by James D. Hamilton, reproduced from EconBrowser.com The Federal Reserve Bank of New York announced on Thursday that it had sold the last remaining securities from its Maiden Lane III portfolio, successfully closing the chapter on its assistance to insurance giant AIG. I thought this would be a good occasion to review the various measures that the …
By EconMatters Spain finally bowed to the rising interest rates and the billions of euros worth of bad loans at Spain’s regional governments to ask for a loan. After emergency talks between Euro Zone finance ministers on Saturday, Spain will get up to $125 billion from the European Union (EU) to bail out its banking system.
by Aaron Tornell & Frank Westermann
With economists’ eyes fixed squarely on Greece, this column tries to solve a puzzle. Since 2008, tens of billions of euros have fled Greek bank accounts. Yet somehow the country still has a current-account deficit. Where has this money come from?
Normally, things don’t work like this for nations in crisis. Greece has experienced severe capital flight yet its current-account deficit has remained almost unchanged; its international reserves are little changed. On net, €24 billion of private capital left the country between 2008 and 2010, but Greece still managed to accumulate a €85 billion current-account deficit – 12% of GDP.
Where has the money come from? The answer can be found by looking at the balance of payments statistics.
The bail-out plan brings no real news. Europe keeps on fighting the crisis by keeping Greece on financial life support and demanding austerity. There is still no coherent theory to explain how this exactly should work.
What if all goes wrong in Europe? How bad could it actually be? What’s the worst case scenario for the world economy, and do the twin debt crisis in the US and Europe have the potential to drag down China too?