Tuesday, June 01, 2010

Prescriptions for the world economy

Not many expected sovereign debt to spook the recovery to the extent it has following the Greek/EU crisis. Deleveraging of private sector and household debt has proceeded apace. Now, there is pressure to deleverage government debt as well.

Nouriel Roubini and Arnab Das propose the following:

First, the eurozone must get its act together. It must deregulate, liberalise, reform the south and stoke demand in the north to restore dynamism and growth; ease monetary policy to prevent deflation and boost competitiveness; implement sovereign debt restructuring mechanisms to limit moral hazard from bail-outs; and put expansion of the eurozone on ice.

Second, creditors need to take a hit, and debtors adjust. This is a solvency problem, demanding a grand work-out. ....

Third, it is time for radical reform of finance. The majority of proposals on the table are inadequate or irrelevant. Large financial institutions must be unbundled; they are too big, interconnected and complex to manage. Investors and customers can find all the traditional banking, investment banking, hedge fund, mutual fund and insurance services they need in specialised firms. We need to go back to Glass-Steagal on steroids.

Last, the global economy must be rebalanced....
All but the third are unexceptionable. Going back to Glass-Steagal, to my mind, is infeasible and also inappropriate. Size is the problem; not scope.


KK said...

Aren't scope and size interrelated ?

T T Ram Mohan said...

KK, Size and scope are related but they are not the same. It is possible limit the size of a bank to, say $25 bn in assets but it can be in diverse activities.


Pranam said...

I'm a regular reader of your blogs. Most of the times you give a super easy explaination that makes me understand your blog entry. Sometimes they go over the top. This one was Greek and Latin to me :))

KK said...

But by limiting the size and expanding only the scope will not lead to competitive disadvantage?
For exmp consider an Investment bank(B1) having $50bn in assets and a bank(B2) which does all things like hedge funds, traditional banking,IB etc having also $50bn in assets... will not the bank B2 be at disadvantage?

Anonymous said...

the size and scope are inter-related and make a strong impact on it.

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