FE1 Leverage and Macroeconomics Dec 2011
Transcript of FE1 Leverage and Macroeconomics Dec 2011
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
1/118
Leverage,
Finance andMacroeconomics
google EPI chatelain theorie
financiere
Jean-Bernard Chatelain
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
2/118
Macroeconomics
Macroeconomics: started after the 1929 Crisis.Keynes and others.
National Accounts, macro-economics aggregates
2 separate fields in the 1990s.
- Business Cycles: Pro-market, Competitive Real
Business Cycles, small costs of cycles forrepresentative agent. Y=AKaL1-a
- Growth: Pro-public intervention, Externalities inGrowth models (Paul Romer (1983)). Y=AKL1-a
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
3/118
The current crisis and
macroeconomics
They say they want a revolution
DSGE models bashing.
Harsh debates (Krugman, Buiter,).
Institute for New Economic Thinking (Soros).
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
4/118
August
2009
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
5/118
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
6/118
Macroeconomics in Crisis?
Cover of the Economist, August 2009.
Institute for New Economic Thinking 2010
(videos) financed by Georges Soros.
Failure of the dominant views pre-2007.
Saltwater versus Freshwater 1976 (David Warsh:Knowledge and the wealth of nations 2006):
Krugman versus Lucas,
MIT Harvard versus Chicago
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
7/118
Highly controversial
In 2009, Paul Krugman (Princeton), Brad
DeLong (Berkeley) and Willem Buiter (LSE)
argued against Robert Lucas (Chicago)that they are also unable to provide
adequatemonetary and fiscal policy
answers to the crisis.
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
8/118
Why do they?
Guilt by economists misunderstanding of the
upcoming crisis?
Old memories. Fighting back against Lucas
rational expectations?
A new macroeconomic regime with weakly
regulated financial sector?
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
9/118
Interaction Growth/Cycle
Possibility to disentangle growth componentfrom cycle component frommacroeconomic times series.
Cycles: say 6-8 years.
Recurrent financial crisis and depressioncomes back.
But large Crisis lasts long and affect thegrowth trend, not only the cyclicalcomponent: USA 1929-1946, Japan1990s-2010.
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
10/118
Plan: 3 parts
1. We have a problem
2. Solutions of yesterday
3. Solutions for tomorrow
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
11/118
I. We have a problem
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
12/118
YES,
IT CAN!
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
13/118
IT: World map showing Real
GDP Growth Rate for 2009
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
14/118
I. Why it will happen again
tomorrow.We need a reason to do a revolution in
mainstream macroeconomics.
The reason is: It will happen again in thenext 3 business cycles (3x8years).
It : another large world major financial
crisis in developped countries.
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
15/118
One world crisis every 80
years? Or every three cycles?The low frequency of the last two major world
crisis (1 every 80 years) is related to the stabilityperiod which followed Bretton Woods
(1945-1973).
This period is also related to a great reversal inthe balance of power for promoting international
private banking and international capital flows,with respect to the period 1870-1940.
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
16/118
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
17/118
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
18/118
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
19/118
to B
Regime B: Strongly regulated international finance.
1.Control of international capital flows.
2.Control of the amount of credit upwards or
downwards by large retail banks in order to limit
bubbles at the national level (strong macro-
prudential policy, credit control).
3.Strong involvement of government or of thepublic sector in the allocation of credit or capital.
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
20/118
Strengthes/Weaknesses
Regime A:
+ Better allocation of world capital.
- High probability of world (core OECD countries,
NOT the periphery) systemic bankruptcy with
large cost.
Regime B:
- Weaker allocation of world capital.+ Very low probability of world systemic
bankruptcy (including low contagion effects).
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
21/118
Condition for A to B in 1945
Weak bargaining power of international
banking.
1.Decrease in trade2.Decrease in capital flows (war).
3.Banking Regulations in 1933
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
22/118
Condition for A to B in 1945
4. War economies and expected
reconstruction economies with strong
involvement of government in the banking
sector and in the allocation of capital.
5. Willingness to move to fixed exchange
rate and international stability for the
western world.
Others
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
23/118
Conditions from A to B in 2011
Strong bargaining power of international
finance.
None of the former sixth conditions met.Banking sector regulations:
1933 (4 years) : Glass Steagall Act.
2011 (3 years): Basel 3 in the next 8 years.International Coordination issues among
Jurisdictions; Dissents inside Nations.
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
24/118
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
25/118
Benefits of Opacity
during crisis management (2)Nobody buy losses with probability one originated by a crisis. Opacity allows to
spread those losses in larger portfolios to
investors (return tickets to Jersey for bad
banks ).
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
26/118
Benefits of Opacity
during crisis management (3)
Opacity on losses allows soft budget
constraints on financial markets with hardimmediate budget constraints. It allows an
optimal timing of annoucement of losses. It
allows gamble for resurrection.
Hence, some regulators may write about
regulation after the crisis
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
27/118
Low frequency of world crisis:
a Bretton Woods IITo reach a low frequency of world crisis, oneneeds a Bretton Woods IIalong with a greatreversalof the balance of power of internationalprivate banking, limiting its activities.
The (geo)-political conditions for a great reversalwhere built in by 1945. They are very far frombeing built in 2011.
There will not be a Bretton Woods II in the nextyears. The probability of world systemicbankruptcy and related crisis will remainhigh.
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
28/118
1 decade over 3 ?
A depression: a lost decade.
1/8 decade
Less 3 decades of Bretton Woods1/5 decade
1880-1929: higher frequency: 1/3 cycle
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
29/118
Not foreseen?
Prior: it is rare (80
years?). Low
probability
The cost is small (cf.
Sweden 1990s
knows better than
Argentina 1990s).
Small costs of
cycles.
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
30/118
II. Solutions of Yesterday
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
31/118
Financial accelerator DSGE
Imperfect capital markets with bankruptcy
costs for non financial firms and also for
banks.
Debt backed by collateral valued at next
period asset price.
Next period asset price determined as the
fundamental value of the asset (efficient
market hypothesis).
-
8/3/2019 FE1 Leverage and Macroeconomics Dec 2011
32/118
Hypothesis: collateral backed
aggregate credit rationing
(t+1: +1 year or +10 years average?)
.
E1Zm