Greg Ip

Articles by The Economist’s U.S. Economics Editor

Archive for the ‘Financial crisis’ Category

Central banks: A More Complicated Game

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The West’s financial crisis has shaken public confidence in its leading central banks. Yet it has also led to an expansion of their duties and powers

Feb 17th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] IN TWO days, two prominent central bankers, one on each side of the Atlantic, headed for the exit. Few people were surprised when Kevin Warsh tendered his resignation from the Federal Reserve on February 10th. Rather more people were taken aback when rumours started to fly that Axel Weber would stand down as president of Germany’s Bundesbank and thus rule himself out as the next president of the European Central Bank (ECB), a job for which he had been the front-runner. The rumours were confirmed on February 11th.

The timing was coincidental. Yet the two men have something in common. Both were uneasy about changes in the way that central banks conduct themselves—specifically, about the unprecedented forays into financial markets by the Fed and the ECB. Mr Weber publicly opposed the ECB’s decision last May to start buying the bonds of member countries’ governments. His colleagues, he believed, were intruding dangerously into fiscal policy. Mr Warsh, similarly though more quietly, fretted that the Fed’s policy of quantitative easing (QE)—the purchase of government bonds with newly printed money—was fomenting new imbalances in the global economy and steering the Fed into treacherous political waters.

Since the financial crisis in 2007 central banks have expanded their remits, either at their own initiative or at governments’ behest, well beyond conventional monetary policy. They have not only extended the usual limits of monetary policy by buying government bonds and other assets (see chart). They are also taking on more responsibility for the supervision of banks and the stability of financial systems. Their new duties require new “macroprudential” policies: in essence, this means regulating banks with an eye on any dangers for the whole economy. And their old monetary-policy tasks are not getting any easier to perform. Central banking is becoming a more complicated game.

The entire article is linked here.


Book Review: The Financial Crisis

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[Greg Ip] THE latest book on the financial crisis has an odd title. You begin reading “All the Devils Are Here”, a line from Shakespeare’s “The Tempest”, expecting to encounter satanic bankers and corrupt government cronies preying on a defenceless public. In fact the people who emerge are infinitely more interesting: arrogant, desperate, even clueless—but, with a few exceptions, not devils. Read the rest of this entry »

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January 6, 2011 at 6:04 pm

The legacy of Larry Summers

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Dec 13th 2010, 22:10 by G.I. | WASHINGTON

[Greg Ip] FOR two years the Obama Administration’s economic policy has been caricatured from the right as an invasive expansion of government and from the left as a cowardly capitulation to Wall Street free market fundamentalism.

How can it be both things at once? It helps to understand the philosophy of the man who most embodies that policy, Larry Summers, who today delivered perhaps his final public speech as Barack Obama’s National Economic Council director. The “Summers Doctrine” fuses microeconomic laissez faire with macroeconomic activism. Markets should allocate capital, labour and ideas without interference, but sometimes markets go haywire, and must be counteracted forcefully by government. Read the rest of this entry »

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December 31, 2010 at 7:17 pm

Think this economy is bad? Wait for 2012.

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By Greg Ip

Washington Post Outlook, Sunday, October 24, 2010; B03

We’re barely two years past the banking crisis, still weathering the mortgage crisis and nervously watching Europe struggle with its sovereign debt crisis. Yet every economic seer has a favorite prediction about what part of the economy the next crisis will come from: Municipal bonds? Hedge funds? Derivatives? The federal debt?

I, for one, have no idea what will cause the next economic disaster. But I do have an idea of when it will begin: 2012.

Yes, an election year. Economic crises have a habit of erupting just when politicians face the voters. The reason is simple: They are born of long-festering problems such as lax lending, excessive deficits or an overvalued currency, and these are precisely the sort of problems that politicians try to ignore, hide or even double down on during campaign season, hoping to delay the reckoning until after the polls close or a new government takes office. Read the rest of this entry »

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October 24, 2010 at 12:00 pm

The American economy: The great debt drag

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Sep 16th 2010 | WASHINGTON, DC

[Greg Ip] IN THREE decades of selling cars in southern California, David Wilson has been through countless ups and downs. So when sales at his 16 dealerships, mostly around Los Angeles and Orange Counties, fell by a third in 2008, he naturally expected them to go up again. They still haven’t.

Mr Wilson now realises that his boom-year sales were a by-product of the state’s housing bubble. Dealers reckon that before the crisis a third of new cars in California were bought with home-equity loans. “Now there’s no home equity,” says Mr Wilson, “there’s no down-payment for cars.” He foresees no sales growth for another two to three years. “The country is not optimistic. If you’re not optimistic you don’t buy a new house or new car.”

