country after the chaos, economic ruin and breakdown of the old system that we saw in the 1990s.” But it suffers from a drawback: it is false, as Michael McFaul and Kathryn Stoner-Weiss of Stanford University argue in a powerful article*.

True, between 1999, the year before Mr Putin became president, and 2007, the Russian economy expanded by 69 per cent. But the economies of 11 of the 15 former republics of the Soviet Union expanded by more than Russia’s. Indeed, only Kyrgyzstan did markedly worse. A number of the former Soviet republics did, it is true, benefit from an oil and gas bonanza. But so, too, did Russia: its oil and gas exports jumped from $76bn in 1999 to $350bn last year. Even so, the Russian economy expanded by less than Ukraine’s.

The remainder of this column can be read here. Debate from our panel of economists appears below.

Why it is so hard to keep the financial sector caged

By Martin Wolf

When will the next financial crisis come? We do not know. Yet of one thing we can be sure: unless we learn from this crisis, another one will put the world economy back on to the rocks in the not too distant future.

The FT has published a number of contributions on the lessons: Charles Goodhart of the London School of Economics and Avinash Persaud of Intelligence Capital offered “a proposal for how to avoid the next crash” (January 31); Francisco González of BBVA discussed “What banks can learn from this credit crisis” (February 4); and Daniel Heller of the Swiss National Bank argued for three ways to reform bank bonuses (February 4). The substance of Mr Heller’s argument was similar to a contribution of my own (“Regulators should intervene in bankers’ pay”, January 15), but without the regulatory coercion.

The big question, indeed, is whether lessons must be embedded in regulation. Optimistic opponents of regulation argue that the banks have learnt their lesson and will behave more responsibly in future. Pessimistic opponents fear that legislators might create a Sarbanes- Oxley squared. The Act passed by the US Congress in 2002, after Enron and other scandals, was bad enough, they say. The banks might now suffer something worse.

The remainder of this column can be read here. Debate from our panel of economists appears below.

China may yet be the economy to lose sleep over

By Kenneth Rogoff

Given the highly vulnerable state of the US and European economies, what would happen to global growth if the Chinese juggernaut also started sputtering? Few investors or policymakers seem to be seriously contemplating this scenario.

China’s remarkable resilience to both the 2001 global recession and the 1997-98 Asian financial crisis has convinced almost everyone that another year of double-digit growth is all but inevitable. In fact, the odds of a significant growth recession in China – at least one year of sub-6 per cent growth – during the next couple of years are 50:50. With Chinese inflation spiking, notable backpedalling on market reforms and falling export demand, 2008 could be particularly challenging.

The remainder of this column can be read here. Debate from our panel of economists appears below.

Bernanke’s reflation gamble may work too well

By Martin Wolf

Whatever else it may be, the Federal Reserve is not boring. Indeed, by the standards of other central banks, it is hyperactive. The shock 0.75 percentage point reduction in the Federal Funds rate of interest last week, particularly if followed by the widely expected 0.5 percentage points on Wednesday, is a dramatic example. The Fed is the exemplar of an activist central bank. But US fiscal authorities are not far behind, as the $150bn (just over 1 per cent of gross domestic product) fiscal package going through Congress demonstrates.

So what are the US monetary and fiscal authorities trying to do? Will it work? What are the risks? Should others follow suit? The urgency of these questions was made clear at the annual meetings of the World Economic Forum in Davos last week. The consensus was gloomy. Comfortingly, the Davos consensus is usually wrong. The Fed is certainly trying to prove it so this time.

The answer to the first question is: apply “risk management”. That approach is associated with Alan Greenspan, the former Fed chairman. But it is also central to the thinking of the Fed under Ben Bernanke.

The remainder of this column can be read here. Debate from our panel of economists appears below.

Beyond fiscal stimulus, further action is needed

By Lawrence Summers

Markets and perceptions of the economic outlook change rapidly. Even two months ago most observers doubted predictions of a US recession, saw no need for a fiscal stimulus, and thought that inflation fears should constrain monetary policy. Now, Washington is more or less settled on a stimulus package that will exceed $150bn; markets at one point last week expected a Fed funds rate below 2 per cent by September. The debate about recession is now about how deep and global its impact will be.

There is enormous uncertainty around economic or financial forecasts. It is possible that pessimism will recede as declining interest rates and dollar exchange rates increase demand. It is more likely, though, that the situation will deteriorate further as perceptions of declining growth increase credit spreads and risk premiums in financial markets, leading to reduced lending, borrowing and spending exacerbating the pessimism about growth.

Perhaps inevitably given the complexity of the problems, policy measures have seemed ad hoc and reactive: measures to increase bank liquidity one week; to help homeowners avoid foreclosure another; to work towards fiscal stimulus another; to lower interest rates most recently. Confidence would be well served by a comprehensive programme of measures that offers the prospect of accelerating growth and insures against a prolonged downturn. Until that happens, it will be difficult for confidence to return.

Substantial monetary and fiscal stimulus is now in train. This will reduce the severity of any recession and provide some insurance against a protracted downturn. Along with macro-economic stimulus in the US, there is the need for further policy development in three other areas – repair of the financial system, containing the damage caused by the housing sector and assuring the global co-ordination of policy.

The remainder of this column can be read here. Debate from our panel of economists appears below.

