"Please send a Christmas card to Wall Street bankers"

Early in the morning I tend to begin my day with reading articles from the media in France, Malaysia, UK, Deutschland, España, Estados Unidos (in Spanish), US, Brasil, Chile, South Africa, Nederland.

Then I use certain key words (such as 'global currency', 'international monetary reform' and 'carry trade') to do a "Search News" in various languages, which provides me with more interesting articles from various websites including the press agencies.

When I find an article interesting, I send it to myself and, when I think it might be of interest to one or more members of the Fondad Network (the picture above is of one of them, Charles Wyplosz, and the picture below of another, Andrew Sheng), I send it to them as well, highlighting a few paras or quoting the article fully, and raising a question.

Based on these articles an interesting discussion may develop between a few members of the Fondad Network (which is larger than the one included on the Fondad website), and if I think the discussion is of interest to the larger Fondad group, I send it to them too.

It would take me too much time to report on these discussions in this blog -- as I have done sometimes in the past. However, I'd like to share with you a few thoughts that were exchanged recently about zero-interest rate policy (ZIRP).

The discussion started with an article I sent around in which it was argued, "by pegging interest rates at zero percent, the Fed is inflating speculative bubbles worldwide [including China]".

This prompted Charles Wyplosz to say that this statement was not only totally misguided reasoning but also very dangerous. "The Fed deals with US economic and financial conditions, which are weak enough to justify very low interest rates. The impact on China only exists because the Chinese authorities have decided to peg the RMB to the dollar," he stressed.

Andrew Sheng responded, "Charles, who is really being helped by the low interest rates? I can understand why the real sector needs zero interest rates but the 30 year fixed rate mortgage is still 5% per annum, more in real terms. The real winners are the bankers who pay themselves massive bonuses on the back of government guarantees and subsidies from the central banks and then depositors around the world."

Charles Wyplosz retorted, "Assuming that the zero interest rate policy has the effect that you describe, and only that effect, it is redistribution within the US, something that is striclty a US issue. It has no bearing whatsoever on China's monetary policy."

Subsequently, I sent around an article by Andrew Sheng, "A year in crisis - who pays?", in which he says:

"Thanks to the zero interest rate policies, the world is one big carry trade and emerging markets are very bubbly.

Investors are now once again caught between greed and fear. Greed drives a lot to join the momentum play, fear rising as prices go higher and higher. (...)

It is not surprising that the world is schizophrenic about both deflation and inflation.

Economists like Paul Krugman and Nouriel Roubini are in the camp of deflation, whereas investors like George Soros and Warren Buffett are signaling that they are worried about inflation.

Of course, for those with lots of debt, inflation would be welcome because that inflates away the real value of the debt. For those savers whose returns are not higher than the inflation rate, they will share the burden of the inflation tax.

What is quite clear is that most of the world is going to pay for this crisis. So, please send a Christmas card to those Wall Street bankers who are enjoying record bonuses to remind them that all of us are paying for their party."

If you want to read the full article by Andrew Sheng, the link is here.

Macro-prudential regulation

Avinash Persaud sent me some thoughts about macro-prudential regulation which are worth reading (again). Here is what he says:

The counter-revolution begins: the rise and premature fall of macro-prudential regulation

An early consensus to emerge from the wreckage of the global financial system was that in addition to the old, we needed a new type of regulation: macro-prudential regulation. This became so readily accepted, at a time when policy makers were ready to accept almost anything that appeared to be affirmative action, that the term, “macro-prudential regulation”, quickly became a cliché: over-used and poorly understood. So poorly understood, it now appears, that despite much talk of the need for macro-prudential regulation and its cousin, “systemic risk regulation”, it is actually hard to find any detailed macro-prudential regulation in the US Administration’s White Paper. Bank of England Governor, King, has also pointed out that despite being given broader responsibility for systemic risk by the UK Government, he has not yet been given any macro-prudential tools to achieve it.

The term macro-prudential regulation was probably first used in the late 1980s by Andrew Crockett, former General Manager of the Bank of International Settlements. In more recent years his colleagues at the Basle-based BIS, in particular, Bill White and Claudio Borio, championed the idea along with some policy officials –it may be unhelpful to them to identify them by name - and macro-economists like Charles Goodhart, Jose-Antonio Ocampo, myself and others. The point of macro-prudential regulation is that financial firms acting in an individually prudent manner may collectively create systemic problems. Macro-prudential regulation is a response to a failure of composition problem: we cannot make the financial system safe, merely by making every financial institution and product safe.

