This is assuming that markets work, which is the whole crux of the argument. Way to avoid it.

Felix – Deadbeat Millionaire

He writes “The challenge is how hard it is to write down explicit artificial economies with these ingredients, actually solve them, in order to see what makes them tick. Frictions are just bloody hard with the mathematical tools we have now.” I think this is the wrong approach, though I accept many economists seem to think exactly like this. We do not (yet) have the tools to study large groups of interacting agents in real economies, so we come up with toys, which are often poor guides to policy, and also reflect the ideology of those who make them (for example, Keynesian or not).

The second point is that we do in fact know what caused the crash. It was simple criminality, greed and stupidity, on a wide scale, very like the S&L crisis of twenty years earlier. Crime pays, to a point, so real societies have agents intended to make crime expensive. The amazing thing about the US subprime crisis is the lack of subtlety in those who perpetrated it. Madoff was a genius compared with most of these people. The not dissimilar Irish property catastrophe was perpetrated by even less smart people, on the whole.

can you please help me, suggest good site for academic purposes about economics, i’m currently reading paul krugman’s how did economists get it so wrong, i also have a book, why economists are not important as garbagement. you help is really appreciated, im planning to take masteral degree in economics, im from the philippnes. please email your suggestions and help at augustrush082882@gmail.com,,,that you very much.

Prof. Suresh Deman
Honorary Director & Visiting Professor
Centre for Economics & Finance
London, Japan & IGIDR India
UNEP/UNCTAD Consultant

Abstract

Current crisis is distinguished from previous ones and noneconomic measures like social ostracism rather than economic ostracisms have been suggested. Rather then relying on consumption-led growth it is explored whether any lessons can be learned from China’s strategy by focusing on investment-led growth in three phases: (i) Infrastructure spending, (ii) focus on rural areas to stimulate demand, and (iii) speeding up of economic growth in new regions, generating housing demand leading up to consumption led growth. This strategy made China a darling of both foreign direct investment and portfolio investment suggesting while the global equity markets were in turmoil, China has emerged as safe parking lot for the global funds.

In contrast to perfect competition, theoretically allows “Invisible Hand” to guide market to efficiency regardless of moral beliefs of the traders, noneconomic interference is important under adverse selection as it can be helpful instead of harmful. Dichotomy of government solutions introducing agency problem and the costly information problem that they solve by intervention will be addressed with probabilistic-strategic interaction to explain difference between complete and incomplete interbank markets leading to different outcomes.

