What should economists and policymakers learn from the financial crisis? Dr. Ben S Bernanke, LSE

Following the events of the 2008 Great Recession, it is clear that this financial crisis could have been prevented. Therefore, we should prepare for the future and learn how to prevent such a catastrophe if it happens again. Dr. Bernanke argued how policymakers, including the Bank of England, should act if another financial crisis occurs again.

Dr. Bernanke revealed that the Bank of England took very classical approaches to dealing with the recession when it struck, similar to the approach taken for the Great Depression of the 1930s. He commended the mutual agreements that policymakers from across the world made after the 2008 Great Recession. Dr. Bernanke then continued to talk about the currency depreciation that occurred during the 1930s and 1940s and the removal of the gold standard.

Dr. Bernanke began to talk about the present and what economists can learn from the past.  Firstly, he emphasised the problem that many economies are still emerging from the impacts of the Great Recession, with central banks providing monetary policy to help support growth. However, it was made clear that this would impact the competitiveness of these economies and countries. Dr. Bernanke then began to divulge how capital inflows could benefit economies by stating that they are a challenge to policymakers due to their possible volatile nature, but could be a useful tool. Dr. Bernanke ended the lecture, by claiming that literature on the Great Depression hints at the fact that expansionary policy that supports recovery and price stability is generally more of a benefit to these economies, even with the risk of competitive devaluations.

The lecture was interesting and revealing into the mind-set of Dr. Bernanke, the Chairman of the Board of Governors of the Federal Reserve System. However, I feel the issue of inevitability of these financial crises and role of banks was not mentioned in enough detail. This is most apparent with the theory that financial crises could be inevitable after a period of economic prosperity, where an economy grows so large it eventually collapses, if that economy has not been supported enough. This is mostly referred to as the bubble analogy, however, the business cycle also agrees with this theory by stating that after an upturn and peak, a recession will follow. Therefore, economists and policymakers need to ensure the economy is properly supported whilst growing.

In addition, Dr. Bernanke constantly related the Great Recession to the great Depression, however these two significant economic catastrophes occurred as a result of similar and very different reasons. For example, one reason why the Great Recession occurred was due to the failure to properly check the credit rating of people who took out mortgages and loans in the 2000s and surprisingly, many could not pay the banks, so, vast amounts of ‘bad debt’ had accumulated. Another reason for the cause of this financial crisis was the lack of credit reserves the banks had, this meant that the bank had very little ‘real’ money, money which could be taken out in paper form.

Whereas one reason for why the Great Depression occurred was due to the Wall Street Crash of 1929, where America had to quickly retrieve the large loans it lent out to many countries globally, including Germany. This caused catastrophe worldwide and can be argued to be one reason for why the Nazi Party rose to power in Germany during the 1930s. Therefore, one cannot use the example of the Great Depression to prevent another catastrophe such as the one that occurred a mere five years ago, as they occurred due to different causes.

Notice

The next blog post will be published on the 21st June, due to AS exams in May/June.

Does Eastern Europe Still Exist? By Professor Anne Applebaum

Eastern Europe is mostly used as a political term to define those countries who were under Soviet control, such as being a satellite state, prior to the collapse of the Soviet Union in 1991. However, when this collapse occurred all these countries were no longer under control and they took very different approaches at reforms. This lecture by Professor Applebaum, provided a sound argument on whether eastern Europe still exists, both economically and metaphorically.

Firstly, when one thinks of eastern Europe with counties like Poland and Hungary, they imagine poor and unstable economies with low living standards and in desperate need of western Europe’s help. However, it is clearly apparent that this view held for the last twenty years is now completely false, as was demonstrated with the Great Recession of 2008. Professor Applebaum accurately revealed that in fact it was Iceland that was first hit by the recession, possibly the furthest western country of Europe. Furthermore, eastern European countries were mildly affected by the recession and some not at all, for example Poland which has had staggering figures of continuous growth since the 1990s. 

The common belief, prior to the Great Recession, was that eastern European countries would be the first to collapse and that the western countries would have to help, to prevent a Eurozone Crisis. However, the exact opposite has occurred with most of the western European countries on the brink of collapse, with eastern European countries helping. It is now obvious that the people who a few years ago greatly criticised EU enlargement, were incorrect, as if the enlargement never occurred, then the Eurozone crisis would have taken place much sooner, with drastic consequences, as Professor Applebaum revealed.

