Kristin Forbes: Economists must bridge disciplines to find answers to financial crises

MIT Sloan Prof. Kristin Forbes

In 2009 when my colleagues at the National Bureau of Economic Research and I began planning a conference for a project we’re running on the global financial crisis, we were concerned that the material would no longer be timely when the symposium actually occurred. We needn’t have worried.

I’ve just returned from Washington, DC, where our symposium was held, and again financial crises were the topic of the day. Three years after cracks in the subprime mortgage market erupted into the most severe and synchronized global financial crisis and recession since the Great Depression, the world economy is once more in dangerous territory. What began as a singular sovereign debt problem in Greece has spread to the rest of Europe, and now threatens to become a second act to the first financial crisis. How did we get here? And how can we keep it from happening again?

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Christine Lagarde and the demand for dollars

Simon Johnson, Prof. of Global Economics

Source: The New York Times Economix

After receiving support from the United States at the critical moment, Christine Lagarde was named Tuesday as the next managing director of the International Monetary Fund. In campaigning for the job, Ms. Lagarde, France’s finance minister, made various promises to emerging markets with regard to improving their relationships with the I.M.F. But such promises count for little.

The main impact of her appointment will be to encourage countries like South Korea, Brazil, India and Russia to back away from the I.M.F. and to further “self-insure” by accumulating larger stockpiles of foreign-exchange reserves –- the strategy that has been followed by China for most of the last decade.

From an individual country’s perspective, having large amounts of dollar reserves held by your central bank or in a sovereign wealth fund makes a great deal of sense – a rainy day fund in a global economy prone to serious financial floods. Read More »

Europe Needs Trichet’s Unified Finance Ministry: Simon Johnson

MIT Sloan Prof. Simon Johnson

From Bloomberg News

Jean-Claude Trichet, president of the European Central Bank until October, last week floated two proposals aimed at dealing with Greece and related eurozone public-debt problems.

The first idea would allow European Union authorities to override the policy decisions of member governments that can’t come up with sustainable budgets, implying the creation of an external control board for the likes of Greece. This approach has been used in the past for very weak countries (as well as for the cities of New York andWashington in recent decades). In Europe today, it would have no political legitimacy and would be completely unworkable — imagine the street protests it would spark.

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Emerging Markets May Name Strauss-Kahn’s Heir: Simon Johnson

MIT Sloan Prof. Simon Johnson

From Bloomberg

Even before the shocking events of the past few days, the international policy community had been contemplating a successor to Dominique Strauss-Kahn at the International Monetary Fund.

Strauss-Kahn, the IMF managing director, was expected to begin campaigning soon for the presidency of France. Now, whatever happens in the New York legal system as he defends himself against attempted rape allegations, it seems likely that the IMF will be searching for a new head sooner rather than later.
The idea that the job has become an attractive sinecure with nice fringe benefits should have been laid to rest by German Chancellor Angela Merkel’s preemptive strike earlier this week, when she said there are currently “good reasons” for the European Union to have a candidate. That produced similar expressions from other leading European politicians, although not all of them are willing to say that Strauss-Kahn is finished. Yesterday, the Chinese Foreign Ministry pronounced that the selection process must emphasize “fairness, transparency and merit.” Translation: China is pushing back against the idea that Europe necessarily gets to name Strauss- Kahn’s heir.

See the full column at Bloomberg Opinion 

Listen to Simon Johnson on NPR’s  All Things Considered

Simon Johnson is Ronald A. Kurtz (1954) Professor of Entrepreneurship and Professor of Global Economics and Management