If the IMF wants to remain relevant …
IMF lending has already shrunk to the point where the IMF is little more than the Turkish monetary fund, and Turkey could easily decide to repay the fund. Right now, Turkey isn’t exactly suffering from a shortage of capital inflows.
Of course, the world could change and demand for Fund lending could reemerge. Commodity prices could fall, putting pressure on a few commodity-exporters that have increased spending rapidly or current wave of private capital flooding emerging economies could come to an end, making it harder to finance Eastern Europe’s large external deficits countries – creating new demand for fund lending.
Then again, the IMF might go some time before any large emerging economy call on its resources. A firefighter shouldn’t always be busy.
However, the IMF doesn’t just exist to lend to crisis-prone economies short on reserves. It also was set up to help avoid conflict over exchange rates. Exchange rate policies tend to have large external spillovers. A country cannot hold its exchange rate down without holding someone else’s exchange rate up. The IMF has a mandate to exercise firm surveillance over exchange rates, and to identify misalignments that inhibit global balance of payments adjustment.
Alas, the IMF’s executive board doesn’t yet seem willing to call out countries with fairly clear exchange rate misalignments – countries like the United Arab Emirates.
The IMF board indicated:
Directors agreed that the current peg of the dirham to the U.S. dollar has served the U.A.E. well. They considered that the exchange rate of the dirham is in line with fundamentals, and noted that further structural reforms would help to sustain the U.A.E.’s competitiveness. (emphasis added)
Really? $80 a barrel oil isn’t one of the UAE’s “fundamentals”? I would love to see the analysis that supports the board’s assessment that the dirham is in line with fundamentals, especially as the dirham — according to the data the IMF released — depreciated in real terms from the end of 2003 to the end of 2006 and oil rather obviously didn’t. The IMF doesn’t expect the increase in the price of oil — relative to say its 1990s average – to be temporary either.
The nominal depreciation of the dirham at a time when the increase in the real price of oil calls for a real appreciation has contributed to the large increase in inflation in the UAE – and, given the dirham’s peg to the dollar, very negative real rates. That isn’t exactly a policy I would expect the IMF’s Executive Board to endorse.
A few bold members of the IMF’s executive board did see “value in some flexibility” going forward. Good for them. The UAE should be an easy case with oil close to $50 a barrel, let alone with oil close to $80 a barrel.
Former Treasury Under Secretary Adams argued two years ago that:
the perception that the IMF is asleep at the wheel on its most fundamental responsibility—exchange rate surveillance—is very unhealthy for the institution and the international monetary system.
And yes, I fully recognize that the United States didn’t exactly set the best of examples by criticizing the Fund’s conclusion earlier this year that the dollar was over-valued on the grounds that the dollar’s exchange rate was “market-determined” despite record intervention in the foreign exchange market by emerging economies.
No Responses to “If the IMF wants to remain relevant …”
US Dollar Victimization of Japan and China
Writes Henry CK Liu, Japan is a classic case of a victim of monetary imperialism. In 1990, as a result of Japanese export prowess, the Industrial Bank of Japan was the largest bank in the world, with a market capitalization of $57 billion. The top nine of the 10 largest banks then were all Japanese, trailed by Canadian Alliance in 10th place. No US bank made the top-ten list. By 2001, the effects of dollar hegemony have pushed Citigroup into first place with a market capitalization of $260 billion. Seven of the top ten largest financial institutions in the world in 2001 were US-based, with descending ranking in market capitalization: Citigroup ($260 billion), AIG ($209 billion), HSBC (British-$110 billion), Berkshire Hathaway ($100 billion), Bank of America ($99 billion), Fanny Mae ($80 billion), Wells Fargo ($74 billion), JP Morgan Chase ($72 billion), RBS (British-$70 billion) and UBS (Swiss-$67 billion). No Japanese bank survived on the list.
China is a neoclassic case of dollar hegemony victimization even though its domestic financial markets are still not open and the RMB yuan is still not freely convertible. With over $1.4 trillion in foreign exchange reserves earned at an previously lower fixed exchange rate of 8.2 to a dollar set in 1985, now growing at the rate of $1 billion a day at a narrow range floating exchange rate of around 7.5 since July 2005, China cannot spend much of its dollar holdings on domestic development without domestic inflation caused by excessive expansion of its yuan money supply. The Chinese economy is overheating because the bulk of its surplus revenue is in dollars from exports that cannot be spent inside China without monetary penalty. Chinese wages are too low to absorb sudden expansion of yuan money supply to develop the domestic economy. And with over $1.4 trillion in foreign exchange reserves, equal to its annual GDP, China cannot even divest from the dollar without having the market effect of a falling dollar moving against its remaining holdings.
