On the eve of the September 5/6 G20 meeting of Finance Ministers in London, the OECD published an interim forecast of the macroeconomic and financial performance of the G7 economies. According to the OECD, “Recovery from the global recession is likely to arrive earlier than had been expected a few months ago but the pace of activity will remain weak well into next year.” So is it time to start reversing the various fiscal and monetary stimuli adopted around the world? Or should governments and central banks continue to stimulate aggregate demand in order to maintain the fragile recovery? The following news releases, speeches and articles look at answers given to these questions by various countries and international institutions.
Recovery arriving quicker than expected but activity will remain weak, says OECD OECD News release (3/9/09)
What is the economic outlook for OECD countries? An interim assessment OECD Economic Outlook, Interim Assessment (3/9/09)
IMF Managing Director Dominique Strauss-Kahn sees Renewed Stability but remains cautious about Global Economic Recovery, notes need for Continued Policy Actions IMF press release (4/9/09)
Beyond the Crisis: Sustainable Growth and a Stable International Monetary System Speech by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (4/9/09)
Brown urges further G20 spending (video) Gordon Brown on BBC News (5/9/09)
America’s Timothy Geithner says it’s ‘too early’ to withdraw economic stimulus Telegraph (3/9/09)
Finance chiefs warn against early end to state support for eurozone economies Guardian (3/9/09)
Keep spending – Darling warns G20 against complacency Independent (3/9/09)
Brown’s agenda deserves a hearing Financial Times (1/9/09)
Tories join Germany and France in call for exit strategy from G20 bailout Times Online (3/9/09)
UK recession: Why are we lagging our neighbours? Telegraph (3/9/09)
Reflections after the conference:
After the shock, challenges remain BBC News (7/9/09)
The G20 has saved us, but it’s failing to rein in those who caused the crisis Observer (6/9/09)
The world is as one on not endangering recovery Times Online (t/9/09)
Questions
- Why is the pace of recovery in the G7 countries likely to be modest for some time?
- Why have unemployment rates risen much more rapidly in some countries than in others (see page 19 of the OECD report)?
- Referring to the OECD report, how would you summarise changes in the global financial situation over the past few months?
- Assess the arguments put forward by France and Germany for reining in their expansionary fiscal and monetary policies.
- Why is the UK economy, according to the OECD, likely to be the last of the G7 countries to pull out of recession?
In the light of the continuing recession that, according to the Bank of England, “appears to have been deeper than previously thought”, the Monetary Policy Committee has decided to increase narrow money through an additional £50 billion of ‘quantitative easing’. This will involve extending “its programme of purchases of government and corporate debt to a total of £175 billion, financed by the issuance of central bank reserves. The Committee expects the announced programme to take another three months to complete. The scale of the programme will be kept under review.”
This decision took markets by surprise. Does this mean that the outlook for the economy is bleaker than most people expect? Why does the MPC feel that the original £125 billion of quantitative easing is insufficient? What will determine the effectiveness of the additional £50 billion increase in narrow money? The articles below look at the issues.
Bank of England Maintains Bank Rate at 0.5% and Increases Size of Asset Purchase Programme by £50 Billion to £175 Billion Bank of England News Release (6/8/09)
Bank pumps in another £50bn to aid green shoots of recovery Guardian (6/8/09)
Quantitative easing: questions and answers Guardian (6/8/09)
How much money has been pumped into the British economy? Guardian (6/8/09)
Bank of England pumps another £50 billion into economy ITN News (YouTube) (6/8/09)
Bank pumps £50bn into economy BBC News (video) (6/8/09)
Bank policy ‘not fully effective’ BBC Today Programme (audio) (6/8/09)
Are the banks lending enough? BBC News (video) (4/8/09)
Is quantitative easing working? BBC News (6/8/09)
QE: More to do? Stephanomics: BBC blog (6/8/09)
What RBS’s results say about QE Peston’s picks: BBC blog (7/8/09)
Bank wants extra £50bn for ‘fragile’ economy Independent (7/8/09)
David Prosser: Have MPC members lost their nerve? Independent (7/8/09)
The Bank of England thinks the credit crunch is far from over: Edmund Conway Telegraph (6/8/09)
Bank split over money injection BBC News (19/8/09)
Questions
- Why did the Bank of England’s Monetary Policy Committee feel that it was necessary to increase the money supply further through the purchase of an additional £50 billion of assets?
- With the use of a diagram, explain how the effect of the increase in money supply will depend on the nature of the demand for money?
