Must-Read: Thorstein Beck et al.: The Global Crisis Special Issue of Economic Policy: “The Global Crisis was a watershed… for economies around the world… [and] for economics as a discipline…

…[This] special issue of Economic Policy… chart[s] the evolution of economists’ thinking on the causes of and cures for the Global and EZ Crises…. A large literature has explored commonalities across crisis countries, relating to macroeconomic imbalances, financial sector fragilities and policy variables. Applying this to the the euro periphery countries shows that their pre-crisis domestic vulnerabilities resemble those of earlier crises…. The extensive knowledge accumulated through these past banking crises… could have helped to both provide early warning signals and design recovery policies…. Evidence from the Great Depression shows that the decision by many countries to use fiscal stimulus policies was the right one….

International capital flows were an important part of the pre-crisis boom as much as their retrenchment was an important dimension of the crises…. Current account imbalances were financed mostly by intra-Eurozone capital inflows, which permitted external imbalances to grow over many years until the EZ Crisis hit…. Iceland has often been pointed to as having taken a very different approach to resolving the crisis, with the government cutting banks loose early on (with the result that the Icelandic government never lost its investment grade credit rating)…. The Greek sovereign debt crisis was at the core of the EZ Crisis…. One of the countries suffering from ‘contagion’ of the Greek debt restructuring was Cyprus….

Early on, observers noted the difference between the rapid and coordinated reaction of monetary policymakers to the crises – providing ample liquidity to unfreeze markets on the one hand – and the uncoordinated and rather inefficient reaction to bank failures on the other…. In the absence of bank resolution frameworks that allowed an effective and swift intervention into failing banks, most European countries (with the notable exception of Iceland) decided in 2008/9 for bailouts in the form of public recapitalisation…. Only large recapitalisations and infusions of common equity are associated with higher total regulatory capital ratios and sustained loan growth. These findings send the important message that if you bail out, you better do it well!…

The deadly embrace of sovereign and banks has been at the core of the EZ Crisis. This vicious cycle started in January 2009 when the nationalisation of Anglo-Irish by the Irish government showed the limitations of fiscal support for national banks…. The banking union is partly a response to this deadly embrace, although many observers would argue that it has not completely solved the problems….

The papers included in this special issue are just a sample… have… been an important source for the crisis consensus narrative…. Stay tuned for more…