"If the eurozone adopts the program outlined above, there should be no need for Germany to pick up any tab. But under the perverse policies that Europe has adopted, one debt restructuring has been followed by another. If Germany and the other northern European countries continue to insist on pursuing current policies, they, together with their southern neighbors, will wind up paying a high price."
The former chair of the U.S. Federal Reserve asks how so many experts, including him, failed to see the 2008 financial crisis approaching. An important part of the answer to that question is a very old idea: Keynesian "animal spirits," the irrational elements of decisionmaking that have been left out of economic forecasting for too long.
Peter Orszag writes that the Reserve Bank of New Zealand's limits on high loan-to-value mortgages are a model for the kind of actions the U.S. Federal Reserve could have taken to manage the U.S. mortgage market and reduce the risks that the housing bubble posed to the financial system.
"Much attention has been lavished on the speculators who reaped huge paydays betting against the subprime mortgages that stoked the financial crisis. Doomsayers like the hedge fund manager John Paulson and the cast of characters in "The Big Short," the Michael Lewis book, saw calamity coming, and their contrarian bets delivered when the housing market collapsed.
But what about the big long? During the dark days of late 2008, while other investors dumped their holdings or sat paralyzed on the sidelines, who decided that it was time to put money on the line? Who bought low and then sold high?"
"In a monetary union, adjustment is hard without any transfers and without a fiscal union. I know of no plausible plan how the eurozone can manage the dual feat of economic adjustment and debt sustainability within the straitjacket of official policy. And as long as such a plan does not exist, the crisis is not over."
"The International Monetary Fund proceeded with its record 2010 bailout of Greece despite deep internal divisions over whether it would work, according to confidential documents that contradict the fund's public statements."
"So far, the grand bargain between the core and the periphery has held up: the periphery continues austerity and reform while the core remains patient and provides financing. But the eurozone's political strains may soon reach a breaking point, with populist anti-austerity parties in the periphery and populist anti-euro and anti-bailout parties in the core possibly gaining the upper hand in next year's European Parliament elections."
The Fed, which celebrates its centennial in 2013, has been transformed in the past decade, expanding its role of maintaining full employment and stable prices to deploying trillions of dollars to boost the U.S. economy.
As Egypt's political crisis deepens, its economy has been stabilized by a cash infusion from the oil-rich Persian Gulf. Economist Farouk Soussa outlines the limited options facing Egypt's interim government.
Benn Steil and Dinah Walker explain the market massacre following Ben Bernanke's press conference on June 19. Bernanke's repeated statements that a key tool of current Fed policy, asset purchases, would be "calibrated" to employment data, each month's publication of which can imply a major shift in the unemployment trend line, suggests that Fed tightening could begin as early as the middle of next year—nearly a year and half earlier than the Fed had suggested in its pledge statement last fall.
The global economic downturn is hardly over, and without a more dramatic set of actions, the United States is likely to suffer another major crisis in the years ahead. A new book by Alan Blinder may be the best general volume on the recession to date, but it paints an overly optimistic portrait of the current situation.
Central bankers have always carried a mystique far beyond justification, whether they are cast as malicious, incomprehensible, or all-powerful. Neil Irwin's new book on monetary policy during the financial crisis should dispel these myths once and for all.
"Austerity has failed. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but also in the long term: the costs of investments unmade, of businesses not started, of skills atrophied, and of hopes destroyed."
The Council on Foreign Relations' David Rockefeller Studies Program—CFR's "think tank"—is home to more than seventy full-time, adjunct, and visiting scholars and practitioners (called "fellows"). Their expertise covers the world's major regions as well as the critical issues shaping today's global agenda. Download the printable CFR Experts Guide.