Peterson Institute Update

Dr. Singh of India Comes to Town

Hard on the heels of his tour of China—a visit that produced mixed results and even more mixed reviews&mdashPresident Obama welcomes Prime Minister Manmohan Singh to the White House in the first state visit of his presidency. For both Mr. Obama and Dr. Singh, the trip will be important symbolically, politically, and economically&mdasheven if it does not produce the kind of concrete results that flowed from the Indian leader�s relationship with former President Bush, especially the epochal civil nuclear accord of last year that ended India�s pariah status in the nuclear field.

RealTime Economic Issues Watch post by Arvind Subramanian.

Working Paper 09-13: Mortgage Loan Modifications: Program Incentives and Restructuring Design [pdf]

Mortgage defaults and home foreclosures remain a growing problem that undermines the nascent US economic recovery. Delinquencies continue to skyrocket, up 300 percent since the beginning of the crisis, and the contagion has spread to prime loans where delinquencies have risen to over 11 percent of outstanding loans. The resulting foreclosures have broad consequences: Individuals lose their homes, banks take losses on the loans, neighbors suffer as area prices go down, and localities lose on property taxes. The economics of modifying loans to avoid defaults appear strong: Lenders lose an average of $145,000 during a foreclosure compared with less than $24,000 on a modified loan. Yet the track record of modification programs has been surprisingly poor. Potential lawsuits over modifying loans in securitization trusts may be a less important obstacle than many claim. More significant are misaligned incentives that put mortgage servicers in opposition to both investors and borrowers, conflicts between investors holding different tranches of mortgage-backed securities (MBS), operational impediments, and problems in loan modification design that contribute to redefaults. Policymakers should improve reporting metrics to highlight servicers' conflicts of interest, shift the emphasis of loan modifications from short-term fixes to making the new loans more sustainable, and use government resources to drive operational/capacity improvements in the industry.

Working paper by Dan Magder.

Interview: Seminal Visit by India's Prime Minister

Arvind Subramanian says that Prime Minister Manmohan Singh, in the first state visit of the Obama administration, will hold crucial talks on climate change, energy, the global economic crisis, Iran, and the wars in Afghanistan and Pakistan.

Event: Global Lessons on Healthcare Reform

Journalist and author T. R. Reid delivered the speech "Global Lessons on Healthcare Reform: What the United States Can Learn from Other Countries," at the Peterson Institute for International Economics on November 19, 2009. His is the author of the book, The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care, published August 2009, and was the lead correspondent for the 2008 Frontline documentary "Sick Around the World."

Event materials are available online.

Testimony: The Impact of the Troubled Asset Relief Program on the US Financial System and Economy [pdf]

To save the banking system in the face of generalized panic, the United States must: 1) prevent banks from collapsing in an uncontrolled manner; 2) take over and implement orderly resolution for insolvent banks; and 3) immediately address underlying weaknesses in corporate governance that created potential vulnerability to crisis. Considering these three recommendations, Simon Johnson testifies that the Troubled Asset Relief Program (TARP) has been badly mismanaged. Its funds supported troubled banks and the executives who ran them into the ground. Additionally TARP's implementation exacerbated the perception that some financial institutions really are too big to fail.

However, the overall US policy response did well by preventing a collapse in spending via monetary policy that responded quickly and appropriately. The 2009 stimulus kept domestic spending relatively buoyant despite the credit contraction and rising unemployment. In the midst of what is arguably the largest global financial shock the world has seen, things could have been a lot worse. There is no question that passing TARP was the right thing to do, but if bank regulators do not limit the direct and indirect risk exposures of US financial institutions to the new "carry trade," we face the prospect of another even larger crisis.

Testimony by Simon Johnson.

Forget Emissions, Focus on Research

President Barack Obama reflected the consensus view this week when he acknowledged that no agreement on climate change—at least not with specific commitments—would be reached at next month's Copenhagen summit.

Op-ed by Nancy Birdsall and Arvind Subramanian.

American Economic Relations with Asia [pdf]

The United States and Asia have an enormous stake in each others' continuing prosperity. This outcome is linked to the preservation of the open international economic order, which in turn faces challenges at both the interstate diplomatic level and at the domestic political level. The global financial crisis is probably the worst since the Great Depression and the domestic politics makes it increasingly difficult to formulate a constructive trade policy. In the absence of adequate reform at the global level, the alternative could be further fragmentation into competing regional blocs. Asia holds the key, combining both dissatisfaction with existing global arrangements with the resources to reconstitute, at least at the regional level, an alternative set of institutions and practices. How Asia responds, acting to strengthen reformed global institutions or undermine them in favor of regional alternatives, will partly depend on the policies of the dominant global power, the United States.

