Thomakos et al (eds ) a financial crisis manual; reflections and the road ahead (2015)

Moosa GOOD REGULATION, BAD REGULATION Elisa Menicucci FAIR VALUE ACCOUNTING Key Issues Arising from the Financial Crisis Anna Omarini RETAIL BANKING Business Transformation and Co

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A financial crisis manual : reflections and the road ahead / edited by Dimitrios D Thomakos, Professor of Applied Econometrics, University of Peloponnese, Greece, Platon Monokroussos, Group Chief Economist and Deputy General Manager of Eurobank Ergasias S.A., Greece, Konstantinos I Nikolopoulos, Professor of Decision Sciences, Bangor Business School, UK

pages cm — (Palgrave Macmillan studies in banking and financial institutions)

1 Finance, Public – European Union countries 2 Monetary policy – European Union countries 3 Debts, Public – Law and legislation – European Union countries I Thomakos, Dimitrios D., editor II Monokroussos, Platon, 1965– editor III Nikolopoulos, Konstantinos I., 1974– editor

also for their patience of endlessly listening about the crisis and always responding, “cheer up, it’s the economists’ limelight!”

Dimitris

To my lovely parents and sister, my nieces Lydia and Kyveli and to Lilian for

all the love and encouragement they have given me in editing this volume

Platon

To Nina, Ilias, Polyanna and Spyros for all the time I’ve stolen from them;

and for all the love and inspiration they have given me

Kostas

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Part I The Industry Perspective

1 A Retrospective on the Great Recession: Causes,

5 Chasing the Tail of Financial Stability? Solutions to the

Marcel Kasumovich

Part II The Case of Greece

6 An Empirical Study on Greece’s Current Account

Determinants Before and After the Outbreak of the Global

Platon Monokroussos and Dimitrios D Thomakos

7 Greek Fiscal Multipliers Revisited: Government

Spending Cuts vs Tax Hikes and the Role of Public

Platon Monokroussos and Dimitrios D Thomakos

8 The Challenge of Restoring Debt Sustainability in a Deep

Platon Monokroussos

9 The Case for a New Reprofiling of Greek Public Debt and

Why a Relaxation of the Bailout Program’s Future Fiscal

Targets May Prove to Be a Self-Financing Policy Shift 189

Fokion Karavias and Platon Monokroussos

10 External Debt Evolution When Global Financial

Alexis Anagnostopoulos and Gregorios D Siourounis

11 Foreign Direct Investment, Innovation and Brain Drain in

Constantina Kottaridi

Part III Crisis Economics and the Road Ahead

Dimitrios D Thomakos, Platon Monokroussos and

Konstantinos I Nikolopoulos

List of Figures

2.1 Levels and changes in spending composition

2.2 (a) Public sector investment (% of GDP) and

3.1 Eurozone monetary policy stance

3.2 Monetary policy stance: spread from a Taylor rule

3.3 Monetary policy stance (policy rate – Taylor rule) 44 3.4 Performance since the global crisis and inflation in

3.9 ECB vs Fed monetary policy stance and EUR/USD 50

3.11 Eurozone trade of goods and services with the rest

3.12 Eurozone current account balance (four-quarter

3.13 Eurozone balance of payments (6M moving sum, €bn) 53

3.15 Bank sector claims (BIS data, % of EZ GDP) 55 3.16 EZ equity flows from non-EZ (four-week average,

5.1 US financial integration much deeper than trade 84 5.2 Bank deleveraging substantial and ongoing 86

5.4 Rapid capital inflows into emerging markets ($bn) 90 5.5 US Treasury buying dominated by central banks 92 5.6 US corporate financing needs low, debt issuance surges 93 5.7 Fixed income demand much stronger in this cycle 94 5.8 EM bond funds have a steep discount to asset value 96 6.1 Greece’s current account (CA) deficit (ppts of GDP) 115

6.2 Greece’s CA as a savings-investment imbalance

7.1 (a) ( G t , T t , Y t ) – negative G t shock (−1.5% YoY) in

regime 1 (lower) and regime 2 (upper); (b) ( G t , T t , Y t ) –

positive G t shock (+1.5% YoY) in regime 1 (lower)

7.2 ( G t , T t , Y t ) – negative G t shock (−3 YoY) in regime 1

(lower) and regime 2 (upper); (b) ( G t , T t , Y t ) – positive

G t shock (+3 YoY) in regime 1 (lower) and

7.3 ( G t , T t , Y t ) – negative G t shock (−5 YoY) in regime 1

(lower) and regime 2 (upper); (b) ( G t , T t , Y t ) – positive

G t shock (+5 YoY) in regime 1 (lower) and

7.4 Critical threshold for TVAR model specification

y t = ( G t , T t , Y t ) 163 7.5 (a) ( G t , T t , Y t ) – negative T t shock (−1.5% YoY) in regime 1(lower) and regime 2 (upper); (b) ( G t , T t , Y t ) – positive

T t shock (+1.5% YoY) in regime 1 (lower) and

7.6 (a) ( G t , T t , Y t ) – negative T t shock (−3% YoY) in regime 1

(lower) and regime 2 (upper); (b) ( G t , T t , Y t ) – positive

T t shock (+3% YoY) in regime 1 (lower) and

7.7 (a) ( G t , T t , Y t ) – negative T t shock (−5% YoY) in regime 1

(lower) and regime 2 (upper); (b) ( G t , T t , Y t ) – positive

T t shock (+5% YoY) in regime 1 (lower) and

7.8 Critical threshold for TVAR model specification

y t = ( G t , T t , Y t ) 166 8.1 Debt-to-GDP ratio evolution, under different fiscal

adjustment scenarios using potential GDP growth

8.2 Debt-to-GDP ratio evolution, under different fiscal

adjustment scenarios using the GDP growth of the

8.3 Response of GDP to one-off cyclical adjustment 186 10.1 Calibrated Impulse Response Functions to a one period

one standard deviation positive productivity shock in an

11.1 Crisis and recovery paths of the US and Greece

11.2 Future plans of respondent, migration survey 238 11.3 The interrelationships among innovation, human

capital, FDI and growth and the effect of brain drain on economic growth via its leakages from key growth-

13.13 Germany’s international investment position 298

13.15 German trade balance, changes since March 2008 300

13.17 Germany’s gross external assets, by type of holder 301 13.18 Germany’s gross external assets, change 2009–2013 302 13.19 Germany’s gross external assets, by type of asset 302 13.20 Germany’s net investment abroad, 2009–2013 303 13.21 Germany’s banks: foreign claims, end 2013 305

