Tag: Financial crisis

  • This is a Financial Crisis like Any Other – Treat it Like One

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    Christian E. Weller

    I wanted to thank Bob Lawless, Elizabeth Warren and Credit Slips to invite me back as guest blogger. It seems an appropriate time to discuss topics in two of my areas of expertise — financial crises and retirement income security — as they are directly related to the current financial turmoil.

    The markets are crashing. This is a standard financial crisis, as many other countries experienced over the past twenty or so years. In a crisis four risks materialize: default risk, maturity risk, interest rate risk, and exchange rate risk. We are spared from the last one since the dollar dropped well before this crisis. The problem is that we are not adequately addressing the remaining risks.

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  • Is the Crisis Real?

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    Elizabeth Warren

    At a Harvard panel discussion yesterday, [correction**] Gregory Mankiw–Harvard economist and Chair of the President’s Council of Economic Advisers 2003-2005, made an interesting point: The liquidity crisis isn’t real.  Or, to restate it: Any liquidity crisis is caused by the promise of a government bailout. Greg said that his many friends in investment banking said that there is plenty of money to invest in financial services, but right now it is "sitting on the sidelines."  Why?  Because the financial services industry does not want to pay the terms required to get that money back in circulation (e.g., give up equity).  As he put it, why do business with Warren Buffett who will negotiate a tough deal, if you believe that the government will ride in soon with cheaper cash? 

    Economics professor Ken Rogoff also talked about the need to shrink the financial services sector. He thinks it is good that the investment banking houses are failing and many people on Wall Street are losing their jobs because, in his view, we have an oversupply in that sector and our economy just can’t support it.   

    Greg’s work with the current administration and Ken’s background with the IMF and on the Board of the Federal Reserve add a certain credibility to their assessments of conditions on Wall Street.  If they are right, the $700 bailout is saving some investment bankers’ jobs in the short term, but overall it is just making the financial system worse. 

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