I Introduction
A search of literature on the notion of contagion (see, Morris (1997), Morris, Rob and Shin (1995), Chwe (1998), Durlauf (1993), and Scheinkman & Woodford (1994)] reveals that the diagnosis and prognosis of economic and financial crises are mainly based on conventional wisdom of Neo-Classical theory or on Arrow-Debreu (A-D) framework incorporating rational expectations into the models. The criticism of A-D model by Herbert Simon, Jean-Jacques Laffont and John Romer is widely accepted due to bounded rationality, asymmetric information and imperfect credit markets. Earlier Joan Robinson also criticized neoclassical theories for its too restrictive assumptions. This leaves Random Walk no longer random and the assumption of “Invisible Hand”, nowhere seem to be working in correcting failing markets. Even if one incorporates the rational expectations character into the explanation, it might lead to an inefficient solution resulting in run on the Banks.
As to the suggested solutions to the crisis, it appears Communist Manifesto has become a bedside reading of many economists and politicians around the world in search for crash programs via economic boosts to achieve consumption led growth. Krugman and Davies in their persuasive analysis argued that the Asian crisis was largely a crisis of poor financial structure and inefficient institutions. But the present crisis is more serious. Financial institutions collapsed due to reckless lending, i.e., lending at subprime rate by self-certification and without checking affordability, which fueled Housing Bubble and Credit crunch and created Toxic assets, etc.
This paper attempts to distinguish the present crises from any other previous crises, for example, Latin American, Mexican, Tiger Economies (better known as Gang of Four), and Japan and offers a strategic explanation for current crises.
Paper explores, if there is any causal nexus between various causes like moral hazard, adverse selection or some idiosyncratic reasons or self contradictions of free market economy. Further, rather then relying on consumption-led growth, I explore whether it is possible to learn lessons from China’s strategy to overcome the crisis by focusing on investment- led growth in three phases; namely, (i) Infrastructure spending, (ii) focus on rural areas and the interiors to stimulate demand, and (iii) speeding up of economic growth in new regions, generating new sources of housing demand on the back of continued urbanization leading up to consumption led growth. This strategy made China a darling of both foreign direct investment and portfolio investment which clearly suggests while the global equity markets were in turmoil, China has emerged as parking lot for the global funds.
II. Causes of Financial Crises
Since the meltdown of financial markets began in 2008, 130 banks have failed in United States alone. To understand the dynamics of this crisis one has to look into retrospect. In 1980s and early 1990s, the United States witnessed 750 Savings and Loans Associations (some of which owned by Bush family) failing. SLAs specialized in accepting deposits and expanding residential mortgage loans. Deregulation in early 1980 under Regan-Thatcher ear allowed them to lend to increasingly risky borrowers who defaulted on the loans once housing bubbles busted. However, the SLA crisis remained local and with government support successfully rescued the depositors for just $120 billion in tax payers’ money.
In sharp contrast, the reasons identified for the US financial crisis engulfing the whole global financial and economic system boil down to a single cause relating to a complete failure of the financial market regulatory mechanism due to the complicity between the regulatory authorities and dubious financial institutions operating through “shadow financial economy” based on illegal speculative transactions of complex financial instruments, indirectly placing the risky mortgages on the balance sheets around the world. However, the moot point seems to be whether any lessons have been learnt from the crisis, and efforts made to revamp the global financial architecture by plugging the loopholes, or as it seems now, that again there is business as usual, as could be seen in the revival of risky financial dealings by the same financial institutions that were responsible to cause the global financial collapse. Defaults in housing market had significant impact on all those holding these derivatives.
In the housing market there are two classes of borrowers, prime and subprime and three types of Banks, Central & Commercial Banks (Federal Reserves, Bank of Scotland, RBI & State Banks) Retail Banks (SLA, Cooperative Banks & Building Societies) and Investment Banks (Lehman Brothers, JP Morgan, Gorman Sacks, City Group, etc). The former of borrowers exhibiting low risk of default due to good credit history and the latter high risk due to past defaults or low and unstable income. Banking regulations forbid commercial banks from lending to borrowers at subprime rates. Instead, brokers and mortgage companies who often are affiliated to banks and other prime lenders, lend them mortgages at an interest rates 2-3% higher than the interest rate in the prime market. Due to the economic boom in the housing market, residential subprime mortgages increased from less than $100 billion in 1995 to $1.5 trillion by 2006 and constituted 15% of total mortgages. On the other hand, Adjustable Rate Mortgage (ARM) loans increased from 28% of total subprime mortgages in 1998 to 50% in 2006. A key factor driving the expansion of mortgages was the ability of lenders to sell their mortgages to other shadow investment banks, such as Lehman Brothers, Goldman Sachs, Meryl Lynch, etc., which do not have enough capital and are not regulated by financial authorities like banks do. This insulated them from any default risk and emboldened them to court ever riskier borrowers, often without checking their sources of income.
A financial institution buying mortgages did not just hold them, but it packaged mortgages of varying risks and returns into a mortgage-backed security (MBS) and parceled it into bonds of smaller denomination of different seniority and returns. For example, consider an MBS backed by $20 million worth of mortgages. The institution would identify five levels of seniority with associated risk and return and issue 4,000 bonds of each type with face value of $1,000 each. The Bonds with the highest seniority rated as AAA by rating agencies would receive the lowest return and also bear the lowest risk of default. Higher the level of seniority bonds lower is the risk and would have the next lowest risk and return. Bonds with near the lowest level of seniority received junk rating. If there was a default on some of the mortgages underlying the MBS, the lowest seniority bonds would be the first to stop receiving returns. The securitization process thus produced some AAA rated bonds in which even commercial banks could lend although, otherwise forbidden from lending to borrowers at subprime rate.

