Grabel, I. 2003. Averting crisis? Assessing measures to manage financial integration in emerging economies. Cambridge Journal of Economics 27, no. 3: 317-336.
Grabel highlights five distinct types of risk that are brought about when a country adopts neoliberal policy reforms. These are outlined in Table 1 (319) and are the following types of risk: currency, flight, fragility, contagion and sovereignty. Alternative policies are then outlined in Table 2 (322).
Showing posts with label Financial Crisis. Show all posts
Showing posts with label Financial Crisis. Show all posts
Tuesday, March 24, 2009
Monday, March 23, 2009
Alves, Ferrari and Paula: The Post Keynesian Critique of Conventional Currency Crisis Models
Alves, AJ, F Ferrari, and LF de Paula. 2000. The Post Keynesian critique of conventional currency crisis models and Davidson's proposal to reform the international monetary system. JOURNAL OF POST KEYNESIAN ECONOMICS 22, no. 2: 207-226.
Efficient market theory provides an account of financial crises that focuses on poorly performing economic fundamentals, whether or not speculators are herding or following their own rational behavior. This post-Keynsian approach is quite different in that it focuses on the impossibility of ever fully knowing what the fundamentals are, and thus not being able to ever fully adjudicate as to exactly how the causes of the financial crisis were fundamental related. Thus, speculation is a constant and foundational part of market activity as it is currently organized.
Efficient market theory provides an account of financial crises that focuses on poorly performing economic fundamentals, whether or not speculators are herding or following their own rational behavior. This post-Keynsian approach is quite different in that it focuses on the impossibility of ever fully knowing what the fundamentals are, and thus not being able to ever fully adjudicate as to exactly how the causes of the financial crisis were fundamental related. Thus, speculation is a constant and foundational part of market activity as it is currently organized.
Harmes: Institutional Investors and Polanyi's Double Movement
Harmes, A. 2001. Institutional investors and Polanyi's double movement: a model of contemporary currency crises. Review of International Political Economy 8, no. 3: 389-437.
"This article constructs a model of contemporary currency crises which incorporates the role played by institutional investors and the dynamics associated with Karl Polanyi's notion of the 'double movement'. Polanyi's double movement, and its recognition of the need to integrate politics with economics, is used to explain why so many governments are prone to pursue policies that lead to a speculative attack against fixed exchange rates and why virtually every modern fixed exchange rate regime has ended in crisis. Evidence on the short-term and herd behavior of institutional investors is used to explain why contemporary currency crises do not appear to be justified by underlying economic fundamentals and why these crises do so much more damage than their earlier counterparts" (389; from abstract).
There have been more frequent currency crises since the collapse of Bretton Woods in the early 70s. There are two key features of these crises: the speculative actions that attacked the economic systems of these countries were not based on fundamentals and secondly is the severity of the damage caused by these attacks.
Overview of Mundell Flemming on 391.
Dornbusch et all promote the Washington Consensus view that low taxes, free markets and solid monetary policy will cause returns in the long-run (391).
The author explores financial crises from the perspective of Polanyi's double movement. What the double movement doesn't explain is why crises have become pronounced in the 90s. For that, the author explores the increase in herd mentality that arises from increased institutional investors.
"In policy terms, the key difference between the model presented here and those expounded by proponents of the Washington consensus relates to the viability of the different policy options contained within the unholy trinity or Mundell-Fleming thesis. Where neoclassical models focus on policy autonomy and government intervention designed to stimulate employment and protect wages as the cause of currency crises, this article has located the origins of recent crises with the policy options of capital mobility and fixed exchange rates. Many observers have argued that capital mobility has become a structural feature of the global political economy. Whether true or not, the same argument would seem to apply to democracy and, in turn, to the need for governments to retain their monetary policy autonomy. If this is the case, if both capital mobility and democracy have become structural features of the global political economy, then Polanyi's insights imply that fixed exchange rates...are no longer a viable option" (432).
UPDATE:
"...under conditions of capital mobility, governments are forced to choose between either price and exchange rate stability or monetary policy autonomy; they cannot pursue both simultaneously. For example, if a government sought to maintain a stable exchange rate, it would have to forgo the option of stimulating its economy through a monetary expansion. This is the case as an expansionary policy would cause domestic interest rates to fall below foreign rates, leading to an outflow of capital and, in turn, to a depreciation of the currency. To prevent governments from pursuing such expansionary policies (which are regarded as inflationary), proponents of the Washington consensus have often promoted institutional reforms designed to pre-commit governments to policies of price and exchange rate stability. Such measures range from granting full independence to central banks, to the adoption of fixed exchange rates, to the more drastic measure of creating a currency board" (391).