Thus China is trapped into a trade regime operating on an international monetary architecture in which it must continue to export real wealth in the form of underpaid labor and polluted environment in exchange for dollars that it must reinvest in the US. Ironically, the recent rise of anti-trade sentiment in US domestic politics offers China a convenient, opportune escape from dollar hegemony to reduce its dependence on export to concentrate on domestic development. Chinese domestic special interest groups in the export sector would otherwise oppose any policy to slow the growth in export if not for the rise of US protectionism which causes shot-term pain for China but long-term benefit in China’s need to restructure its economy toward domestic development. Further trade surplus denominated in dollar is of no advantage to China.
Even as the domestic US economy declines since the onset of globalization in the early 1990s, US dominance in global finance has continued to this day on account of dollar hegemony. It should not be surprising that the nation that can print at will the world’s reserve currency for international trade should come up on top in deregulated global financial markets. The so-called emerging markets around the world are the new colonies of monetary imperialism in a global neo-liberal trading regime operating under dollar hegemony geopolitically dominated by the US as the world’s sole remaining military superpower.
With the IMF under the de facto contol of the US Treasury, the Washington based organization has absolutely no credibility left in the developing world. The IMF is notorious for imposing draconian sanctions targeting the poor and middle class of developing nations for the narrow economic benefit interests of the New York Banksters. John Perkins, the economic hitman, discusses what a debt to the IMF means. Poor people in Indonesia are still paying for it today – they’re subjected to IMF Structural Adjustment Programmes that slash education spending, food subsidies for the poor, infrastructure investment, etc.
The one power that the IMF really has is to organize a bailout in a crisis. No crisis means no bailouts are necessary, in which case what the IMF thinks is pretty irrelevant. Suppose the IMF declares China’s currency policy to be the work of the anti-Christ….. Now what?
like when the fiat money system collapses, the IMF could come off looking pretty good if it was prepared for it… or get the IMF to work on moldbug’s plan: 2007-08-10 16:56:44
2fish — you are right, the imf’s real leverage comes from its lending. China has no need to borrow. Nor does the US. That allows both to ignore its analysis. However, the IMF’s analysis of the US conceivably could shape Chinese policy toward the US, and the IMF’s analysis of China could shape US policy toward China. That interaction gives it a small amount of influence.
What I don’t get though is why the IMF is unwilling to use the (limited) leverage it has. Who knows whether or not the IMF has an ability to persuade those with undervalued exchange rates to change if it won’t even indicate that their exchange rates are undervalued …
bsetser: However, the IMF’s analysis of the US conceivably could shape Chinese policy toward the US, and the IMF’s analysis of China could shape US policy toward China. That interaction gives it a small amount of influence.
True, but if it where acting purely as a think tank, how would the IMF’s influence be more than any other think tank? IMF writes a paper that says that Chinese currency policy is awful. Brookings or CSIS or Harvard University or Center for Economic Policy Research or World Bank writes a paper that it isn’t. What makes IMF’s papers more authoritative?
bsetser: What I don’t get though is why the IMF is unwilling to use the (limited) leverage it has.
Because IMF is pretty badly structured for a think tank. Most think tank papers have this large disclaimer saying that the opinions are only those of its economists and not of the group, and that gives people some freedom to say what they think.
There are so many political constraints on the IMF, that if it said something then people would figure “well of course you’d say this because so-and-so put you up to say it.”
Dave, please make me a favour. If you have the chance, please tell Chinese authorities to sell all this Euro Stuff which is happily flowing to China.
Suggestions: Buy German Cars, Italian Clothes, Spanish oranges, send some million chinese to Europe. It’s not so bad. They can simply sell Euros in the market asking for RMB (Are there?) or any other currency, except the $, you know, they have so many.
I’m Frightened to think I could become the new “monetarian imperialist”, so please, if you can, tell the chinese TO SELL Euros.
