Category: Policies

The author of this article, Simon Johnson, is a highly regarded economics professor at MIT and former chief economist of the IMF.  He has long argued persuasively, at least to my thinking, that the bailout of the “to-big-fail” banks in the US (and UK) did not work to solve the toxic asset problem, but merely kicked the can down the road.

In the two essays linked below Johnson argues that the political rigidities and peculiarities of the eurozone are impeding a rational adjustment to a major part of the worldwide debt problem.  This is increasing the probability of a concatenation of mutually destructive policy actions and reactions like those that precipitated the global depression in the 1930s.

Euro Falling, US Recovery Under Threat

Simon Johnson, Baseline Scenario, 7 February 2010

The euro depreciates, the dollar strengthens, and our path to recovery starts to run more uphill.

Europe Risks Another Global Depression

Simon Johnson, Baseline Scenario, 7 February 2010

The entirely pointless G7 meeting this weekend only served to underline the fact that Europe is again entering a serious economic crisis.

At the end of the meeting yesterday, Treasury Secretary Tim Geithner told reporters, “I just want to underscore they made it clear to us, they the European authorities, that they will manage this [the Greek debt crisis] with great care.”

But the Europeans are not being careful – and it’s not just about Greece any more.  Worries about government debt and associated public sector liabilities (e.g., because banking systems are in deep trouble) have spread through the eurozone to Spain and Portugal.  Ireland and Italy are next up for hostile reconsideration by the markets, and the UK may not be far behind.

First Base: The Eurozone worked very well to increase the economic welfare of its poorer members during the economic expansion of 2002-2008, but it is becoming increasingly clear that the interconnected character of the economies of Eurozone, together with the sacrifice of sovereign currencies in favor of the Euro managed by the European Central Bank, creates institutional rigidities and solvency problems that impede the formulation of counter-cyclical policies in these countries when their economic growth stagnates.  The attached two articles describe how these rigidities could spillover to feed back on and push the US into a double dip recession or an extended period of stagnation.

Is Tim Geithner Paying Attention To the Global Economy? By Peter Boone and Simon Johnson, Baseline Scenario, 6 Feb 2010

Second Base: Should the Nature of a Sovereign Currency Be Considered When Shaping a Counter Cyclical Economic Policy? A political consensus is emerging in the US to cut back on deficit spending, even though the US economy is at best in the early stage of recovering from a steep recession, or at worst on the cusp of a double dip recession, or even worse, a debt deflation.  This is a very dangerous possibility, made more so by a morally bankrupt political decision-making system that runs more in accordance with the rhythms of soundbytes and simplistic slogans.

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