Proposals to improve the regulation of firms, products and markets - contained in the US Administration’s White paper - are generally a good thing, but they are not macro-prudential. Moreover, these proposals neglect the critical observation that we have spent the last 20 years tightening up micro-prudential regulation and yet financial crashes are just as deep if not more so and they do not occur randomly, which a failure of a rogue firm might imply, but always follow booms. This boom-bust cycle implies there is something “macro” going on we need to address urgently.

A common source of macro-prudential risk is common behaviour by financial firms - often as a result of closer adherence to tougher micro-prudential rules. During booms, asset prices rise and measured risks fall. Acting prudently, financial firms will feel it is safe to expand lending. All financial firms expanding together will lead to a scramble for assets that will create, post-hoc, excesses in valuations and lending. During the resulting crashes asset prices collapse temporarily and measured risks soar. In “Sending the herd off the cliff edge” (IIF, 2000) I showed how all financial firms responding to common prudential, market-based risk controls, would lead them to want to sell the same assets at the same time, creating a liquidity black hole.

Macro-prudential regulation is about encouraging different behaviour than a prudent firm would follow, wherever this prudential behaviour could undermine the financial system if followed by everyone. It is rather like the paradox of saving. Individually saving is good; collectively we can have too much of it. A classic macro-prudential tool that Charles Goodhart and I have advocated is to raise capital adequacy requirements, not for all times, but specifically when aggregate borrowing in an economy or a sector is above average in an attempt to put sand in the systemically dangerous spiral of rising asset prices leading to rising borrowing to buy assets, leading to rising asset prices. This is doable as the Spanish have shown with their counter-cyclical provisioning. India could be said to have carried out macro-prudential regulation when the RBI tightened up credit conditions for lending in the housing market during the recent housing boom. Counter-cyclical measures will not end boom-bust cycles, but they may reduce their amplitude.

Another macro-prudential tool is to take a holistic approach to the financial sector and encourage certain risks to flow to places with a capacity for that risk. When the crash comes, firms that can absorb short-term liquidity risks, perhaps because they have long-term funding, are not forced to join the selling frenzy in the name of common prudential rules for all, but are more able to buy and diversify liquidity risks across time. This would forestall the implosion of the financial system that would occur if there are no buyers, only sellers.

Buried beneath the US Administration’s proposals are hints at counter-cyclical provisioning, extra capital for liquidity risks at banks and differentiated accounting, but the Paper essentially gives to much to those carrying the pitch forks in Congress who argue that what was wrong was that we didn’t have enough regulation. The brave observation is that we had too little of the right, and too much of the wrong, regulation. Doubling up existing regulation will satisfy the justifiable moral outrage against bankers that many voters feel; but it will lead to more of the same in financial boom and bust because it is insufficiently macro-prudential.

Avinash D. Persaud is Chairman of Intelligence Capital Limited, Chairman of the Warwick Commission and Member of the UN Commission of Experts and Pew Task Force on financial reform and Emeritus Professor of Gresham College.

Reform or crisis management?

Interviewing Robert Triffin in 1985 in his room at the University of Louvain-la-Neuve.

Last week I gave a speech at a conference in Louvain-la-Neuve (7-8 May 2009) in which I advocated fundamental reform of the international monetary system. In my speech, "Why should we have listened better to Robert Triffin?", I refer to the March 2009 plea by China's central banker Zhou Xiaochuan to create a new global reserve currency replacing the dollar and I remind that three years earlier Fan Gang, member of the Monetary Policy Committee of China's central bank and member of the Fondad Network, made a similar plea in his contribution to the Fondad conference and book Global Imbalances and the US Debt Problem: Should Developing Countries Support the US Dollar?

At the end of my speech I discuss the likelihood that the world's policymakers will finally adopt and implement a fundamental reform of the international monetary system in an updated version of the Triffin Plan or any other plan that departs from the same basic idea that we need a truly international global reserve asset as key currency of the system.

Given the reactions by US, European and Japanese policymakers to the Chinese and Russian proposals I expect that the process of reform will be slow. Let me quote the end of my speech:

US policymakers, Japanese policymakers and a few European policymakers immediately reacted to the news about the need for "a new global currency" by saying that a fundamental reform that implied replacing the dollar was neither necessary, nor likely in the near future. A number of academics and columnists said the same. But the UN Commission headed by Stiglitz advocated fundamental reform of the international monetary system, and so did the Italian minister of economy, Giulio Tremonti, recently, according to news agency Reuters (30 April). So, is reform about to take place?