List of Tables

2.1 Impact of lower interest rates on debt servicing costs 26 2.2 Fiscal multipliers vary across spending and revenues 35 6.1 Current account determinants and sign of theoretical

6.2 Determinants of Greece’s current account balance:

6.4 Unit root test results for current account-to-GDP,

7.2 Package of new austerity measures 2013–2016/1 146

7.4 Output response to government current expenditure

9.1 Impact of EU bailout loan restructuring on Greece’s

9.2 Cumulative impact of EU bailout loan restructuring

on Greece’s general government net borrowing

requirement in billion euros (negative sign indicates

9.3 Impact of EU bailout loan restructuring and relaxation

of the primary surplus target on the debt ratio 195

10.1 Summary statistics 209

11.1 FDI inflows in the euro area member states during

11.3 Motives to work abroad in order of significance

13.1 Inflation of countries with large c/a surpluses and

13.2 Germany’s portfolio investment assets – top five

Acknowledgments

First and foremost we thank all our contributors (all named in the next section where detailed bios are provided), without which this edited book would have not been possible

A very special thanks must go to our editorial assistance team, Thomas Alexopoulos and Andreas Tsalas, both PhD candidates in the Department

of Economics, University of the Peloponnese in Greece, for their able help and support in preparing this volume

Special thanks to the team from Palgrave Macmillan publishing house – initially Aimee Dibbens and in the latest and most crucial stages Grace Jackson as well as the production team Also our gratitude to Professor Phil Molyneux (Dean – Bangor University College of Business, Law, Education and Social Sciences), Editor-in-Chief for the Palgrave Macmillan Studies in Banking and Financial Institution Series for his decision to approve our proposal, and his comments and suggestions at all stages of the project

Also many thanks to our colleagues at the University of the Peloponnese, the Rimini Centre of Economic Analysis, Eurobank S.A and Prifysgol Bangor University (as well as in many other fora) for their ideas shared with us whenever the topic of the book was coming to the discussion; a final thanks to all our students that have been “fresh-ening” up our take, view, ideas and thinking on the topic throughout the years

Disclaimer

The Editorial team emphasizes that the contributors’ views expressed in their respective chapters are their personal views and do not express the views of any of their previous or current employers

Notes on Contributors

Editors

Platon Monokroussos is Deputy General Manager and Group Chief

Economist at Eurobank Ergasias S.A He is the Chairman of the Scientific Council of the Hellenic Bank Association and its representative at the Chief Economist Group of the European Banking Federation He is also

a member of Board of Directors of Eurobank Properties REIC, a public company which manages one of the most important commercial prop-erty portfolios in Greece and Eastern Europe He holds a Professional Qualification Certificate for the provision of investment services (type D) issued by the Bank of Greece Before joining Eurobank, he held high-level positions in leading financial institutions, including ABN AMRO and Bank of America Monokroussos holds a Bachelor’s degree in theoretical Mathematics (University of Crete, Greece), Masters Degrees in Economics (Clark University, Worcester, MA, USA) and Business Administration (Boston College, Wallace E Carroll School of Management Boston, MA, USA) as well as a Diploma in Business and Corporate Leadership from Harvard Business Publishing He holds a PhD from the National and Kapodistrian University of Athens (doctorate thesis on foreign exchange microstructure)

Kostas I Nikolopoulos is the Director of forLAB, the forecasting

laboratory (www.forLAB.eu) in Bangor Business School and the think tank www.forTANK.com He specializes in time series analysis and forecasting, decision support systems and forecasting the impact of special events He holds a PhD in Engineering from National Technical University of Athens (ΕΜ∏) He holds the Chair in Decision Sciences

at Bangor Business School and is the College Director of Research (Assistant Dean/Research) for the College of Business, Law, Education and Social Sciences in Prifysgol Bangor University His work has

appeared in numerous journals, and he is Associate Editor of Oxford

IMA Journal of Management Mathematics and Supply Chain Forum:

An International Journal He is co-originator of the Theta forecasting

method and the ADIDA temporal aggregation method-improving framework

Dimitrios D Thomakos is Professor of Applied Econometrics and Head

of the Department of Economics at the University of Peloponnese, Greece, and senior fellow and member of the Scientific Committee at the Rimini Center for Economic Analysis in Italy He holds an MA, MPhil and PhD from the Department of Economics of Columbia University His research work has appeared in several prestigious international

journals in economics and finance such as the Review of Economics and

Statistics , Canadian Journal of Economics , Review of International Economics ,

Journal of Empirical Finance , International Review of Financial Analysis ,

International Journal of Forecasting and others He has been a guest itor for Mathematical & Computer Modelling , an editorial board member

co-ed-of the Journal co-ed-of Modern Applied Statistical Methods and now serves on the editorial board of the International Journal of Energy and Statistics He is

also the co-founder of QuantF.com

Contributors

Alexis Anagnostopoulos holds a BSc in Business Mathematics and

Statistics and an MSc in Econometrics and Mathematical Economics from the London School of Economics He went on to complete his PhD thesis at the London Business School in 2006 under the supervi-sion of Prof Morten Ravn Since graduating, he has been working as an assistant professor in The economics Department of the State University

of New York at Stony Brook He has spent time as a visiting scholar at the University of Cambridge, at the University of Southern California Marshall Business School and at UCLA His research interests lie in the area of the macroeconomic effects of financial market incomplete-ness His recent work has looked into the effects of incomplete markets

on optimal tax policy as well as on households’ home-ownership decisions

Michael G Arghyrou is Reader in Economics and Director of the M.Sc

in International Economics, Banking and Finance at Cardiff Business School His research interests are international macroeconomics/

finance His articles have appeared in the Canadian Journal of Economics , Oxford Economic Papers , Review of International Economics , Economics Letters , Journal of Macroeconomics , Journal of International Financial Markets and Institutions & Money He provides regular commentary

to major international media including the BBC, CNN, Sky News, Voice of America, Bloomberg Radio, Washington Post, Reuters, ABC News and Russia Today He also provides regular commentary and

opinion articles to Greek media including SKAI TV, Kathimerini and others He is a member of the Research Fellows Network of the CESifo Group Munich (http://www.cesifo-group.de/ifoHome.html) He is also a member of the Scientific Board of the Institute of Democracy Konstantinos Karamanlis, Athens (http://nd.gr/organosi/institouto-

Macroeconomics;