"This article constructs a model of contemporary currency crises which incorporates the role played by institutional investors and the dynamics associated with Karl Polanyi's notion of the 'double movement'. Polanyi's double movement, and its recognition of the need to integrate politics with economics, is used to explain why so many governments are prone to pursue policies that lead to a speculative attack against fixed exchange rates and why virtually every modern fixed exchange rate regime has ended in crisis. Evidence on the short-term and herd behavior of institutional investors is used to explain why contemporary currency crises do not appear to be justified by underlying economic fundamentals and why these crises do so much more damage than their earlier counterparts" (389; from abstract).
There have been more frequent currency crises since the collapse of Bretton Woods in the early 70s. There are two key features of these crises: the speculative actions that attacked the economic systems of these countries were not based on fundamentals and secondly is the severity of the damage caused by these attacks.
Overview of Mundell Flemming on 391.
Dornbusch et all promote the Washington Consensus view that low taxes, free markets and solid monetary policy will cause returns in the long-run (391).
The author explores financial crises from the perspective of Polanyi's double movement. What the double movement doesn't explain is why crises have become pronounced in the 90s. For that, the author explores the increase in herd mentality that arises from increased institutional investors.
"In policy terms, the key difference between the model presented here and those expounded by proponents of the Washington consensus relates to the viability of the different policy options contained within the unholy trinity or Mundell-Fleming thesis. Where neoclassical models focus on policy autonomy and government intervention designed to stimulate employment and protect wages as the cause of currency crises, this article has located the origins of recent crises with the policy options of capital mobility and fixed exchange rates. Many observers have argued that capital mobility has become a structural feature of the global political economy. Whether true or not, the same argument would seem to apply to democracy and, in turn, to the need for governments to retain their monetary policy autonomy. If this is the case, if both capital mobility and democracy have become structural features of the global political economy, then Polanyi's insights imply that fixed exchange rates...are no longer a viable option" (432).
UPDATE:
"...under conditions of capital mobility, governments are forced to choose between either price and exchange rate stability or monetary policy autonomy; they cannot pursue both simultaneously. For example, if a government sought to maintain a stable exchange rate, it would have to forgo the option of stimulating its economy through a monetary expansion. This is the case as an expansionary policy would cause domestic interest rates to fall below foreign rates, leading to an outflow of capital and, in turn, to a depreciation of the currency. To prevent governments from pursuing such expansionary policies (which are regarded as inflationary), proponents of the Washington consensus have often promoted institutional reforms designed to pre-commit governments to policies of price and exchange rate stability. Such measures range from granting full independence to central banks, to the adoption of fixed exchange rates, to the more drastic measure of creating a currency board" (391).
Thursday, March 12, 2009
Shiller: The subprime solution
Shiller, RJ. 2008. The subprime solution. Princeton University Press.
The subprime crisis is a real-estate bubble that spread to finance. It has produced conditions that are potentially catastrophic, and needs to be addressed in a serious and direct way.
This is not, however, a crisis that should signal the retreat from finance capitalism. In fact, we should be doing more to create infrastructures that promote markets that are designed to mitigate risk. We should also be increasing transparency and moving towards a situation where the system is able to avoid the promotion of bubbles through increased information. As in Shiller's other work, there is a heavy focus on the psychological aspects of market behavior.
"The key to the subprime solution, to preventing future crises like the current one, as well as mitigating its aftereffects, is democratizing finance--extending the application of sound financial principles to a larger and larger segment of society, and using all the modern technology at our disposal to achieve that goal" (115).
In the index, there is no mention of either derivatives or collateralized debt obligations.
The subprime crisis is a real-estate bubble that spread to finance. It has produced conditions that are potentially catastrophic, and needs to be addressed in a serious and direct way.
This is not, however, a crisis that should signal the retreat from finance capitalism. In fact, we should be doing more to create infrastructures that promote markets that are designed to mitigate risk. We should also be increasing transparency and moving towards a situation where the system is able to avoid the promotion of bubbles through increased information. As in Shiller's other work, there is a heavy focus on the psychological aspects of market behavior.
"The key to the subprime solution, to preventing future crises like the current one, as well as mitigating its aftereffects, is democratizing finance--extending the application of sound financial principles to a larger and larger segment of society, and using all the modern technology at our disposal to achieve that goal" (115).
In the index, there is no mention of either derivatives or collateralized debt obligations.
