How can governments and multilateral institutions successfully manage the ongoing sovereign debt crises and restore health to the global economy? At the fourth annual CFA Institute European Investment Conference in Paris next week, three monetary and fiscal policy experts will share their perspectives on managing economic emergencies.
Former International Monetary Fund chief economist Simon Johnson, who opens the Conference on 2 November, says policymakers should focus on “too big to save” rather than “too big to fail.” The Bank for International Settlements’ Stephen G. Cecchetti, who addresses delegates on 3 November, is an advocate for increasing the policy tools available to central bankers. And Richard C. Koo — the chief economist at Nomura Research Institute who will take the podium later that afternoon — contends that governments in crisis-stricken economies should increase spending.
Johnson, an author and MIT professor, has ruffled feathers around the world by questioning the “too big to fail” doctrine. His argument that “too big to save” is the bigger risk* is based on the fact that bank assets in many cases exceed the gross domestic product of the countries in which they are domiciled. Johnson therefore encourages policy makers, investors, and businesses to rethink the blank check bailouts of the past. Any true “fiscal conservatism,” he argues, must insist on language forbidding “too big to fail.” In his talk at the European Investment Conference, entitled “The Next Financial Crisis,” Johnson will cover the different types of fiscal crises, lay out a long-term solution for the European sovereign debt crisis, and explore how to counteract the moral hazard of the previous financial crisis.
The Bank for International Settlement’s Stephen G. Cecchetti, a former executive vice president and director of research at the Federal Reserve Bank of New York, has written and spoken extensively about the evolution of the current financial crisis from a short-term credit problem to a full-fledged global crisis.* His work has also examined the appropriateness of the U.S. Federal Reserve response to the crisis.* Cecchetti’s presentation at the upcoming European Investment Conference is entitled “Reducing Systemic Risk: The Private Sector Must Be a Partner” and will cover the role of individual financial institutions in reinforcing their own risk control and ensuring that others behave responsibly.
Japan is no stranger to crisis economics — and that country’s recent experience will inform a third presentation in Paris on emergency economic management. Nomura Research Institute’s Richard C. Koo, a former advisor to prime ministers, had a view from the trenches of Japan’s real estate bubble and its aftermath. Koo believes that the most recent recession and its consequences are a “balance sheet” recession,* in which the private sector engages in deleveraging of debt whose collateral is underwater, leading to excess saving yet no borrowing. Koo’s policy prescription is for governments to increase their spending in order to soak up excess savings and pick up the economic slack. At the European Investment Conference, Koo will be talking about the unique aspects of a balance sheet recession, the problems that rating agencies present during this type of recession, and the real “danger of a double dip.”
Follow our Conference blog for session highlights beginning 2 November.
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