The larger issue is whether the world wants to have an international economic sheriff, or whether it wants a bunch of cowboys acting however they want. The rich countries of the world have typically liked having a sheriff, or a sheriff and posse. The G7 was the sheriff for rich-country disputes, and the IMF “sorted out” the poor and emerging market countries.
Fast forward to today. The G7 is pretty irrelevant, because there is no consensus that rich-country exchange rate issues need addressing. And newly rich EM countries- China, Russia, Middle East- don’t want a sheriff telling them how to run their economies, just like they are not particularly interested in using the UN as a world policeman (for things like Darfur.)
So while the US qand Europe would kinda-sorta like the IMF to be the world currency sheriff, the countries most in need of “currency policing” aren’t interested (and in fairness, the US wasn’t either when it came to the buck.)
So what all these countries need to decide is whether they want to create a forum, whether the IMF or something else, as a forum to resolve/mediate disputes, or whether they want every cowboy to shoot his revolver wherever he damn well likes.
I suspect and fear that the letter will be the case, as we’ll end up with a veritable Wild West of tarriffs, taxes, and other protectonist barriers.
Bush Administration relying on China to solve Iranian and North Korea problems
GEORGE W. BUSH, embattled at home, tied down in Iraq and watching the clock run out on his presidency, has found a diplomatic crutch in an unlikely place: China.
Last week’s agreement by North Korea to disable its nuclear facilities — announced in Beijing, tellingly — showed just how much Mr. Bush’s foreign policy has come to rely, for better or worse, on the help of the Chinese. They might just be the administration’s best hope for peacefully resolving the next big crisis on the horizon, Iran’s refusal to give up the right to enrich uranium. Or so some in the administration are hoping.
Mr. Bush, who spent most of his presidency with a swaggering, go-it-alone style, has increasingly turned to China on problem after problem: from North Korea to Darfur to the demonstrators in Myanmar.
“China has become the first stop for any American diplomacy,” said Christopher R. Hill, the American negotiator in the North Korea talks.
Steven Clemons of the New America Foundation, a bipartisan research organization in Washington, said that China has already played an active role in trying to resolve tensions that could lead to another military conflict in the Persian Gulf.
He credited what he said were quiet Chinese efforts to win the release of four Iranian-Americans jailed by the authorities in Iran this summer.
China, by virtue of its permanent seat on the United Nations Security Council, has always been an important diplomatic player. But its importance to the Bush administration has grown for two reasons: it has become more assertive around the globe and the administration has exhausted a lot of its options.
“I think we need China almost everywhere in the world because we’ve disengaged from the rest of the world,” Mr. Clemons said, criticizing the administration’s initial disdain for concerted international diplomacy and citing its preoccupation with Iraq.
Meanwhile, China has steadily expanded its diplomatic and economic ties far beyond Asia. Mr. Clemons suggested that that has caused a subtle tectonic shift in how nations view it and, conversely, the United States. “They see China as an ascending power,” Mr. Clemons added, “and they don’t see us that way any more.”
macroman — well said.
re: a veritable Wild West of tarriffs, taxes, and other protectonist barriers “IMF Urges Countries Against Using Capital Controls” http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aR.3H.nnxuJw
“…in a world of fiat currency democracies, bad stuff is outlawed…” http://www.ft.com/cms/s/0/25199334-7213-11dc-8960-0000779fd2ac.html
re: “in line with fundamentals” – if there is any consensus as to what this means
If the UAE dirham is in line with fundamentals, no.
“…We go by logic and fundamentals. Well, sort of … who said gold was an inflation hedge? The price today is around $730… When the Aden sisters were on the case it hit $875. Adjusted for US inflation, the price has fallen 60%…” http://www.ft.com/cms/s/0/fc32fe32-7538-11dc-892d-0000779fd2ac.html
consensus on a contemporary, global (before it can be regionalized) definition of ‘the fundamentals’
A lot of protectionist talk during the Republican debate last night.
re: “…hedge funds are already stockpiling”
“The number of cases involving manipulation and false price reporting in commodity and commodity futures markets caught by US regulators has reached record levels in the past 12 months. The Commodity Futures Trading Commission, which oversees such markets, on Tuesday revealed it had collected a record $540m in civil penalties, restitution and disgorgement… from cases involving fraud, manipulation and other misconduct. It said this was a record. The disclosures are a sign that unprecedented volumes in commodity markets are giving rise to a corresponding increase in enforcement actions… Of the 41 actions filed in the year to last month, the CFTC filed eight against hedge funds…” http://www.ft.com/cms/s/0/8d038194-711e-11dc-98fc-0000779fd2ac.html
‘the fundamentals’ – “…there looms a potential conflict over depleting water reserves…” http://www.pinr.com/report.php?ac=view_report&report_id=695&language_id=1
shrek — tell more. I read somewhere that the reps all agreed on free trade and low taxes … and i didn’t see the debate.
