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koganbotPaul Krugman posted a technical paper ("The International Finance Multiplier") on the current global financial interdependence. "Interdependence this time is real – and it seems to be operating through channels that are not yet part of standard international macro analysis."
we seem to be dealing with a phenomenon I'll call the international finance multiplier, in which changes in asset prices are transmitted internationally through their effects on the balance sheets of highly leveraged financial institutions.
...
The proposed channel that seems most relevant [to the situation in the late '90s], however, seems to have been originally proposed by Calvo (1998): contagion through the balance sheets of financial intermediaries. Loosely, when hedge funds lost a lot of money in Russia, they were forced to contract their balance sheets – and that meant cutting off credit to Brazil.
[bunch o' equations w/ symbols I don't understand]
...
The key point, of course, is that Home and Foreign risky assets become complements: a rise in q, by increasing HLIs' capital, increases the demand for Foreign assets, a rise in q* similarly increases the demand for Home assets.
...
The story laid out here seems to have two main implications for policy in the crisis. First, it suggests that the core problem is capital, not liquidity – or at least that you can explain much of what's going on without appealing to a breakdown of buying and selling per se. To the extent that this is true, rescue plans centered on making troubled assets liquid, like the Paulson plan passed last week, won't do the trick. Instead, what's needed is an injection of capital, which can't reverse the original shock, but can undo the financial multiplier effect of that shock. Second, the international implications: to the extent that we regard falling asset prices and their consequences as a bad thing, which we obviously do right now, this analysis suggests that there are large cross-border externalities in financial rescues. Macroeconomic policy coordination never got much traction, largely because economists never could make the case that it was terribly important. Financial policy coordination, however, looks on the face of it much more important. Capital injections by U.S. fiscal authorities would help alleviate the European financial crisis, capital injections by European fiscal authorities help alleviate the U.S. financial crisis.
The idea here is that you need coordinated gov't action in Europe and the U.S. to inject capital, and I'd say that unless you want the injection to be a simple giveaway, a logical extrapolation would be something along the Swedish line of temporary nationalization, but internationally coordinated. Problem would be that in the U.S. you're not likely to have the political will to nationalize, even after the January inauguration, whereas in Europe (whose behavior over the last week seems even more dysfunctional than the U.S.'s) there might be willingness to nationalize but there is little willingness to coordinate.
we seem to be dealing with a phenomenon I'll call the international finance multiplier, in which changes in asset prices are transmitted internationally through their effects on the balance sheets of highly leveraged financial institutions.
...
The proposed channel that seems most relevant [to the situation in the late '90s], however, seems to have been originally proposed by Calvo (1998): contagion through the balance sheets of financial intermediaries. Loosely, when hedge funds lost a lot of money in Russia, they were forced to contract their balance sheets – and that meant cutting off credit to Brazil.
[bunch o' equations w/ symbols I don't understand]
...
The key point, of course, is that Home and Foreign risky assets become complements: a rise in q, by increasing HLIs' capital, increases the demand for Foreign assets, a rise in q* similarly increases the demand for Home assets.
...
The story laid out here seems to have two main implications for policy in the crisis. First, it suggests that the core problem is capital, not liquidity – or at least that you can explain much of what's going on without appealing to a breakdown of buying and selling per se. To the extent that this is true, rescue plans centered on making troubled assets liquid, like the Paulson plan passed last week, won't do the trick. Instead, what's needed is an injection of capital, which can't reverse the original shock, but can undo the financial multiplier effect of that shock. Second, the international implications: to the extent that we regard falling asset prices and their consequences as a bad thing, which we obviously do right now, this analysis suggests that there are large cross-border externalities in financial rescues. Macroeconomic policy coordination never got much traction, largely because economists never could make the case that it was terribly important. Financial policy coordination, however, looks on the face of it much more important. Capital injections by U.S. fiscal authorities would help alleviate the European financial crisis, capital injections by European fiscal authorities help alleviate the U.S. financial crisis.
The idea here is that you need coordinated gov't action in Europe and the U.S. to inject capital, and I'd say that unless you want the injection to be a simple giveaway, a logical extrapolation would be something along the Swedish line of temporary nationalization, but internationally coordinated. Problem would be that in the U.S. you're not likely to have the political will to nationalize, even after the January inauguration, whereas in Europe (whose behavior over the last week seems even more dysfunctional than the U.S.'s) there might be willingness to nationalize but there is little willingness to coordinate.
test
Date: 2010-02-03 10:42 pm (UTC)Re: test
Date: 2010-02-04 12:13 am (UTC)