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Everything seems to be going well in the world economy at the moment, provided we can avoid a trade war. However, given the long expansion, a lot of leverage has been building up in the system, further empowered by complex derivatives. When rates rise, the liquidity turns and growth stalls. This could very well turn […]

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Two decades after the Asian crisis, emerging markets have high levels of corporate debt and especially more dollar denominated debt. This makes them quite vulnerable to external shocks to earnings, currency movements and changes in interest rates. On the whole though, we haven’t reached the dangers of two decades ago, but one shouldn’t get too […]

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High debt can lead to financial crisis. Since debt levels have risen in many countries, there is considerable reason for concern. However, big financial crises, while economically enormously harmful, are rare events needing outsized asset bubbles financed by debt, we don’t see that in the developed world yet. We have to distinguish between public and […]

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Should we raise interest rates to curb possible asset price bubbles? Answers depend on who you ask. “Hard money” people say yes, “soft money” people say no. So we’ll look at the costs, benefits, and alternatives. Hard Money, Soft Money And Asset Bubbles | Seeking Alpha

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The securitization of mortgages is an especially bad idea and responsible for much of the crisis because banks could absolve themselves from one of their prime economic functions, assessing creditworthyness ob borrowers. If the mortgages can move off the balance sheet and their risk hidden in complex composed securities (“Abacus”) rubber stamped by regulators, banks […]

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Oliver Blanchard, chief economist of the IMF: My generation, which was born after World War II, lived with the notion that the world was getting to be a better and better place. We knew how to do things better, not only in economics but in other fields as well. What we have learned is that¹s […]

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Debate among the big beasts..

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An interesting but curious crisis narrative, can we have too much of a good thing?

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We reported on The Paulson plan and an alternative. The essence of both is that they argue that the markets for those complex financial products are unrealistically pessimistic and prices are not reflecting true value. The Paulson plan will lift those prices by direct intervention in these markets (buying these complex financial instruments), the alternative […]

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