I tend to think maybe (if that is qualification enough) that it might be a good thing for the US to impose 20% tariffs on Chinese imports…to break the logjam of the present situation and force some movement (ie changes) in the present regime. While not desirable in itself it might force China to revalue, etc.
About the IFM’s role and the current situation, MM makes a very good point, but in the comparison to UN… Don’t forget US manipulations to start a war (i don’t want to compare Darfour and Iraq, but.. again) and who’s interest is a weak UN.
I want to copy-paste another point of view by the banker Jerome a Paris, who touches ore on ground points as an answer to DC, Carlo and then all of US (a bit long, brad, but important, sorry):
Economy: only China can save us?
Martin Wolf, the senior economics editor of the Financial Times, Europe’s main Englsih-language business paper, continues to peddle the notion that the huge financial imbalances in today’s global economy (fundamentally, US debt-fuelled consumption driven deficits, and China’s booming export surplus) were caused by the Asian countries’ choice to focus on exports rather than domestic consumption, and that US deficits are only a consequence of that, rather than the other way round.
My take on the current imbalances is that corporations and their shareholders had hit what they thought was a wonderful virtous circle (for them):
• invest in China (or threaten to invest in China) to have lower wages – the Chinese ones, or those at home thanks to the threat of offshoring – and lower costs of compliance with health, safety and environmental regulations;
• export those low cost goods back home, where demand is kept brisk, despite stagnant wages, thanks to skyrocketing cheap debt and out-of-control government spending (the Bush-Greenspan corporate welfare double act);
• use the threat of China to meanwhile reduce regulations at home, as being a threat to competitivity, with the risk of negative investor sentiment;
• present skyrocketing profits (and the correspondingly high stock market values) as a sign of good economic health back at home, and lobby to lower the taxes that bear on them to unleash further “dynamism”;
• as a bonus, take advantage of bubbling financial asset prices to become even richer.;
Unfortunately, cheap debt leads to empoverished consumers, and to poor investment decisions, and thus to bust (as in “boom and bust”).
That difference noted, let’s go back to Martin Wolf: he wisely notices that US debt capacity has now reached its limits, and thus that these imbalances, which fuelled world growth in recent years, must unravel, thus threatening that growth. As growth is unconditionally a GOOD THING, it is now incumbent on Asians, starting with China, to keep it up:
“The analytical point is that offsetting any slowdown in US demand requires faster growth of demand in the rest of the world.
What matters at such times is changes in demand relative to supply. From this point of view, China’s current mix is a disaster. Rebalancing towards stronger domestic demand and a smaller current account surplus has long been domestically desirable. In an era of weaker US demand, it has become a global necessity. China is about to have economic leadership thrust upon it. What happens now will depend heavily on how the Asian giant responds to this great challenge.”
While, as stated above, I disagree on the origins of the imbalances, I agree that they are about to unravel, which means that the Chinese surplus will shrink, mechanically. The question is whether that happens via lower exports, or via increased domestic consumption. Or, put another way, will incomes increase in both the West and China (to keep demand buoyant on both sides) or will they not?
Somehow, I doubt that in a global slowdown, corporations and their pundit oncheerers will be visionary enough to choose the former…
We can expect a lot of fingerpointing towards China, but we should not forget that currently 50 to 70% of total Chinese exports are made by foreign owned companies. This is “offshore” in many ways: it’s production by the West for the West, but using Chinese labor and Chinese regulations. China has decided that it benefits enough (in apparent development – despite the staggering pollution and other not-so-invisible environmental and social costs) to let it happen, but the damages to the world – to the global environment, and to the standards of living of the lwoer middle classes in the West, are not small – and the beneficiaries are just as obvious: the corporations and their shareholders.
Time to blame them rather than China.
I forgot to say this bunch of cowboys acting however they want, shouldn’t impose veto rights to a few oldish strong cowboys, in the same way that Alistair Darling wants to screw some outsiders who live in London without voting rights.