Shanti P Chakravarty is Professor Emeritus of Economics at Prifysgol

Bangor University in Wales and specializes in development, welfare economics and political economy He is also interested in macroeco-nomic forecasting and is a strategic advisor for forLAB, the forecasting laboratory in Bangor Business School He is a former “Centre for Systems Science” fellow at the University of Rochester and research fellow on the Southampton Econometric Model Building Unit More recently he was Chair in Economics at Bangor Business School He subsequently worked

on the construction of an econometric model for Wales Recently, he was

a visiting professor at the University of Frankfurt and the guest lecturer

at Central Institute of Finance, Beijing

Fokion Karavias is a chief executive officer at Eurobank Ergasias S.A

and a member of the Board of Directors He was Senior General Manager, Head of Group Corporate and Investment Banking, Capital Markets and Wealth Management from July 2014 to January 2015 He has held professional positions at JP Morgan, Citibank and Eurobank, and became Treasurer at Telesis Investment Bank in 2000 Ηe is a member

of the Board of Directors of Eurobank Private Bank Luxembourg S.A He holds a Diploma in Chemical Engineering from the National Technical University of Athens, a Master’s and PhD in Chemical Engineering from the University of Pennsylvania, Philadelphia He has published several papers on topics concerning his academic research Most recently, he has written a number of articles about the Eurozone and Greek sover-eign crisis, published in the Greek press

Marcel Kasumovich has a background in the intersection of global

macro, policy and financial markets His experience ranges from academic policy research at the Bank of Canada, technical advisor to the International Monetary Fund, international bond and currency strate-gies at Goldman Sachs and Merrill Lynch, and asset management at Soros Fund Management, as well as start-up funds As regulatory and techno-logical changes alter the investment landscape, Marcel is increasingly

focused on new innovations to identify and deliver medium-term macro investment exposures to global investors Marcel holds a Master’s in Economics from the University of Toronto

Constantina Kottaridi is an assistant professor in the Department

of Economics at the University of Piraeus She holds a Master’s in Economics with a Bachelor’s in Statistics from Iowa State University She joined the doctoral program of the Department of International and European Economic Studies at Athens University of Economics and Business where she was granted her PhD in 2004 In September 2004 she was employed at the University of Peloponnese, Department of Economics as a visiting lecturer Her area of specialization is in foreign direct investment and multinational corporations, economic develop-ment and growth, small- and medium-sized enterprises Her articles have

appeared in Journal of Macroeconomics , Empirical Economics and Review of

International Economics She is a special advisor to the Observatory Plus,

Crisis Observatory, ELIAMEP (Hellenic Foundation for European and Foreign Policy), a board member of the Hellenic Open University and Centre for the Greek Language

Inachos Lazos began his career in finance at the London office of

Salomon Brothers in 1999 as an investment-banking analyst Following the firm’s absorption by Citigroup, he spent six years advising European financial institutions in mergers and acquisitions and debt capital market transactions Since 2006 he has worked as a portfolio strategist, holding positions at some of the world’s largest and most reputable global macro hedge funds in New York, London, Geneva and Singapore In these roles

he has navigated the gyrations of the global economy and their ment implications during the past decade He holds a BA in European Studies from Essex University, UK as well as an MBA from the Sloan School of Management in Boston

Fabrice Montagné is Chief UK Economist at Barclays Previously, he

was a senior European economist responsible for French, Greek and euro area macroeconomics He joined Barclays in January 2012 from the Dutch Central Bank where he was responsible for balance sheet, asset/liability management and strategic asset allocation decisions in the Financial Market division Prior to that, he worked at the French Treasury and Fonds de Reserves pour les Retraites He graduated from Ecole Polytechnique and holds an MSc in Economics and Statistics from ENSAE and an MSc in Economic Analysis and Policy from the Paris School of Economics

Alex Patelis is the founder of Patelis Macro, a macroeconomic research

firm he launched in 2010 He has over 18 years of experience with global client franchises Patelis Macro (www.patelismacro.com) is an inde-pendent, unbiased, boutique firm offering macroeconomic research to select clients around the world Previously, Alex was Managing Director

of Global Research, Head of International Economics with Merrill Lynch Based in London, he joined Merrill Lynch in 2002, was promoted to Head of Global FX & Debt Strategy in 2006 and to his latest position in

2007 Prior to that, Alex was a quantitative economist with Citigroup Asset Management based in London, an associate with Goldman, Sachs

& Co in New York working for Bill Dudley, Chief US Economist as well

as a proprietary FICC trader He holds an MA and PhD in Economics

Gregorios D Siourounis is Assistant Professor of Economic Theory and

Policy in the Department of Regional and Economic Studies, Panteion University, Athens, Greece He holds a PhD from the London Business School He received the 2005 Young Economist Award from the European Economic Association and the 2008 Austin Robinson Prize from the Royal Economic Society for his work on “Democratization and Growth” (jointly with Elias Papaioannou) After his PhD, Gregorios spent almost two years in the Global FX Strategy team at Barclays Capital as global head of quantitative research He has published papers in democra-tization, reserve allocation, capital markets and capital flows, and he

is currently working on political institutions and foreign aid, human capital quality accumulation for long-term growth and capital flows and asset prices He advises numerous private equity funds on asset alloca-tion and is certified from the British FSA on consulting and trading finan-cial instruments He is a member of the American Economic Association

and the Royal Economic Society and a referee for Econometrica , American

Economic Review , Quarterly Journal of Economics , Economic Journal and the

Review of Economics and Statistics

Ralph Sueppel is an executive member of Graham Capital LLP He

manages relative-value investments based on macroeconomic trends across asset classes and markets Prior to joining Graham, he worked

at UBS Investment Bank as Head of Quant Macro Algorithmic Trading Strategies (2010–2011) From 2005 to 2009, he was a partner at BlueCrest Capital Management, serving as Chief Economist and Portfolio Manager Prior to this assignment, he held positions in research and strategy at J.P Morgan (1993–2002), the European Central Bank (2002–2003) and Merrill Lynch (2003–2005) He holds a PhD in Monetary Policy and Financial Markets from the University of Bonn

Athanasios Vamvakidis has been Managing Director and Head of

European G10 Foreign Exchange Strategy for Bank of America Merrill Lynch in Europe since 2010 During 1997–2010, he worked at the International Monetary Fund, where he held a number of senior posi-tions, including Deputy Division Chief in the Strategy, Policy and Review Department and Resident Representative in Croatia He was one of the architects of the IMF-FSB Early Warning Exercise He holds a Master’s and PhD in Economics from Harvard University His research interests include a broad range of topics in international economics and macr-oeconomics and he has published extensively