The financial market took this process of securitization one step forward and a financial institution would take bonds of middle level seniority (BBB) belonging to different MBSs and packaged them into a collateralized debt obligation (CDO). This mechanism then would allow them to issue and sell secondary CDOs of different seniority and returns along the lines of bonds based on MBS. This was an indirect way to improve the ratings as Ratings agencies would give the secondary CDOs of highest seniority rating (AAA).

In accentuating the crisis, next stage is the leveraging of investments. For every dollar invested in MBSs, CDOs or other derivatives, Lehman Brothers borrowed $30 from market by selling short-term commercial paper. Since short-run interest rates were significantly lower than the return on mortgage-backed derivatives, it could service the debt on the commercial paper and still make a great deal of profit. However, as the housing market started declining, returns on the derivatives began to exhaust and this undermined the Lehman Brothers’ capacity to service and refinance the short-term debts. This contributed to its eventual default and it had a great deal of impact on the balance sheet of Lehman Brothers’ lenders who were holding commercial paper and thus made them vulnerable to more default. Further, the credit default swap (CDS) added an additional important dimension to the financial crisis that provided insurance against the risk of default in return for a premium. Those who were holding Lehman Brothers’ commercial paper could go to the American Insurance Group (AIG) and buy CDSs from it in case Lehman Brothers defaulted. In fact, even those not holding the commercial paper but wishing to bet against Lehman Brothers could buy such CDSs. As uncertainty kept on increasing, CDSs market exploded and reached over $50 trillion. Given Lehman Brothers’ default after defaults on other derivatives, AIG had to make good on CDSs worth multi-billion dollars. Mody had to make a downward adjustment in its credit rating, which necessitated an additional $14.5 billion in collateral, sealing fate of AIG. The sequence of events left all financial institutions unwilling to part with their liquid assets unless they need them to cover cash shortage caused by defaults on their assets.
They also began pulling out investments elsewhere including in the emerging market economies to raise cash. The financial markets were frozen completely and even firms selling cars, furniture and other durables goods found themselves out of lenders adding fuel to the fire.
On the demand side, in the 2000s, the adjustable rate mortgage (ARM) or variable rate (VR) loans (carried a lower teaser rate), in the first 2 to 3 years jumped to a much higher level, subsequently flourished. Borrowers counted on equity in buildings and credit during the low interest rate period and then replacing the ARM by a low fixed rate in the prime market. But this only worked during an economic boom. If house prices crashed, no equity is being accumulated, and the jump in the interest rate threw the borrowers into default as well.
The Wall Street hurricane thus reached the High Street and
given the derivatives traded globally, financial institutions in countries with weak regulatory system also became invested in them making the local crisis, a global crisis. However, the above Krugman, Pangaria and Reddy kind of analysis gives us a superfluous explanation of the crises as they do not seem to accept that the crises were systemic of the market economies rather than systematic.
III. Previous Crises and the Global Crises
The financial and banking crises have been around us for centuries and always either preceded or followed by changes in government policies. For example, during the great depression of 1929-1934 security market collapsed and the governments had to intervene in a big way to rescue the markets. Deregulation and liberalization started in early 1980s (better known as Reagan-Thatcher era of deregulation) which generated waves of takeovers across the world and a number of economies of Latin America, Mexico, and Asia were unable to cope with it and led to Latin American crisis of 1982-84, Mexican crisis of 1994-95, financial crisis of Japan in 1990s and the crisis of Tiger economies of 1997-98.
Tiger economies with the injection of large amounts of foreign investment capital, grew substantially between the late 1980s and early- to mid-1990s. They then experienced a financial crisis in 1997 and 1998. Some of the reasons for this period of financial turmoil included huge debt-servicing expenses and an inequitable distribution of wealth, as most of the wealth remained in the control of a few elite.