Wednesday, March 11, 2009
Strange: Mad Money
Strange, S. 1998. Mad Money. Manchester University Press.
This is a wide ranging tale of financial markets gone wild. States no longer have the power, capabilities and/or will to control the forces of free flowing capital. The causes of this crisis, while being decisions made by actors, are generally seen as being deterministic. The solution to the problem requires swift and bold action.
Written after the SE Asian crisis of '97, this book contains much that should be considered in today's economic climate, and much that remains hyperbole.
The book begins by explaining why the author understands the current organization of the financial system to be "mad". One moment it is manic, the other it is depressed. The output of the system is, in effect, insane.
The themes of Casino Capitalism are explored: volatility; we're all "involuntary gamblers"; arose from 5 decisions that really weren't decisions.
Markets have outgrown the constraints of government. This is not the only problem that has become too large, complicated or forceful to move beyond the capacity of states to regulate (environment, technology, etc).
All areas of the economy move to the rhythm of finance. States have much less control over finance than they had previously. Financial concentration is increasingly a problematic reality. Excess leads to "moral contamination" (181). There are widening gaps (income gaps, gaps between large and small business, between large and small states).
This is a wide ranging tale of financial markets gone wild. States no longer have the power, capabilities and/or will to control the forces of free flowing capital. The causes of this crisis, while being decisions made by actors, are generally seen as being deterministic. The solution to the problem requires swift and bold action.
Written after the SE Asian crisis of '97, this book contains much that should be considered in today's economic climate, and much that remains hyperbole.
The book begins by explaining why the author understands the current organization of the financial system to be "mad". One moment it is manic, the other it is depressed. The output of the system is, in effect, insane.
The themes of Casino Capitalism are explored: volatility; we're all "involuntary gamblers"; arose from 5 decisions that really weren't decisions.
Markets have outgrown the constraints of government. This is not the only problem that has become too large, complicated or forceful to move beyond the capacity of states to regulate (environment, technology, etc).
All areas of the economy move to the rhythm of finance. States have much less control over finance than they had previously. Financial concentration is increasingly a problematic reality. Excess leads to "moral contamination" (181). There are widening gaps (income gaps, gaps between large and small business, between large and small states).
Friday, January 30, 2009
Grabel: Trip Wires and Speed Bumps
Grabel, I, United Nations Conference on Trade and Development, Group of Twenty-four, and Intergovernmental Group of Twenty-four on International Monetary Affairs. 2004. Trip wires and speed bumps: managing financial risks and reducing the potential for financial crises in developing economies. United Nations.
There are four things outlined in the abstract that are accomplished by this paper: "First, it demonstrates that efforts to develop EWS [early warning systems] for banking, currency and generalized financial crises in developing countries have largely failed...Second, the paper advances an approach to managing financial risk through trip wires and speed bumps. Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed...Third...the proposal for a trip wire-speed bump regime is not intended as a means to prevent all financial instability and crises in developing countries...Fourth, the paper responds to likely concerns about the response of investors, the IMF and powerful governments to the trip wire-speed bump approach" (abstract).
It is assumed that there is a link between financial liberalization and financial crises. It is also assumed that developing countries are keen to avoid financial crises, as recoveries can be quite difficult.
"Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed. Among the most significant of these vulnerabilities are the risk of large-scale currency depreciations, the risk that domestic and foreign investors and lenders may suddenly withdraw capital, the risk that locational and/or maturity mismatches will induce debt distress, the risk that non-transparent financial transactions will induce financial fragility, and the risk that a country will suffer the contagion effects of financial crises that originate elsewhere in the world or within particular sectors of their own economies" (2).
EWS models have an incredibly poor track record. When a model is calibrated to be able to identify a crisis, it is thus tuned to a certain set of circumstances and is unable to predict subsequent crises.
"I argue that the failings of existing predictive models stem from the fact that they are based on six misguided initial assumptions" (6).
The assumptions about informational accuracy are too rigid, the people analyzing the data do not take into consideration that the analysis and the economy are overdetermined, crises do not have the same set of causal drivers, crises will not be averted with EWS systems, it has never been possible to predict economic tipping events, and investors do not necessarily have to respond to increased information with stabilizing actions.
The trip wire solution proposed by the author is distinct from the EWS method. Trip wires are diagnostic tools. They are designed to potentially stop market transactions when a certain point has been reached. They can be designed to solve a variety of problems associated with financial crises.
