Cycles of financial crises author. On the causes of global financial crises: a model of a controlled crisis. 1st big cycle of economic conditions
ECONOMIC AND FINANCIAL INSTITUTE
COURSE WORK
ON ECONOMIC THEORY
"ECONOMIC CYCLES AND CRISES"
COMPLETED: Belova I.V.
CHECKED:
M O S K V A 1 9 9 9
CONTENT:
Introduction.
Chapter 1. History of the problem of cyclical economic development.
Chapter 2. Four phases of the cycle.
1. Crisis.
2. Depression.
3. Revitalization.
4. Rise (boom).
Chapter 3. Reasons for the cyclical development of the economy.
Chapter 4. Types of economic cycles.
Chapter 5. Non-cyclical fluctuations.
Chapter 6. State countercyclical regulation.
INTRODUCTION
Economic history shows that economic growth is never smooth or uniform. Several years of business recovery and prosperity are followed by recession or even panic or collapse.
The economic cycle covers all possible aspects of society. It permeates everywhere - into manufacturing, construction, employment, income, the stock market, and politics. Even such non-economic phenomena as birth rates and marriages are feeling the full brunt of the crisis.
The economic cycle affects individuals and individual sectors of the economy in different ways and to varying degrees. For example, workers and industries producing capital goods, consumer durables, and construction are the ones most affected by the recession. Non-durable consumer goods industries tend to respond less to downturns.
Entrepreneurs rely on certain assumptions about the future when making decisions about investment and production volume. If they believe that next year will bring a recession, they will try to reduce investments now. When, on the contrary, they expect a revival and a significant rise in prices, they rush to purchase goods and expand production and construction.
Exchange players also want to know the future in order to be able to make a profit from buying or selling shares.
The ability to foresee the consequences of a particular factor means that an entrepreneur can take measures in advance to smooth out the negative impact in the event of a recession or stimulating measures in the event of a recovery.
Entrepreneurs in all developed countries are constantly faced with the problem of a win-win investment of capital, therefore the study of economic cycles from the point of view of predicting the increase or decline of economic activity is one of the most important tasks of modern economics.
“Evolution is, at its core, a process that
moves in cycles... Only the cycle itself is real
by oneself". J. Schumpeter.
HISTORY OF THE PROBLEM OF CYCLIC
ECONOMIC DEVELOPMENT
The peculiarity of a market economy, manifested in the tendency to repeat economic phenomena, was noticed by economists back in the first half of the last century.
In an effort to limitlessly expand their production, to conquer the largest possible market, which at any given moment has limits, the owners of capitalist enterprises periodically encountered overproduction of goods. The essence of overproduction is manifested in the preponderance of supply of a given product over demand, when the price of the product drops to a level at which, if not for all, then at least for a significant part of producers, there is no longer even a normal profit, let alone an economic profit.
Trying to identify the causes of overproduction, economists paid attention to the periodicity of such phenomena as an increase or decrease in demand, an increase in production volumes or its downtime. A certain sequence in the alternation of these phenomena has also emerged. The problem was of such great importance for economic development that almost none of the leading economists of the 19th and 20th centuries ignored it. Dozens of different works have been written that determine the causes of cyclical development, and a wide variety of explanations and forecasts have been obtained. The work of such scientists as K. Clark, W. Mitchell, K. Marx, N.D. is devoted to the study of economic cycles. Kondratiev,
J. Schumpeter and many others.
Colin Clark (1905) – American economist and statistician. He believed that with appropriate government policies, namely regulating the activities of monopolies and nationalizing a number of industries, it is possible to mitigate cyclical fluctuations in the economy.
A special place in the development of the theory of cyclicity belongs to the Russian scientist N. D. Kondratiev (the theory of “long waves”). See Chapter 4.
It is worth emphasizing J. Schumpeter's idea of a three-cycle scheme, that is, oscillatory processes in the economy, occurring at three levels, as it were, as the most suitable for describing many phenomena occurring in the economy. He named these cycles after N.D. Kondratiev, K. Juglar and J. Kitchin - the scientists who discovered these cycles. Schumpeter believed that the economic system shows the interconnection and interdependence of all three cycles.
It is impossible not to mention the contribution of K. Marx to the development of the theory of cyclicity. He studied short cycles called periodic cycles or crises of overproduction.
“The ultimate cause of all real crises always remains poverty and limited consumption of the masses, counteracting the desire of capitalist production to develop the productive forces in such a way as if the limit of their development was only the absolute consumption ability of society” K. Marx.
P. Samuelson in his famous book “Economics” defines the economic cycle as a common feature of almost all areas of economic life and for all countries with a market economy. It is this cyclical nature that characterizes the development of all industrialized countries. Through recessions and upswings, they inevitably follow the same path for almost two centuries, at least from this stage, when a relatively subsistence economy society began to move to a higher level of a developed monetary economy based on the close interdependence of all its links.
Fluctuating economic dynamics have been observed for 170 years. The first economic crises date back to 1825 in England and 1840 in Germany.
PHASES OF THE CYCLE.
1. CRISIS.
The term business cycle refers to successive ups and downs in levels of economic activity over several years. Individual economic cycles differ significantly from each other in duration and intensity. There is no exact formula for predicting the duration and time sequence of economic cycles. In their irregularity, economic cycles are more like weather changes. However, they all have the same phases, which are called differently by different researchers. Q0 T
Recession (contraction) is a state of the economy when the gross national product, with a steady decline, becomes smaller, which indicates a decline in production or a slowdown in the rate of its development.
The crisis of the market economic system is characterized by a sharp decline in production, which begins gradually with a narrowing and reduction in business activity (trade transactions are concluded less frequently, the volume of business transactions carried out both on credit and in cash decreases). A crisis is characterized by an imbalance between supply and demand for any product or in any particular sector of the economy, in that it arises as a general overproduction, accompanied by a rapid fall in prices, bankruptcy of banks and shutdown of production enterprises, rising interest rates, and unemployment.
Let's imagine the general picture of the industrial crisis of the 19th - early 20th centuries.
The market, which has freely absorbed all the goods produced, at some time turns out to be overcrowded; goods continue to arrive, meanwhile demand gradually decreases, lags behind supply, and finally stops altogether. Anxiety is spreading throughout the market. Demand disappears, meanwhile, there are still huge stocks of goods everywhere, and many enterprises continue to operate at full capacity due to inertia and throw more and more new masses of goods onto the market. A rapid drop in prices follows.
