Secondary Sources: Economic Myths, Crisis Lessons, Cooperation

July 2nd, 2008 | Wall Street Journal

A roundup of economic news from around the Web.

Summer Myths: David Leonhardt of the New York Times takes aim at some economic myths. “Pundits have been scratching their heads about why the public mood is so grim. Last week, Barrons called the drop in consumer confidence difficult to figure. A front-page headline in The Washington Post claimed, Were Gloomier Than the Economy. But are we really? For the first time on record, an economic expansion seems to have just ended without most families having received a raise. For the first time on record, the typical home price nationwide is falling. The inflation-adjusted value of the Standard & Poors 500-stock index has dropped 20 percent in the last year — and 30 percent since its peak in 2000. I think the public has called this issue exactly right: the American economy has some real problems. Even if this summers downturn turns out to be mild, those problems arent mild — or simple — and they arent going away anytime soon. Its going to take some real work.”

Crisis Lessons: The Financial Times’s Martin Wolf looks at a recent BIS report to find lessons learned from the financial crisis. “The most interesting part of the BIS analysis of the lessons is that it focuses not on what is new — the paraphernalia of the modern financial system — but on what is old — the inherent procyclicality of the financial system and excessive credit growth. The important point here is that fiddling with details of the regulatory regime or tightening supervision of individual institutions is not the heart of the matter. What matters is the operation of the system as a whole. This is why the BIS takes such a strong stance on the need to tighten monetary policy when credit growth soars and asset prices explode, even if that temporarily reduces inflation below target levels. This, argues the BIS, would be a more symmetrical use of policy instruments. It is also why the report stresses macroprudential policies. These would focus not on the misbehaviour of specific institutions but rather on systemic risks, such as their shared exposure to common shocks and possible adverse interactions among and between institutions and markets.”

Environmental Spillover: Andrew K. Rose and Mark M. Spiegel write for the voxeu blog about ways to boost global environmental cooperation. “Prospects for international environmental cooperation often seem dim, as agreement must hew to the lowest common denominator. This column identifies economic gains from environmental commitments via reputational spillovers and their impact on capital flows. The evidence suggests that nations have more to gain from cooperation than they may realise.”

Compiled by Phil Izzo