Monday, March 31, 2008

Stock prices

This morning I looked for an hour at CNBC -- a channel for those who love to talk about prices. They talk about changing prices as if it is the largest joy in life, and the most important matter in the world.

To be more precise: they talked about stock prices. What do you think of stock prices? Do you like them? Do you read them?

I've always skipped stock prices in newspapers, I don't even saw them really. But now I was looking at them, for an hour, and they couldn't escape my eye as they moved on and on on the screen, and as the men and women on the screen seemed to have the most lively and amusing conversations about them.

Suddenly someone pops in from France. A nice looking man, typical Frenchman, impeccable English, with a nice French accent. Then an Italian businessman, the businessman of the year !, pops in, also in impeccable English, with less of an accent than the Frenchman. He is a bit older than the Frenchman and does not wear a tie but a black pullover. The Italian is more relaxed -- he seems to have made his fortune already. Or do those who have gained a fortune always want more?

Then a lady walks back and forth on the screen, not doing exercises but pointing vividly at man-size graphics with... prices ! She seems to enjoy them, and seems to think that we enjoy then too. Do you?

My brother (Herman) said in a comment to my previous post that he was not amused when he saw the prices of his stocks fall. He lost (a lot of?) money. I promised him to write a comment on his comment.

The above is, in part, my comment. I could say more about it but hesitate to say too much as it has already become clear how I think about stock prices. Gaining and losing -- it's all in the game.

What about pensions and pension funds. I obviously hope that my pension will not be wiped away by a crisis. That's why I'm engaged with crisis prevention for already more than 25 years...

No, I was kidding. The real reason I'm engaged in crisis prevention is that I am concerned about people whose living conditions are much less fortunate than mine. I don't have any reason to be concerned about my own fate. I do worry, however, about other people's fate.

I remember vividly a letter from a (poor) Chilean friend of mine who lost his savings in a banking crisis in Chile. I also remember vividly my worries about my brother who had to face exorbitant high interest rates after the change of monetary policy in the United States at the end of the 1970s, just after he had emigrated to Canada and had to indebt himself to set up a dairy farm.

So here you have my thoughts, brother.

On the picture you see my brother and me, not yet discussing stock prices.

Thursday, March 27, 2008

A critical mind

My son and I are driving to the Rotterdam office of Fondad, to fix some IT problems (he, not me). My son studies physics but still has a keen interest in economics.

"I find it ridiculous that banks can let public institutions pay when they incur large losses," says my son.
"You are right," I say.
"I find it ridiculous that people make such a problem about falling stock prices."
"You are right," I say.

My son considered studying economics. Next year he wants to study theoretical physics. To what use will he put his critical mind?

The picture of him and me is of about ten years ago, during a holiday in France. I read today the article in Le Monde Diplomatique and will refer to it in one of my next posts.

Tuesday, March 25, 2008

Explaining the crisis (1)

The global financial system looks complicated, but is simple, even though it does not present itself as simple. True, it's not easy to grasp its simplicity. Once I made an effort, in a long article, "The Monetary Crunch: Crisis or Scandal?" (to be put soon on the Fondad website), and I was not fully satisfied.

I have received several papers in response to my request for articles about the international credit crisis (which started last year as a subprime mortgage crisis in the US). In the first two posts on explaining the crisis, I'd like to discuss unpublished papers by John Williamson and Andrew Sheng.

The first time I came across John's name was in the early 1980s, when I spoke to Robert Triffin who referred to him. Ten years later, I had the pleasure of inviting him to a Fondad conference about "The Functioning of the International Monetary System" (see Fragile Finance). Since then John has been a great contributor to Fondad conferences and books.

I saw Andrew's name for the first time in the early 1990s. Last year I invited him to a Fondad conference in Kuala Lumpur about "Globalisation, Asian Economic Integration, and National Development Strategies: Challenges to Asia in a Fast-Changing World". I enjoyed Andrew's contributions in the conference and our private conversations.

My assertion that the global financial system is, or ought to be, a simple matter departs from the idea that the crucial variable in the system is prices: prices of assets (houses, for example) and prices of loans (payment of interest and repayment of principal), or whatever else that carries prices. What is there more simple than prices?

It is the essence of prices that they can rise and fall, and so do the prices of assets and loans. Nothing complicated.

The complication begins when people expect prices to be stable. Then you are in for trouble. As John says, "trouble started when house prices [in the US] stopped rising and started falling".

However, bankers and central bankers should have expected the falling of house prices since booms do not go on for ever. "The existence of a boom must have been clear even to central bankers (some of whom assert that they cannot be expected to identify bubbles)," says John.

Again, this has nothing to do with "complicated" economics, it's just the simple behaviour of commercial bankers (lenders), house owners (borrowers), and central bankers (regulators and supervisors).

Where then is the complication in the subprime mortgage loan crisis? In the slicing, dicing and packaging of the subprime mortgages into new financial instruments such as "special investment vehicles", says John.

As a result, "financial intermediaries did not know where many of the losses would end up, and to avoid unpleasant surprises they aimed to stop lending even to counterparties that would normally have been regarded as rock-solid."