Current crises have puzzled many economists, statesmen and politicians all over the world since there is not unique reason which can explain the crises and therefore there cannot be a unique solution. The explanations do not seem to be consistent with either the view that financial crises are random events, unrelated to changes in real the era economy, for example, the Classical theories of “Mob psychology” or “Mass hysteria” e.g., Kindleberger (1978), or with the modern view that bank runs are self-fulfilling prophecies developed as “sunspot” phenomenon developed by Diamond and Dybvig (1983) and Bryant (1980). It is not consistent with an alternative view that financial crises are an inherent part of the business cycle as suggested by Mitchell (1941), Gorton (1988) and Allen and Gale (1998a). However, the foundation of most of the proposed solutions appears to be grounded in the Neo-classical or Keynesian framework which lacks correct theory of distribution, strategic interaction and rational expectations. Their analysis does not tell the readers how the nature and gravity of the present financial crises is different from any other previous crises. They do not mention underlying restrictive assumptions of their models explain the crises. In fact, most of the above models are based on complete information, rational expectations, excluding effect of international currency markets, identical consumers, homogenous consumption goods, constant aggregate demand for liquidity, enough liquidity in the banking system as a whole, every region take a small hit not to cause a global crisis, etc. Such analysis and explanation hides the self-contradictions and failure of the self correcting mechanism within market economic system (some like Krugman characterized the crises as Bush’s derangement syndrome). When one looks at the economic analysis of current crises, it reminds of Mrs. Joan Robinson’s characterization of Neo-classical explanation which she puts it very eloquently as follows:
“The economist’s case for free trade is deployed by means of a model from which all relevant considerations are eliminated by the assumption”.
The present crisis is definitely qualitative different from earlier crisis of Latin America, Mexico, Japan and Asia. Previous crises probably were not systemic cases for international economy and financial systems as a U.S and IMF intervention may have prevented them. However, the current crisis is systemic and more serious because it has been persisting for a long time since the economic depression of 1929-34. In fact, G20 and rest of the world have acknowledged that no individual country can make a difference. It has raised serious issues for the regulators and supervisors and the severity of crises can be gleaned by the fact that even all times enemies like, Russia, China, US and UK were forced to come together to look for solutions.
(i) CURRENT CRISES IS DIFFERENT BECAUSE IT BECAME SYSTEMIC
Current worldwide crises triggered in 2008 with the bubble burst in housing market although an announcement of 50 billon package to boost the mortgage marker in Western Europe signaled that worst was round the corner and meltdown of financial market began. Despite G20 frequent meetings in Washington, London and Pittsburgh and partial success from $1 billion ‘Cash for Clunkers’ package, results of electro-cardiograms of US & UK economies do not seem to be functioning very well. US Congress is asked for an additional $2 billon boost, unemployment rate in US is up by 9.5%, and gasoline prices reached $4-5 per gallon in spite of a decline in crude prices to $50 per barrel and trade deficit with China accumulating US Treasury Bonds worth US$ 790 billion. Similarly, unemployment rate in UK and Japan has increased by 9.6% (14 million) and 5.4% respectively and GDP declined by 2.5%.
Recently, UK Treasury Secretary pledged overall support to Royal Bank of Scotland (RBS) and said, it will remain “broadly the same” and the new deal would provide “better risk sharing and greater incentives to exit”. This measure would be the most cost effective to the public purse and the new deals were “better for the taxpayer, better for the banks and better for the economy”. The Treasury announced earlier that it would put another £25.5 billion into Royal Bank of Scotland and £5.7 billion into Lloyds Banking Group – over five times the cost of annual military operations in Afghanistan and Iraq. The Treasury Secretary claimed that the changes mean there will be more competition among high street banks and the taxpayer will get rid of about £300 billion of “toxic” liabilities. For the first time, he gave a rough idea about the quantum of toxic assets although like the WMBs he has yet to identify where these toxic assets are?
Shadow Chancellor, George Osborne argued that the Government measure would cost £2,000 per family which was a “new world record as the single biggest bail-out of any bank anywhere in the world”. He also accused the Chancellor with not even being prepared to put the full figure – £39.2 billion – before the Commons. This extra money comes a year after the Government spent £14.5 billion on shares in Lloyds and pumped £20 billion into RBS to prevent a collapse in the banking sector. The new money is part of a restructuring forced by European Union competition rules. RBS is selling branches in England and Wales, NatWest branches in Scotland, the Churchill and Direct Line insurance arm and parts of its investment banking business. Lloyds will offload branches in Scotland, Cheltenham & Gloucester branches, and the Intelligent Finance online business.

