Download Slide 1 - World Bank

The crisis:
How bewildered should we feel?
Ricardo Hausmann
Center for International Development &
Kennedy School of Government
Harvard University
Agenda
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How is the world?
How did we get here?
What does this diagnostic imply?
How scared should we (Latin Americans) be?
How much should we change our economic
policy beliefs?
• How will Latin American countries fare?
The world is a mess
• Biggest global recession since 1929
• Synchronized as never before
– Sept 15, 2008
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Starting in the center, not the periphery
Spreading globally instantaneously
Amazing collapses in asset values
Response includes huge fiscal deficits, zero
interest rates, incredible expansions of central
bank balance sheets (US, UK and Japan)
What happened?
• Financial crisis
– A heart attack
• Not much use to discuss what caused it
– Too much booze, lack of exercise
• Or how to prevent the next one
– The asymmetry of regulation
– Now we want them to lend but they don’t
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It caused a collapse in counter-party trust
…closing down all credit markets
…triggering an asset price collapse
…and a major decline in demand
– Access to credit, wealth effect and lower animal spirits
In other words
• A network of trust that disappeared
• Flight to safety
• Enter the super-borrower
– Increase in the ability to borrow of a few big
governments
• They have the capacity to provide temporary
rewiring of the global system
– Domestic fiscal expansion, GM, Citibank, etc.
• …but are trapped in a country-focused political
process
– Global problem, partial solution
Implications
• The problem
– The US is already spending more than it is earning
• Large current account deficit
– …and is accumulating a ton of net debt
• The alternative (or the complement)
– Use the borrowing capacity to expand abroad
– Increasing export demand
– No increase in net debt: new debt is matched by new assets
• Implementing
– Recapitalize the MDBs
– Buy a portfolio of EM securities, as Bernanke is doing with
student loans and credit card debt
– Give the resources to the IFC to manage
How scared should we
(Latin Americans) be?
• We have been here before
– Sudden stop in capital flows (1982, 1994, 1998, 2002)
– Deterioration of the terms of trade
– Slower export demand
• ..we are more experienced
• …we have better balance sheets
– did not have that much time to do stupid things
– The last crisis was as recent as 2002
• …but things are also a bit different
– Many times in the past we got out through a real depreciation and an export
boom
– This time around the crisis is global so getting out of it may be more
challenging
– Like 1981-82, in the sense that it was a sudden stop and a global recession
– but harder: then it was a “desired” recession
– it was followed by very rapid global growth
Should we change our ex-ante beliefs?
• Not much
– Old lessons are as good as ever
• Keep public debt low and well structured
– Level, currency denomination, maturity
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Keep exchange rate flexible and competitive
Save fiscal resources in boom times
Lean against the wind of excessive capital inflows
Keep banks liquid, well capitalized and on a short leash
Behave in a credible manner
– Budget institutions, credible supervisors, property rights
– Contrast Argentina and Uruguay
• Develop well structured safety net
– not just for the chronically poor
– …but also for the suddenly impoverished
Should we change our views about
crisis management?
• Not too much
• Be as anti-cyclical as you can
– Do you have access to finance at reasonable cost?
– Are domestic real interest rates low?
• But we have not figured out what to do with our
reserves
– We accumulated them for a purpose (self-insurance)
– But we are not sure what to do with them in a crisis
– We have let exchange rates take the hit instead
What would a better international
financial system do for us?
• Have sufficiently flexible access to
international liquidity so we can feel more
confident to expand at home
• Hence, would increase the scope for anticyclical policies
• We may need more multilateral lending to
cope with a slow recovery of market access
– Recapitalized WB and IDB
Who will do well? Who will do poorly?
• Disciplined, market friendly countries will recover
– Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Uruguay
– With differences, given their different structures
• They may even surprise
– Crises change the choice between exploitation vs.
exploration
– Leads to new diversification
• Neo-populists and neo-totalitarian governments will do
poorly
– High taxes on exports, no access to credit markets, investor
unfriendly, no economic freedom to spur innovation,
– Argentina, Ecuador, Nicaragua, Venezuela