Truly heroic efforts are being made to save the day. But all means are fruitless. Many businesses are unable to withstand sharp price cuts. Liquidations and collapses begin. First of all, banks and credit institutions are dying. The trust of market economy subjects in each other is undermined. Everyone demands payment in cash. Bills of exchange, which only yesterday did not raise any doubts, acquire the value of simple paper. Loan interest rates increase. The largest enterprises are going bankrupt, cars are stopped, factories are closed. Crowds of unemployed people appear on the streets. Famine begins, an epidemic of suicides begins.
The first crisis broke out in England in 1825, then in England and the USA in 1836, in 1841 in the USA, in 1847 in the USA, England, France and Germany. Then came the crises of 1873, 1882, 1890. The most devastating crisis was the years 1900-1902. It began almost simultaneously in Russia and the United States and primarily hit the metallurgical industry. Having struck the American metal market, the crisis spread first to England, then to the European continent. The textile industry was the first to suffer, followed by the construction, chemical, machinery, and electrical industries. With incredible speed, the crisis spread to all European countries: France, Austria, Germany, Italy, Belgium and soon became universal. Prices plummeted downwards. Reputable enterprises were uprooted. The ruin of industry was accompanied by a rapid increase in unemployment.
One of the most popular macroeconomists, Claudio Borio from the international bank BIS, wrote a policy essay outlining a new theory for the origin of the current crisis. According to it, the crisis arose due to cyclical financial imbalances, expressed in a sharp increase in lending. Central banks around the world overlooked it because it did not fit into the standard models at the time. But even after 5 years, the authorities are treating it completely incorrectly - endless easing only drives the disease inside the economy.
Basel. FINMARKET.RU- Economists have not been able to explain the crisis, the waves of which have been rolling over different countries for five years, within the framework of standard neo-Keynesian and neo-classical theories of business cycles. Therefore, to explain, we need to apply the well-forgotten and long-out-of-fashion theory of financial cycles, writes Claudio Borio from the Bank for International Settlements (BIS) - one of the most “fashionable” economists of our time.
For the first time after a long break, the theory (based on the views of the Austrian school, but gone far from it) was remembered in the 90s, when Japan plunged into an incomprehensible and illogical stagnation. But studying the issue did not save the world from repeating the sorrowful Japanese path.
The knowledge accumulated over a couple of decades is enough to understand: the ultra-soft policy of the Fed and other world central banks will not help. The only way out of the crisis is for governments to take on all private debts, Borio is sure.
What is the financial cycle?
Borio has written a short primer on the concept for economists accustomed to thinking of finance as a simple system of resource reallocation in which only transaction costs need to be considered:
- Think medium term rather than short term because financial cycles are much longer than standard business cycles.
- Think about the monetary nature of the economy, because the financial system not only allocates resources, but also creates purchasing power itself and therefore, partly, lives an independent life.
- Think globally, because the world economy with its financial, product and intermediate markets is already quite integrated.
There is no generally accepted definition of the financial cycle, writes Borio, who is at the forefront of this theoretical trend.
The closest definition is “the self-producing interconnections of our ideas about the value of assets, risks, and financial restrictions lead to a boom and then a fall in markets.”
- Our position in the financial cycle is most accurately shown real estate prices and loan costs. Lending is especially important in the construction and purchase of real estate, so the two components are usually interrelated. Stock prices have much less correlation with these two benchmarks.
- Also important when studying cycles are interest rates, volatility, risk premiums, bad loans, and so on.
- Financial cycles change less frequently than business cycles. Traditional business cycles repeat with a frequency of 5-8 years. The average financial cycle length for the 7 advanced economies is 16 years, based on measurements dating back to the 1960s.
The financial cycle is longer than the business cycle
- The peak of the financial cycle is immediately followed by a crisis. Typically, as soon as the cycle reaches its apex, a banking crisis begins. During the entire study of 7 developed economies, the crisis did not immediately follow the peak only if it was caused by external losses of banks and financial institutions. For example, recent problems in the banking systems of Switzerland and Germany have been linked to the financial cycles of other European countries and the United States.
- The recession after the financial crisis is worse than after the economic crisis. Typically a downturn is 50% deeper than the downturn caused by the business cycle.
The peak of the financial cycle is usually followed by a crisis
- The crisis can be predicted. The modern theory of financial cycles allows us to detect signs of a crisis in the future. Moreover, risks can be determined quite accurately and in real time. The clearest benchmark is the simultaneous positive deviation of the loan-to-GDP ratio and asset prices, especially real estate, from historical norms. Together, these two deviations give a clear signal - the peak is near, a crisis is about to begin.
- Along with globalization, the role of the international component of cycles is growing - this can be determined, for example, by the share of loans issued to non-financial enterprises by foreign banks.
The current financial crisis in the United States could have been predicted
The "international factor" contributed to the spread of the crisis
- The duration of the cycle depends on government policy. The looser the financial policy, the more pronounced the upward and downward parts of the cycle are.
- An open macroeconomic policy in the context of globalization also leads to a boom: the potential of the economy is growing, there are more opportunities for rising asset prices and lending, as well as for lower inflation. Because of the latter feature, central banks concerned with inflation targeting miss the boom, which is usually a sign of rising inflation - and they simply have no incentive to tighten monetary policy. Then it is already too late - the boom is “unexpectedly” followed by a crisis.
What you need to forget to understand financial cycles
According to Borio, all models that will make it possible to predict crises and select the right policies must necessarily include three aspects:
1. Financial booms do not just precede crises, they cause them. A crisis is a consequence of system vulnerabilities that appear during the boom stage.
2. It is lending and debt in general that are the engine of any boom, because companies allow themselves to spend and buy more. This leads to improper allocation of resources, both capital and labor. Once asset prices and cash flows begin to contract in a recession, debt becomes a drag on the recovery as households, businesses and governments scramble to save to repair their balance sheets.
3. It is necessary to take into account the difference between potential release models:
- according to standard theory, this is output at a level that ensures full employment and does not cause inflation to accelerate. It is assumed that if an economy has reached its potential, it will remain there indefinitely until it is “knocked out” by an external shock. Inflation in this model is a reliable indicator of whether output is above or below potential.
- According to the theory of financial cycles, inflation can be stable, but output will decline or grow rapidly - this is due to financial imbalances. Inflation, however, cannot tell us anything about output.
The release potential may be different in different models
Finally, we need to forget everything that was taught by the theory of rational behavior of markets, which died in terrible agony during the crisis:
- It is worth abandoning the idea that the behavior of economic agents is rational and they have complete information about the state of markets. We must assume that the agents' information is incomplete.
- In addition, we must remember that the attitude towards risk is not absolute, but changes depending on information about the state of the economy.