Speed bumps work in conjunction with trip wires: "Speed bgumps are narrowly targeted, gradual changes in policies and regulations that are activated whenever trip wires reveal particular vulnerabilities" (11).
There are four things outlined in the abstract that are accomplished by this paper: "First, it demonstrates that efforts to develop EWS [early warning systems] for banking, currency and generalized financial crises in developing countries have largely failed...Second, the paper advances an approach to managing financial risk through trip wires and speed bumps. Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed...Third...the proposal for a trip wire-speed bump regime is not intended as a means to prevent all financial instability and crises in developing countries...Fourth, the paper responds to likely concerns about the response of investors, the IMF and powerful governments to the trip wire-speed bump approach" (abstract).
It is assumed that there is a link between financial liberalization and financial crises. It is also assumed that developing countries are keen to avoid financial crises, as recoveries can be quite difficult.
"Trip wires are indicators of vulnerability that can illuminate the specific risks to which developing economies are exposed. Among the most significant of these vulnerabilities are the risk of large-scale currency depreciations, the risk that domestic and foreign investors and lenders may suddenly withdraw capital, the risk that locational and/or maturity mismatches will induce debt distress, the risk that non-transparent financial transactions will induce financial fragility, and the risk that a country will suffer the contagion effects of financial crises that originate elsewhere in the world or within particular sectors of their own economies" (2).
EWS models have an incredibly poor track record. When a model is calibrated to be able to identify a crisis, it is thus tuned to a certain set of circumstances and is unable to predict subsequent crises.
"I argue that the failings of existing predictive models stem from the fact that they are based on six misguided initial assumptions" (6).
The assumptions about informational accuracy are too rigid, the people analyzing the data do not take into consideration that the analysis and the economy are overdetermined, crises do not have the same set of causal drivers, crises will not be averted with EWS systems, it has never been possible to predict economic tipping events, and investors do not necessarily have to respond to increased information with stabilizing actions.
The trip wire solution proposed by the author is distinct from the EWS method. Trip wires are diagnostic tools. They are designed to potentially stop market transactions when a certain point has been reached. They can be designed to solve a variety of problems associated with financial crises.
Speed bumps work in conjunction with trip wires: "Speed bgumps are narrowly targeted, gradual changes in policies and regulations that are activated whenever trip wires reveal particular vulnerabilities" (11).
Wednesday, January 28, 2009
Fischer: In Defense of the IMF
Fischer, S. 1998. In Defense of the IMF-Specialized Tools for a Specialized Task. Foreign Affairs 77, no. 4: 103-6.
"Martin Feldstein makes three criticisms of the International Monetary Fund's remedies for the Asian crisis...First, he argues that they are simply the same old IMF austerity medicine, inappropriately dispensed to countries su8ffering from a different malady. Second--and the main theme--he contends that by including in the program a number of structural elements, the IMF is unwisely going beyond its essential task of correcting the balance of payments and intruding into the countries' political processes. Third, he is troubled by the problem of moral hazard--the bailout issue" (103).
Fischer argues that the first two considerations are linked: the structural elements make IMF policies towards SE Asia very different from previous IMF SAP applications, and that the structural elements must be addressed in order for crises like this to not happen in the future. As to the issue of moral hazard, it is, according to this author, overstated.
This crisis stemmed from the following: "First, Thailand and other countries were showing signs of overheating in the form of large trade deficits and real estate and stock market bubbles. Second, pegged exchange-rate regimes had been maintained for too long, encouraging heavy external borrowing, which led, in turn, to excessive foreign exchange risk exposure on the part of domestic financial institutions and corporations. Third, lax prudential rules and financial oversight had permitted the quality of banks' loan portfolios to deteriorate sharply" (104).
Fischer argues that, though Feldstein proposed three questions that the IMF should consider before prescribing structural adjustment, each of these miss the most important question: "Does the program address the underlying causes of the crisis?" (105). "Financial sector and other structural reforms are vital to the reform programs of Thailand, Indonesia, and South Korea because the problems of weak financial institutions, inadequate bank regulation and supervision, and the complicated and non-transparent relations among governments banks, and corporations were central to the economic crisis. IMF lending to these countries would serve no purpose if these problems were not addressed. Nor would it be in the countries' interest to leave the structural and governance issues aside: markets are skeptical of halfhearted reform efforts" (105).
"Martin Feldstein makes three criticisms of the International Monetary Fund's remedies for the Asian crisis...First, he argues that they are simply the same old IMF austerity medicine, inappropriately dispensed to countries su8ffering from a different malady. Second--and the main theme--he contends that by including in the program a number of structural elements, the IMF is unwisely going beyond its essential task of correcting the balance of payments and intruding into the countries' political processes. Third, he is troubled by the problem of moral hazard--the bailout issue" (103).
