In the Aftermath of Global Financial Crisis: Implications of a New Economic Order with the G20. Jeffrey Frankel Harpel Professor, Harvard University 25 th anniversary of the KAEA Allied Social Science Association Meetings Atlanta, January 4, 2010.
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Implications of a New Economic Order with the G20
Jeffrey FrankelHarpel Professor, Harvard University
25th anniversary of the KAEAAllied Social Science Association Meetings
Atlanta, January 4, 2010
and with Korea chairing the G20?
The desirable principles haven’t changed, only the claim that the US uniquely embodies them
3) A possible rival currency to the $ exists.
Central banks’ reserve holdings was a reasonable middle position:Frankel & Chinn (2007)estimated effects of country size, market depth, ability to hold value, and network effects
Simulation suggests € could overtake $ by 2022.
via RGE Monitor 2009 Global Outlook
Also newly relevant are some almost-forgotten macroeconomics?and less-formalized notions of cycles:
1. It is inevitable that more power go to large-GDP countries than small.
2. Conversation is not possible with more than 20 in the room.
Example: many rounds of trade response avoided 1930s mistakes
negotiations under the GATT.
Well before 2007, there were danger signals:
Real interest rates <0, 2003-04;
Early corporate scandals (Enron 2001…);
Risk was priced very low,
Source: Benn Steil, CFR, March 2009
Real interest rates <0
Source: “The EMBI in the Global Village,” room.Javier GomezMay 18, 2008 juanpablofernandez.wordpress.com/2008/05/
In 2003-07, market-perceived volatility, as measured by options (VIX), plummeted.
So did spreads on US junk & emerging market bonds.
In 2008, it all reversed.
1. UScorporate governance falls short
E.g., rating agencies;
executive compensation …
2. US households save too little,borrow too much.
3. Politicians slant excessively toward homeownership
Tax-deductible mortgage interest, cap.gains;
Fannie Mae & Freddie Mac;
Allowing teasers, NINJA loans, liar loans…
MSN Money & Forbes
4. Starting 2001, the federal budgetwas set on a reckless path,
reminiscent of 1981-1990
5. Monetary policy was too loose, during 2003-05,
accommodating fiscal expansion,reminiscent of the Vietnam era.
6. Financial market participants during this period grossly underpriced risk.
Underestimated riskin financial mkts
Failures of corporate governance
Households saving too little, borrowing too much
Federal budget deficits
Monetary policy easy 2004-05
Excessive leverage in financial institutions
Low national saving
Lower long-term econ.growth
Eventual loss of US hegemony
Oil price spike
Though arguments about the unique quality, and so has earned the right to finance its deficits, has been undermined by dysfunctionality that the financial crisis suddenly revealed in 2007-08. high quality of US private assets have been tarnished, the idea of America as World Banker is still alive: the $ is the world’s reserve currency, by virtue of US size & history.
Proposal quality, and so has earned the right to finance its deficits, has been undermined by dysfunctionality that the financial crisis suddenly revealed in 2007-08.
Stage 2:When the time comes for developing country cuts, targets are determined by a formula incorporating 3 elements, designed so each is asked only to take actions analogous to those already taken by others:
◙ In one version, concentrations level off at 500 ppm quality, and so has earned the right to finance its deficits, has been undermined by dysfunctionality that the financial crisis suddenly revealed in 2007-08. in the latter part of the century.
◙ Constraints are satisfied: -- No country in any one period suffers a loss as large as 5% of GDP by participating. -- Present Discounted Value of loss < 1% GDP.
Global peak date ≈ 2035