- It is necessary to take into account that the financial system itself creates purchasing power, and does not simply serve as a resource transfer system.
Two views on the current crisis
- Current account surpluses, especially in Asian economies, led to capital outflows from these countries, which financed the credit boom in countries with current account deficits - mainly the United States, the epicenter of the crisis.
- There was more savings in the world than investments. The result of this was pressure on the interest rate - it was especially low on dollar assets, in which the surpluses of Asian countries were mainly invested. Investors, in search of greater returns, began to take on unnecessary risks - this was the cause of the financial crisis.
But this is not true, writes Borio. One of the consequences in this model replaces the root cause of the crisis:
- You can't focus on savings. The crisis is associated with a rapid increase in the ratio of lending to GDP, and savings are only a small part of GDP.
- The US credit boom was largely financed by domestic funds or funds from other countries with large current account deficits, such as the UK. And the United States itself was a major exporter of capital.
- The cause of the crisis is a gap in financing channels in the lending structure - the flows of savings and investments will not tell us anything about this until the roast rooster bites us. When analyzing, you should rather focus not on net (inflow minus outflow), but on total capital flows.
- The unbalanced allocation of assets changed the balance of supply and demand in the money market, and also “shifted” long-term natural rates - rates corresponding to potential output. Unlike market rates, which depend on central bank policies and other factors, natural rates depend only on fundamental factors. Which, in fact, changed imperceptibly during the boom period.
Trade imbalances and high savings rates cannot fully explain the crisis
How to prevent a crisis
Policymakers need to combat credit booms through fiscal, monetary and macroeconomic policies. This will help curb the development of imbalances and quickly cope with their consequences. The government can thus remove what is called "excess elasticity" from the system.
An effective method is to increase the requirements for reserves and liquidity of banks, for example, within the framework of Basel III, but not during a crisis, but during a boom. But first, you need to learn how to quickly identify a boom.
- When conducting monetary policy, central banks should be guided not only by inflation, but also by other indicators of the financial market. The forecasting horizon of regulators should be more than 2 years, and the main emphasis in it should be on risks.
- Fiscal policy should be as modest as possible, because during booms, forecasts for economic growth and incomes are usually overestimated. Thus, before the crisis, the budgets of Spain and Ireland seemed quite reliable: the level of public debt to GDP was relatively low, and the budget itself was in surplus. But the government did not take into account the possible crisis (who did?) and the related problems of the banking sector, which drove them into a debt trap. If the risks of financial cycles were taken into account, then governments would not have to take on the debts of banks and they would not find themselves in a debt crisis.
The advice is excellent, but difficult to implement, Borio admits. Most likely, next time governments, busy with short-term and urgent matters, will simply not be able to keep track of financial cycles, because they are much longer than business cycles. They will miss significant imbalances in asset allocation. And then again they will not treat the financial disease, but only its symptoms and complications in the form of a recession. This will only delay the day when the economy begins to recover.
Crisis Management Guide
Most crises after the war looked completely different: high inflation indicated overheating to central banks, they tightened policies, this led to a recession, the economy recovered quickly, new debts did not arise, and therefore did not interfere with the recovery. But this crisis began during a period of stable inflation, and the monetary authorities did not track it, and then they could not stop it correctly, although they began the fight with the right steps. According to Borio, you need to act like this:
- Crisis management. The main goal of the authorities at this stage is to minimize the damage and stop the spread. A variety of means are suitable here - from increasing budget spending to easing monetary policy.
- Resolving the crisis. Symptomatic treatment should be immediately followed by the main one, eliminating the causes of the crisis. The priority must be to restore the balance sheets of banks, companies and households. This will become the basis for economic recovery.
- The government needs to immediately determine how to use limited budgetary resources to help solve the problem of private sector balance sheets. Thus, banks should be provided with capital, but only subject to debt write-off and possible nationalization. Households may have some of their debt written off.
- This means an active strategy to replace private debt with public debt. At the same time, it is necessary to actively and decisively resolve all conflicts between borrowers and lenders, management, shareholders and investors. Once the risks are reduced, the economy will begin to grow.
- Too long an aggressive monetary policy - as a way to “buy time” - is contraindicated for the patient. It will likely only delay the economic recovery rather than solve the problems. This also applies to the period of low rates and an aggressive asset purchase program. The result may be a decrease in the income of financial companies and the atrophy of financial markets. In addition, the aggressive policies of central banks can drive the disease inside, making it chronic.
- The central banks themselves will be too burdened with assets. Their independence and reliability will suffer. There will be a reason to criticize them for being too aggressive in their policies. As a result, there will be even more risks, and a way out of the vicious circle will never be found. The conclusion is that monetary policy, unlike budgetary policy, is actually not effective during financial crises.
- But a depreciation of the currency, which will lead to an increase in exports, may be effective. In this case, the economic recovery will be more sustainable.
- A good example of anti-crisis policy is the Nordic countries in the 1990s. The crisis management stage was short, but quite effective: the authorities stabilized the financial market with the help of state guarantees to banks and liquidity injections.
They then immediately took on the problem of balance sheets - they carried out severe stress tests, had to temporarily nationalize some financial institutions, wrote off bad assets, eliminated excess capacity in the financial system and improved operational efficiency. As a result, the economic recovery was rapid.
An unfortunate example is Japan, which also experienced a financial crisis in the 1990s. The authorities did not immediately determine that this was a financial market crisis, and the problem was in balance sheets, and began to reduce rates until they hit the bottom. Then, when the diagnosis was finally made, it took several years to use taxpayer money to improve the balance sheets of banks and companies. The economy never really recovered.
BIS, a bank created specifically to coordinate the work of central banks, strongly advises the central banks of the world not to get carried away with monetary stimulation. Policies that appear to be effective for some countries can have devastating consequences at the global level.
There are already signs that some developing economies are developing imbalances similar to those in developed countries before the crisis.
http://www.finmarket.ru/z/nws/hotnews.asp?id=3171005
Alex Brumer, one of the UK's leading financial journalists, writes in his book The Crisis (2008):
“The cooling in financial markets that began on August 9 and plagued the global financial system until the spring of 2008 led to an emergency shutdown. Uncertainty is the main enemy of financial stability, and in such an atmosphere, banks became increasingly preoccupied with the bad debts of their competitors and stopped giving loans to each other. Nervousness soon spread from the intrabank sector to other financial markets. Shares, and not just banks, fell significantly. This was not surprising: since loans were often bundled into mortgage financial instruments, which were then sold around the world, many FTSE-100 companies were likely to have them in their portfolio. In such a situation, the infection quickly spread to the stock markets, and stocks began to fall sharply...”1
The cyclical nature of economic development was discovered back in the 18th century, and the first crises appeared along with capitalism. Many economists of the past and present have devoted themselves to the study of the crisis as one of the stages of the cyclical process in the economy.
