Olivier Blanchard and His Team Talk Sense: Economists Squarely in the Bagehot-Minsky-Kindleberger Tradition Watch
Mike Konczal:
The IMF Goes All-Out on Balance-Sheet Recessions, Providing Sanity on Economic Policy: [T]he recent April 2012 World Economic Report by the IMF…. The relevant part is Chapter 3, "Dealing with Household Debt"…. You should read it all, but I want to point out a few high-level arguments they make:
(1) The run-up in household debt and leverage explains the economic collapse across countries…. [T]he problems aren't labor "inflexiblity" or whatever the latest faddish argument is. It's household leverage. You see the same exact relationship across the states in the United States, where the biggest increases in household leverage ratios (i.e. the places with the biggest housing collapses) have the worst unemployment and consumption collapses. In the United States monetary policy and transfers help mitigate this. We send checks to Arizona and Florida, where housing is a disaster. As Paul Krugman and others have pointed out, there are no equivalent transfers across these countries, especially in the Euro.
(2) Financial crises are not a driver of prolongued recessions. If anything they are a symptom. There's a common wisdom among many elites that prolongued recessions are just what happens in the aftermath of a financial crisis. Most people who argue this derive it from Kenneth Rogoff and Carmen Reinhart's This Time It's Different. These arguments have always been a bit difficult to justify. Usually people who invoke them call for inaction…. Busts with large household leverage ratios have much bigger drops in consumptions years out… with or without financial crises…. [C]ountries that have giant drops in housing values and/or increases in debt-to-income ratios probably create financial crises. But this means that having a financial crisis, like we did, doesn't change the game; it just amplifies the case for normal demand-side stimulus.
(3) HAMP is a failed program. I remember when saying that HAMP was a failed program that was making the situation worse was a controversial opinion…. We bloggers ringing the bell about HAMP also argued two additional points: that Treasury wasn't actually spending the money Congress told it to spend on homeowners…. Here's the IMF:
HAMP had significant ambitions but has thus far achieved far fewer modifications than envisaged....By the same token, the amount disbursed under MHA as of December 2011 was only $2.3 billion, well below the allocation of $30 billion (0.2 percent of GDP). Issues with HAMP’s design help explain this disappointing performance….
(4) Foreclosures are a problem. It's never been clear whether Treasury views mass foreclosures as a macroeconomic problem. Well, the IMF does…. Ironically I had first heard the theoretical financial-macroeconomic arguments about preventing the fireselling of assets into a depressed market from Shleifer/Vishny's 1992 paper that the IMF cites. Shleifer is a protégé of Larry Summers, so I assumed Summers might have gone a bit harder about preventing the mass fireselling of the largest consumer asset, an asset which just has a gigantic collapse in value, into the largest economic downturn since the Great Depression. Alas. (5) Demand demand-side stimulus. Across the board. Now….
Temporary macroeconomic policy stimulus… simulations of policy models developed at six policy institutions suggest that, in the current environment, a temporary (two-year) transfer of 1 percent of GDP to financially constrained households would raise GDP by 1.3 percent and 1.1 percent in the United States and the European Union, respectively… Monetary stimulus can also provide relief to indebted households by easing the debt service burden… A social safety net can automatically provide targeted transfers to households with distressed balance sheets and a high marginal propensity to consume, without the need for additional policy deliberation…
Support for household debt restructuring: Finally, the government may choose to tackle the problem of household debt directly by setting up frameworks for voluntary out-of-court household debt restructuring—including write-downs—or by initiating government-sponsored debt restructuring programs….
Huh. That's actually an amazing set of polices. When can we start? And can we get the IMF advising US economic policy if this is what they are suggesting?
