Many attribute the beginning of the financial crisis to the collapse of the housing market. While the housing bust indeed plays an important role, particularly in the health and stability of the banking sector, the real problem is deeper. The fluctuations observed across real estate markets over the last decade or so simply reflect sizable macroeconomic imbalances. It is the nature of these imbalances that we must fully appreciate to better understand the crisis and to potentially forecast plausible scenarios going forward. At the broadest level, we have witnessed a consumption boom over the last two decades, where U.S. aggregate household consumption grew to represent more than 70% of gross domestic product (GDP), a historically and unsustainably high level (see Exhibit 1).
Read the rest of this entry »
The U.S. Economic Crisis: Root Causes and the Road to Recovery
Accounting changes need global reach
Changes in accounting standards, rules and policies for financial institutions must be coordinated globally in the effort to help avoid a recurrence of the economic crisis, federal regulators said Monday.
“Now that some measure of confidence has been restored and financial strains are receding, it is time to turn our attention to the lessons learned in the crisis,” Federal Reserve Gov. Elizabeth Duke told an accounting industry audience on the first anniversary of the collapse of Lehman Brothers, the day before it filed for bankruptcy. “Accounting standard setters, regulators and policymakers around the world are discussing and proposing preventative measures. Now the challenge lies in integrating those changes smoothly and seamlessly.”
Read the rest of this entry »
Perkier Economy Pushes Dollar Back Down the Slide
The U.S. dollar continued its descent Wednesday, probably resuming a slide that began earlier in the decade, as improving economic conditions have prompted investors to seek higher returns in emerging markets and in gold futures.
The decline of the dollar was temporarily reversed last year as the global economy found itself in the grip of the worst downturn since the Great Depression. Despite the nose-diving U.S. economy, nervous investors and central banks looked to greenbacks and U.S. Treasurys as safe havens and loaded up accordingly.
Many economists think the global recession is winding down or is already over, which has encouraged investors to dump dollars to buy stocks and other higher-yielding assets. “As we have stepped away from the abyss people have a healthier appetite for risk,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
Read the rest of this entry »
Another financial crisis inevitable: Greenspan
Another global financial crisis is inevitable because human nature always reverts to “speculative excesses” during a period of sustained prosperity, former U.S. Federal Reserve Chairman Alan Greenspan said.
“The crisis will happen again but it will be different,” he told BBC Two’s “The Love of Money” television series.
“That is the unquenchable capability of human beings when confronted with long periods of prosperity to presume that that will continue,” he said.
Greenspan, speaking to the BBC to mark the first anniversary of the fall of U.S. investment bank Lehman Brothers, said Britain will be hit worse than the U.S. by the subsequent worldwide financial crisis and global recession because it has a globally-focused economy.
Read the rest of this entry »