He’s right: Americans are not optimistic. Official statistics say that the economy has been growing for nearly 15 months, but so sluggishly that most people seem to think it is still in recession. For a few months it looked as if the economy might even shrink again, as growth slowed to a mere 1.6% (at an annualised rate) in the second quarter, job creation almost stopped and home sales plunged. Read the rest of this entry »

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September 16, 2010 at 4:00 pm

Financial reform in America: A decent start

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A somewhat clumsy bill is hardly a panacea, though it fixes some important things

Jul 1st 2010

IT IS touted as the biggest overhaul of American finance since the Great Depression. The 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act, now nearing the end of its odyssey through Congress, tackles almost every aspect of American finance from municipal bonds to executive pay. Its success, however, rests on a simple question: does it make another crisis significantly less likely?

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July 1, 2010 at 2:52 pm

Financial reform in America: The hand of Dodd

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The Senate bill is finally published

Mar 18th 2010 | WASHINGTON, DC | From The Economist print edition

 Dodd bandages things up

[Greg Ip] CHRIS DODD, the soon-to-retire chairman of the Senate Banking Committee, has staked his legacy on overhauling America’s financial regulations. If he fails, it won’t be for lack of trying.

On March 15th Mr Dodd unveiled a sweeping proposal to rearrange the duties of America’s financial regulators while creating new powers and authorities to sniff out and squelch the risks that brought on the financial crisis. This is not the first reform blueprint: the House of Representatives has passed its own bill, the Treasury issued proposals last year, and Mr Dodd himself had already unveiled one, aborted draft of the Senate bill. This version, however, is the first to reflect substantial input from Republicans, whose support is necessary to reach the 60-vote margin needed in the Senate for the bill to become law.

The causes of the financial crisis are countless, and the 1,336-page bill takes aim at most of them, from credit-rating agencies to derivatives. But the two most sensitive proposals are its plans to deal with big, risky firms, and the creation of a new body to protect consumers.

To curb risks to the financial system, Mr Dodd would create a Financial Stability Oversight Council composed of regulatory chiefs who can designate any big financial firm as systemically important. That would put it under the eye of the Federal Reserve. Republicans have justifiably worried that designating any firm as systemically important would encourage markets to assume it is too big to fail, making it cheaper for the firm to borrow.

Mr Dodd’s bill seeks to make size unappealing by requiring firms with more than $50 billion in assets to fund a resolution kitty to deal with failing firms, also worth $50 billion. And it opens the door to the adoption of Barack Obama’s “Volcker rule”, which would restrict banks and other Fed-regulated financial companies from proprietary trading and sponsorship of hedge funds and private equity.

More importantly, Mr Dodd has also made the resolution process deeply unpleasant. If a failing firm were deemed a threat to the system, the Fed, the Federal Deposit Insurance Corporation and the Treasury, with the agreement of three bankruptcy judges, could impose an “orderly liquidation” on the firm, forcing shareholders and unsecured creditors to take losses. Such a resolution mechanism has long existed for banks but not for other big financial companies or for bank-holding companies.

It may prove unworkable, of course. The threat of being wiped out in bankruptcy could cause creditors to flee both the troubled firm and any firms like it, precisely the sort of panic the resolution regime is meant to avoid. “In a severe financial crisis it will be too terrifying for politicians and bureaucrats to use” the new process, predicts Douglas Elliott of the Brookings Institution. Instead, he says, they will resort to ad hoc measures as they did in 2008.

Less important but much more controversial is the issue of consumer protection. Democrats want to take that job away from bank regulators and give it to an independent agency. Republicans fear such an agency would kill off legitimate products and circumscribe banks’ financial health. Mr Dodd’s clunking compromise is to place a Consumer Financial Protection Bureau inside the Fed (where it gets a chunk of the Fed’s budget), make its director a presidential appointee and allow the oversight council to overrule its decisions.

There are other compromises, too. Mr Dodd had originally planned to merge America’s four overlapping bank regulators into one. He has given up that laudable fight. Just the hapless Office of Thrift Supervision will disappear. The Fed will lose authority over smaller banks—a move it opposes—while retaining it over large bank-holding companies. The bill also includes politically motivated loopholes: banks with less than $10 billion in assets will be spared the attention of the new consumer-protection bureau, though they are hardly paragons of virtue. They have some of the highest overdraft fees, says Michael Calhoun of the Centre for Responsible Lending, a consumer-advocacy group.

Despite Mr Dodd’s contortions, no Republicans have yet said they will support the bill. Modest concessions may entice Bob Corker of Tennessee and Judd Gregg of New Hampshire to vote for it. But the final product could then be unacceptable to liberal Democrats. And if Mr Dodd shifts left to bridge the gaps between his bill and the House’s, any Republican support could quickly melt away. With time running out before attention turns to mid-term elections in November, Mr Dodd’s place in history is still in the balance.

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March 18, 2010 at 1:55 pm