M2 Economics Unabated
Although India was not affected by the crises seriously as much as countries of G20 the prediction of economic growth has been somewhat intriguing as it has varied a great deal since the formation of UPA government under Congress Party leadership. Just after elections, Dr Manmohan Singh claimed to have 8-9% growth then Deputy Chairman, Dr Montek Singh estimated this to be 6.5%, then 7.5%, 8% and recently projected to 9%. Despite the fact, last Indian budget appeared to be an obituary rather than real hope of glorious fulfillment of election manifesto forecast of growth for Indian economy seems to follow a U-shaped curve contrary to all variations of conventional wisdom in economics. Regardless of rate of growth, India’s growth is going nowhere as it is driven by growth of energy intensive consumer durable goods and financial sector and very little growth in other sectors (e.g., agriculture) leading into emergence of two India, rich and poor. Mechanism which is causing this is: (i) output growth is higher than the growth in employment, (ii) efficiency, i.e., productivity growth, (iii) sensitivity of financial sector due to uncertainties of financial markets, and (iv) increasing disparities between profits and wages. Hence India’s growth strategy continues to accentuate inequalities of income and creating a unique demand pattern (a black hole). History of past financial crises has witness that some of the reasons for the period of financial turmoil included huge debt-servicing expenses and an inequitable distribution of wealth, as most of the wealth remained in the control of a few elite. Unfortunately, some consciously and the so-called left unconsciously caught into the Neo-Classical and Keynesian cobweb.
India is relying on the projects, which also include a national job guarantee plan and an urban renewal mission, to keep the economy ticking, rather than on a big new stimulus package. The sign of any real boost for stimulating the economy from the quagmire of worldwide recession is nowhere near a real recovery as there are no signs of stimulation in either investment or consumption demand. To add insult to plight of common recently Dr Choudhary, a Member of the Indian Planning Commission told the media that the medicine (a mere 5% fiscal stimulation) has cured the problem despite Bank of Scotland’s Chairman’s statement that, “UK economy is bumping along the bottom”. How one could think of a cure of Indian economy without the global recovery. In defence of this criticism, Dr Manmohan Singh & Dr. Montek Singh (M2- M Squared Economics), in a joint enterprise, relied upon the external help in case a further stimulation was needed, without realizing that the developed countries themselves are heading for a deep crisis. In fact, prior to eruption of global economic volcano, under the M2 – Economics programs backed by World Bank trained Economists (Dr Reddy, Dr Panagaria, Dr Chaudhary & others) claimed double digit growth of India economy, which had taken India into double digit inflation. Once again, India is well ahead of double digit inflation (over 18% increases in prices of basic consumption goods). Clearly, India hopes to ride out economic slowdown without a major stimulus package although India’s policy makers continued to suffer with the ‘Double digit growth obsessive compulsive syndrome’ due to China’s double digit growth in the past and recent remarkable recovery.
In layman terms, one can summarizes the crisis as follows: Too much borrowing by consumers, too much lending by banks and too much spending led to the cardio-arrest of banking & financial markets. In fact, most economies were shrinking (falling prices and decline in GDP) and it appears crash programs are crashing up. A lack of capital flows and inadequate financial structure would always signal financial trouble. Further, economies are now global and so are capital flows. But our regulatory structure still continues to remains regional and national. Despite outcry for globalization of markets our financial and accounting system remain different and unequal. I have summarized distinguishing characteristics of current crises with previous ones which are as follows:
• It is longest & deepest since the Great depression of 1929-34
• Delayed economic recovery, volatile oil prices
• uncertainties of financial markets;
• Competitive devaluations;
• Protectionist moves by US and other countries;
• Further institutional shocks, especially in banking systems;
• Problems in inter-bank markets;
• Political problems (witnessed in G20 submit in London);
• Japan, UK, US, France, Germany & many other countries (wide spread).