So it is the panic and uncertainty that led to the subprime mortgage crisis in August 2007.

Then, as with previous financial crises, the crisis quickly spread and deepened. "While the first impact was on the mortgage and interbank markets, many additional assets have now been affected," observes John.

This is also nothing new. From previous crises we know that chain reactions happen.

As John says, "A fall in the value of certain assets triggers calls for increased collateral ... by those who have used those assets as collateral ... the affected institutions are forced to sell other assets, whose prices therefore fall; and that in turn sets the stage for the further propagation of the crisis."

Instead of chain reaction you can also call it "contagion" -- not a very complicated economic notion either.

So it seems that financial crises have more to do with (mass) psychology than anything else: expectations, uncertainty, fear, herd behaviour, contagion, etcetera.

In the next posts, I will continue discussing John's ideas and I will include thoughts of Andrew as well as those of others. I just glanced at the opening lines of a front page article in Le Monde Diplomatique, "Crises financières, n'en tirer aucune leçon..." Will it contain interesting thoughts?

Tuesday, March 18, 2008

Another light thought

Another light thought before I get to the serious business of analysing the current turmoil of global financial markets: economics is nothing more -- and nothing less -- than opinion supported by certain facts. Opinion can change, as happens in economic science, and facts can change, as happens in reality.

There are many other thoughts one can derive from or associate with this light thought.

In the meantime, I have received many interesting articles from you. Thanks! I will write about them.

Too seriously

A small thought in between: I think that one of the problems of our world is that economists talk too much to each other and that non-economists take them too seriously.

The same applies to politicians.

And journalists?

This is not to say that I'm against serious economic analysis. On the contrary.

Sunday, March 16, 2008

Explaining (dollar) debt crises (1)

As I said in my previous post, explaning the debt crisis Bernard Snoy put more emphasis on the way the international monetary system had evolved. In his speech of June 7th, 1986, he said: "When the Bretton Woods monetary system collapsed in 1971, this caused great economic and monetary uncertainty, and the large U.S. budget deficit led to an increase in lending and borrowing in U.S. dollars outside the U.S., notably on the uncontrolled Euro-markets. Together with the sudden increase in oil prices and the oil-producers' subsequent preference to place their revenues in short-term deposits in commercial banks, the conditions leading to the massive increase in international debts were set."

In these two sentences Bernard said a lot of things other "analysts" of the debt crisis did not say: (1) its relationship with the international monetary system; (2) global economic and monetary uncertainty; (3) large US budget deficit; (4) US debt leading to an increase in lending and borrowing in US dollars; (5) uncontrolled international capital markets; (6) oil producers' preference to place their revenues in short-term deposits in commercial banks.

These six factors are worth dwelling upon and applying to the current crisis in international capital markets. I would like to do that in a next post -- if you haven't done so already in your comments (will there be comments? I'd like to invite Barbara, Wing, John, Jan, Peter B., Charles, Stephany, José Antonio, Rob, Mark, Ricardo, William (Bill), Louis, Zdeněk, Yung Chul, Roy, Bernardo, Eugene, Brian, Jane D', Bernard (Snoy), Dani, Barry, György, Esteban, Andrew (Sheng), Matthew, Yılmaz, Ernest, Benno, William, Amar, Amar, Henk, Nout, Age, Stijn, Geske, Geoffrey, Mohamed, Onno de, Rogério, Heiner, Eisuke, Geng, Yunjong, Fan, Robert, Marek, Gerald K. (Gerry), Jan, Li-Gang, Johannes, Liliana, Osvaldo, Jeffrey...)

I still owe you the question I raised in the June 7th 1986 debate organised by Dutch christian-democrats (attended by Balkenende) and the reply by Onno Ruding, both according to the report. Here comes my question: I "asked whether the allies of the U.S. would be willing to use their influence in order to plead for a reduction in military expenditures, so as to reduce the U.S. budget deficit and thereby lead to a lower interest rate."

And Ruding answered: "At the heart of today's discussion is whether the U.S. should decrease its budget deficit, not how it is to do so, however interesting that might be for the U.S. itself or for those in favor of reducing military expenditures."

Wednesday, March 12, 2008

Ruding and Balkenende

When in the 1980s the debt crisis emerged, I was astonished by the superficiality of most analyses. Generally it was argued that developing countries had borrowed irresponsibly or that banks had lent irresponsibly (stupid countries and stupid banks) and that, therefore, the only solution was that developing countries cut down their expenditures and increased their capacity to pay their debts. Strangely enough it was much less frequently and prominently argued that banks had to accept a write-down of their loans.

But what was missing most was an in-depth analysis of how the debt crisis had emerged, what its origins had been, and how much it had to do with the way the international monetary and financial system had evolved.

A similar feeling of astonishment invaded me when in 2007 the so-called subprime mortgage crisis emerged. Again, superficial analysis prevailed, which can be summarised as "Stupid loans by stupid banks".

Recently, when thousands of papers went through my fingers as I was moving the Fondad office from
The Hague to Amsterdam, I came across a report of a meeting I had attended on 7th of June 1986 about "The International Debt Problem", organised by the Dutch christian-democratic party.