Fischer argues that the first two considerations are linked: the structural elements make IMF policies towards SE Asia very different from previous IMF SAP applications, and that the structural elements must be addressed in order for crises like this to not happen in the future. As to the issue of moral hazard, it is, according to this author, overstated.
This crisis stemmed from the following: "First, Thailand and other countries were showing signs of overheating in the form of large trade deficits and real estate and stock market bubbles. Second, pegged exchange-rate regimes had been maintained for too long, encouraging heavy external borrowing, which led, in turn, to excessive foreign exchange risk exposure on the part of domestic financial institutions and corporations. Third, lax prudential rules and financial oversight had permitted the quality of banks' loan portfolios to deteriorate sharply" (104).
Fischer argues that, though Feldstein proposed three questions that the IMF should consider before prescribing structural adjustment, each of these miss the most important question: "Does the program address the underlying causes of the crisis?" (105). "Financial sector and other structural reforms are vital to the reform programs of Thailand, Indonesia, and South Korea because the problems of weak financial institutions, inadequate bank regulation and supervision, and the complicated and non-transparent relations among governments banks, and corporations were central to the economic crisis. IMF lending to these countries would serve no purpose if these problems were not addressed. Nor would it be in the countries' interest to leave the structural and governance issues aside: markets are skeptical of halfhearted reform efforts" (105).
Thursday, January 22, 2009
Reinhart and Rogoff: Is the 2007 US Sub-Prime Financial Crisis so Different?
REINHART, CM, and K ROGOFF. 2008. Is the 2007 US Sub-Prime Financial Crisis so Different? an International Historical Comparison. NBER Working Paper.
This paper explores the relationship between the sub-prime mortgage crisis and historical patterns that emerge before financial crises. The authors find that there is a great deal of parallels between these emerging patterns and other crises. Particularly, they find that large gluts in equity and housing prices are indicative of a pending crisis. The authors then engage in a historical comparison.
The results of the comparison are as follows: house prices followed similar patterns with other crises, though they rose more acutely and seem to be falling even more rapidly; real equity prices have yet to fall substantially as has been the case with other financial crises, though the growth trend is very sharply upward; the US current account balance is much less balanced than the average for other countries entering financial crises; real GDP growth per capita is following a similar, slightly contracted, trend as have other countries as they approach financial crises; public debt has also risen consistently, as was the case with previous crises.
The authors conclude by noting that all financial crises are surely different, and that most crises are preceded by a period of financial liberalization. While they note that there has not been substantial juridical liberalization, financial freedom can be seen in the removal of certain barriers and regulatory frameworks.
The authors also paralell the 1970s petro-dollar recycling that took place, and how that led to the debt crisis of the 1980s, where cheap money was freely given to countries. In the 1990s, however, the unsuitable debtor is not a de facto nation, but rather a slice of American borrowers who cannot afford to be home owners.
This paper explores the relationship between the sub-prime mortgage crisis and historical patterns that emerge before financial crises. The authors find that there is a great deal of parallels between these emerging patterns and other crises. Particularly, they find that large gluts in equity and housing prices are indicative of a pending crisis. The authors then engage in a historical comparison.
The results of the comparison are as follows: house prices followed similar patterns with other crises, though they rose more acutely and seem to be falling even more rapidly; real equity prices have yet to fall substantially as has been the case with other financial crises, though the growth trend is very sharply upward; the US current account balance is much less balanced than the average for other countries entering financial crises; real GDP growth per capita is following a similar, slightly contracted, trend as have other countries as they approach financial crises; public debt has also risen consistently, as was the case with previous crises.
The authors conclude by noting that all financial crises are surely different, and that most crises are preceded by a period of financial liberalization. While they note that there has not been substantial juridical liberalization, financial freedom can be seen in the removal of certain barriers and regulatory frameworks.
The authors also paralell the 1970s petro-dollar recycling that took place, and how that led to the debt crisis of the 1980s, where cheap money was freely given to countries. In the 1990s, however, the unsuitable debtor is not a de facto nation, but rather a slice of American borrowers who cannot afford to be home owners.
Reinhart and Rogoff: The Aftermath of Financial Crises
Reinhart, Carmen, and Kenneth Rogoff. 2008. The Aftermath of Financial Crises. NBER Working Paper (December 19).