And although his Budget will have a hole the size of the Andromeda Galaxy, as Cassandra says, London’s days as a Tax Refuge are limited, it seems. I doubt it, but they are thinking on it.
Power is power, money is money, and votes are votes. In the middle of the triangle, mafia orchestrating the vertices. And in the center… some employee complaining… of what? Capitalists taxes?
I’d like to see people working in London Exchange in demonstration on the streets of London. After watching to bishops and priest demonstrating in madrid against the gays weddings, I’m ready to any kind of demonstration anywhere. A taught decision, anyway.
“Of the 41 actions filed in the year to last month, the CFTC filed eight against hedge funds, “pool operators” and trading advisers.” – who/what the other 33 were and what total revenues were from all enforcement actions – how much these earnings make up for any perceived shortfall in tax returns
Macroman: So what all these countries need to decide is whether they want to create a forum, whether the IMF or something else, as a forum to resolve/mediate disputes, or whether they want every cowboy to shoot his revolver wherever he damn well likes.
That’s the purpose of the WTO, and it works pretty well for trade. The thing about WTO is that you need to get about 150 countries to coordinate actions, and so you need some sort of institutional mediator. In the case of currencies, you have at most five people that matter and there is no need to create some sort of forum.
“…China’s billionaire tally is second only to that of the U.S… “China may have 200 billionaires, we just haven’t identified them yet – there are a lot of people out there who don’t report their assets…” http://www.bloomberg.com/apps/news?pid=20601100&sid=a_TDRFAAr7.k&refer=germany
“…global consumption levels pushed the world into “ecological debt” on 9 October; this year… Ecological debt means that our demands exceed the Earth’s ability to supply resources and absorb the demands placed upon it…” http://news.bbc.co.uk/2/hi/science/nature/7028573.stm
Since the subject is the IMF, does anyone have an idea why Rato is leaving early? Possible frustration with alleged US domination of the organization?
And what do you informed observers think of Strauss-Kahn’s chances to revive the IMF? It is said that he wants emerging economies to be more influential and more active. Since I live in France, I have observed him in action for a number of years and have a positive impression. He is perhaps a better politician than economist, but maybe that is what is needed.
Also I understand Martin Wolf criticised the choice of Strauss-Kahn quite strongly – Didn’t see the article.
I think Stiglitz had written a book on IMF?
IMF, WB, G7, blahblahblah…look at their makeup. We are still hanging onto the baggage from the 1900s. Time have since changed. My Dean used to tell me. I think its time for a change.
For a “fair” and “democratic” organisation you need to have voting rights for all members not just a priviledged few.
Nobody knows why Rato is leaving the FMI, and nobody believes in Spain his familiar reasons.
Rato was the best prime minister of Aznar and the probably the man who got Aznar to be president for a second mandate, because Spain economically “was well”, as Aznar used to say.
With the memory of a big industrial crisis, that had been corrected by Solbes, Rato went to government with Aznar, and collected Solbes reforms.
Then he made private the most important public companies among aznar friends (sort of Telefonica, Endesa, etc), and “Spain goes well” was Aznar’s main syntax and wording. Spanish growth was sound and spanish fascist were “sacando pecho” (showing off their breast, literally).
But after the demonstrations against Iraq war, he was the only man in government town saying “is would be an imprudent step and very unpopular”.
Aznar never forgave him, but he went from Aznar’s lost government (do you remember march 13th), directly to IFM in the weakest moment of Aznar’s Gov.
He say’s for familiar reasons (his wife is about to 25 years younger than him, and could be), but nobody believes it.
I think that after some years of leash, first with Aznar and then with Bush or some slave of him, he decided to be out of Gov. and news and enjoy a healthy and wealthy retirement without troubles.
Anyway, he lowered next year spanish growth Gov. ratio (as IMF pres.), and pissed-off all journalist asking stupid questions against current Gov.
Some news expected he to be the next pres. of spain. That’s totally off-question today.
So, who knows.
PS.: I think he’s saying piss off to everybody.
i don’t remember wolf criticizing DSK explicitly, but the FT certainly was at the forefront of those calling for a new, more open selection process for the IMF’s leadership, one that wouldn’t reserve the MD’s job for European politicians.
My sense is that Rato never really liked the Fund job, and his ambitions continue to lie in Spanish politics. His one main initiative — the multilateral consultation process — didn’t go anywhere.