Responding to the Queen’s criticism for the failure to anticipate the credit crunch, a group of influential economists apologised:

“ most were convinced that banks knew what they were doing

They believed that the financial wizards had found new and clever ways of managing risks ”

(Beesly et al., 2009: 2)

“Seriously? Not another book about the crisis? And, unfortunately too, it’s probably written by academics; you know these wise guys that never set foot in the real world” This may well have been your reaction on seeing the title of this book We understand – the financial crisis of 2008 has generated such an enormous amount of discussion, in all aspects of economic and social life, that some might find it tiresome to continue to ponder about what happened and how things can improve

But if you think a bit more about it, for some the crisis is not really over and the problems it created have not gone away Not only that, the crisis has generated a lot of structural changes in how we see the work-ings of the economy, how we handle issues of international finances, how people’s incentives change, how the flow of labor mobility has changed accordingly and many, many other issues The question “Can

it happen again (soon)?” is continually being asked, from various players around the world and with various underlying reasons

In this book we present a different view of things The world economy

is a complex structure and, like all complex structures, it requires many different skills and abilities from different people to function properly Some problems recur but others are new and need to be handled “on the fly” It would be nice if there were “instructions”, a “manual” of

Introduction

Dimitrios D Thomakos , Platon Monokroussos and

Konstantinos I Nikolopoulos

operation to refer to, right? However, in order to produce instructions that work in a systematic fashion you need to bring in contributors who work on different stages of its operation

In the real world, academics are often listened to but their opinions are infrequently put into action; practitioners rarely collaborate with them, their actions mostly dictated by client needs and the constraints

of economic and financial regulation – the latter being put into place by politicians (not necessarily economists!) In the end we risk each group

of actors doing their work in isolation, both physical and mental This can be neither productive nor complete

We have tried to bridge the gap between practitioners and academics,

to put forward the perspective of those who have spent a significant amount of their lives being educated by the “best” the university system has to offer and take academically informed decisions in their everyday business life – and by doing so affecting the way the real world works

We want them to share their perspective with academics so that we can attempt to understand what went wrong with “theory” before the crisis and how it can be mended, so that it will not happen again (well, not soon at least)

It is one thing to talk about fiscal imbalances in the classroom, or in

a seminar; quite another to discuss them in a meeting where decisions affecting the global flow of funds are being taken The impact of the crisis on views about financial regulation has been completely different for those who implement financial transactions every day than for those who frame policy in Brussels or Frankfurt The solutions to problems of growth and unemployment and the implications of monetary policy decisions can be explored in an academic exercise, but have the poten-tial to make firms, sectors and countries go bankrupt due to the possi-bility of misinterpretation

All in all, to talk about the crisis without having a mix-and-match

of industry practitioners and academics will not provide the real-world solutions that we need As you read through this volume you can, we hope, gain a more complete understanding, not only of the way the causes of the crisis were and are understood by a variety of actors, but also how those actors understand the potential solutions Practitioners and academics don’t have to agree (either on the causes or the solutions), but they do have to be aware of each other’s views so that “accidents” don’t happen and mutually beneficial solutions to current economic prob-lems can be suggested to policy-makers In fact, we see our merging of opinions of industry and academia as a very important issue for policy-making: a concentrated thrust from both groups to policy-makers can

possibly lead to solving (or in the end just cutting through) the Gordian knot of economic recovery and growth for the years ahead

Our attempt to reach the aforementioned mix of contributions took

us the best part of two years, a period full of uncertainty and spasmodic actions in the markets and the global economy, a period that left even our contributors wondering whether their chapters would still be rele-vant once you read these lines We believe emphatically that they are relevant and will remain so for quite some time, as originally hoped This is a (crisis) manual for future reference

The book is divided into three main parts: Part I presents “The Industry Perspective”, with well-informed practitioners providing insightful and insider accounts of what really happened in the last (and lost?) decade and the factors involved Most importantly they attempt to show how

we can move forward These are not the views of people who have long retired, sitting on their accumulated bonuses These are people who day-in and day-out are taking decisions at the forefront of the financial and banking sector

Part II focuses on Greece, for a number of reasons It’s the country most affected by the crisis and still at the very core of the turmoil, with the terms “default”, “Grexit” and “Greccident” reappearing every other week in official (EU) governmental and Commission documents It is a live “laboratory”, where all kind of orthodox (and unorthodox) policies, experiments and “recipes” have been applied by local government(s) and, most importantly, imposed on it by the IMF, the ECB and the – still – not so federal EU

Part III explores the views of economists: hence the title “Crisis Economics and the Road Ahead” It was absolutely critical for this book that we attempt to include a section like this We cannot overlook all the alternatives economic theory has to offer, wherever they might come from If implemented pragmatically in a 21st-century environment they may well prove to be the fresh ideas and solutions we were looking for

in the first place (even if they turn out to be 200 or 2,000 years old!) This section includes both economists working in universities as well as those practising 24/7 in the forefront of the financial battlefield This last part of the book may seem to be a bit more theoretical, but it is 100% relevant to the context that we have been experiencing in the last few years of turmoil Most importantly it explains, to a certain extent, the past and helps prepare us for the future!

In Chapter 1, titled “A Retrospective on the Great Recession: Causes, Effects and Prospects”, Inachos Lazos claims that macroeconomic asym-metries had been in the making in the euro area ever since its inception,

and although leading indicators did exist the timing was less certain and certainly vulnerable to an exogenous shock Regulators and policy-makers failed to pre-empt and respond to subsequent developments, while investment opportunities have been significant as a function of divergent policy response

In Chapter 2, “European Public Finances through the Crisis”, Fabrice Montagné raises the question of improved economic and fiscal coordina-tion, as well as options to share liabilities, that clearly have not been seri-ously considered by member states, showing that the road to complete economic integration is still long and challenging It is claimed that the EC’s initiative of €315bn investment fund goes in the right direction but the creation of a European level real fiscal space seems more and more inevitable in order to allow for a better integration and functioning of the European Union

In Chapter 3, “ECB Monetary Policy and the Euro during the Crisis”, Athanasios Vamvakidis discusses the ECB monetary policies and their implications during and after the Eurozone crisis, assessing the mone-tary policy stance of the ECB and its appropriateness for the Eurozone

as a whole, but also the crisis countries, and concluding that the ECB succeeded in addressing tail risks during the crisis, but had a relatively tight monetary policy stance before the recent introduction of quantita-tive easing, which made the periphery’s adjustment more difficult

