2011 In Review: Four Hard Truths


By Olivier Blanchard

(Versions in  عربي中文, EspañolFrançaisРусский, 日本語)

What a difference a year makes …

We started 2011 in recovery mode, admittedly weak and unbalanced, but nevertheless there was hope. The issues appeared more tractable: how to deal with excessive housing debt in the United States, how to deal with adjustment in countries at the periphery of the Euro area, how to handle volatile capital inflows to emerging economies, and how to improve financial sector regulation.

It was a long agenda, but one that appeared within reach.

Yet, as the year draws to a close, the recovery in many advanced economies is at a standstill, with some investors even exploring the implications of a potential breakup of the euro zone, and the real possibility that conditions may be worse than we saw in 2008.

I draw four main lessons from what has happened.

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A Balanced Debate About Reforming Macroeconomics


Guest post by Joseph E. Stiglitz, Columbia University, and
co-host of the Conference on Macro and Growth Policies in the Wake of the Crisis

The most remarkable aspect of the recent conference at the IMF was the broad consensus that the macroeconomic models that had been relied upon in the past and had informed major aspects of monetary and macro-policy had failed. They failed to predict the crisis; standard models even said bubbles couldn’t exist—markets were efficient. Even after the bubble broke, they said the effects would be contained. Even after it was clear that the effects were not “contained,” they provided limited guidance on how the economy should respond. Maintaining low and stable inflation did not ensure real economic stability. The crisis was “man-made.” While in standard models, shocks were exogenous, here, they were endogenous. Continue reading

No End in Sight: Early Lessons on Crisis Management


By Stijn Claessens and Ceyla Pazarbasioglu

(Version in Español)

Crises are like stories; they have a beginning, middle, and an end, and on occasion, we learn something along the way.

In times of crisis, choices must be made. In the most recent global economic crisis policymakers moved quickly to stabilize the system, providing massive financial support, which is the right response in the beginning of any crisis. But that only treated the symptoms of the global financial meltdown, and now a rare opportunity is being thrown away to tackle the underlying causes.

Without restructuring financial institutions’ balance sheets and their operations, as well as their assets ‒ loans to over-indebted households and enterprises ‒ the economic recovery will suffer, and the seeds will be sown for the next crisis. Continue reading

Forewarned Is Forearmed: How the Early Warning Exercise Expands the IMF’s Surveillance Toolkit


By John Lipsky

“Never again can we let ourselves be caught unprepared by an economic and financial crisis of such global magnitude.” This was the spirit in which G-20 Finance Ministers in late 2008 tasked the IMF and the newly-formed Financial Stability Board to jointly develop an Early Warning Exercise (EWE), to be ready by the IMF’s 2009 Istanbul Annual Meetings.

The inspiration was clear: In the wake of the September 2008 onset of unprecedented financial turmoil, policymakers recognized that earlier danger signs had not been synthesized into an actionable warning. The EWE was intended to fill the analytical gap: the goal is to produce an effective “call to arms” as threats emerge—but well before crises erupt. Continue reading

Financial Reform: What Must Be Done


By José Viñals

Financial system reform has reached a critical point around the world. Pressure is building from the financial industry to slow reform and concerns about fiscal conditions risk drawing public and political energies away from the need to act on financial sector problems. Fortunately, the Group of Twenty (G-20) reaffirmed its commitment at a summit in Toronto on June 26-27 to a comprehensive reform agenda—and we must seize the moment.

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