In an earlier publication, these authors explored a variety of factors relating to the US economy. All of these indicators pointed towards the onset of a financial crisis. This paper also uses history to explore current events by looking at what happens to economies after a banking crisis has occurred.
This analysis includes some emerging countries that have experienced financial crises. The argument is that there is not a very substantive difference between the characteristics of those crises and the crises that strike more financially complex nations.
In general, there are three characteristics that can be inferred form the aftermath of a financial crisis: "First, asset market collapses are deep and prolonged...Second, the aftermath of banking crises is associated with profound declines in output and employment...Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes...In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn" (2).
Decline in house prices is explored. In financial crises, there is typically a decline of about 35.5% in house prices from the peak to the trough of the contraction. The average length of time that the decline is experienced is 6 years. In terms of equity prices, there is an average drop of 55.9% and an average duration of 3.4 years. In terms of unemployment, there is an average increase of 7% and a duration of 4.8 years. Decrease in Real GDP averages 9.3% with an average duration of 1.9 years. After three years, there is an average governmental debt increase of 86%.
"How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime...On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors" (10).
In an earlier publication, these authors explored a variety of factors relating to the US economy. All of these indicators pointed towards the onset of a financial crisis. This paper also uses history to explore current events by looking at what happens to economies after a banking crisis has occurred.
This analysis includes some emerging countries that have experienced financial crises. The argument is that there is not a very substantive difference between the characteristics of those crises and the crises that strike more financially complex nations.
In general, there are three characteristics that can be inferred form the aftermath of a financial crisis: "First, asset market collapses are deep and prolonged...Second, the aftermath of banking crises is associated with profound declines in output and employment...Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes...In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn" (2).
Decline in house prices is explored. In financial crises, there is typically a decline of about 35.5% in house prices from the peak to the trough of the contraction. The average length of time that the decline is experienced is 6 years. In terms of equity prices, there is an average drop of 55.9% and an average duration of 3.4 years. In terms of unemployment, there is an average increase of 7% and a duration of 4.8 years. Decrease in Real GDP averages 9.3% with an average duration of 1.9 years. After three years, there is an average governmental debt increase of 86%.
"How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime...On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors" (10).
Sunday, December 21, 2008
Summers: International Financial Crises: Causes, Prevention, and Cures
Summers, LH. 2005. International Financial Crises: Causes, Prevention, and Cures. Economic Globalization In Asia.
This is a lecture.
Summers begins by noting how important applied economic research is to policy decisions, and how frequently it is used to make decisions that affect the lives of millions. Today he is talking about crises. There are four points that he outlines that he will address: 1.) what is the relationship between efficiency in financial architecture and system performance? 2.) what are the sources of crises? 3.) how best should the financial architecture be structured either internationally or nationally? 4.) what should nations do when a crisis occurs? (2).
Summers analogizes the advent of jet-engine technology to that of financial capital flows: the jet improved international travel immensely, even though there were spectacular crashes that occurred, especially earlier in the adoption of the technology. In this same way, finance capital can also stream-line international capitalism, though it may also be prone to spectacular crashes.
"International financial crises can be defined in many ways and can take many forms. What I mean by an international financial crisis is a situation where the international dimension substantially worsens a crisis in ways that would not occur in a closed economy" (5).
"There have been six major international financial crises during the 1000's: Mexico in 1995; Thailand, Indonesia, and South Korea in 1997-1998; Russia in 1998; and Brazil in 1998-1999" (6).
There are three general trends that can be inferred from these crises: "First, after a period of substantial capital inflows, investors...decide to reduce the stock of their assets in the affected country in response to a change in its fundamentals...Second, after this process went on for some time in these emerging-market countries, investors shifted their focus from evaluating the situation in the country to evaluating the behavior of other investors...Third, the withdrawal of capital and the associated sharp swing in the exchange rate and reduced access to capital exacerbated fundamental weakness, in turn exacerbating the financial-market response" (6).
Contagion is also another crucial factor in determining the severity and breadth. The author lists seven different ways that contagion can take effect.
"Just as better airplanes and airports are good in ways that go beyond accident-prevention, all of these steps are valuable not simply as crisis prevention measures, but in their own right, as proven strategies for promoting economic efficiency and growth" (9).
"Crisis response, like crisis prevention, has two dimensions: national policies that can restore confidence and international efforts to finance a credible path out of crises. Of these, by the far the [sic] most important is the response of national authorities in the countries concerned" (10).
Summers outlines potentially helpful national and international responses to financial crises.
This is a lecture.