In Chapter 4, “The Repression of Financial Markets”, Ralph Sueppel highlights the fact that public policies have side effects Containment

of volatility weakens institutional resilience to future shocks, while compression of bond yields fosters addiction to long-duration risk And monetary accommodation with regulatory constraints spurs non-bank financial intermediation relative to regulated market making, increasing the probability of future liquidity events (Greece is a useful example

of this)

In Chapter 5, “Chasing the Tail of Financial Stability? Solutions to the Last Crisis Are the Seeds for the Next One”, Marcel Kasumovich argues that appropriate policy responses to the Great Financial Crisis will ensure it is not repeated To that end two changes in policy focus can mitigate instability risks First, incentives need to change Regulators can evaluate asset values and capital over a longer window to incorporate periods of high and low asset volatility; manager compensation should also be over longer horizons based more closely on realized outcomes Second, the lender of last resort concept needs to adjust to incorporate non-bank intermediaries Run dynamics are possible for non-banks as well as banks; building asset swap lines to inject the financial system

with the highest-quality collateral at an appropriate haircut for other private assets could minimize the risk of run dynamics and cushion them should they occur

Part II (“The Case of Greece”) opens with four chapters contributed by two of the members of our editorial team In Chapter 6, “An Empirical Study on Greece’s Current Account Determinants Before and After the Outbreak of the Global Financial Crisis”, Platon Monokroussos and Dimitrios D Thomakos analyze the inter-temporal evolution of Greece’s current account, putting particular emphasis on the period following the country’s euro area entry The results of the empirical study docu-ment a number of drivers contributing to the significant deterioration in the country’s external position in the years leading to the global finan-

cial crisis These include, inter alia , the accumulated loss of economic

competitiveness vis-à-vis the main trading partners and the pronounced fiscal relaxation following the euro adoption

Chapter 7, “Greek Fiscal Multipliers Revisited: Government Spending Cuts vs Tax Hikes and the Role of Public Investment Expenditure”, also by Platon Monokroussos and Dimitrios D Thomakos, presents an empirical study on the macroeconomic effects of major fiscal policy shifts in Greece The response of real output to discretionary shocks in government current spending or tax revenue depends on the regime in which the shock occurs, as well as on the size and direction of the initial shock In general, expansionary or contractionary shocks taking place in lower output regimes (economic downturns) appear to have much larger effects on output than shocks of similar sign and size occurring in upper regimes (economic expansions) Finally, the empirical estimates argue in favor of higher public investment spending in the present recessionary trajectory as a means of boosting Greece’s short- and medium-term economic growth prospects

Chapter 8, “The Challenge of Restoring Debt Sustainability in a Deep Economic Recession: The Case of Greece”, discusses the fiscal effects

of the draconian austerity programs that have been implemented in Greece since 2010 In it, Platon Monokroussos studies the evolution of the Greek public debt ratio under different scenarios regarding the size and the degree of persistence of fiscal multipliers, the size and the imple-mentation profile of the applied fiscal adjustment, as well as the response

of financial markets to fiscal consolidation (myopic vs forward-looking markets) One of the main results of this simulation exercise is that the significant increase in Greece’s public debt ratio over the last five years can be attributed to the ratio’s elevated initial level, a very wide initial structural deficit as well as the deep economic recession

In Chapter 9, “The Case for a New Reprofiling of Greek Public Debt and Why a Relaxation of the Bailout Program’s Future Fiscal Targets May Prove to Be a Self-financing Policy Shift”, Fokion Karavias and Platon Monokroussos examine the future evolution of Greek public debt under various scenarios regarding the structure of a new debt relief package and the macroeconomic impact of a potential relaxation of the primary fiscal targets The debt relief structure analyzed herein involves both the EU bilateral loans (GLF) and the EFSF loans given to Greece in the context

of the two bailout programs implemented since 2010 Furthermore, the macroeconomic effects of the fiscal policy easing are quantified based

on a number of discrete scenarios as regards impact multipliers, plier persistence and the existence or not of “hysteresis” effects

We continue with a contribution on a critical and to a certain extent rhetorical question: In “External Debt Evolution When Global Financial Markets Are Incomplete”, Alexis Anagnostopoulos and Gregorios

D Siourounis show how a country’s output growth, employment, consumption, investment, interest rates and external debt behave in the presence of international asset markets incompleteness Examining

a panel of 60 developed and developing countries between 1970 and

2008, and assessing stationarity with panel unit root tests, reveals that external debt is a non-stationary process, whereas growth rate of output

is a stationary process regardless of income or region stratum They claim that this behavior is best accounted for by a model of incomplete markets, in which agents issue only one-period risk-free assets This is

of paramount importance, since it shows that countries that experience transitory adverse shocks are not compensated by the international asset markets, as predicted by the complete markets paradigm, leading

to indefinite indebtedness These implications are crucial to standing the importance of how domestic financial markets should be structured in order to be better prepared to hedge liquidity and debt-related problems

The last chapter of Part II touches on a very sensitive topic, that of the Brain Drain In “Foreign Direct Investment, Innovation and Brain Drain in Greece: Turning a Problem into an Opportunity”, Constantina Kottaridi argues that the challenge is how to proceed to implement all the necessary structural reforms to initially restore trust in the country and form the basis for a unified growth enhancing strategy plan Stopping the Brain Drain leakage and restoring employment for the younger generation should be one of the highest priorities of this plan Not only will it provide for renewed incentives to promote local entrepreneur-ship and investment, but it will also strengthen the country’s future

opportunities for attracting foreign direct investment and, hopefully, change its productive structure so that it can start converging towards the other member states of the EU

Part III (“Crisis Economics and the Road Ahead”) opens with a quite critical approach, not only of how the whole economy and financial sector has been operating in the last few decades but more importantly,

of how the whole society was affected through the crisis In “Globalized Finance in Disarray”, Shanti P Chakravarty offers a radically different perspective, touching on many issues not discussed in the other chap-ters Rational discourse among economists about what does and does not work came to be replaced in the final quarter of the twentieth century, especially amongst a politically influential group of economists, that unfettered markets are the only credible mechanism for reconciling the tension of competing demands for the allocation of resources in the economy This ideology, especially when it came to be applied to finan-cial markets to remove constraints on speculative behavior, proved espe-cially dangerous, leading to the ongoing financial crisis Here we have another how and why the financial crisis was advanced, along with a completely different set of curative prescriptions How successful these prescriptions can be remains to be seen: maybe in Greece, possibly else-where too