However, every crisis is different from the previous one. Therefore, to a question like “Is economic recovery likely?”2 (“Is economic recovery possible?”) the answer is known - it will recover. The only question remains - when?
Economic theories concerning cyclical processes developed by the great economists of the 19th and 20th centuries, such as the cycles of Kitchin, Juglar, Kuznets, Kondratiev, do not give a clear answer in the conditions of the modern global market.
In this essay, I would like to present both general information regarding the issue of the cyclical development of a market economy, and more relevant information regarding the current global financial crisis and its possible prospects and consequences.
Historical excursion
The theory of economic cycles, along with the theory of economic growth, refers to theories of economic dynamics that explain the movement of the national economy. If growth theory examines the factors and conditions of growth as a long-term trend, then cycle theory examines the causes of fluctuations in economic activity over time. The direction and degree of change in the set of indicators characterizing the equilibrium development of the economy form the economic situation.
The nature of the cycle is still one of the most controversial and poorly understood problems. Researchers involved in the study of market dynamics can be divided into two areas:
Some do not recognize the existence of periodically repeating cycles in social life;
Others take a deterministic position and argue that economic cycles ebb and flow with regularity.
Representatives of the first direction, to which the most authoritative scientists of the modern Western neoclassical school belong, and whose opinion I share, believe that cycles are the result of random influences (impulses or shocks) on the economic system, which causes a cyclical response model, that is, cyclicality is the result impact on the economy of a series of independent impulses. The foundations of this approach were laid in 1927 by the Soviet economist E.E. Slutsky (1880-1948). But this direction received wide recognition in the West only 30 years later.
Representatives of the second direction consider the cycle as a kind of fundamental principle, an elementary indivisible “atom” of the real world. The cycle, in their opinion, is a special, universal and absolute formation of the material world. The structure of the cycle is formed by two opposing material objects that are in the process of interaction in it.
It is interesting to note that the idea of cyclicity as the fundamental principle of the world has been floating in world science since the times of Ancient Greece and Ancient China (especially in the works of Chinese Taoists).
If the problem of cyclicality has interested philosophers for many centuries, economists paid attention to it quite recently, only at the beginning of the 19th century. The first studies of crisis phenomena in the economy appeared in the works of J. Sismondi (1773-1842), C. Rodbertus-Yagentsov (1805-1875) and T. Malthus (1766-1834). Moreover, the problems of crisis and cycle were, as a rule, dealt with by representatives of side currents of economic thought. Orthodox economists rejected the idea of cyclicality as contrary to Say's law, according to which demand is always equal to supply. Therefore, the old classics A. Smith, D. Ricciardo, J. St. Mill, A. Marshall, if the phenomenon of the cycle was considered, it was in passing, as a private and fleeting movement. Moreover, neither A. Smith nor D. Ricardo witnessed economic cycles.
Phases of cyclic development
The economic cycle is usually divided into separate periods, or phases. There are two main classifications of phases of cyclical economic development: four-phase and two-phase models.
Four-phase business cycle model
The four-phase structure of the cycle, usually called classical, includes the phases of crisis, depression, recovery and recovery. Each of them is characterized by certain quantitative characteristics and qualitative features.
The main quantitative parameter of the cycle is the change in such volumetric indicators as gross domestic product (GDP), gross national product (GNP) and national income (NI). In the past, the volume of industrial production was put first. However, at present, given the significant reduction in the share of both industrial and all material production in the total GDP, it is more preferable to consider changes in the level of GDP as a whole (the latter, of course, does not mean that the dynamics of its individual components are not revealed within this indicator). It is the general change in the volume of manufactured products (both tangible and intangible) that serves as the basis for dividing the classical cycle into four phases (see Fig. 1).
Rice. 1. Four-phase model of the business cycle3
I - crisis, II - depression, III - revival, IV - rise.
A is the point of the first (pre-crisis) maximum rise in production.
B is the point of maximum decline in production.
A1 is the point of the second rise, at which the pre-crisis production volume is achieved.
A2 is the point of the second maximum rise in production.
In the first phase (crisis), there is a drop (reduction) in production to a certain minimum level; in the second (depression), the decline in production stops, but there is still no growth; in the third (revival) there is an increase in production to the level of its highest pre-crisis volume; in the fourth (rise), production growth goes beyond the pre-crisis level and develops into an economic boom. In this case, three phases (crisis, depression and recovery) represent a kind of “failure” on the path of production rising to a higher quantitative level. It is obvious that any cycle and each of its phases have a certain duration. Consequently, even a purely quantitative characteristic of the cycle, together with the phases included in it, makes it possible to clarify the spasmodic dynamics of the economy of both an individual country and a group of countries.
Moreover, each of the four phases has specific and fairly typical features.
During a crisis, the demand for basic factors of production, as well as for consumer goods and services, decreases, and the volume of unsold products increases. As a result of decreased sales, prices, enterprise profits, household incomes and state budget revenues decrease, loan interest increases (money becomes more expensive), and loans are reduced. With an increase in non-payments, credit ties are disrupted, stock prices and other securities plummet, which is accompanied by panic on stock exchanges, massive bankruptcies of companies occur and unemployment rises sharply.
During a depression, the economy stagnates, the reduction in investment and consumer demand stops, the volume of unsold products decreases, and mass unemployment persists with low prices. But the process of updating fixed capital begins, more modern production technologies are being introduced, and the prerequisites for future economic growth are gradually being formed when so-called “growth points” arise.
During the period of recovery, the demand for factors of production and consumer goods increases, the process of renewal of fixed capital accelerates, loan interest decreases (money becomes cheaper), sales of finished products and prices increase, and unemployment decreases.
During the boom period, acceleration affects the dynamics of aggregate demand, production and sales, and the renewal of fixed capital. During this phase, active construction of new enterprises and modernization of old ones takes place, interest rates are reduced, prices are rising and profits, household incomes and state budget revenues are increasing. Cyclical unemployment decreases to its minimum.
Two-phase business cycle model
When describing the phase structure of cyclicity itself, modern economists usually use another option that differs from the classical one.
In this version, the cycle breaks down into the following elements:
1) peak (the point at which real output reaches its highest volume);
2) reduction (a period during which there is a decrease in output and which ends with a bottom, or bottom);
3) the bottom, or sole (the point at which the actual output reaches the smallest volume);
4) rise (the period during which there is an increase in real output).