(ii) CURRENT CRISES AND ITS SIMILARITY WITH JAPANESE CRISIS

In the 1990s, Japan experienced a financial crisis after the bubble burst although the seeds of the crisis might have been sown during the financial deregulation in the 1980s before the formation of asset bubbles. When the gap between competitive pressures in the financial markets and a “convoy” style of banking supervision and regulation that, in effect, ensured the viability of the weakest banks became unsustainable, the crisis erupted. It may be argued that the crisis was accentuated by the formation and bursting of the bubble. It was an unprecedented crisis in terms of severity. The common features of the current financial crisis and the Japanese experience are as follows:
• Nature of the debt burden, asset values;
• State of Banking sector;
• Japanese/Asian exposure;
• Deflation, recession and shrinking (about 2.5-3.5%);
• Restructuring, especially in financial sector;
• Recovery packages (Got to be huge- Japanese lesson);
• Political factors.

If the above concise summary is correct then question arises why other members of G20 have not leaned any lessons from the Japanese crisis. Surprisingly, economists and politicians continued to engage in an exercise in naiveté to rely and advocate free trade, liberalization and globalization to rest of the world although they themselves now forced to adopt protectionist measures to avoid the present crises. However, as Professor Krugman (2009) pointed out there was a telling moment in 2005, at a conference held to honor Greenspan’s tenure at the Federal Reserve. One brave participant, Raghuram Rajan of the University of Chicago, surprisingly, presented a paper warning that the financial system was taking on potentially dangerous levels of risk. He was mocked by almost all present – including, by the way, Larry Summers, who dismissed his warnings as “misguided.”

IV Moral Hazard & Adverse Selection and the Global Crises
Credit market faces two main problems, namely, (i) moral hazard, (ii) adverse selection. First problem arise because the lenders are unable to observer borrowers choice (i.e., their credit worthiness) subconsciously or ignores it in the expectation of higher interest (subprime lending) consciously. Second, problem arises because of great deal of heterogeneity among borrowers. While the lenders might have a good idea of about average characteristics of the pool of potential borrowers (knows only the probability distribution of characteristics of borrowers), they may not have complete and prefect information about individual characteristic of borrowers (i.e., actual type of borrowers). This leads to a problem of adverse selection as the lenders are unable to distinguish between good borrowers and bad borrowers due to asymmetry of information.
A typical real world example of a bank loan is as follows: Suppose two borrowers came to bank for an unsecured loan of $20,000 to put a down payment on purchase of a house. Normally, Banks do not lend money to put a down payment on a mortgage and can lend only 3-4 times of borrower’s salary or income depending on the practice and policy at the relevant time. One borrower is prepared to pay 10% interest and the other 100%, which one should the lender chose? I will address this question in full paper.

VI. Stimulation Package and the Global Crises
Since late 2007 many countries of Western Europe and US have given economic boosts and introduced their strategies, initially to save the mortgage market (i.e. partial nationalization of financial sector), repeated stimulation packages (Cash for Clunkers, etc.) and the Financial Regulations Authorities have adopted tight financial regulations (i.e. plugging loopholes by swallowing poison pills) rather than conventional measures of laissez fair economy relying upon self-correcting mechanism underlying theories of “Random Walk” and “invisible Hand”. A Bar diagram 1 and Table 1 below summarize various stimulation packages and strategies for some G20 countries and China. The size of China’s stimulation package is over 4 trillion Yuan ($586 billion) or 13.3 percent of 2008 GDP over time frame of November 2008 to end of 2010. Rollout began in fourth quarter and strategic focus of the stimulation is 37.5 percent on roads, rail and water; 25 percent on post-earthquake reconstruction; 10 percent housing; 9.25 percent on rural infrastructure; 9.25 percent on economic upgrading; 5.25 percent on environmental protection; 3.75 percent on health and education. Although senior officials are pleased with initial impact; will watch data before deciding whether more is needed, there is a plan 2. In contrast to China, in India rollout started with 0.4% of GDP, which increased to 5% of GDP in the annual budget of 2009. The focus of the package is limited to fiscal measures to stimulate Industrial production and consumption demand by tax cuts and subsidies. Although domestic demand has not been affected seriously as in other advanced countries, banks have not been affected as much and on the contrary the slowdown provides an opportunity to invest in technology and diversify both regionally and globally and yet, banks are unwilling to lend, consumers are unwilling to spend and investors are unwilling to invest.” Although continuance of stimulus packages can be criticized for widening the fiscal deficit and crowding out private investment as government borrows more from the market, it is justified by the premise that minimizing slowdown is more important than crowding out private investments. Despite this there are no signs of more stimulus package to come except the Finance Minister said if more needed they would borrow from abroad without specifying from whom.