The reasons behind the success of these eastern European countries and the failure of most of the western European countries is difficult to decipher. However, one argument that Professor Applebaum pointed out was that they paid little into bonds, whereas other western European countries did not, instead countries like Greece and Spain paid up to 8-10% in forms of bonds, whereas their eastern European counterparts where doing about half. However, this is just one reason behind why eastern European countries are becoming prosperous. 

The graph below shows the growth rates of most, if not all, European countries. It was produced by the Ministry of Treasury of Poland. It clearly demonstrates the true extent to which eastern Europe was overtaking western Europe. However, upon close analysis, it is evident that not all of eastern Europe is experiencing this prosperity that their neighbours have been, such as Slovenia.

To conclude, this lecture presented by Professor Anne Applebaum was interesting and offered another opinion on these rising economies. Perhaps it is time for us, as Professor Applebaum suggested, to stop having these stereotypes and old cliches about eastern Europe, because in fact western Europe should learn from the failures and successes of eastern Europe.

State of the Economy Conference 2013, Institute of Economic Affairs, Institute of Directors

I was very fortunate to have the opportunity to attend this very prestigious event with many well-known and famous speakers. The day was split into four sessions, each discussing a different aspect of the title of the conference:

‘Stagnation or Recovery – What does the future hold?’

Session 1 – Chaired by David Smith, Economics Editor of The Sunday Times:

To talk first was Charles Bean the Deputy Governor of the Bank of England (BoE). This was a very interesting lecture, as many people were curious of what somebody of this authority believed, regarding the current economic situation of the UK. The majority of his talk was about the dismal state of the economy following the Great Recession of 2008, including the high inflation, demise of Lehman Brothers and the impact of this on the Banking world, uneasy growth rates and the failure of many polices such as Quantitative Easing (QE). Furthermore, it was evident that the demand and supply of the UK had been significantly impacted by the Recession and this led to further economic complications. However, Mr Bean claimed that the Monetary Policy Committee (MPC), which he has some control over, would be trying to maintain growth rates amid these economic uncertain times.

The next talk was by Roger Bootle the Managing Director of the Capital Economics. Mr Bootle’s talk was on the possible solutions of the Eurozone crisis. Firstly, a brief introduction on the problems the Eurozone faced were outlined: shrinking economies, the near collapse of the economies of peripherals (i.e. Spain, Italy and Greece) and the failure of competitiveness which is a main drive for markets to keep their growth rates. Moreover, it was apparent that the banks of Europe were still very weak following the collapse of Lehman Brothers and their exposure to risks was high, such as credit risk. However, it became increasingly obvious with the facts and figures that the Eurozone might break up and that this could occur in many ways, for example a strong country, like Germany, would leave first. Furthermore, Mr Bootle touched on the point that economies were prosperous before the Euro was formed in the 1990s and that after the formation of the Eurozone, countries began to slowly suffer. So, perhaps a break up of the Eurozone would be a good thing?

The last talk of this session was by Stephen King the Chief Economist of HSBC. Mr King’s talk was regarding the dynamics of global economies, in particular China. China in the last few years has received exceptional boosts in its economy and consequentially it has helped on a global scale, as it is a significant contributor to exports in the world. In addition, there was an excellent diagram to accurately describe the reasons why China has excelled to this great economic state. It was apparent that American and other countries’ investors placed money into China, which would sub sequentially end with companies and firms with higher profits, yet in the process the economy of China greatly excels.

Session 2 – Chaired by Louise Cooper, Senior Financial Analyst of BGC Partners:

The first talk was by Antony Browne the Chief Executive of the British Bankers’ Association. The main focus of this talk was regarding how to promote financial stability. The current banking sector is very risk orientated, with substantial losses or wins being made, based mostly on chance. However, when a bank loses on a risk for a trade or deal, they need to be bailed out by taxpayers, which further negatively affects the economy. This means the culture of ‘too big to fail’ needs to be eradicated as people highly depend on banks, so when they collapse as Lehman Brothers did, there are many consequences that ensue. There needs to be many more safety procedures in place to ensure that banks are safe regardless of how risky a transaction is. For example building a ‘firewall’ so if one bank collapses others will not be affected too much. Mr Browne’s ideas and suggestions were very interesting and posed a different opinion on the anti-bank attitude that has arisen following the Great Recession.