Article by Marcus Noland.

Working Paper 09-12: Capital Flows to Developing Countries: The Allocation Puzzle [pdf]

The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract more foreign capital. The authors show that the allocation of capital flows across developing countries is the opposite of this prediction: Capital seems to flow more to countries that invest and grow less. They introduce wedges into the neoclassical growth model and find that one needs a saving wedge in order to explain the correlation between growth and capital flows observed in the data. They conclude with a discussion of some possible avenues for research to resolve the contradiction between the model predictions and the data.

Working paper by Pierre-Olivier Gourinchas and Olivier Jeanne.

Senator Schumer's Blowhard Moment?

"American taxpayer dollars should not be used to finance those Chinese jobs." Who could disagree with Senator Schumer's statement, which accompanied his recent call for cancellation of $450 million in federal stimulus funds for a new $1.5 billion wind park in Texas—on the grounds that it would utilize 240 wind turbines made in China? As with the "buy American" furor earlier in the year when the stimulus bill was enacted, the Senator's claim that American taxpayers should not support jobs programs overseas has an undeniable political appeal.

RealTime post by Jacob Funk Kirkegaard.

Is the Financial System Condemned to a "Doom Loop"?

"Banking on the State" by Andrew Haldane and Piergiorgio Alessandri is making waves in official circles. Haldane, executive director for financial stability at the Bank of England, is widely regarded as both a technical expert and as someone who can communicate his points effectively to policymakers. He is obviously closely in line—although not in complete agreement—with the thinking of Mervyn King, governor of the Bank of England.

RealTime post by Simon Johnson.

Event: Future of US-India Relations

Ambassador of India to the United States Meera Shankar delivered her speech, "India's Role in the World Economy and the Future of US-India Relations," at PIIE on November 18, 2009.

Event materials are available online.

Interview: Obama Embraces a Trans-Pacific Partnership

C. Fred Bergsten says the US intention to engage with the Trans-Pacific Strategic Economic Partnership (TPP) could address concerns about the emergence of a China-led, Asian-only trading bloc.

Interview: Financial Regulatory Reform Moves Ahead

Morris Goldstein rates the new legislation offered by Senator Christopher Dodd as a positive step, especially in its proposal to establish a tough new prudential regulator.

Cooling the Planet Without Chilling Trade

There is little doubt that current WTO negotiations do not fully address that a collision between climate policy and trade agreements poses real danger to the critical goals of controlling climate change and expanding trade. The two bills before Congress for "leveling the carbon playing field" consist of carbon-intensive import "border charges" and domestic producer subsidization—both of which are targets of criticism that could lead to WTO challenges that might undermine climate and trade agreements or lead to retaliation that could escalate to trade wars. Not only is it politically unrealistic and unwise to attempt a cap-and-trade system, argue C. Fred Bergsten and Lori Wallach, but it also makes no sense to impose a cost on those producing steel, automobiles, and other goods only to have jobs and pollution shifted to emerging economies. The only way to solve our problems is to treat them together as a global community before the challenges accumulate and produce paralysis instead of action.

Op-ed by C. Fred Bergsten and and Lori Wallach.

Interview: The Declining Dollar: No Cause for Concern

Joseph E. Gagnon discusses the consequences of a declining dollar and sees little likelihood of the dollar crashing in relation to other currencies.

Interview: Capitalism 20 Years after the Berlin Wall

Anders Åslund assesses the record of post-Communist Europe's transition to free markets and questions whether the United States has learned the right lessons from history.

Lessons from the Global Economic and Financial Crisis [pdf]

The G-20 and the international financial community have their work cut out for them over the next year or so. The objective, Edwin Truman argues, should not be to achieve ideal solutions but to promote solutions that are as mutually compatible and robust as possible from a global perspective. Some of the important lessons from the recent global financial crisis focus on the macroeconomic policy failures in the United States and similarly situated countries. Many countries, including the United States, the United Kingdom, Japan, and other Asian countries, had monetary policies that were too easy for too long.

The global community currently faces two major issues in financial regulatory reform, according to Truman. The first is construction of a robust framework of macroprudential policies, which should include equal parts of: (1) improved macroeconomic policies of supervision and regulation that impact macroeconomic performance; and (2) improved macroeconomic policies that impact the financial system. The second is that there is not a "silver bullet" solution to the too-big-to-fail problem; a combination of approaches involving size, regulations, and supervision is needed.

Speech by Edwin Truman.