Bar Diagram 1
Many countries across the world are rolling out fiscal stimulus packages, hoping the tax payers’ funds will boost demand, limit unemployment and prevent a deeper downswing of economies. In submit of G20 leaders, US was pressing for a bigger boost from other member countries but EC countries said it has done enough unraveling a rift that made it difficult to produce a clear and convincing messages of unity. IMF officials said that discretionary fiscal stimulus so far amounted to around 1.8 percent of GDP for 2009 and 1.3 percent in 2010 at G20 level, short of the annual two percent that they would like to see. Discretionary stimulus package amounted to 2.0 percent of GDP in 2009, double the combined 1.0 percent discretionary stimulus of the four biggest European economies (Germany, Britain, France and Italy), according to IMF estimates which put China’s stimulus at 3.2% (13.3% in 2009) of GDP and Japan’s at 1.4% (2% in 2009) in 2008. The estimated impact was an aggregate G20 gain of anywhere between 0.4 and 1.3 percentage points of GDP in 2009, and 0.1-0.2 percent in 2010, though the impact of total fiscal expansion (including so-called automatic stabilizers) is 0.8-3.2 percent in 2010 and 0.1-0.9 in 2010. However, the realization falls short of estimated figures.
Strategies of G20 countries
United Sates UK Germany France Italy
Size: $787 billion, or about 5.5 percent of GDP.
Size: 20 billion pounds ($29 billion), over 1 percent of GDP.
Size: 81 billion Euros ($110 billion) officially for two packages, or 3.25 percent of GDP. Size: 26 billion Euros ($35 billion) , 1.3 percent of GDP
Size: circa 7.0 billion Euros ($10 billion), 0.4 percent of GDP

Timeframe: 2009-10 but tax cuts spread over several years. Timeframe: three years from late 2008. Timeframe: Two-year 2009-10. Timeframe: 2009 principally. Timeframe: 2009

Focus: $287 billion in tax breaks, $500 billion in spending projects and money for social programs. Focus: mainly on sales tax cut (12.5 billion pounds worth, but also includes three billion pounds of extra capital spending) Focus: First package (31 billion Euros) includes: a new lending program of up to 15 billion Euros for state development bank KfW; 3 billion for building renovations; 3 billion for infrastructure projects; 2 billion for transport investment; tax incentives to buy new cars and an increase in the amount that is tax deductable for house repairs. Focus: mostly public investment projects, also 1 billion Euros for car sector, 1.8 billion Euros for construction industry. Focus: tax breaks for poorer families, firms, fiscal incentives to buy cars, white goods, furniture

Rollout: signed into law in February. Obama has already told Treasury to get employers to reduce payroll withholdings.
Rollout: began last December
Focus: second package (50 billion Euros) includes: 18 billion Euros in investments; tax relief of 2.9 billion Euros in 2009 and 6.05 billion in 2010; measures to boost demand for cars worth 1.5 billion Euros; health insurance contributions will also be cut; the package also includes credit guarantees of up to 100 billion Euros to help firms survive the credit crunch
Rollout: Both approved by parliament and being rolled out Rollout: already in place
Extras: Separately, 6 billion Euros in loans to car makers PSA Peugeot Citroen and Renault; strategic investment fund (FSI) with 6 billion Euros, to invest in hardhit companies and already used in part for car parts manufacturer Valeo
Rollout: began January 2009

More to come? No sign of that.

More to come? Yes, more expected in April budget
More to come? No talk of it
More to come? Open question. Opp. calling for cons. stimulus. Econ Minister Christine Lagarde says important to work on existing package before a new plan is intro. More to come? No. Economy Minister Giulio Tremonti says he is skeptical of large stimulus programs. Recent announcements about project to build bridge to Sicily and promote home repairs have no figures/dates attached and no clear signal so far that new money involved.

