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  • Author: Thomas Grennes
  • Publication Date: 01-2013
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The value of government debt relative to the size of the economy has become a serious problem, and the problem is likely to grow in the future. Total debt of the U.S. government relative to gross domestic product increased substantially since the financial crisis and the Great Recession that began in 2007, but the debt ratio has been increasing since 2001. Gross debt relative to GDP increased from 55 percent in 2001 to 67 percent in 2007 to 107 percent in 2012. Comparable figures for debt held by the public (net debt or gross debt minus debt held by various government agencies) were 80 percent in 2011 and 84 percent in May 2012 (IMF 2012). As a result, the debt ratio is now the highest in U.S. history, except for World War II, when it reached 125 percent of GDP (Bohn 2010). U.S. debt is also high relative to the debt of other high-income countries, and projections of future debt place the U.S. government among the world's largest debtors (IMF 2011, 2012; Evans et al. 2012). Gross debt consists of all the bonds issued by the U.S. Treasury, but a broader measure that includes contingent debt results in a much larger debt (Cochrane 2011). Contingent debt includes unfunded obligations related to Social Security, Medicare, Medicaid, and loan guarantees to agencies such as Fannie Mae and Freddie Mac, and these obligations are so large that they have been described as a “debt explosion” (Evans et al. 2012). The sovereign debt crisis of the European Union has similarities to the U.S. debt problem, but it also has significant differences, as will be shown below. Interestingly, the poorer countries of the world that have frequently experienced debt problems in the past, have avoided major debt problems so far.
  • Topic: Financial Crisis
  • Political Geography: United States, Europe
  • Author: Jeffrey M. Lacker
  • Publication Date: 06-2012
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The financial crisis of 2007 and 2008 was a watershed event for the Federal Reserve and other central banks. The extraordinary actions they took have been described, alternatively, as a natural extension of monetary policy to extreme circumstances or as a problematic exercise in credit allocation. I have expressed my view elsewhere that much of the Fed's response to the crisis falls in the latter category rather than the former (Lacker 2010). Rather than reargue that case, I want to take this opportunity to reflect on some of the institutional reasons behind the prevailing propensity of many modern central banks to intervene in credit markets.
  • Topic: Financial Crisis
  • Political Geography: United States
  • Author: Peter J. Wallison
  • Publication Date: 06-2010
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: It is popular around the world to blame the financial crisis on the United States. But before we identify this as the usual anti- Americanism, we should perhaps look more seriously at our country's housing policies. Unfortunately, there is a strong argument that the financial crisis is indeed the fault of the United States—an artifact of the housing policies that this country has followed since the early 1990s. These policies produced an unprecedented number of subprime and other nonprime mortgages (known as Alt-A), and when the housing bubble topped out in late 2006 and early 2007, these loans began to default at unprecedented rates. In my view, the severe losses associated with these defaults caused weakness of Bear Stearns and AIG—resulting in their rescue—the failure of Lehman Brothers, the severe recession we are experiencing in the United States today, and ultimately the financial crisis itself.
  • Topic: Financial Crisis
  • Political Geography: United States
  • Author: Mark Calabria
  • Publication Date: 06-2010
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Charles Rowley and Nathanael Smith have put together a brief, yet extensive, study comparing America's Great Depression and the recent financial crisis. Their focus is on both the economics and the politics behind these events. With both, they demonstrate how each was a failure of government, not of the market. The book concludes with several recommendations for addressing our nation's current economic and fiscal situation. The most original contribution of their work is in bringing a Public Choice framework to evaluating the financial crisis.
  • Topic: Economics, Financial Crisis
  • Political Geography: United States
  • Author: Miranda Xafa
  • Publication Date: 09-2010
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: More than two years on, the impact of the financial crisis that erupted in August 2007 is still being felt as the global economy emerges from the Great Recession. The crisis intensified dramatically after the bankruptcy of Lehman and the rescue of insurance giant AIG in September 2008, which narrowly avoided a near-simultaneous failure of multiple counterparties. The International Monetary Fund's early forecast of the severity of the resulting economic downturn (IMF 2008a) helped mobilize concerted official action to address quickly and forcefully these extraordinary economic and financial events by providing fiscal stimulus to sustain growth, as well as capital injections and guarantees to ease the credit crunch. Following the emergency summit of G20 leaders in Washington in November 2008, support packages for banks were put together in a hurry in the United States, Europe, and elsewhere to prevent the dis- orderly failure of systemically important institutions and to restore confidence in the financial system.
  • Topic: Financial Crisis
  • Political Geography: United States, Middle East
  • Author: Anna J. Schwartz
  • Publication Date: 01-2009
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: I begin by describing the factors that contributed to the financial market crisis of 2008. I end by proposing policies that could have prevented the baleful effects that produced the crisis.
  • Topic: Democratization, Economics, International Trade and Finance, Markets, Privatization, Financial Crisis
  • Political Geography: United States
  • Author: Allan H. Meltzer
  • Publication Date: 01-2009
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: I am going to make several unrelated points, and then I am going to discuss how we got into this financial crisis and some needed changes to reduce the risk of future crises.
  • Topic: Democratization, Economics, International Trade and Finance, Markets, Privatization, Financial Crisis
  • Political Geography: United States
  • Author: Jeffrey M. Lacker
  • Publication Date: 01-2009
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The current financial crisis undoubtedly will inspire a great deal of research in the years ahead, and it may take some time before anything like a professional consensus emerges on causes and consequences. After all, it took several decades to document the causes of the Great Depression, and recent research continues to provide new perspectives. Nonetheless, I believe the central questions that are likely to occupy researchers are plainly in view, and some tentative lessons have emerged already. And in any event, legislators are not likely to await the fruits of future scholarship.
  • Topic: Democratization, Economics, International Trade and Finance, Markets, Privatization, Financial Crisis
  • Political Geography: United States
  • Author: Eswar S. Prasad
  • Publication Date: 08-2009
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: The U.S. and China are two of the dominant economies in the world today and the nature of their relationship has far-reaching implications for the smooth functioning of the global trade and financial systems. These two economies are becoming increasingly integrated with each other through the flows of goods, financial capital, and people. These rising linkages of course now stretch far beyond just trade and finance, to a variety of geopolitical and global security issues. Getting this relationship right is therefore of considerable importance.
  • Topic: Financial Crisis
  • Political Geography: United States, China