Ten questions about the subprime crisis.

The ongoing credit crunch represents the fi rst crisis of the age of mass securitization. One conclusion sometimes drawn is that the costs of securitization, in the form of risks to fi nancial stability, exceed the benefits. The implication is that we should return to the simpler days when commercial banks originate loans to households and fi rms and hold them on their balance sheets, rather than slicing them, dicing them and selling them off. But this back-to-the-future formula ignores economic realities. Securitization is bound up with the broader deregulation of fi nancial markets and with the information-technology revolution. Policy makers cannot eliminate this process short of reimposing the kind of restrictive regulation to which banking and fi nancial systems were subject half a century ago.liquidity lines provided by financial institutions. Market liquidity depends not only on objective, exogenous factors, but also on endogenous market dynamics. Central banks responsible for systemic stability need to consider how far their traditional responsibility for the health of the banking system needs to be adapted to promote stability in the relevant financial markets. In any case, turning back the clock would not be desirable because the constellation of financial innovations referred to as securitization has real benefits for the economy. Those innovations have allowed the financial system to repackage and spread risk. They have reduced the amount of equity capital that this system requires to absorb that risk. The result has been to lower funding costs for both fi rms and homeowners as a class. In the aftermath of the Great Securitization Crisis of 2007-8, would-be reformers will surely say that financial regulators need to rethink speed limits and rules of the road. In my view, policy makers should focus on the banking system. Banks still play a unique role. They are at the center of the information-impacted segments of the financial system. Their key role and their vulnerability are recognized by the protection they receive via the financial safety net. Re-thinking should start with the role of Basel II, and within Basel II of the role of internal models and bond ratings.

Banking union in historical perspective: the initiative of the European Commission in the 1960s-1970s

This article shows that planning for the organization of EU banking regulation and supervision did not just appear on the agenda in recent years with discussions over the creation of the eurozone banking union. It unveils a hitherto neglected initiative of the European Commission in the 1960s and early 1970s. Drawing on extensive archival work, this article explains that this initiative, however, rested on a number of different assumptions, and emerged in a much different context. It first explains that the Commission's initial project was not crisis-driven; that it articulated the link between monetary integration and banking regulation; and finally that it did not set out to move the supervisory framework to the supranational level, unlike present-day developments

If You’re Going Through Hell, Keep Going: Nonlinear Effects of Financial Liberalization in Transition Economies

Copyright © Taylor & Francis Group, LLC. Did increasing the level and pace of financial liberalization during transition expose countries to crises? And if a crisis did strike, did liberalization do more harm or good? Using a database of 28 transition economies over 22 years, this article examines these questions across a host of economic outcomes, including savings and the size of the private sector. The results provide evidence that, while liberalization may initially increase the probability of a crisis, the prospect of a crisis drops dramatically at higher levels of financial openness. Moreover, the benefits of liberalization across several metrics outweigh the risks of these intermediate stages

The changing patterns of group politics in Britain

Two interpretations of ways in which group politics in Britain have presented challenges to democracy are reviewed: neo-corporatism or pluralistic stagnation and the rise of single issue interest groups. The disappearance of the first paradigm created a political space for the second to emerge. A three-phase model of group activity is developed: a phase centred around production interests, followed by the development of broadly based 'other regarding' groups, succeeded by fragmented, inner directed groups focusing on particular interests. Explanations of the decay of corporatism are reviewed. Single issue group activity has increased as party membership has declined and is facilitated by changes in traditional media and the development of the internet. Such groups can overload the policy-making process and frustrate depoliticisation. Debates about the constitution and governance have largely ignored these issues and there is need for a debate

Small States in the Rearview Mirror: Legitimacy in the Management of Economy and Society

Small States in World Markets is about political efficacy and legitimation rather than scoring who is ahead in the economic sweepstakes. Its case for democratic corporatism rests on norms, particularly stability, rather than on narrow measures of economic efficiency. But stability and the efficacious management of the economy and social problems requires a degree of technocracy that undermines the legitimacy of the management process itself by helping to produce populist revolts