With such structuring of the economic cycle, ultimately there are only two main phases in it: ascending and descending, i.e. rise and decline in production, its “rise” and “fall” (see Fig. 2).
Rice. 2. Two-phase model of the business cycle4
I—downward wave (production reduction),
II—rising wave (increase in production)
The wave-like curve shown on the graph reflects cyclical fluctuations in output (GDP) with peaks B and F and a low point of decline (bottom) D. The time interval between two points that are in the same stages of fluctuation (in this case between points B and F) is determined by as one period of a cycle, which in turn consists of two phases: descending (from B to D) and ascending (from D to F).
In this case, the wavy curve of cyclical fluctuations is located on the graph around the straight line of the so-called “secular” trend, depicting the long-term trend of economic growth of the gross domestic product and having a positive slope (the trend line always goes in the direction from “southwest” to “northeast” ). As for the intensity of fluctuations, it is measured by their amplitude, determined by the magnitude of the deviations of the peak and bottom points from the trend line (on the graph these are the distances BG, DH and FI). Depending on the amplitude of fluctuations, it is customary to distinguish three main varieties (three forms) of the economic cycles themselves: first, converging (or damping) cycles, characterized by a decreasing amplitude over time; secondly, divergent (or explosive) cycles with increasing amplitude; thirdly, constants with an amplitude that remains unchanged over a period of time.
It should be added that when considering specific elements and periods of cyclicity in the economic literature, quite varied terminology is used, sometimes differing in content from the definitions of the classical phases of the cycle. In particular, this applies to such concepts associated with the downward phase of the cycle as depression, recession, stagnation and stagflation. The term depression is identified, for example, with a long-term decline in production lasting several years, which is accompanied by a high level of unemployment. Hence the global crisis of 1929-1933. called the "Great Depression". A recession also refers to a decline in output, but one observed for six or more consecutive months. A period of recession, characterized by stagnation in the economy, is often called stagnation, and in the case of intertwining crisis processes with accelerated inflation (price increases), it is designated by the hybrid concept of stagflation.
Types of economic cycles
All cycles in reality are not similar to each other; each has its own specific features and interweavings. Moreover, each crisis arises as if unexpectedly and is caused by some completely exceptional circumstances. In the period between crises, as in the sea in clear weather, disturbances and “shocks” in the form of partial, small and intermediate recessions are possible, which gave reason to talk about different types of economic crises.
Economic science, based on an analysis of economic practices throughout the history of its development, identifies several types of economic cycles, which are called waves. They are usually given the names of scientists who have devoted special research to this problem. The most famous cycles are N.D. Kondratiev (50-60 years old), called “long waves”, S. Kuznets cycles (18-25 years old), i.e. “medium waves”, cycles of K. Juglar (10 years) and short cycles of J. Kitchen (2 years and 4 months).
The development of the theory of long waves began in 1847, when the English scientist H. Clarke, drawing attention to the 54-year gap between the crises of 1793 and 1847, suggested that this gap was not accidental. V. Jevons was the first to use the statistics of oscillations in the analysis of long waves to explain a phenomenon new to science. The original statistical processing of materials is contained in the works of Dutch scientists J. Gederen and S. Wolf when considering technical progress as a cyclical factor.
It is impossible not to note the contribution of K. Marx to the development of the theory of economic crises. He studied short cycles called periodic cycles, or crises of overproduction.
A special place in the development of the theory of cyclicity belongs to the Russian scientist N.D. Kondratiev. His research covers the development of England, France and the USA over a period of 100-150 years, which summarizes material from the end of the 18th century. (1790) on indicators such as the average level of trade, coal production and consumption, cast iron and lead production, i.e., in essence, he conducted a multifactor analysis of economic growth. As a result of these studies, N.D. Kondratiev identified three large cycles: 1 cycle from 1787 to 1814 - an upward wave and from 1814 to 1951 - a downward wave; Cycle II from 1844 to 1875 - an upward wave and from 1870 to 1896 - a downward wave; Cycle III from 1896 to 1920 - an upward wave.
The concept of “long waves” N.D. Kondratieva caused heated controversy in Russia in the 1930s. Supporters of the “automatic” collapse of capitalism accused Kondratiev of apologizing for capitalism, since according to his theory, the capitalism of a developed market economy was recognized as having mechanisms for self-propulsion and recovery from economic crises. N.D. Kondratiev was arrested and killed as an enemy of the people. Reality proved him right.
The study of long waves in the current century has been carried out by such world-famous scientists as Schumpeter, S. Kuznets, K. Clark, W. Mitchell, P. Boccara, D. Gordon and others. In Russia, these processes are studied by Y. Yakovetsu L. Klimenko, S. Menshikov et al.
Crises in the 20th century
RIA Novosti on its website5 provides a history of economic crises.
So, in 1914 The year saw an international financial crisis caused by the outbreak of the First World War. The reason is the total sale of securities of foreign issuers by the governments of the USA, Great Britain, France and Germany to finance military operations. This crisis, unlike others, did not spread from the center to the periphery, but began almost simultaneously in several countries after the warring parties began to liquidate foreign assets. This led to a collapse in all markets, both commodity and money. Banking panic in the US, UK and some other countries was mitigated by timely interventions by central banks.
The next global economic crisis, associated with post-war deflation (increased purchasing power of the national currency) and recession (decline in production), occurred in 1920-1922. The phenomenon was associated with banking and currency crises in Denmark, Italy, Finland, Holland, Norway, the USA and Great Britain.
1929-1933 - the time of the Great Depression
On October 24, 1929 (Black Thursday), stocks fell sharply on the New York Stock Exchange, marking the beginning of the largest economic crisis in global history. The value of securities fell by 60-70%, business activity decreased sharply, and the gold standard for the world's major currencies was abolished. After World War I, the US economy developed dynamically, millions of shareholders increased their capital, and consumer demand grew rapidly. And everything collapsed overnight. The most solid stocks: the American Telephone and Telegraph Company, the General Electric Company and the General Motor Company - lost up to two hundred points during the week. By the end of the month, shareholders had lost over $15 billion. By the end of 1929, the fall in securities prices reached a fantastic amount of 40 billion dollars. Firms and factories closed, banks burst, millions of unemployed people wandered around in search of work. The crisis raged until 1933, and its consequences were felt until the end of the 30s.