To be effective, the head of the IMF needs to be a politician, so i don’t think that is a strike v DSK. To me the real question is what DSK envisions the fund doing so to speak.
Reforms to the fund’s governance to give EMs more voice should be a no brainer, but they don’t answer the question of what the fund should be doing.
incidentally, DSK’s considerable political skill will be needed to convince the europeans to give up some of their voting shares to open up room for others to have more, and to reduce the number of european chairs on the board, again, freeing up space. that is a task a commited european can do more easily than an american, or an emerging marketer.
I think that Stiglitz, Krugman, Dean Baker, and our beloved Brad, and a few economist more, each in their way, tell their mind openly and with sound arguments about what is happening in the world economy (and I love Mark Thoma’s work, or econbrowser, or Y. Smith from nakedcapitalism or even Macroman and his humor). But very few dare to tell their mind speaking to politics or the media.
I’d liked that NYT or WaPo or The Economist offered a well-paid column on sundays to Brad, just to show his hard data to general people. No hope.
MSM is eating us.
I remember that P. Krugman was proud to say that he can say what he wants because he’s a professor in a USA university.
The banker Jerome a Paris, above, is a banker in business working with corporations in structured lending of hi-cost projects on energy. He knows a lot about energy. But he blogs, with a big success.
“For a “fair” and “democratic” organization you need to have voting rights for all members not just a privileged few.”, you say.
But now a days…
Last of Stiglitz:
The House of Cards:
There are times when being proven right brings no pleasure. For several years, I argued that America’s economy was being supported by a housing bubble that had replaced the stock market bubble of the 1990′s. But no bubble can expand forever. With middle-class incomes in the United States stagnating, Americans could not afford ever more expensive homes.
As one of my predecessors as chairman of the US President’s Council of Economic Advisers famously put it, “that which is not sustainable will not be sustained.” Economists, as opposed to those who make their living gambling on stocks, make no claim to being able to predict when the day of reckoning will come, much less identifying the event that will bring down the house of cards. But the patterns are systematic, with consequences that unfold gradually, and painfully, over time.
There is a macro-story and a micro-story here. The macro-story is simple, but dramatic. Some, observing the crash of the sub-prime mortgage market, say, “Don’t worry, it is only a problem in the real estate sector.” But this overlooks the key role that the housing sector has played in the US economy recently, with direct investment in real estate and money taken out of houses through refinancing mortgages accounting for two-thirds to three-quarters of growth over the last six years.
Booming home prices gave Americans the confidence, and the financial wherewithal, to spend more than their income. America’s household savings rate was at levels not seen since the Great Depression, either negative or zero.
With higher interest rates depressing housing prices, the game is over. As America moves to, say, a 4% savings rate (still small by normal standards), aggregate demand will weaken, and with it, the economy.
The micro-story is more dramatic. Record-low interest rates in 2001, 2002 and 2003 did not lead Americans to invest more – there was already excess capacity. Instead, easy money stimulated the economy by inducing households to refinance their mortgages, and to spend some of their capital.
It is one thing to borrow to make an investment, which strengthens balance sheets; it is another thing to borrow to finance a vacation or a consumption binge. But this is what Alan Greenspan encouraged Americans to do. When normal mortgages did not prime the pump enough, he encouraged them to take out variable-rate mortgages – at a time when interest rates had nowhere to go but up.
Predatory lenders went further, offering negative amortisation loans, so the amount owed went up year after year. Sometime in the future, payments would rise, but borrowers were told, again, not to worry: house prices would rise faster, making it easy to refinance with another negative amortisation loan. The only way (in this view) not to win was to sit on the sidelines. All of this amounted to a human and economic disaster in the making. Now reality has hit: newspapers report cases of borrowers whose mortgage payments exceed their entire income.
Globalisation implies that America’s mortgage problem has worldwide repercussions. The first run on a bank occurred against the British mortgage lender Northern Rock. America managed to pass off bad mortgages worth hundreds of billions of dollars to investors (including banks) around the world. They buried the bad mortgages in complicated instruments, buried them so deep that no one knew exactly how badly they were impaired, and no one could calculate how to reprice them quickly. In the face of such uncertainty, markets froze.
