Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
Decemeber 13, 2011

"Washington's premier think tank on the global economy"
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The Peterson Institute for International Economics mourns the passing of Joseph E. Robert, Jr., founder and executive chairman of J.E. Robert Companies, renowned philanthropist, and longtime generous supporter of the Institute. As a member of the executive committee of the Institute's Board of Directors, Mr. Robert brought inspired leadership for nearly 12 years, helping to guide the evolution of the research program and governance structure of the Institute. C. Fred Bergsten, the Director of the Institute, joins with the staff and Board in extending condolences to the family and many friends of this extraordinary businessman and civic leader.
  Policy Brief
Oil Exporters to the Euro's Rescue?

Philip K. Verleger, Jr.
  Energy-exporting countries have more at risk than any other participant in the world economy if the euro crisis plunges Europe into recession. These countries would likely experience greater losses in 2012 should Europe fail. Oil and natural gas prices would plummet, and the price collapse would likely be larger than the 2008–09 decline. Energy-exporting countries therefore should be working feverishly with the International Monetary Fund (IMF) and the European Union to rescue the euro. They, along with China and other large holders of foreign exchange reserves, should lend to the IMF to help it construct an emergency lending facility with capacity of more than €1 trillion. The fund, administered by the IMF, could be used to buy bonds issued by Greece, Italy, Spain, Portugal, and Ireland. The goal should be to bring interest rates on long-term bonds down to 3 percent. Simultaneously, efforts should be redoubled to fix the economic problems in the troubled nations and restore balance to their budgets. An energy price collapse would increase disruptions in energy-exporting countries, promote economic ills in some consuming nations, such as Canada, and almost certainly start yet a third, even more violent, economic cycle.

>> Read full policy brief [pdf]

  Congressional Testimony
A New Regime for Regulating Large, Complex Financial Institutions

Simon Johnson
  Simon Johnson Recent adjustments to the US regulatory framework, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, have not fixed the core problems that brought the United States to the brink of catastrophe in fall 2008. The six largest bank holding companies currently have assets valued at close to $9.5 trillion, which is around 62.5 percent of GDP (using the latest available data, from end of Q3 2011). The same companies had balance sheets worth around 55 percent of GDP before the crisis (e.g., in 2006) and no more than 17 percent of GDP in 1995. With assets ranging from around $800 billion to nearly $2.5 trillion (under US Generally Accepted Accounting Principles, or GAAP), these bank holding companies are perceived by the market as "too big to fail," meaning that they are implicitly backed by the full faith and credit of the US government. This is a classic recipe for financial instability and fiscal calamity. At best, this can only lead to further instability in what the Bank of England refers to as a "doom loop." At worst, the United States is heading for fiscal disaster and the loss of reserve currency status.

>> Read full congressional testimony [pdf]

Leave China Out of a Trade Pact at Your Peril

Aaditya Mattoo and Arvind Subramanian
  One of the biggest challenges facing trade ministers meeting at the World Trade Organization in Geneva is how to deal with the rise of China. Ministers need to prepare for a new "China Round" of multilateral trade negotiations. China is the world's largest exporter and is set to become an economically dominant power: By 2020 the country's trade will be nearly one-and-a-half times as much as that of the United States. Some of the most contentious issues in trade over the past few years—such as the perceived "beggar-thy-neighbor" effects of undervalued exchange rates and the opaque purchasing and investment practices of government entities—have involved China. World leaders have an interest in ensuring that these issues are resolved without undermining the open trading system. Countries in the West have in the past been the drivers of trade negotiations. Now, China and the other big emerging market countries must take the lead in negotiating further multilateral liberalization.

>> Read full op-ed

Peterson Perspectives Interviews

audio  Incremental Progress in Europe, but Is That Enough?
Nicolas Véron says that it is unclear if the markets will be patient enough for the reforms discussed in Europe to be implemented in the months ahead.

audio  Is the 'Reset' with Russia on the Rocks?
Anders Åslund says the recent political setbacks for Prime Minister Putin have poisoned US relations and jeopardized prospects for improved trade relations.

audio  European Turmoil: How Big a Threat to the United States?
Edwin M. Truman explains why the US recovery is endangered by Europe and what Treasury Secretary Geithner and the Europeans might do about it.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea: Witness to Transformation
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Why the Euro Will Remain…a Different Kind of Currency

The Global Community Should Ask Europe to Abandon Unanimity on Crisis Finance

Sanctioning the Central Bank of Iran: How Effective a Step?

Thinking the Unthinkable: How to Break Up the Euro Area

Two US Economic Recoveries: One Is V-Shaped, the Other Is Not
  What Do Increasing Loan Impairment Losses Mean for Chinese Banks?

China's Carefully Managed Local Government Bond Issuance

SOEs Are Important, But Let's Not Exaggerate

Negative Real Interest Rates and Credit Tightening

The Hole in Chinese Exports
  Newt Gingrich on North Korea

Corruption in North Korea

Glimpses: the face of hunger in North Korea

Over 100 NGOs, 278 Activists Call on ROK to Act for North Korea's Human Rights

Romney on North Korea

PIIE Noted in the News and on the Web

NPR: Planet Money
Europe's New Pact
Jacob Funk Kirkegaard helps Planet Money summarize the euro area's new fiscal pact.

NPR: Planet Money
Was The Euro A Mistake To Begin With? (Part I)
Jacob Funk Kirkegaard writes that to say the euro area was a mistake ignores the fact that the initial institutional design of the euro, while flawed, can be fixed—provided the political will is present.

Wall Street Journal Real Time Economics Blog
Remaking Doha for China
Bob Davis of the Wall Street Journal comments on Arvind Subramanian and Aaditya Mattoo's latest working paper, A China Round of Multilateral Trade Negotiations.

Financial Times
EM Currencies: Going Cheap?
The Financial Times turns to William Cline and John Williamson's recent update to their ongoing fundamental equilibrium exchange rates (FEERs) study to answer the question of whether emerging market currencies are cheap enough to invest in now.

American Enterprise Institute
Putin Made Two Mistakes About Medvedev
Anders Åslund speaks at the conference, "Russia's Revolution 20 Years Later: Hopes of the Past, Expectations for the Future," hosted by the American Enterprise Institute.

In This Issue

Featured Book

Press Conference Call
The Outcome of the December 9 EU Summit and ECB Action and their Impact on Economic and Financial Stability in Europe

C. Fred Bergsten, Jacob Funk Kirkegaard, and Nicolas Véron interpret recent events in Europe, including new initiatives announced by the European Central Bank, and the outcome of the December 9 European Union summit and suggest next steps to resolve the crisis.

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