At this week’s Humphrey Hawkins hearings, Congress gets its six-monthly chance to press Fed Chairman Ben Bernanke on the future conduct of US monetary policy. It does so at a time when there can longer be any doubt that the US economy is in the throes of its worst economic crisis in the post-war period. It also does so at a time when large swathes of the US financial system are insolvent and when credit markets remain largely frozen.
The current global financial market crisis will claim its share of casualties. Prominent among them may be any further expansion of the European Monetary Union. It is also more than likely that today’s global financial market crisis will mark the end of any serious challenge by the euro to the U.S. dollar as an alternate international reserve currency. Not only will a deep and long global economic recession put severe strain on the current fifteen-country euro area, it will also expose the acute external vulnerabilities of those twelve Eastern European countries that are aspiring to full euro area membership.
Among the more probable long-run casualties of today’s global and financial market crisis will be any further expansion of European monetary union. It is also more than likely that today’s global financial market crisis will mark the end of any serious challenge by the euro to the US dollar as an alternate international reserve currency.
In response to the global financial market crisis, G-7 policymakers have taken dramatic, albeit belated, steps to arrest a global financial market meltdown. Yet, despite these efforts, it is far from clear whether these measures will be nearly enough to prevent the worst global economic recession in the post-war period. It is also not clear whether these measures will be sufficient to either forestall the further nationalization of a wide swath of the global banking system or to prevent an excessive over-regulation of the financial system.
Larry Summers is certainly right in asserting that the impact of Hank Paulson’s US$700 billion plan on the US fiscal position need not be very large and it will depend very much on how it is deployed and how the economy performs. He is also right in arguing that, in the present difficult economic circumstances, […]