Those in financial markets who believe in free markets have temporarily abandoned their faith. For the greater good of all (of course, it is never for their own selfish interests), they argued a bailout was necessary. While the US Treasury and the IMF warned East Asian countries facing financial crises 10 years ago against the risks of bail-outs and told them not to raise their interest rates, the US ignored its own lectures about moral hazard effects, bought up billions in mortgages, and lowered interest rates.
But lower short-term interest rates have led to higher medium-term interest rates, which are more relevant for the mortgage market, perhaps because of increasing worries about inflationary pressures. It may make sense for central banks (or Fannie Mae, America’s major government-sponsored mortgage company) to buy mortgage-backed securities in order to help provide market liquidity. But those from whom they buy them should provide a guarantee, so the public does not have to pay the price for their bad investment decisions. Equity owners in banks should not get a free ride.
Securitisation, with all of its advantages in sharing risk, has three problems that were not adequately anticipated. While it meant that American banks were not hit as hard as they would otherwise, America’s bad lending practices have had global effects.
Moreover, securitisation contributed to bad lending: in the old days, banks that originated bad loans bore the consequences; in the new world of securitisation, the originators could pass the loans onto others. (As economists would say, problems of asymmetric information have increased.)
In the old days, when borrowers found it impossible to make their payments, mortgages would be restructured; foreclosures were bad for both the borrower and the lender. Securitisation made debt restructuring difficult, if not impossible.
It is the victims of predatory lenders who need government help. With mortgages amounting to 95% or more of the value of the house, debt restructuring will not be easy. What is required is to give individuals with excessive indebtedness an expedited way to a fresh start – for example, a special bankruptcy provision allowing them to recover, say, 75% of the equity they originally put into the house, with the lenders bearing the cost.
There are many lessons for America, and the rest of the world; but among them is the need for greater financial sector regulation, especially better protection against predatory lending, and more transparency.
Sorry, Brad, enough for today!
“NUCLEAR-armed states are criminal states. They have a legal obligation, confirmed by the World Court, to live up to Article 6 of the Nuclear Nonproliferation Treaty, which calls on them to carry out good-faith negotiations to eliminate nuclear weapons entirely. None of the nuclear states has lived up to it.
The United States is a leading violator, especially the Bush administration, which even has stated that it isn’t subject to Article 6.
On July 27, Washington entered into an agreement with India that guts the central part of the NPT, though there remains substantial opposition in both countries. India, like Israel and Pakistan (but unlike Iran), is not an NPT signatory, and has developed nuclear weapons outside the treaty. With this new agreement, the Bush administration effectively endorses and facilitates this outlaw behaviour. The agreement violates US law, and bypasses the Nuclear Suppliers Group, the 45 nations that have established strict rules to lessen the danger of proliferation of nuclear weapons.”
koteli — somewhat shorter comments please; it generally isn’t helpful to paste in entire columns from other sources. thanks.
Bush goes out of his way to poke China in the eye.
WASHINGTON (AFP) – US President George W. Bush will risk angering China by attending a ceremony next week to award a Congress medal to the exiled Tibetan leader, the Dalai Lama, at the bastion of American democracy.
“…it is worth asking why…(Sama) chose instead to ignore and defy the pressure coming from outside its borders. First, a revaluation would reduce Saudi Arabia’s oil income as currency appreciation would lead to less riyal income when converted from US dollars… Finally, it could be that other Gulf Co-operation Council economies opt to revalue and depeg as Kuwait did, even though Kuwait’s decision was motivated by a desire to signal its disquiet about the proposed 2010 currency union rather than to leave the US dollar axis. In the event of a GCC economy revaluing its currency, Saudi Arabia will not necessarily follow…” http://www.ft.com/cms/s/0/4ba6456e-775f-11dc-9de8-0000779fd2ac.html?nclick_check=1
China’s year of the billionaire
A country that had no superrich entrepreneurs in 2002 now boasts 106, second only to the U.S.
October 11, 2007
BEIJING — China’s booming stock markets are creating a new elite class of the superrich, giving the country more billionaires than any country in the world except the United States.
The dramatic rise of Chinese share prices, combined with surging property values, has fuelled a remarkable sevenfold increase in the number of billionaires in the country over the past year.
An annual list of China’s richest people, compiled by researcher Rupert Hoogewerf, says there are 106 dollar-billionaires, up from 15 on last year’s list and none in 2002. And the average wealth of the richest tycoons has doubled to $562-million (U.S.) over the past year.
The two richest people are women.