The Centre for Economic Policy Research has published a 40-page ebook entitled How to Rescue Our Jobs and Savings: What G7/8 Leaders Can Do To Solve The Global Credit Crisis. It is being distributed in coordination with the G7 meetings in DC today. It is available for free on their policy portal, VoxEU.org.
The ebook contains 14 essays covering a variety of aspects to the global credit crisis. And, to be blunt, I'm reading it so that you don't have to. I've summarized the essays below the fold.
Coordinating International Responses to the Crisis
Klaus F. Zimmermann
Governments need to adopt a mixed strategy of short-term and long-term measures to handle the crisis. The key is worldwide concerted action, based on similar policies executed by national governments. Some of the measures necessary have already been undertaken - but without the international coordination essential for their effectiveness.
Klaus Zimmermann is Full Professor of Economics at Bonn University and Director of the Institute for the Study of Labour (IZA Bonn) since 1998, President of the German Institute for Economic Research (DIW Berlin) since 2000.
Calming the Panic
Alberto Alesina and Guido Tabellini
The central banks should guarantee not only deposits but also bank loans, especially in the interbank market. This measure could be temporary until the situation is stabilised. These guarantees would in large part not be used to the extent that the problem is panic rather than fundamentals.
Alberto Alesina is the Nathaniel Ropes Professor of Political Economy at Harvard University and was Chairman of the Department of Economics (2003 - 2006), having obtained his PhD in Economics from Harvard in 1986.
Guido Tabellini is Professor of Economics at Bocconi University, and President of IGIER at Bocconi University in Milan. Previously, he taught at Stanford University and UCLA.
How to Save the European Banking System
Daniel Gros
There are two related reasons for the problem in Europe. The large money-centre banks that provide the backbone for the inter-bank lending market are undercapitalised. With their low capitalisation, they are vulnerable to even small swings in market conditions. Any liquidity problem thus turns almost immediately into a solvency problem. Because of this vulnerability they do not trust each other, thus paralysing the inter-bank market. A two-pronged approach is thus needed:
- Recapitalising the large banks, and
- Restarting inter-bank lending.
Daniel Gros is the Director of the Centre for European Policy Studies (CEPS) in Brussels.
What Is To Be Done - and by Whom?
Five Separate Initiatives
Avinash Persaud
- Revive inter-bank markets by providing a temporary guarantee for short-term unsecured lending between regulated institutions.
- Inject preference share capital to institutions that need it on condition of a partial swap of "old" debt for equity.
- Facilitate the creation of long-term liquidity pools to purchase assets.
- Implement counter-cyclical capital charges, implemented as an internationally co-ordinated regulatory initiative.
- Develop greater sensitivity to risk capacity and a better appreciation that diversity is the key to liquidity.
Avinash Persaud is currently Chairman of Intelligence Capital, a financial consultancy and a Member of the Board of three investment boutiques.
What Next?
Douglas W. Diamond, Anil K. Kashyap and Raghuram G. Rajan
If the panic of the second week of October 2008 worsens, governments need to be prepared to stop it using auditing, recapitalisation, and liquidation. A stopgap stabilisation plan would be to guarantee all banks' short-term liabilities, audit their assets, and then clean up the mess.
Douglas W. Diamond is Professor at the University of Chicago's Graduate School of Business having previously taught at Yale and the Hong Kong University of Science and Technology. He specializes in the study of financial intermediaries, financial crises.
Anil K. Kashyap is Professor at University of Chicago's Graduate School of Business, consultant for the Federal Reserve Bank of Chicago, and advisor to the Cabinet Office of the Japanese Government.
Raghuram G. Rajan is a Professor at University of Chicago's Graduate School of Business, having served as Chief Economist at the International Monetary Fund (2003- 2006).
A Strategy Emerges: The Right Policies to Deal with the Crisis
Richard Portes
The Paulson plan (US Emergency Economic Stabilisation Act, EESA) focused on creating a market for impaired securities. This is important, although there may be better ways of doing it. But the urgent issues are the recapitalisation of banks and re-liquefying the term funding markets.
Richard Portes is Professor of Economics at London Business School and Founder and President of the Centre for Economic Policy Research (CEPR), Directeur d'Etudes at the Ecole des Hautes Etudes en Sciences Sociales, Secretary-General of the Royal Economic Society, and Senior Editor and Co-Chairman of the Board of Economic Policy.