The next chapter, by Alex Patelis, touches on a very sensitive area within the EU & Eurozone (not-so) federal structure “The Elephant in the Euro Room” highlights the role of Germany in creating and control-ling the extent of the current and future crisis in the Eurozone area The claim is that the elephant is Germany’s record current account surplus,

a direct result of the asymmetric policy response to the crisis No term equilibrium can be reached without that being significantly reduced Correcting this incredibly large imbalance will be very diffi-cult and risks creating future global vulnerabilities There are only two ways of achieving this First, via real exchange rate appreciation – that

long-is, primarily, higher inflation in Germany Second, via losses in lated assets – those are now mostly outside the euro area periphery Any future global recession will be violently transmitted via Germany This chapter offers a clear view of why Germany’s leading role might turn out to be crucial for the future of the EU and what one might anticipate for the future of domestic demand in Germany and exports from the periphery

The final chapter from Michael G Arghyrou, “From the Euro-Crisis

to a New European Economic Architecture”, concludes on a positive note, looking at what can be done politically to secure a better future

for Europe and the rest of the world The reforms that have taken place since 2010 are steps in the right direction but maintain many of the drawbacks of the pre-crisis governance regime Given the political diffi-culties associated with the imposition of sanctions within the EMU area, two key ingredients of a credible institutional response are: fiscal centralization; and, granting officially to the ECB the role of lender of last resort As, however, both prospects face strong political opposition,

it is concluded that the best prospect of promoting further the stability

of the EMU area is to explore additional channels increasing market pressure towards sustainable economic outcomes

We hope that the final outcome meets your expectations and that

it will read as an effective manual for future reference: a work to be consulted, a source of knowledge where analogies may be recalled so as

to anticipate to a certain extent (and definitely prepare better for) the future In sum, a pool of useful lessons to be learned, most importantly via a learning process and “syllabus” provided by academics as well as experienced practitioners

In the words of the Nobel laureate Professor Paul Krugman ( New York

Times , 29 August 2013) when referring to the lessons learned (not!) from

the Asian financial crisis back in 1997–1998:

Nor did we learn the right lessons about how to respond when crisis strikes In fact, not only have we been making many of the same mistakes this time around, in important ways we’re actually doing much worse now than we did then

So our aspiration is for some lessons to be learned from this effort, and for it to be used as a reference point before and when the next crisis strikes because it most definitely will unless we can put now into effect the right policies to prevent it!

Part I

The Industry Perspective

1 Introductory remarks

The term crisis is missing from the title of this analysis on purpose, as

it is, in all likelihood, among the most abused terms used to describe global and domestic economic developments since the US subprime and the Lehman collapse This in as far as it denotes an ephemeral phenom-enon, a temporary deviation from the norm to which conditions are expected to revert In turn, while it is universally hoped that economies

do return to a path to prosperity, the sequence of events that has shaken

the world since 2007 is much more accurately described as continuous, deterministic and evolutionary, rather than accidental and discrete break-downs of limited time span The lessons and implications should also be interpreted under this light

2 Macroeconomic and institutional asymmetries in the euro area prior to the Great Recession

As it applies to the euro area, this framework suggests that structural macroeconomic and institutional asymmetries existed, and with a growing tendency, in the long period that preceded the Great Recession that started in 2008 This is almost definitional: the single market was (and remains) incomplete, particularly in regards to financial services; policy making is bound by the local political economies with very little centralized power and governance at the EU level; fiscal management was overwhelmingly local, to mention but a few components Without doubt, such a set-up produces asymmetries throughout the euro area

1

A Retrospective on the Great

Recession: Causes, Effects and

Prospects

Inachos Lazos

member state economies What is more, the one institution that truly possesses indisputable supra-national and uniform authority – the European Central Bank – has ironically been exposing and compounding such asymmetries by applying homogeneous monetary policy to still heterogeneous national economies

In tracing back the root causes of the crisis, a few basic thoughts are warranted First, the contributing factors were not discreet but contin-uous and intertwined Second, the Eurozone was and is not on a planet

of its own, but also interacts with the global economy This exposes it

to dynamics and imbalances that are global in nature and also affects its degrees of freedom in applying remedial policy

More specifically, during the previous decade the integration into the world economy of several billion emerging market consumers came along with what has been characterized as a global debt super cycle

Developed economies, led by the United States, became consumers of first and last resort, as emerging economy savings were recycled back to them via the levered system At the same time as the demand function

in developed economies was overheating, the supply side was subjected

to the effects of the so-called Great Moderation as low cost producers in lower income countries came online and gained global market share, while keeping inflation muted despite overheating demand

The levered systems of the developed economies on both sides of the Atlantic adjusted by turning their attention to the non-tradable sectors, primarily the real estate market where bubbles formed In certain coun-tries such as the United States and Spain these became obvious to the naked eye Nonetheless, this phenomenon is also evident to the present day in countries such France and even Greece In the decade since the introduction of the euro, France turned from a current account surplus economy into a deficit one as investment was directed away from trada-bles and competitiveness lost Likewise in Greece, where a real estate bubble per se might be harder to identify, capital expenditure and credit were overwhelmingly directed to the non-tradable sectors To different degrees the productive capacity of these economies was hollowed out

as a matter of underinvestment Policy makers failed to anticipate and identify these dynamics in time, and it appears that they are still misun-derstanding them today The institutions and the political economy

of Eurozone member states were unprepared to face not only the lenges of participation in a monetary union, but also the medium and longer term consequences of a rapidly globalizing economy

This of course concerns both the north and the south of Europe, albeit from opposite directions Savers in the north, having shifted their

own demand function sustainably downward through a permanently understated exchange rate, demanded higher returns on their excessive savings and the only way to achieve that was by their levered systems recycling savings through the bubble-zones of the south Meanwhile, the global backdrop mirrored these developments and imbalances grew everywhere, in the form of sizeable current account deficits or surpluses financed via the global credit system that recycled and channeled an unprecedented “savings glut” wherever in the world it could achieve even marginally higher returns, even for the wrong reasons