Credibility and adjustment: gold standards versus currency boards

It is often maintained that currency boards (CBs) and gold standards (GSs) are alike in that they are stringent monetary rules, the two basic features of which are high credibility of monetary authorities and the existence of automatic adjustment (non discretionary) mechanism. This article includes a comparative analysis of these two types of regimes both from the perspective of the sources and mechanisms of generating confidence and credibility, and the elements of operation of the automatic adjustment mechanism. Confidence under the GS is endogenously driven, whereas it is exogenously determined under the CB. CB is a much more asymmetric regime than GS (the adjustment is much to the detriment of peripheral countries) although asymmetry is a typical feature of any monetary regime. The lack of credibility is typical for peripheral countries and cannot be overcome completely even by “hard” monetary regimes.http://deepblue.lib.umich.edu/bitstream/2027.42/40078/3/wp692.pd

All Politics is Local: The Renminbi's Prospects as a Future Global Currency

Recent years have seen a heated discussion over Chinese capital account liberalization and internationalization of China’s currency, the renminbi (RMB). Against the backdrop of a weak U.S. economy and China’s growing international economic clout, there has been speculation about the RMB replacing the U.S. dollar as the world’s leading currency. Subramanian (2011: 1), for instance, maintains that “the renminbi could become the premier reserve currency by the end of this decade, or early next decade.” Much of the current discourse recalls past discussions when other currencies, especially the Japanese yen (Burstein 1988; Kwan 1994; Taguchi 1994) and the Euro (Chinn and Frankel 2007), were seen as candidates to “dethrone” the dollar

Sovereign debt restructuring : the judge, the vultures and creditor rights

What role did the US courts play in the Argentine debt swap of 2005? What implications does this have for the future of creditor rights in sovereign bond markets? The judge in the Argentine case has, it appears, deftly exploited creditor heterogeneity – between holdouts seeking capital gains and institutional investors wanting a settlement – to promote a swap with a supermajority of creditors. Our analysis of Argentine debt litigation reveals a ‘judge-mediated’ sovereign debt restructuring, which resolves the key issues of Transition and Aggregation - two of the tasks envisaged for the IMF’s still-born Sovereign Debt Restructuring Mechanism. For the future, we discuss how judge-mediated sovereign debt restructuring (together with creditor committees) could complement the alternative promoted by the US Treasury, namely collective action clauses in sovereign bond contracts

Piketty's Calibration Economics: Inequality and the Dissolution of Solutions?

© 2015 Taylor & Francis. Abstract: By popularising interest in inequality, Thomas Piketty's Capital in the Twenty-First Century has made a significant contribution. It has helped to change the basic terms of debate regarding wealth and income. However, Capital exhibits several weaknesses. The overall statement of Piketty's 3 laws tends to confuse the reader by conflating capital with all forms of wealth, and capital with the current market valuation of wealth assets. The whole creates a form of empiricism by metrics or calibration. The aggregation also lends itself to data as history rather than as historically grounded explanation of evidence. Concomitantly, it lacks a theorisation of capitalism, of power, of the state, of social movements, and of social transformations. This affects the way in which possible solutions to inequality are conceived. However, it does provoke further grounds for ethical counterargument productive of more progressive solutions to the problems it highlights

The determinants of vulnerability to currency crises: country-specific factors versus regional factors

We investigate the determinants of exchange market pressures (EMP) for some new EU member states at both the national and regional levels, where macroeconomic and financial variables are considered as potential sources. The regional common factors are extracted from these variables by using dynamic factor analysis. The linear empirical analysis, in general, highlights the importance of country-specific factors to defend themselves against vulnerability in their external sectors. Yet, given a significant impact of the common component in credit on EMP, a contagion effect is apparent through the conduit of credit market integration across these countries under investigation