The remainder of session 2 was a panel discussion with Professor Phillip Booth the Editorial Director of the Institute of Economic Affairs, Professor Laurence Copeland of Cardiff Business School, Antony Browne the Chief Executive of the British Bankers’ Association and Chris Leslie MP, the Shadow Financial Secretary to the Treasury and a Labour and Co-operative MP for Nottingham East. The discussion was regarding regulatory reforms in trying to maintain a strong and healthy financial sector. A shared idea was that the problem with banks in the UK was the size of these banks and that a break up was required, not to remove them all together, as most people believed. The legislation that was discussed would have evidently prevented the collapse of Lehman Brothers, as they ‘wind’ the banks back, if they fail.

Session 3 – Chaired by Edmund Conway, Economics Editor of Sky News:

The entire session was a panel discussion featuring Professor Trevor Williams the Chief Economist of Lloyds Bank Commercial Banking, Andrew Lilico the Principal of Europe Economics and Dr Kwasi Kwarteng an MP of the Conservative party. The topic of this session was how to use supply-side reforms to boost the economy.

There were many ideas and policies discussed such as: freedom of the labour market, higher interest rates to curb inflation, to improve education and training schemes, increasing the size of the labour force, by increasing the age of retirement, increasing competitiveness of markets and to cut government spending. However, there were conflicts in ideas such as government spending, it was argued that a cut in government spending would help to decrease the budget deficit; yet increasing government spending could cause the multiplier effect, which would also positively affect the economy. This panel discussion offered many views and opinions that conflicted with others and all seemed viable but none seemed to single-handedly achieve the prime economic target of kick-starting the economy.

Session 4 – Chaired by Graeme Leach, Chief Economist & Director of Policy of the Institute of Directors:

The first talk was by Simon Hayes who is the chief UK economist of Barclays bank. This talk was about the change in bond yields, equities and interest rates over the years especially over the course of the Great Recession of 2008. It is apparent that the recession had a tremendous impact on the economy of the UK, as uncertainty and interest rates were affected by this event. Furthermore, it is evident that there is now a scarcity of ‘save-haven’ assets, where consumers and firms are safe and feel safe in financial matters.

The next talk was by Thomas Mayer, Senior Fellow at Frankfurt University and advisor of Deutsche bank, regarding the impact of the Eurozone crisis. Firstly it was evident that there have been adverse consequences to the crisis of the Eurozone that followed the Great Recession, such as: public debts rising, public budget deficits increasing and the increase in labour costs. There are many solutions to these problems; however there are always alternatives and choosing one is not easy as was demonstrated in session three. Mr Mayer emphasised the importance of competition of markets but of currency too, which has been lacking in the last few years. These possible solutions could help to turn around the crisis of the Eurozone and needs to be dealt with soon, as economies could begin to collapse if otherwise.

The final talk of this session and of the day was about trying to improve prospects of growth in Europe by Ludger Schuknecht the Director General of the German Ministry of Finance. It has been apparent that weak growth has been common over the last few years, along with rising public debt in the European Union (EU). To help the economies of the EU, there needs to be three prolonged strategies, according to Mr Schuknecht: fiscal consolidation, structural reforms and the strengthening of the institution of framework. Referring to case studies of Ireland, New Zealand, Sweden, East Germany and many other countries, it is obvious these past crises have required these three reforms to successfully exit their economic depressions. Normally, these fiscal changes can be considerably large and have a tremendous impact on society and the economy. However, these types of reforms should hopefully reverse the image the Eurozone has acquired, of being an economic disaster to a prosperous alliance of countries.

In conclusion, all four session combined presented a sound and intriguing argument regarding the state of the economy. There were many conflicting opinions, such as Ludger Schuknecht believing that the Eurozone should become a strong and prosperous alliance whereas Roger Bootle claimed that the Eurozone should break up, as evidence suggests that the members of the EU were economically successful prior to the formation of the EU. All in all, the conference featured many famous and influential people and was very informative of the options that governments have to help revive their economies.

What would Hayek do to sort out this mess?, Dr. Eamonn Butler, LSE

Friedrich Hayek was an Austrian economist who later moved to the UK and was considered as the main opponent of John Maynard Keynes, perhaps the most famous British economist and philosopher. However, both these famous economists had many famous theories and ideas that could significantly help the current economic crisis we are in. This lecture provided an insight into the thinking of Hayek and what he would do to fix the economic mess the world is in, according to the theories and ideas he collated in his works.