3 Leading indicators and financial markets ahead of the Great Recession

Whether this dynamic in and of itself constituted a leading indicator

of the imminent breakdown it is debatable for several reasons First, a number of tectonic shifts were genuinely occurring in the world: the unprecedented integration of the global economy with its billions of consumers, savers and labor; technological progress that was the stuff

of dreams only a few years back; financial innovation and the deepest and most liquid financial markets the world had ever seen Second, the path of the “crisis” was almost certainly not pre-set In that sense, while deterministic, the trajectory of the European as well as the global economy was highly dependent on the fiscal and monetary policy reac-tion function and its associated errors and biases To that end, finan-cial markets and practitioners had to not only predict fundamental economic developments, but more overwhelmingly than ever, the human error element behind policy decisions It would have been impossible, and arguably irrational for financial markets to predict an ex-post error such as the collapse of Lehman Brothers Yet having been burnt once, when the distress moved on to Europe’s doorstep with the onset of the Greek crisis market practitioners were forced to weigh probabilities differently As tensions escalated, genuinely poor decision making, political and economic institutional failure in the south of Europe ultimately led markets to entirely shift their ex-ante probabil-

istic assessment to the negative side, unless proven otherwise And that is

when a dissolution of the euro took on self-fulfilling properties, most acutely manifested in the domestic capital flight witnessed in Germany, where savers scrambled to acquire “risk-free” financial assets such as German Bunds that in some form would survive currency dissolution, or leaving the euro altogether and seeking refuge in the Swiss franc, which skyrocketed

The ultimate collapse of a currency occurs when domestic savers lose faith and seek refuge elsewhere, thus provoking a capital flight that fatally erodes its value That is, when the European Central Bank finally came in and Mario Draghi, in August 2012 delivered his “what-ever it takes” speech, which arrested the self-destruction sequence the Eurozone had been engaged in Financial markets for a long period of time had not considered such developments as likely on the whole, as the conditional probabilities were exceedingly low However, once the unlikely event sequences began materializing, ex-ante probabilities for the next serial mistake rose sharply and rapidly to match the accurate ex-post probabilities of the previously unexpected events that had just occurred – against the odds

4 Regulator and policy maker responsibility for the

Great Recession

There is little doubt that most agents involved in macro- and economic management at various levels, and particularly the regulators and policy makers, contributed to the dislocation, in two main ways First, pre-emptive measures proved de facto inadequate to prevent the dislocation from occurring in the first place Second, reactive measures were too slow to become adequate as the policy maker optimization function was at least partly constrained by the local political economies and ideological rigidities These not only aggravated the situation, but also even stronger response across domains Policy makers and regula-tors stood idly watching a dramatic amount of credit being channeled

micro-to non-productivity enhancing non-tradable secmicro-tors, which steadily eroded external competitiveness In turn, the financial system was lax enough to such credit creation in ways that clearly under-priced risk exposures, both at a sectoral level as well as, perhaps more importantly,

at a macro-prudential level

This trifecta could simply not go on forever, and the paths were twofold: a gradual improvement and reversal via incremental policy adjustment at multiple levels, or a sudden stop through a shock On the monetary front, extraordinary accommodation was required to stabilize the global financial system Central banks led by the Federal Reserve and the Bank of England engaged in concerted efforts that served to both expand money supply, but, equally important, to ware-house assets via outright purchases that allowed price discovery at levels that broke the vicious downward economic spiral Furthermore,

in the United States primarily and the United Kingdom secondarily this

was accompanied by upfront fiscal accommodation as well as rigorous bank recapitalization By contrast, European policy makers, led by the northern countries and Germany, at best worked toward and applied

a hesitant and, at times, contradictory policy mix, which remarkably saw even ECB rate hikes as late as 2011 In short, fiscal adjustment

in the Eurozone was strong and immediate, while the central bank’s balance sheet was allowed to contract again, after growing significantly through emergency lending

The rather myopic European policy reaction has exacerbated the adjustment burden While in the United States and the United Kingdom the main post-crisis challenge resides on the monetary front, and rate setting, as the balance sheet remains enormous by historical standards,

in Europe the frontloaded fiscal consolidation generated a much worse nominal growth trade-off European policy makers seem to have failed to appreciate and, to a much lesser extent, react to the detrimental effects

of sharply weakened aggregate demand In other words, they have largely misread the binding constraints of the Eurozone macro economy

by choosing the path of voluntary domestic demand depression as an adjustment avenue External demand has not been sufficient to sustain-ably lift the single currency area out of recession: as a result, investment spending has not been sufficiently strong to boost growth and produc-tivity From its side, the monetary policy response was timid, and thus broadly unable to offset the observed tightening of financial conditions and the depressive impact of fiscal adjustment Consequently, the true binding constraint, which is no other than nominal growth, is mani-festing itself both via substantial inflation undershoot as well as real growth hysteresis

Clearly, post-crisis is not where the Eurozone is By contrast, it can be

argued that the euro area economy is right in the middle of an tial crisis, which from acute has now become chronic This is because policy inadequacy thus far will have to be overcompensated in the future by actions that may challenge even further the Eurozone insti-tutional infrastructure, at both local as well as supranational level It is critical for European policy makers to offer a demand impulse and use both monetary as well as fiscal tools to achieve this Fiscal adjustment has to take a back seat at the same time as structural reforms boost long-term growth potential while upsetting current vested interest structures

existen-at all levels External demand has to be supported by a weaker currency and the most effective and immediate way to achieve this in the near term is via monetary accommodation Markets were already discounting this prospect before the ECB formally announced its quantitative easing

program and as a result compressed euro yields to record lows This has rejuvenated inflows into the area, while preserving substantially afford-able funding costs for the sovereigns, corporates and households Obvious or not, there is not a great degree of variation to the policy prescription that leads to recovery Now, as ever, it rests firmly in the hands of policy makers to create the conditions for – and to steer the private economy into – a positive future trajectory: their actions my well determine the success or the failure of the common currency area

5 Policy response to the Great Recession

The response to the crisis in the United States was comprehensive, frontloaded and overwhelming It should be certain that breaking an acute deflationary shock requires as much in principle The US response consisted of both a significant fiscal stimulus as well as an unprece-dented monetary stimulus While the purpose of the former was rather more straightforward in supporting the demand side of the economy, the latter was and remains a bit more elaborate, as it involves manipula-tion of both the price as well as the quantity of money The unsterilized Treasury bond purchases by the Federal Reserve strongly suppressed interest rates while expanding money supply The Bank of England acted similarly Furthermore, the Federal Reserve became the buyer of last resort for securities that were being sold at distressed prices in the downward market spiral, and whose ex-post valuation would ultimately

be inconsistent with the objective of an economic recovery The Fed thus embarked on a vast purchasing program that encompassed an alphabet soup of securities, for which it provided a market as well as