Industrial production during this crisis decreased in the USA by 46%, in the UK by 24%, in Germany by 41%, and in France by 32%. Share prices of industrial companies fell by 87% in the US, 48% in the UK, 64% in Germany, and 60% in France. Unemployment has reached colossal proportions. According to official data, in 1933 there were 30 million unemployed in 32 developed countries, including 14 million in the United States.
The first post-war global economic crisis began at the end of 1957 and lasted until mid-1958. It covered the USA, Great Britain, Canada, Belgium, the Netherlands and some other capitalist countries. Industrial production in developed capitalist countries decreased by 4%. The army of unemployed people has reached almost 10 million people.
The economic crisis that began in the United States at the end of 1973 in terms of the breadth of countries covered, duration, depth and destructive power significantly exceeded the global economic crisis of 1957-1958 and, in a number of characteristics, approached the crisis of 1929-1933. During the crisis, industrial production in the USA decreased by 13%, in Japan by 20%, in Germany by 22%, in Great Britain by 10%, in France by 13%, in Italy by 14%. In just one year - from December 1973 to December 1974 - stock prices fell in the USA by 33%, in Japan by 17%, in Germany by 10%, in Great Britain by 56%, in France by 33%, in Italy by 28%. The number of bankruptcies in 1974 compared to 1973 increased in the USA by 6%, in Japan by 42%, in Germany by 40%, in Great Britain by 47%, in France by 27%. By mid-1975, the number of completely unemployed in developed capitalist countries reached 15 million people. In addition, more than 10 million were transferred to part-time work or temporarily laid off from their enterprises. There has been a fall in real incomes of working people everywhere.
The first energy crisis also occurred in 1973, which began with OPEC member countries reducing oil production. Thus, black gold miners tried to raise the price of oil on the world market. On October 16, 1973, the price of a barrel of oil rose by 67% - from $3 to $5. In 1974, the price of oil reached $12.
Black Monday 1987. On October 19, 1987, the American stock index Dow Jones Industrial fell by 22.6%. Following the American market, the markets of Australia, Canada, and Hong Kong collapsed. Possible cause of the crisis: the outflow of investors from the markets after a strong decline in the capitalization of several large companies.
The Mexican crisis occurred in 1994-1995
In the late 1980s, the Mexican government pursued a policy to attract investment into the country. In particular, officials opened a stock exchange and brought the majority of Mexican state-owned companies onto the platform. In 1989-1994, a flow of foreign capital poured into Mexico. The first manifestation of the crisis was capital flight from Mexico: foreigners began to fear the economic crisis in the country. In 1995, $10 billion was withdrawn from the country. A crisis in the banking system began.
In 1997 - Asian crisis
The biggest fall in the Asian stock market since World War II. The crisis is a consequence of the withdrawal of foreign investors from Southeast Asian countries. The reason is the devaluation of the national currencies of the region and the high level of balance of payments deficit in Southeast Asian countries. According to economists, the Asian crisis reduced global GDP by $2 trillion.
In 1998 - Russian crisis
One of the most severe economic crises in Russian history. Reasons for the default: Russia's huge public debt, low world prices for raw materials (Russia is a major supplier of oil and gas to the world market) and a pyramid of government short-term bonds, which the Russian government was unable to pay on time. The ruble exchange rate against the dollar in August 1998 - January 1999 fell 3 times - from 6 rubles. per dollar up to 21 rubles. for a dollar.
Experts predicted the beginning of the next powerful economic crisis by 2007-2008. In America, the collapse of oil markets was predicted, in Eurasia - the complete defeat of the dollar.
Features of economic fluctuations in the 20th century
A general idea of the course of the cyclical development of the economy after the Second World War is given by information on quantitative fluctuations in industrial production in a number of leading countries where the market economic system has long been established (Table 1).
Table 1. Duration and depth of fall
Industrial production (highest point to lowest point)
During periods of post-war world crises*6
From the second half of the 50s of the XX century. economic crises usually took on a global scale, affecting, to one degree or another, the leading countries of America, Europe and Asia. The exception was the first post-war crisis of 1948-1949, which seriously affected the US economy, while at the same time rapid economic growth was observed in Germany and Japan. The 90s were marked by uneven growth and large differences in its pace in the leading countries of the modern world. Thus, in 1993, Germany, France and some other Western European countries experienced an economic recession, and in 1995-1996. - stagnation. Japan in 1997-1999. There was a real crisis, manifested in a reduction in production and financial turmoil, which gave way in 2000 to a very sluggish revival of the economic situation.
It should be especially noted that since the 80s. XX century Financial crises have become an essential element of economic cycles. During this time, they shook the national economies of 93 countries (5 developed and 88 developing). The most acute financial crises were characteristic of the 90s, which primarily include the Western European crisis of 1992, the Mexican crisis of 1994-1995, the Asian crisis of 1997-1998, and the Russian and Latin American crisis of 1998-1999. and Argentine 2001
Observed back in the 70-80s. a certain synchronization of economic cycles clearly gave way in the 90s to their desynchronization. Against this background, for 10 years there was a powerful expansion of the US economy, the longest in the history of a country that accounts for almost a third of world GDP. This long-term growth is in many ways unlike previous upward phases of the cycle. The decisive influence on it is now exerted by such internal factors as the massive development of new resource-saving technologies, an increase in the share of high-tech products, and the priority nature of investments in education, health care, science and technology. At the same time, one of the main external factors of the unusually long rise in PITA was the very desynchronization of the world cycle, in which other countries experienced either weak economic growth or crisis and stagnation processes.
Global financial crisis of the 21st century
US Economy
America's economy produces $11 trillion in GDP7. Chart 1 clearly shows the growth of the US economy from the beginning of the century to the present day.
Diagram 1. US GDP and its expenditure structure
For greater clarity, let's look at this diagram in logarithmic form (diagram 2):
Diagram 2. Logarithmic US GDP and its expenditure structure
As can be seen from the diagram, the growth is constant.
According to Yegor Gaidar8, “the engine of the world market over the past 50 years has been the American economy.” Now its share in global GDP (at purchasing power parity) is approximately 20%, in the capitalization of world financial markets - 40%.
“With an open capital market, any recession in America affects the economies of other countries. Recently, this influence has been increasing. The reaction of financial markets to economic problems in America is paradoxical. The trigger for a slowdown in global growth is usually a recession in the United States. It would seem common sense that when the American economy is bad, capital should flow to other markets. Investors usually react in the opposite way. In conditions of unfavorable global conditions, capital is coming to the US Treasury markets. 2001 clearly demonstrated this.”9
Economy of Russia
Economic growth in Russia began in 1997 after overcoming the post-socialist recession associated with the collapse of the Soviet economy and the restructuring of the most important economic institutions. In 1998, it was interrupted by a sharp deterioration in the global economic situation, capital outflow from many emerging markets (including Russian), and a drop in oil prices (in real terms) to a level unprecedented in the last 30 years. Growth resumed in 1999 and has continued for 9 years since then. Its average rate for this period is 6.9% per year.