- What will determine the size of the money multiplier effect resulting from the increased asset purchases?
Whilst some economists predicted the banking crisis of 2007/8 and the subsequent global recession, many did not. Was this a failure of macroeconomics, or at least of certain macroeconomic schools of thought, such as New Classical economics? Or was it a failure to apply the subject with sufficient wisdom? Should the subject be radically rethought, or can it simply be amended to take into account aspects of behavioural economics and a better understanding of systemic risk?
The four linked articles below from The Economist look at the debate and at the whole state of macroeconomics. The other articles pick up some of the issues.
Will the ‘crisis in macroeconomics’ lead to a stronger subject, more able to explain economies in crisis and not just when they are working well? Will a new consensus emerge or will economists remain divided, not only about the correct analysis of how economies work at a macro level, but also about how to tackle crises such as the present recession?
What went wrong with economics The Economist (16/7/09)
The other-worldly philosophers The Economist (16/7/09)
Efficiency and beyond The Economist (16/7/09)
In defence of the dismal science The Economist (6/8/09)
How to rebuild a shamed subject Financial Times (5/8/09)
What is the point of economists? Financial Times – Arena (28/7/09)
Macroeconomic Models Wall Street Pit (23/7/09)
Macroeconomics: Economics is in crisis – it is time for a profound revamp Business Day (27/7/09)
Questions
- Distinguish between ‘freshwater’, ‘saltwater’ and ‘brackish’ macroeconomics.
- Explain why economists differ over the efficacy of fiscal policy in times of recession. To what extent does the debate hinge on the size of the multiplier?
- Why is the potential for macroeconomics higher now than prior to the recession?
- What is meant by the ‘efficient market hypothesis’? How did inefficiencies in financial markets contribute to the banking crisis and recession?
- Should economists predict the future, or should they confine themselves to explaining the present and past?
The current recession has seen the re-emergence of many of the intellectual battles fought amongst economists between the two worlds wars and again from the 1960s to the 1980s. The current debate has hinged around the appropriate policy response to the current recession. Is the solution a Keynesian one of stimulating aggregate demand; or is it a new classical one of keeping public spending under control to make room for private spending and to allow the market to function to best effect? And what about banking reform? What are the arguments here? The following articles by Lord Skidelsky examine the debate.
Robert Skidelsky, Economists clash on shifting sands Financial Times (9/6/09)
Robert Skidelsky, Economic reform needs a dose of reality Guardian (27/7/09)
See also the following video:
Robert Skidelsky, The financial challenge of our times Guardian (2/3/09)
Questions
- Explain the ways in which economics is (a) similar to and (b) different from the natural sciences.
- For what reasons would new classical economists criticise the fiscal stimulus packages pursued by many countries in the past few months?
- Under what circumstances would a fiscal stimulus crowd out private spending? Do these circumstances apply (a) today; (b) over the next two years?
- Why may crowding out in practice depend on issues of confidence?
- What ‘Keynesian lessons’ have been learned from the banking crisis and recession?
The early part of the current recession, dating from April 2008, had much in common with the Great Depression dating from June 1929. But the Great Depression lasted three years. So does this grim prospect await the world this time round? Or have we learned the lessons of the past and will the policies of giving economies a large fiscal stimulus, combined with bank rescues and quantitative easing, help to pull the world out of recession this year? The following articles look at the issues.
The recession tracks the Great Depression Martin Wolf, Financial Times (16/6/09)
A Tale of Two Depressions Barry Eichengreen, Kevin H. O’Rourke, Vox (4/6/09)
Economics: How the world economy might recover its poise Financial Times (15/6/09)
Weak recovery in sight but damage from crisis likely to be long-lasting, says OECD OECD (24/6/09)
OECD sees strongest outlook since 2007 Financial Times (24/6/09)
Press Release Board of Governors of the US Federal Reserve System (24/6/09)
You might also like to watch the following two videos. The first uses historical footage to examine the Wall Street Crash of 1929 and the Great Depression that followed. The second is an interview with Joseph Stiglitz about whether the recession of 2008/9 is heading for another Great Depression.
The 1929 Crash (1 of 6) Nibelungensohn, YouTube (27/2/09). Note that you can link to the other five parts of this from this link.
Joseph Stiglitz: ‘This is worse than the Great Depression’ NBC Nightly News (10/2/09)
Questions
- Why may the past be a poor guide to the present and future?
- What dangers are there from the policies of expanding aggregate demand through fiscal and monetary policies?
- Explain why the ‘race to full recovery is likely to be long, hard and uncertain.