“warehousing” facility, possibly until maturity Last but not least, the

US government proceeded with decisive clean up and recapitalization

of the banking system

The European reaction function on the other hand was constrained

by the architectural, political economy as well as genuine macro metries among the Eurozone countries Warren Buffet famously said in his own words that “the US economy is an athlete that has fallen on the ground, we need to lift him up and get him running again But he

asym-is still an athlete” The same cannot be claimed about the Eurozone The preceding decade had nurtured deep imbalances and flawed poli-cies that were unsustainable both within the monetary union as well as the global economy, which had to be corrected Getting the European athlete back up was one thing, but getting him to run an entirely different matter For instance, it is almost certain that there

was little room for demand stimulus within southern economies that were already exhibiting some of the highest twin deficits in their histo-ries Given the stretched fiscal accounts, this could only have been achieved via overt monetary intervention that in all likelihood would have been self-defeating Capital flight was already under way and it could have become irreversible if monetary policy and consequently the currency had lost credibility, leading to terminal sudden stop and debt liquidation

Therefore, Europe should indeed borrow heavily from the US book” However, it remains constrained by the pace of structural effort, which is a prerequisite for everything else to work It is critical for policy makers to appreciate that this will necessarily look very different than the past in both its drivers and impediments

6 Main effects of the Great Recession and sustainable

growth prospects

The Great Recession, as well as the global policy reaction in its math, have left deep and visible scars on the world economy Where asset bubbles had developed economies suffered supply side shocks through the disappearance or the dramatic reduction of overheated sectors Output gaps eventually appear to have shrunk somewhat, but that has happened the negative way: in other words, by reducing the actual growth potential of major economies, such as France, Italy and Spain This in turn has fed unemployment and, through that, the domestic demand function Trend growth has been reset lower What is more, this has resulted in a large gap between the prior forward projec-tion of the nominal GDP level and the current level and path, exacer-bating the accumulated debt burden

The global environment for growth has thus changed dramatically Both the debt super cycle, as well as the commodity super cycle that had sustained impressive growth for key emerging markets in the preceding decade, have now abated substantially What is more, emerging markets are now faced with the consequences of the extraordinary stimulus they had provided to their domestic economies as part of a globally coordinated policy reaction in the aftermath of the Lehman collapse The domestic adjustment back to more sustainable levels of activity for emerging markets as well as the high indebtedness/low nominal GDP growth nexus in the developed world have meant an almost universal effort to reign in twin deficits wherever in the world they existed As

a result, the world is now lacking an obvious consumer of last resort,

while to some extent the global economy is suffering from a “paradox

of thrift” of sorts

In Europe, the monetary union effectively underwent an internal balance of payment crisis and it was probably inevitable that the south had to shut its external deficits in relatively short order Financing became the binding constraint for these economies, while the European Central Bank had to offer support, albeit without endangering the integ-rity of the single currency Although a full and valid assessment of the counterfactual may remain elusive, it appears logical to have chosen to depress domestic demand in Eurozone countries that had found them-selves out of equilibrium

That, however, belongs to the past and it is entirely fair to say that policy making going forward will remain just as critical in managing the context that has ensued While these economies have now adjusted enough to operate inside their financing boundaries, the challenge has now shifted toward their job creation constraints Indeed it appears that the European south is on track to over deliver on its external adjustment However, this is occurring as the demand side remains substantially suppressed It should come as no surprise that continuing on the current path will soon shift the binding constraint for Eurozone’s entire exist-ence to nominal growth The risk is that the euro area has in some ways learnt the wrong lessons and it is overemphasizing external demand as

a growth driver capable of offsetting its increasingly atrophic internal demand This however is unlikely to be so, given a global context that is itself rebalancing away from external deficits and overheated domestic economies Therefore, the true lesson for Europe is to try to nurture not only the supply, but also the demand side of its economy Excessive (or indeed barely any) external surpluses are neither sustainable nor desired: the patient would simply die from the effort In contrast, Europe

is in dire need for a strategic growth and investment plan that involves different applications across its needy members, spanning infrastructure

to pension reform In parallel, this does include structural reforms, truly opening and completing the internal markets for products and services, with first and foremost the banking sector If the American economy was an athlete that hit a speed bump, fell on the ground and needed to just get up to start running again, the European economy never really was an athlete and needs to not only pick up but also become an athlete before it can really start running Doing so requires a very careful calibra-tion and equal respect for the demand and supply sides of the economy, including the necessary structural reforms that will make it competitive within the global landscape Last but certainly not least this is all against

a backdrop of technological progress that is changing the place of labor

as a production factor and almost certainly depressing its pricing power and income potential

7 Investment opportunities during and post the Great Recession

The investment environment has been all but boring since the last peak

of the economic cycle The 2008–2009 events caused dislocations in global markets and asset classes of a magnitude that has so far been witnessed only once in a hundred years or so Initially, fundamental economic dynamics took on a life of their own and entered a liquidation death spiral Subsequently, policy makers had to intervene forcefully in order to arrest and try to reverse that process Therefore, the framework could at least initially be defined along the following two main axes: one, the magnitude of dislocation for each asset class, and two, the nature of policy intervention and its consequences

In the aftermath of the Lehman collapse the US economy first went into free fall US government bonds rallied massively, while equities collapsed and credit spreads sky rocketed In parallel, this echoed in Europe and around the world as global imbalances and phenomena such as the global debt and commodity super cycles were being forcibly arrested, and at least in part reversed These moves became trending and strong enough that it was possible for hedge funds and other specula-tive capital to take advantage of them This exacerbated the dislocation and added fuel to the fire as markets now took the lead from economic fundamentals in determining developments in a self-fulfilling matter Policy makers, therefore, had a twin objective First, arrest and reverse the visible deterioration of economic fundamentals Second, and equally importantly, never allow again the self-fulfilling market dynamics to interfere negatively with their first objective Investment opportunities were determined along these lines as well In the first phase, we had the

“renormalization” trade as a very powerful economic stimulus program

It was implemented with global coordination Emerging markets such

as the BRICs notably boosted their domestic economies, while oped economies such as the United States and the United Kingdom ran substantial fiscal deficits, which were effectively monetized, yet offered critical support in stabilizing their domestic demand functions A more usual cyclical upswing was thus nurtured and allowed to take hold In parallel, the second objective was serviced via the purchase and ware-housing of dislocated assets, whose value was not consistent with the