At the beginning, the growth was of a restorative nature. Its main source was the use of production facilities created during Soviet times. But starting from 2003-2004, it increasingly acquired an investment character. The growth rate of investment in fixed assets is at a consistently high level. In 2007 they exceeded 20%.
The Russian economy, a market economy (and predominantly private), integrating into the system of global markets, since 1992 has had a currency convertible for current, and since 2007 for capital transactions, a stable situation in the financial and monetary system. At the same time, household incomes (in real terms) have been growing at rates exceeding 10% per year over the past 8 years.
Global financial crisis and its consequences
Alex Brumer writes: “A long period of rapid real estate inflation and historically low interest rates led to a surge in consumer lending between 1997 and 2007. In an atmosphere of ease and freedom of handling money, there was an increase in self-esteem and the availability of mortgages, amounting to £16 billion at 8% per annum. But even in these market conditions, firms that specialize in mortgages for people with bad credit have raised rates significantly—in some cases, increasing standard rates by 2.5%. This meant lenders increased rates to a staggering 11.5%, doubling the Bank of England's base rate. Other companies have refused mortgages. Leading rating agency Standard & Poor's has warned that rates could rise to 60% for borrowers with bad credit.
This is how the crisis developed in America, and this is how it continued to develop in Russia. All the most interesting things in the Russian economy began to happen towards the end of the third quarter of 2008: the shutdown of blast furnaces at metallurgists, the fall of stock markets, etc. “We will see all the worst things in company reports for the first and second quarters of 2009,” he reassures Alexander Laputin, head of the investment consulting department of Otkritie Financial Corporation.
Everyone is interested in the question raised by the American journalist “Is economic recovery likely?” (“Is economic recovery possible?”). However, there are already positive forecasts: “The recession will be severe, but it is possible to avoid depression. Governments have taken measures to avoid a collapse of the banking sector. Growing unemployment and business bankruptcies are inevitable. However, governments cannot afford to lose the battle to restore banking stability. If previous measures prove ineffective, others will be taken.”10
Conclusion
According to the basic forecast prepared by UN economists, the world economy in 2009 is expected to decline by 0.4 percent in the pessimistic scenario, and grow by 1.6 percent in the optimistic scenario.11 The forecast for the Russian economy is growth of 3-3.5 percent. And that's the best case scenario. According to FBK experts, GDP will not be able to grow at all, and, quite possibly, will decrease by 4 percent compared to 2008. Such negative dynamics of the Russian economy is already predetermined by a number of factors. “This is, first of all, a significant drop in the Russian stock market, which had an impact on the real sector of the economy,” notes Igor Nikolaev, director of the strategic analysis department at FBK. - The next factor is the decline in world prices for the main raw materials of Russian exports. After all, due to the contraction of global aggregate economic demand, there is no reason for these prices to increase. Another factor is the accelerated indexation of tariffs of natural monopolies, which has a depressing effect on the economy.”
As a result, due to complete uncertainty regarding the coming year, financiers are expecting a lot of surprises from 2009, and not the most pleasant ones.
When asked by a journalist about the timing of the end of the global crisis, Yegor Gaidar replied: “The basic hypothesis, which is adhered to by a significant part of the expert community, boils down to the fact that this could happen between the fourth quarter of 2009 and the first half of 2010... It is now obvious that the current crisis became the most severe since the Great Depression. They need to be managed. The world will be different now.”
Bibliography
Alex Brummer. The crunch. Random House Business Books, 2008.
Deloitte. Global economic outlook. 1st quarter 2009. http://deloitte.com/dtt/article/0,1002,cid%253D241892,00.html, 2009.
R. Preston McAfee. Introduction to Economic Analysis. http://www.introecon.com, 2006.
Introductory course on economic theory. M.: INFRA-M, 1997.
Gaidar E. “The dollar will not collapse under any circumstances.” Interview with Izvestia newspaper, February 10, 2009.
Gaidar E. Russia and the global economic crisis // Bulletin of Europe, volume XXII-XXIII, 2008.
History of world economic crises. Reference. http://www.rian.ru/crisis_spravki/20080917/151357556.html, 2008.
History of economic doctrines / Ed. V. Avtomonova, O. Ananina, N. Makasheva. - M.: Infra - M, 2000.
Macroeconomics: Theory and Russian practice / Ed. A.G. Gryaznova and N.N. Dumnoy. - M.: KNORUS, 2004.
Mamedov O.Yu. Modern economics. M: Phoenix., 1996.
Savin A. Steeplechase. Who finished in 2008 and how // Financial Director. - 2009. No. 1.
Economic theory: Textbook.- Ed. corr. and additional / Under ob. ed. Academician V.I. Vidyapina, A.I. Dobrynina, G.P. Zhuravleva, L.S. Tarasevich.-M,: INFRA-M, 2005 (Higher education).
Economic theory / Ed. V.D. Kamaeva. - M., 2001.
www.minfin.ru
1 Alex Brummer. The crunch. P.143
3 http://www.zepul.com/index.php?option=content&task=view&id=29
4 http://www.zepul.com/index.php?option=content&task=view&id=30
5 http://www.rian.ru/crisis_spravki/20080917/151357556.html
6 http://www.zepul.com/index.php?option=content&task=view&id=30
7 R. Preston McAfee. Introduction to Economic Analysis. P.56
8 Gaidar E. What a recession, creator!
9 Ibid.
10 David Kern. Is economic recovery likely?
11 http://www.financialdirector.ru/reader.htm?id=780
Basel. December 17. website - The crisis, the waves of which have been rolling over different countries for five years, has not been explained by economists within the framework of standard neo-Keynesian and neo-classical theories of business cycles. Therefore, to explain, we need to apply the well-forgotten and long-out-of-fashion theory of financial cycles, writes Claudio Borio from the Bank for International Settlements (BIS) - one of the most “fashionable” economists of our time. What is the financial cycle? For the first time after a long break, the theory (based on the views of the Austrian school, but gone far from it) was remembered in the 90s, when Japan plunged into an incomprehensible and illogical stagnation. But studying the issue did not save the world from repeating the sorrowful Japanese path.
- The knowledge accumulated over a couple of decades is enough to understand: the ultra-soft policy of the Fed and other world central banks will not help. The only way out of the crisis is for governments to take on all private debts, Borio is sure.