Firstly, Hayek is most known for his contribution in the boom and bust cycles or better known as the Business Cycle. Hayek claimed the problem was the boom and not the recession that follows, according to his theories the recession that is followed by a period of economic prosperity, lasts for as long as the period of economic prosperity was for. Dr. Eamonn Butler used an excellent analogy to describe the peculiar relationship between the boom and the bust and that was the recession was like a hangover after a party which is the period of economic prosperity or boom. Therefore, Hayek warned that whenever there are years of economic boom, economists should be fearful that a recession is going to hit soon, as it is inevitable according to the business cycle. It is apparent that prior to the Great Recession of 2008, economists were unprepared for the total economic disaster that was about to ensue.

Furthermore, Hayek believed that markets should be free and not constrained by government limitation such as in the form of ‘red tape’ which is legislation that limits the flexibility of the market. He also stated that the labour market should be free which means the National Minimum Wage (NMW) should be scrapped, which would cause some outrage amongst people. However, the explanation behind these controversial decisions was extraordinary. In the case of the labour market, it was claimed that the reason why high unemployment exists is due to the NMW and if it were scrapped more people would become employed as currently some people cannot be hired as the NMW is too high for some firms to advocate to. In addition, the normal market should be free so the correct ‘price signals’ are given out. This means that consumers and firms see the correct price of a good or service in the market system, as currently taxation and ‘red tape’ can act as ‘fog’ in Dr. Eamonn Butler’s words.

Moreover according to Dr. Butler, Hayek would have believed that the ability given to the Monetary Policy Committee (MPC) of the Bank of England (BoE) to set interest rates is wrong and should be stopped, as false information is then given out to consumers and firms that they should start to spend more money, whereas they should do the opposite. Similar to the freedom that should be granted to labour markets and the markets for goods and services, should also be granted to the interest rates. This would lead to correct information reaching firms and consumers and they would know the current economic position of the UK, rather than that knowledge only being shared with the central bank, the BoE.

To conclude, Dr. Eamonn Butler offered the most likely opinion Hayek would have offered had he still been alive today. It seems as if that this could perhaps be the solution to exiting the current economic disaster we are in and that is to refer to the theories and teaching of past economists.

China’s New Leadership - Hopes for Reform and Fear of Uncertainty by Professor Athar Hussain, Dr Debin Ma and Professor Arne Westad, LSE

China is quickly rising to be one of the most influential and powerful countries in the world, in terms of their economy and grasp on the world’s markets, such as being one of the largest exporters of goods. China have also recently experienced a slight change in leadership, which raises some eyebrows globally, as China have an unprecedented amount of control in the affairs and decisions of many nations around the world. This lecture gave the analysis of these changes and their significance, from three well-recognised experts in this field.

One of the main focal points of the lecture was how this new leadership is going to deal with the prospect of China’s growth slowing down after decades of sharp increases in growth of their entire economy. This is most apparent after figures and predictions suggest that China could soon experience a slow down in growth and perhaps even the risk of economic collapse. This speculation and predictions can be measured against the graph of the Business Cycle:

The Business cycle would suggest that China would inevitably experience a downturn or in this specific graph a recession, sourced from: http://monevator.com/wpcontent/uploads/2009/05/businesscycle_1.jpg

However, as was pointed out during the lecture these predictions of China’s economy collapsing and a slow down in growth have been stated for many years, making these claims less plausible.

Furthermore, another issue that this new leadership will have to overcome is the rapid urbanisation of China with now more than 51% of people living in cities, which has dramatically increased from amount of people who lived in cities twenty years ago. This urbanisation is occurring at such a rate, due to the substantial advancements in China’s economy and technology, enabling the eradication of domestic issues such as poverty, which was rife in China a mere thirty years ago. This quick urbanisation, however may also have negative consequences, as was expressed in the lecture. It is most evident with the growing rates of inequality in China following their fast growth rates. This will obviously be a grave concern for the new China’s leadership. However in this scenario, slow growth rates could be argued would greatly benefit China, as the problem of inequality would be less of a concern.

Moreover, another issue the new leadership of China will have to face is “What will China do next?” China has evolved from a country stricken with poverty and disease to a bustling, wealthy and urbanised nation in the space of thirty years, which is extraordinary. However, in the process China has gained tremendous power, for example they export significant quantities of goods across the world and as a consequence their economy is now booming. Therefore, as was discussed in the lecture, this new leadership of China ought to consider this and the image they portray to other countries, especially their neighbours.

In conclusion, Professor Athar Hussain, Dr Debin Ma and Professor Arne Westad provided a stimulating discussion regarding the new leadership of China and the impacts of this on their economy. It is clearly apparent that China’s new leadership has many challenges ahead. However, how could the government of one of the most powerful nations on Earth, not have any challenges and obstacles?