The Need for a Comprehensive and Global Solution
Stijn Claessens
We are facing a global financial crisis and bold steps by policy makers gathering this week in Washington are urgently needed. It has become clear that the policy interventions to date have not restored confidence in markets. Rather, at times, by being ad-hoc, interventions have actually created more turmoil. A comprehensive and global approach is needed. It should address the core problems in the financial sector - lack of liquidity in markets, doubts about the value of troubled assets, and a clear shortage of capital - address the underlying losses (notably in housing markets), and cover all markets around the world.
Stijn Claessens is Assistant Director in the Research Department of the International Monetary Fund where he leads the Financial Studies Division. He is also a Professor of International Finance Policy at the University of Amsterdam.
The Content of Coordination
Barry Eichengreen
The priority should be a coordinated programme to immediately recapitalise banking systems. The UK has shown how this can be done in a matter of days. But there is an urgent need for the G7 countries, together with the other Europeans, to immediately implement an analogous plan.
Barry Eichengreen is the George C. Pardee and Helen N. Pardee Professor of Economics and Professor of Political Science at the University of California, Berkeley. He is a fellow of the American Academy of Arts and Sciences, and the convener of the Bellagio Group of academics and economic officials. He has been Senior Policy Advisor at the IMF.
Why Government Responses Need To Be Comprehensive and Coordinated
Charles Wyplosz
Four measures are jointly necessary to clean up the financial mess:
1) Absorb significant amounts of toxic assets (and each day's fall in stock prices widens the definition of toxicity);
2) Recapitalise banks;
3) Restart the interbank market;
4) Prevent bank runs by guaranteeing all deposits.
Charles Wyplosz is Professor of International Economics at the Graduate Institute, Geneva, where he is Director of the International Centre for Money and Banking Studies.
A Proposal to Tackle the Crisis in Europe
Luigi Guiso and Marco Pagano
While the US is trying to attack the bank solvency crisis with the Paulson Plan, no comprehensive response is emerging in Europe. Finance ministers must agree on a common set of rules to recapitalise European banks and establish a European institution to manage this recapitalisation.
Luigi Guiso is professor of economics at the European University Institute in Florence and Scientific Coordinator of Ente 'Luigi Einaudi' for Monetary, Banking and Financial Studies in Rome.
Marco Pagano is a Professor in the Economics Faculty at Università di Napoli Federico II, having also taught at the University of Naples, Bocconi University and at the Università di Salerno, having done his Economics PhD at MIT.
Governments Should Buy Straight Preferred Stock in their Banks
Charles Calomiris
The governments of the G7 should buy straight preferred stock in their banks. This adds capital and liquidity to give banks the room to manage their asset quality and liquidity problems, while ensuring that common stockholders are in a first-loss position, not taxpayers. Since taxpayers are not in a first-loss position (as they would be with asset purchases), there is no need to add upside warrants or other options, and these are not helpful.
Charles W. Calomiris is the Henry Kaufman Professor of Financial Institutions at the Columbia University Graduate School of Business and a Professor at Columbia's School of International and Public Affairs.
An Efficient Rescue Plan
Roger Craine
To restore the interbank lending market and control moral hazard, the government should:
- First, guarantee the short maturity debt (Fed Funds and CDs) of the financial institutions that join the plan and impose a capital requirement on all financial institutions in the plan.
- Second, the government should offer to provide capital to the financial institutions that join the plan for some interval - say, three months - in return for an equity share.
Roger Craine is Professor of Economics at the University of California, Berkeley, having previously served as Senior Economist on the Board of Governors of the Federal Reserve System from 1968-1977.
The Wrong Financial Crisis
J. Bradford DeLong
Catastrophic failures of risk management throughout the entire banking sector multiplied a relatively minor collapse in housing prices into a paralysis of the global finance system not seen since the Great Depression. To fix it, governments should embark on a coordinated fiscal and monetary expansion and a coordinated bank recapitalisation.
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley, having previously taught at Harvard, Boston University and MIT. He is Co-Editor of the Journal of Economic Perspectives, and a Visiting Scholar at the Federal Reserve Bank of San Francisco. He is author of the widely read blog ‘Grasping Reality with Both Hands’.
What Europe should do in the shadow of the financial meltdown
Michael Burda
European fundamentals are in good shape, but its banks are suffering from contagion. To avoid further real damage, EU leaders should guarantee intra-bank lending and recapitalise the banks.
Michael Burda is professor of economics at Humboldt University of Berlin. He previously taught at INSEAD, and Berkeley. His research centres on macroeconomics and the economics of labour markets.
Well, there you have it. Download the ebook and read all the essays. Events are moving pretty fast and there is no guarantee that any of this will be effective by this time next month; but I've always believed that "more information is better." So read up and arm yourself.
And fasten your seatbelt. It's going to be a bumpy ride.