- Borio has written a short primer on the concept for economists accustomed to thinking of finance as a simple system of resource reallocation in which only transaction costs need to be considered:
- Think medium term rather than short term because financial cycles are much longer than standard business cycles.
- Our position in the financial cycle is most accurately shown real estate prices and loan costs The closest definition is “the self-producing interconnections of our ideas about the value of assets, risks, and financial restrictions lead to a boom and then a fall in markets.”
- . Lending is especially important in the construction and purchase of real estate, so the two components are usually interrelated. Stock prices have much less correlation with these two benchmarks.
- Also important when studying cycles are interest rates, volatility, risk premiums, bad loans, and so on. Financial cycles change less frequently than business cycles
- The financial cycle is longer than the business cycle The peak of the financial cycle is immediately followed by a crisis
- The recession after the financial crisis is worse than after the economic crisis.. Typically, as soon as the cycle reaches its apex, a banking crisis begins. During the entire study of 7 developed economies, the crisis did not immediately follow the peak only if it was caused by external losses of banks and financial institutions. For example, recent problems in the banking systems of Switzerland and Germany have been linked to the financial cycles of other European countries and the United States.
- The peak of the financial cycle is usually followed by a crisis The crisis can be predicted.
- The modern theory of financial cycles allows us to detect signs of a crisis in the future. Moreover, risks can be determined quite accurately and in real time. The clearest benchmark is the simultaneous positive deviation of the loan-to-GDP ratio and asset prices, especially real estate, from historical norms. Together, these two deviations give a clear signal - the peak is near, a crisis is about to begin.
The current financial crisis in the United States could have been predicted
- The duration of the cycle depends on government policy. The "international factor" contributed to the spread of the crisis
- An open macroeconomic policy in the context of globalization also leads to a boom: the potential of the economy is growing, there are more opportunities for rising asset prices and lending, as well as for lower inflation. Because of the latter feature, central banks concerned with inflation targeting miss the boom, which is usually a sign of rising inflation - and they simply have no incentive to tighten monetary policy. Then it is already too late - the boom is “unexpectedly” followed by a crisis.
- 2. It is lending and debt in general that are the engine of any boom, because companies allow themselves to spend and buy more. This leads to improper allocation of resources, both capital and labor. Once asset prices and cash flows begin to contract in a recession, debt becomes a drag on the recovery as households, businesses and governments scramble to save to repair their balance sheets.
- 3. It is necessary to take into account the difference between potential release models:
According to the theory of financial cycles, inflation can be stable, but output will decline or grow rapidly - this is due to financial imbalances. Inflation, however, cannot tell us anything about output.
- The release potential may be different in different models
- Finally, we need to forget everything that was taught by the theory of rational behavior of markets, which died in terrible agony during the crisis:
- It is worth abandoning the idea that the behavior of economic agents is rational and they have complete information about the state of markets. We must assume that the agents' information is incomplete.
- Current account surpluses, especially in Asian economies, led to capital outflows from these countries, which financed the credit boom in countries with current account deficits - mainly the United States, the epicenter of the crisis.
- There was more savings in the world than investments. The result of this was pressure on the interest rate - it was especially low on dollar assets, in which the surpluses of Asian countries were mainly invested. Investors, in search of greater returns, began to take on unnecessary risks - this was the cause of the financial crisis.
- You can't focus on savings. The crisis is associated with a rapid increase in the ratio of lending to GDP, and savings are only a small part of GDP.
- The US credit boom was largely financed by domestic funds or funds from other countries with large current account deficits, such as the UK. And the United States itself was a major exporter of capital.
- The cause of the crisis is a gap in financing channels in the lending structure - the flows of savings and investments will not tell us anything about this until the roast rooster bites us. When analyzing, you should rather focus not on net (inflow minus outflow), but on total capital flows.
- The unbalanced allocation of assets changed the balance of supply and demand in the money market, and also “shifted” long-term natural rates - rates corresponding to potential output. Unlike market rates, which depend on central bank policies and other factors, natural rates depend only on fundamental factors. Which, in fact, changed imperceptibly during the boom period.
How to prevent a crisis Policymakers need to combat credit booms through fiscal, monetary and macroeconomic policies. This will help curb the development of imbalances and quickly cope with their consequences. The government can thus remove what is called "excess elasticity" from the system.
- When conducting monetary policy, central banks should be guided not only by inflation, but also by other indicators of the financial market. The forecasting horizon of regulators should be more than 2 years, and the main emphasis in it should be on risks.
- Fiscal policy should be as modest as possible, because during booms, forecasts for economic growth and incomes are usually overestimated. Thus, before the crisis, the budgets of Spain and Ireland seemed quite reliable: the level of public debt to GDP was relatively low, and the budget itself was in surplus. But the government did not take into account the possible crisis (who did?) and the related problems of the banking sector, which drove them into a debt trap. If the risks of financial cycles were taken into account, then governments would not have to take on the debts of banks and they would not find themselves in a debt crisis.
- Crisis management. The main goal of the authorities at this stage is to minimize the damage and stop the spread. A variety of means are suitable here - from increasing budget spending to easing monetary policy.
- Resolving the crisis. Symptomatic treatment should be immediately followed by the main one, eliminating the causes of the crisis. The priority must be to restore the balance sheets of banks, companies and households. This will become the basis for economic recovery.
- The government needs to immediately determine how to use limited budgetary resources to help solve the problem of private sector balance sheets. Thus, banks should be provided with capital, but only subject to debt write-off and possible nationalization. Households may have some of their debt written off.
- This means an active strategy to replace private debt with public debt. At the same time, it is necessary to actively and decisively resolve all conflicts between borrowers and lenders, management, shareholders and investors. Once the risks are reduced, the economy will begin to grow.
- Too long an aggressive monetary policy - as a way to “buy time” - is contraindicated for the patient. It will likely only delay the economic recovery rather than solve the problems. This also applies to the period of low rates and an aggressive asset purchase program. The result may be a decrease in the income of financial companies and the atrophy of financial markets. In addition, the aggressive policies of central banks can drive the disease inside, making it chronic.
- The central banks themselves will be too burdened with assets. Their independence and reliability will suffer. There will be a reason to criticize them for being too aggressive in their policies. As a result, there will be even more risks, and a way out of the vicious circle will never be found. The conclusion is that monetary policy, unlike budgetary policy, is actually not effective during financial crises.
- But a depreciation of the currency, which will lead to an increase in exports, may be effective. In this case, the economic recovery will be more sustainable.