The Economics of the Very Long Run: From Fire to Finance in Two Million Years by Professor Mark Schaffer, Gresham College

This lecture provided a useful insight into the history of economies and finance, over the course of two million years. From the beginnings of mankind to the current economic disaster we are in. Famous names such as Thomas Malthus and Charles Darwin were mentioned frequently and was apparent that they too affected or have been affected by the founding’s of modern day economics.

A recurrent theme that Professor Mark Schaffer used in his lecture was the tremendous impact that technology has had on the progression and formation of economies. The first clear example of this was the effects of fire on the expansion of economies and increases in living standards. The next new ‘technology’ that helped to further expand the economies of the time was the invention of agriculture. These new technologies and many more that were invented in the centuries to come such as the Industrial Revolution and wireless internet has caused wealth to increase and living standards to also follow the pattern.

New technologies lead to extra benefits for the people of the area/time. The creation of fire meant that early humans no longer had to spend hours eating raw meat and that the fire offered protection, warmth and even weapons. This led to positive consequences on the economy as humans now had more available time. The invention of agriculture meant that the hunter/gatherer humans began to settle down and even produce more children, this again had positive consequences on the economy as there were now more humans and potential to create villages and cities. However, a more recent example of the telephone has also had a significant impact on the economies of the time, as people can now communicate with others around the world, which would have expand the economy as people could communicate much faster than before.

Thomas Malthus and his work: ‘An Essay on the Principle of Population’ written in 1798, was a significant aspect of the lecture and it was clearly apparent that his work was controversial and accurate in explaining the changing levels of human population. This led to the formation of the Malthusian Model, which has three key parts: Equilibrium, Stability and Growth, which outline the growth of human population. It was evident that this theory of Malthus was far more plausible than his other theories such as his ‘doomsday prophecy’ which outlined the end of humanity as food production, which increases arithmetically, would be exhausted due to the geometrically increasing human population. 

Professor Schaffer also labelled Malthus the ‘grandfather of the theory of evolution’, as his works especially the Malthusian model helped Charles Darwin and others to formulate this revolutionary theory. This is evidently apparent as the first two parts of the Malthusian Model are shared with the theory of evolution as they both tackle long run changes in society and economies.

To conclude, the lecture was stimulating and thought provoking, as it provided the brief history of the formation of economies and some very important people who theorised the entire process.

The Political Consequences of the Great Recession: Electoral Punishment & Popular Protest by Professor Hanspeter Kriesi, LSE

Professor Kriesi produced a thought-provoking argument that analysed the effects and overall impact of the Great Recession of 2008 both economically and politically. He also used the information and evidence he presented and related it to two case studies, which strengthened his claims and made his theories more credible.

The main bulk of the lecture was filtering the events that follow an economic crisis and understanding the purpose and impact of these events. In addition, a recurring theme within the lecture was the power the people had, more so than the people actually know about. This was most evident in the actions of the general public in times of economic emergency.

Professor Kriesi expanded upon this spectacle and analysed it further. It was soon clear that the government would only act and adapt when there is overwhelming pressure from the people of the specific country. This is most apparent from the power people have in electing parties or individuals at elections to the power people impose during demonstrations and protests against the actions of the government.

Moreover, Professor Kriesi then expanded on the response from the government and the possible assistance a country may receive during times of economic distress, in particular financial aid from the International Monetary Fund (IMF). This then led to his two case studies.

The first of the case studies was Iceland and how it adapted and changed after the effects of the Great Recession. It was one of the first countries to be struck by the crisis, after the three biggest banks of Iceland collapsed. However, Iceland in Professor Kriesi’s words was a ‘victim of the intervention of the IMF’. Furthermore, Iceland experienced popular discontent among the people and this led to more demonstrations and protests. The other case study, which was discussed, was Latvia and how the Great Recession affected them. It was apparent that there were far more protests and demonstrations in Latvia and they were also a ‘victim of the intervention of the IMF’.

However, after analysing both these western and eastern European countries, it was evident that there was an important difference between western and eastern European countries. Firstly in Western Europe the unemployment rate is more important, but in Eastern Europe the growth rate is more important. This would definitely lead to very different approaches taken by the government in trying to revive their country after an economic crisis hits.

To conclude, this lecture provided important facts and figures that demonstrate the impact the Great Recession has had on countries. In addition, this lecture gave an interesting conflict in the aims and objectives of eastern and western European countries, which could therefore be used to analyse and justify the political and economical response of that countries’ people.