Summers begins by noting how important applied economic research is to policy decisions, and how frequently it is used to make decisions that affect the lives of millions. Today he is talking about crises. There are four points that he outlines that he will address: 1.) what is the relationship between efficiency in financial architecture and system performance? 2.) what are the sources of crises? 3.) how best should the financial architecture be structured either internationally or nationally? 4.) what should nations do when a crisis occurs? (2).
Summers analogizes the advent of jet-engine technology to that of financial capital flows: the jet improved international travel immensely, even though there were spectacular crashes that occurred, especially earlier in the adoption of the technology. In this same way, finance capital can also stream-line international capitalism, though it may also be prone to spectacular crashes.
"International financial crises can be defined in many ways and can take many forms. What I mean by an international financial crisis is a situation where the international dimension substantially worsens a crisis in ways that would not occur in a closed economy" (5).
"There have been six major international financial crises during the 1000's: Mexico in 1995; Thailand, Indonesia, and South Korea in 1997-1998; Russia in 1998; and Brazil in 1998-1999" (6).
There are three general trends that can be inferred from these crises: "First, after a period of substantial capital inflows, investors...decide to reduce the stock of their assets in the affected country in response to a change in its fundamentals...Second, after this process went on for some time in these emerging-market countries, investors shifted their focus from evaluating the situation in the country to evaluating the behavior of other investors...Third, the withdrawal of capital and the associated sharp swing in the exchange rate and reduced access to capital exacerbated fundamental weakness, in turn exacerbating the financial-market response" (6).
Contagion is also another crucial factor in determining the severity and breadth. The author lists seven different ways that contagion can take effect.
"Just as better airplanes and airports are good in ways that go beyond accident-prevention, all of these steps are valuable not simply as crisis prevention measures, but in their own right, as proven strategies for promoting economic efficiency and growth" (9).
"Crisis response, like crisis prevention, has two dimensions: national policies that can restore confidence and international efforts to finance a credible path out of crises. Of these, by the far the [sic] most important is the response of national authorities in the countries concerned" (10).
Summers outlines potentially helpful national and international responses to financial crises.
Saturday, December 20, 2008
Armijo: Political Geography of World Financial Reform
Armijo, LE. 2001. Political Geography of World Financial Reform: Who Wants What and Why, The. Global Governance 7: 379.
Ever since the latter third of the 1990s and the collapse of many economies in South East Asia, there have been many calls for finance reforms. "The purpose of this essay is to demystify some of the major reform proposals, and to understand which countries and interests back them. I suggest that the reforms proposed by a loose coalition of 'financial stabilizers' make the most sense on economy efficiency grounds, but that the bargaining structure of the issue area is such that the reforms most likely to be implemented are those of the 'transparency advocates'" (1).
How does one define "Financial Architecture"? "Not unexpectedly, the definition of the beast is elastic. To multinational bankers and institutional. investors, reforms of the financial architecture means consensual global implementation of best practice standards of accounting and reporting of national and corporate financial information in developing countries. To many members of the U.S. Congress, it means that the [IMF]... and World Bank should slim down and stop wasting taxpayers' money. To Japan and many Western European governments it means that the U.S. government should cease acting like a one-man band in responding to global financial crises. To finance ministers in very poor countries, as well as to many middle class activists in the advanced industrial democracies, global financial reform means debt forgiveness...And to incumbent policy makers in the so-called emerging market countries...reform of the world's financial architecture usually implies creation of a global lender of last resort with deeper pockets than the present IMF" (2).
"For purposes of this essay, the global financial architecture is an 'international regime,' designating a set of 'principles, norms, rules and procedures' in an international issue area...The international financial regime includes but is not limited to norms and institutions governing exchange rate practices, regulation of all private cross-border financial flows, and management of the 'international financial institutions'..." (2).
Four groups are identified that are interested in financial reform, but that are motivated by different drivers. These are the following: laissez faire liberalizer, transparency advocates, financial stabilizers and anti-globalizers (3). Detailed overviews of each of these groups is presented. The author argues, as noted earlier, that the financial stabilizers are those that should be listened to, but that this is unlikely to actually happen.
Ever since the latter third of the 1990s and the collapse of many economies in South East Asia, there have been many calls for finance reforms. "The purpose of this essay is to demystify some of the major reform proposals, and to understand which countries and interests back them. I suggest that the reforms proposed by a loose coalition of 'financial stabilizers' make the most sense on economy efficiency grounds, but that the bargaining structure of the issue area is such that the reforms most likely to be implemented are those of the 'transparency advocates'" (1).