COMPARISON OF CHINA & INDIA STIMULATION PACKAGES & STRATEGIES
Japan China India
Size: 12 trillion yen ($122 billion) in three stimulus packages, 2 percent of GDP. Size: 4 trillion Yuan ($586 billion), or 13.3 percent of 2008 GDP. Size: 61 billion $, or 5% 2009 GDP
Timeframe: current and next fiscal year, up to March 2010. Timeframe: Nov 2008 to end-2010. Time Frame: 2009-2010
Focus: payouts to individuals to boost consumption, job-support measures, tax breaks for housing mortgages. Focus: 37.5 percent on roads, rail and water; 25 percent on post-earthquake reconstruction; 10 percent housing; 9.25 percent on rural infrastructure; 9.25 percent on economic upgrading; 5.25 percent on environmental protection; 3.75 percent on health and education. Focus: Stimulation of Industrial production and consumption demand by tax cuts and subsidies.
Rollout: began October 2008, second, third packages being rolled out this month though some spending still pending formal parliament approval of state budget Rollout: began in fourth quarter of 2008. Rollout: Began with 0.4% in 2008 then it increased to 5% of GDP in 2009 after the elections.
More to come? Government seeking new stimulus measures with some ruling party lawmakers calling for spending of further 20-30 trillion yen More to come? Senior officials are pleased with initial impact; will watch data before deciding whether more is needed. More to come? No sign of that. Pranabda said if more needed would borrow from abroad. From whom and how?

In spite of many bottlenecks of recovery from global downturn, France and German economies showed some signs of recovery. However, partial success of some of these crash programs and economic boosts, quick recovery does not seem to be on the menu although claims have been made in the media that, “worst is over” or “financial crisis is bottoming out” or “no free fall in Global economy”, etc. Markets have yet to see what happens, when stimulation packages come to an end after 18 months or so and putting back VAT in January 2010.
VII. Conclusions
It is an irony IMF &WB under G8 leadership, at one time prescribed universal medicine of austerity programs for third world countries, now are openly advocating same measures for themselves. In fact, corporate leaders and politicians are talking in same tune stressing need for being sensitive to public mood to gain their confidence. In contrast, Mr. Subbarao, Governor of RBI opened up India’s financial sector without any mechanism to guard against the growth of a shadow financial economy in the country which primarily triggered the crisis at first place. Such measures appear to help the US and Western European economies more than the domestic market. Further, in course of slow recovery, most governments have to deal with inflation on a war scale. They have to increase interest rates and cut public spending to curb inflation, which is a dangerous thing to do.
There is a public outcry for a healthy banking industry to be supportive of international trade which drives wealth creation around the world for the benefit of developed and developing nations alike as one of Banking’s principal social purpose. It has been strongly suggested that compensation scheme should discourage inappropriate risk-taking and bonuses should be directly linked to the overall performance of the company as a whole rather based on profit and loss performance of any individual. However, contrary to pre G20 summit (at Pittsburgh) pronouncement by Lloyd Blankfein, Chairman and Chief Executive of Goldman Sachs and Stephen Green, Chairman of HSBC, recent windfall for Goldman Sachs, JP Morgan and CitiGroup tells a different story as corporate sharks are already claiming share of their pie for which the taxpayers via government have paid heavy price without the unknown benefit to them. In short, one can summarize that ‘socialization of losses and privatization of profits’ has become a norm in globalized markets.
In above background some nonconventional (i.e., noneconomic) remedial measures seems to make more sense to overcome adverse selection and moral hazard such as social ostracism rather than economic ostracisms. Steps are also taken to limit the size and operation of Banks and to avoid risk in future focus on recapitalization rather than on bonuses. In contrast to perfect competition, which theoretically allows an “Invisible Hand” to guide the market to efficiency, regardless of moral beliefs of the traders, noneconomic interference is important under adverse selection as it can be helpful instead of harmful. However, there appears to be dichotomy of government solutions introducing agency problem and the costly information problem that they solve by intervention and examine spread of crisis in a probabilistic model using non-cooperative and explain the difference between a complete and incomplete interbank market leading to different outcomes, i.e., local and global crises.