Bernanke’s Fed shows that it can be nimble

By Stephen Cecchetti

Tuesday morning’s sudden interest rate cut by the Federal Reserve’s Open Market Committee came as a shock even to those of us who live and breathe this sort of thing. The 75 basis point reduction to 3.5 per cent in the committee’s target for the overnight interbank lending rate was the largest single day move since the Fed adopted its current procedures in 1982. Not only was the action unprecedented in size, it was taken following a quickly organised conference call during the evening of a national holiday.

The immediacy of the cut has its genesis in both the deterioration of macroeconomic conditions over the week ending last Friday, combined with the equity market collapse, and the possible desire of chairman Ben Bernanke and his colleagues to change the committee’s modus operandi.

Up until this week, all of the Fed’s actions – both the more and less conventional – have been directed at keeping debt markets working. Starting with Mr Bernanke’s speech on January 10, 2008 it is clear that policymakers felt they had failed to keep the financial crisis from influencing the real economy. With global stock markets in freefall the need for immediate action became apparent. The Fed was planning to cut rates in 10 days anyway so why not bring the action forward to soothe markets and avoid a meltdown? While the inter-meeting action does not signal an emergency, it does confirm the plan for a dramatic easing.

The remainder of this column can be read here. Debate from our panel of economists appears below.

The financial turmoil is like an elephant in a dark room

By Martin Wolf

“I was gradually coming to believe that the US economy’s greatest strength was its resiliency – its ability to absorb disruptions and recover, often in ways and at a pace you’d never be able to predict, much less dictate.” Alan Greenspan, ‘The Age of Turbulence’.

We all hope that Mr Greenspan proves right about the US economy. The Federal Reserve’s rate cut on Tuesday will succeed if Mr Greenspan’s view is correct. Yet many fear he is wrong. Many, too, blame him for the current mess. So how did the world economy fall into its predicament?

One view is that this crisis is a product of a fundamentally defective financial system. An email I received this week laid out the charge: the crisis, it asserted, is the product of “greedy, immoral, solely self-interested and self-delusional decisions made throughout the 2000s, and earlier, by very real human beings at the very top of the financial food chain”.

The remainder of this column can be read here. Debate from our panel of economists appears below.

Why regulators should intervene in bankers’ pay

By Martin Wolf

"You really don’t like bankers, do you?” The question, asked by a former banker I met last week, set me back. “Not at all,” I replied. “Some of my best friends are bankers.” While true, it was not the whole truth. I may like many bankers, but I rather dislike banks. I recognise their necessity, but fear their irresponsibility. Worse, they are irresponsible partly because they know they are necessary.

My attitude to the banking industry is not a prejudice. It is a “postjudice”. My first experience with out-of-control banking was when I watched the irresponsible lending that led to the devastating developing-country debt crises of the 1980s.

The world has witnessed well over 100 significant banking crises over the past three decades. The authorities have even had to rescue important parts of the US financial system – on most counts, the world’s most sophisticated – four times during the same period: from the developing country debt and “savings and loan” crises of the 1980s to the commercial property crisis of the early 1990s and now the subprime and securitised-credit crisis of 2007-08.

The remainder of this column can be read here. Debate from our panel of economists appears below.

Europe is caught mid-river in labour reforms

By Tito Boeri

European unemployment has fallen to a level not seen for more than 25 years. Long-term unemployment has been declining even more: Europe is no longer a place where half of all job-seekers have been on the dole for more than 12 months, as in the mid-1990s.

The disappearance of mass unemployment is not the result of a shrinking pool of labour; in fact the average employment rate in the European Union has increased by more than 6 per cent in 10 years. This is the only area in which Europe is approaching the ambitious economic targets set at the Lisbon summit in 2000.

These developments are the result of reforms that have reduced employment protection and increased the rewards attached to participating in the labour market. Larger immigration to countries with the biggest regional unemployment differentials, Italy and Spain, has also been important. It has contributed to remarkable wage moderation in Europe, by preventing the overheating of local labour markets where there is a shortage of native workers. Governments, however, are not capitalising on these successes.

The remainder of this column can be read here. Debate from our panel of economists appears below.

Why sterling is the next dollar

By Martin Wolf

Will sterling follow the US dollar? As Willem Buiter pointed out last week (The silver lining in sterling’s decline, January 4), this is highly likely. Movements in exchange rates are, to put it mildly, unpredictable. But this one ought to happen. It should also be welcomed. This possibility was, indeed, why the UK had to keep out of the eurozone.

Like the US, the UK has had buoyant credit growth, huge rises in house prices, low private and national savings and a sizeable current account deficit. Like the US, it also absorbed the surplus savings of much of the rest of the world in the 2000s. It is, in short, one of the canonical "Anglo-Saxon" economies.

Yet, in many respects, the UK position is worse than that of the US. The run-up in UK house prices, for example, was much bigger than in the US. On almost any measure, housing valuations and household indebtedness are still more extreme. To take one example, at the end of 2006, household mortgage debt was 126 per cent of disposable income, against a mere 104 per cent in the US.

Moreover, the UK’s current account deficit, at 5.7 per cent of GDP in the third quarter of 2007, was bigger than that of the US. Indeed, it was bigger even than it seems. As Andrew Smithers of London-based research company Smithers & Co argues, the deficit is significantly understated by current statistical conventions. Retained earnings of direct investment are included in data on investment income, but this is not the case for portfolio investment. Since a high proportion of UK-based multinationals are owned by foreign portfolio investors, this exaggerates the UK’s net investment income. The UK’s true current account deficit may have been close to 7 per cent of GDP.

The remainder of this column can be read here. Debate from our panel of economists appears below.