How does one define "Financial Architecture"? "Not unexpectedly, the definition of the beast is elastic. To multinational bankers and institutional. investors, reforms of the financial architecture means consensual global implementation of best practice standards of accounting and reporting of national and corporate financial information in developing countries. To many members of the U.S. Congress, it means that the [IMF]... and World Bank should slim down and stop wasting taxpayers' money. To Japan and many Western European governments it means that the U.S. government should cease acting like a one-man band in responding to global financial crises. To finance ministers in very poor countries, as well as to many middle class activists in the advanced industrial democracies, global financial reform means debt forgiveness...And to incumbent policy makers in the so-called emerging market countries...reform of the world's financial architecture usually implies creation of a global lender of last resort with deeper pockets than the present IMF" (2).
"For purposes of this essay, the global financial architecture is an 'international regime,' designating a set of 'principles, norms, rules and procedures' in an international issue area...The international financial regime includes but is not limited to norms and institutions governing exchange rate practices, regulation of all private cross-border financial flows, and management of the 'international financial institutions'..." (2).
Four groups are identified that are interested in financial reform, but that are motivated by different drivers. These are the following: laissez faire liberalizer, transparency advocates, financial stabilizers and anti-globalizers (3). Detailed overviews of each of these groups is presented. The author argues, as noted earlier, that the financial stabilizers are those that should be listened to, but that this is unlikely to actually happen.
Hirst and Thompson: Globalization in Question
Hirst, PQ, and G Thompson. Globalization in question. Polity Press.
Ch. 5: The Developing Economies and Globalization:
In the early to mid 90s, around the first edition of this book, the authors claim that there was much hype surrounding the idea that developing countries would continue to grow rapidly, and that they would soon reach parity with more developed countries. It was argued that China would represent the world's largest economy by 2020. These proponents believed that this represented a wonderful trend that would also benefit rich countries, as previously poor countries would now have a demand for the more complicated service items that the developed world has specialized in for some time. However, others argued that this would mark a race to the bottom, where capital, being unrestricted in its movement, would search out the lowest cost for production. This would cause poor countries to have to fight to lower their wages to attract capital. This would also destroy low-skilled employment opportunities in developed countries.
Financial crises in Korea, Latin America and Thailand are explored. Each of these was caused by a different complex mixture of events and factors.
"It should now be obvious that the combination of thoroughgoing internal and external financial liberalization combined with a rigidly pegged exchange rate is a disaster for developing countries. Given the relative shallowness of their financial markets and the difficulty of constructing appropriate regimes of supervision by domestic authorities and practices of transparency by local firms, the tendencies toward exuberant over borrowing and the excessive growth of credit are difficult to prevent. When capital flight begins, attempts to contain it by defending the exchange rate by the use of foreign currency reserves are generally futile" (151).
"The excessive optimism of the early 1990s about the prospects for economic growth in the developing world has rapidly turned sour. It is quite clear that the economic liberal vision of a world transformed by the power of free markets has failed" (160).
Ch. 5: The Developing Economies and Globalization:
In the early to mid 90s, around the first edition of this book, the authors claim that there was much hype surrounding the idea that developing countries would continue to grow rapidly, and that they would soon reach parity with more developed countries. It was argued that China would represent the world's largest economy by 2020. These proponents believed that this represented a wonderful trend that would also benefit rich countries, as previously poor countries would now have a demand for the more complicated service items that the developed world has specialized in for some time. However, others argued that this would mark a race to the bottom, where capital, being unrestricted in its movement, would search out the lowest cost for production. This would cause poor countries to have to fight to lower their wages to attract capital. This would also destroy low-skilled employment opportunities in developed countries.
Financial crises in Korea, Latin America and Thailand are explored. Each of these was caused by a different complex mixture of events and factors.
"It should now be obvious that the combination of thoroughgoing internal and external financial liberalization combined with a rigidly pegged exchange rate is a disaster for developing countries. Given the relative shallowness of their financial markets and the difficulty of constructing appropriate regimes of supervision by domestic authorities and practices of transparency by local firms, the tendencies toward exuberant over borrowing and the excessive growth of credit are difficult to prevent. When capital flight begins, attempts to contain it by defending the exchange rate by the use of foreign currency reserves are generally futile" (151).
"The excessive optimism of the early 1990s about the prospects for economic growth in the developing world has rapidly turned sour. It is quite clear that the economic liberal vision of a world transformed by the power of free markets has failed" (160).
Subscribe to:
Posts (Atom)