And whose names did I find in the report as participants? Yes, indeed, the current prime minister of the Netherlands (Balkenende), a former minister of finance and now banker (Onno Ruding), several professors and MPs, my friend Bernard Snoy, and others.

There were two guest speakers at the June 1986 meeting, Onno Ruding (then minister of finance) and Bernard Snoy (then chief of the Finance and International Relations Unit of the European Office of the World Bank).

Ruding argued that the debt crisis was a problem of middle-income countries who, luckily, had become to realise that they would have to do the job of finding solutions as the problem had been of their own making. "The solution isn't to be expected from getting more money wherever it might be found, but must be based on sound financial policies and economic adjustments, involving mid-term policies with a structural impact," said Ruding according to the report.

Ruding also saw a role for the World Bank and the IMF, the first in promoting appropriate micro-economic policies and the second in providing advice at the macro-economic level (I'm still quoting the report).

And what about "the industrial creditor countries"? They should lower their interest rates, said Ruding ("in particular a reduction in the U.S. budget deficit would lead to lower interest rates which in turn would lessen the debt-servicing burden for developing countries"), reduce protectionism, achieve more economic growth, and take specific financial measures such as export credit guarantees ("which the Netherlands is willing to do for those developing countries who are willing to effectively make the necessary adjustments in their own policies").

After Ruding's speech there was a lively discussion in which I also participated. One of those who raised a question was the young christian-democrat Jan Pieter Balkenende. He felt the debt problem should not only be treated from a financial, economic point of view, "but through its relevance in the economic, cultural and political fields on the international level."

Ruding replied, "As for the influence of for example cultural matters, one can note that in some countries the statal sector is far too extensive and that privatisation is needed. However, on the international level, the role of governments should not be reduced."

In a next post, I will continue my report of this 1986 meeting by highlighting a few of Bernard Snoy's remarks, who has much more of an eye for the way the international monetary and financial system had evolved. I will then also quote my question to Ruding and his answer.

Tuesday, March 11, 2008

Independent thinking

There are five prominent realms of knowledge, reflection and action:

1. politics
2. science
3. business
4. government
5. media.

Our daily life is influenced by all five, in different mixtures. Reflection and action in some of the realms are perceived as more individualistic and independent while others are considered more collective, conformist and bureaucratic.

Strangely, journalists, scientists and politicians often see themselves as individualistic and independent, even though their thoughts and actions are much more collective and conformist than they think.

Government officials and business people are bureaucratic (I never understood why bureaucracy is ascribed mostly to government institutions, while larger organisations, be they public or private, tend to be bureaucratic) and usually recognise their collective and conformist attitude.

Economists are active in all five realms and most economists working in science see themselves as independent, individualistic thinkers. However, they are much more collectivist and conformist than they think. Do they lack critical self-reflection?

There is a tremendous lack of independent economic thinking and I see this as one of the problems of our society (which needs critical analysis) and of economics as science. Economists like to see themselves as independent thinkers, but in fact provide mostly conformist thoughts.

Obviously, this problem is not confined to economics, but of all social sciences it is perhaps the economic science (is it a science?) that has fallen most prominently into the trap of false pretences.

Because of "society's" view of economics, giving it too high a status? Because of the power of business? Because of the lack of critical reflection by journalists and politicians, and by scientists, business people and government officials?

In a next post I will have a critical look at economics and journalists, whose profession and pretences I know, both as an observer and a participant. I will write as well something about economics and politicians. Scientists, business people and government officials will come later.

Thursday, March 6, 2008

Fresh thoughts!

In the mid-1970s, I began to read literature on international finance, mainstream journals like Euromoney, Institutional Investor and newspapers like the Financial Times, and alternative journals such as Development Dialogue (Sweden) and many journals in Spanish and French – as a necessary counterweight to Anglosaxon mainstream thinking and because I like to read and speak Spanish and French.

In the mid-1980s, I was able to create an international forum to discuss the functioning of the international monetary system and the debt crisis, the Forum on Debt and Development (FONDAD). I established it with the view that the debt crisis of the early 1980s was a symptom of a malfunctioning, flawed system – see, for example, my article “The International Monetary Crunch: Crisis or Scandal?”, Alternatives, Volume XII, No. 3, July 1987. (We will put it on FONDAD's website).

A few weeks ago my assistant Adriana and I started moving our office to Amsterdam (headquarters) and Rotterdam (book sales). Thousands of papers, journals, letters and books passed through my hands. My fingers are dry and hurt, and I am exhausted by the selection process.

I have thrown away most of the literature on international finance I had stored and filed over 30 years, not through the window but as old paper to be recycled, to create room (espacio) and stimulate fresh thoughts. Valuable articles and books remained such as those of Robert Triffin.

The picture above shows Robert Triffin and me, in his room at the Université de Louvain-la-Neuve in Belgium, during one of our long conversations in the early 1980s.

Going through the thousands of papers in my old office I found interesting letters and papers whose existence I had forgotten. In next posts I will tell about them. One thought I had when going through the dust of old stuff is that the past harbours interesting ideas for the future.

Nonetheless, I was able to throw away a lot, creando espacio para nuevos pensamientos.