I don't think so. The power groups and interest groups opposing fundamental reform of the international monetary system are still strong. The routine of the bureaucrats and bosses in both official and private institutions is likely to prevent action. The policymakers of the NATO countries - with the exception of Italy ? - do not seem to be eager starting a process of negotiating a new monetary system that replaces the dollar as key currency of the system. The Europeans rather prefer to maintain the dollar and improve financial regulation.

Does the old dream of Robert Triffin remain a dream, a utopia?

My hope is that Triffin's dream will become true. The problems of the current system (its instability, its proneness to crisis, its unfair treatment of developing countries) are too big to let them drag on. We should not wait with reform until the next crisis emerges because the costs are too high. It would also be proof of low intellectual quality of our policymakers, and of low intellectual quality of the academics working with them, if they would let drag on the system as it is. Why should they not change it?

I'd like to end my talk with an encouraging quote from Triffin. When I interviewed him in 1985 for the Dutch and Belgian magazine Intermediair, I asked him if he was never accused of being naïve by still believing in the possibility of reforming the international monetary system. "Yes," he answered frankly.

- And what is your reaction to this reproach? I asked.

'Well, I give the answer Ben Gurion once gave: to be realistic today you need a great deal of utopia. Running away from the most obvious solutions is not realism. It's crisis management, condemning you to more and more crisis management."

Latest unemployment figures (taux de chômage) in Europe

I am going to copy a French article with the latest figures about unemployment in the European Union provided yesterday by the statistical bureau of the EU, Eurostat. For those who do not understand French, just take a look at the figures and try to grasp to what countries they are related. (I think that for solving the world's economic problems one needs people who make an effort to understand other languages than solely their mother tongue. A few other characteristics may be needed as well.)

The issue in this blog is how the rise in unemployment is connected to the current crisis, what the main causes of the crisis are, and how they can be remedied. I will come back to that in another post. Then I will stress again the need for fundamental reform of the international monetary system. The old Plan of Robert Triffin (first developed by him already in 1957) to replace the US dollar with an international reserve currency that is not the currency of one country, has gained powerful support from the Chinese, the Russians and others.

Let's now turn to the unemployment figures:

Selon les chiffres publiés aujourd'hui par Eurostat, l’Office statistique des Communautés européennes, dans la zone euro, le taux de chômage corrigé des variations saisonnières s’est établi à 8,9% en mars 2009, contre 8,7% en février. Il était de 7,2% en mars 2008. Dans l’UE-27, il s’est élevé à 8,3% en mars 2009, contre 8,1% en février. Il était de 6,7% en mars 2008.

Parmi les États membres, le taux de chômage le plus bas a été enregistré aux Pays-Bas (2,8%) et les plus élevés en Espagne (17,4%), en Lettonie (16,1%) et en Lituanie (15,5%).

Trois États membres ont enregistré une baisse de leur taux de chômage sur un an, vingt-trois une hausse, tandis que le taux est resté stable aux Pays-Bas. Les baisses ont été observées en Roumanie (de 6,1% à 5,8% entre les quatrièmes trimestres de 2007 et 2008), en Bulgarie (de 6,1% à 5,9%) et en Grèce (de 7,9% à 7,8% entre les quatrièmes trimestres de 2007 et 2008). Les plus fortes hausses ont été observées en Lituanie (de 4,3% à 15,5%), en Lettonie (de 6,1% à 16,1%) et en Espagne (de 9,5% à 17,4%).

Conquer the monster?

People protest during France's second nationwide strike in two months, to demand a boost to wages and greater protection form the crisis, in Marseille Photo: AFP

There is too much information about the economic, social and political problems in this mad world. I mean, all this information seems to contribute more to continuing the mess we are in rather than solving it.

Almost every day I continue reading articles and analyses. How can I put some order in it, distil the useful, make it my own, and share it with others?

The best would be to throw out a few thoughts and stay close to my feelings. I have the impression that too many of the people I read -- all this information is written by people -- are driven by the desire to impress rather than share in a modest and friendly way information or views. In doing so, they reproduce the monster, even though their intention may be to conquer it.

Another problem is that important information is missing and that there is little agreement among economists and politicians about the origins of the current economic crisis and the best ways to solve it. In my previous post I reiterated my view that the crisis stems from a too little controlled, global financial system based on the US dollar and reported with some optimism that the Chinese prime minister seemed to share this view, at least partly. But I am afraid this view will lead to a change in the system only if it is shared more widely. My guess is that most policymakers are more interested in making work again the current system than replacing it by a new one. All the talk about "reform" and "overhaul" of the system is more rhetoric than reality.

Then there is the problem of arrogance among economists. In particular, U.S. economists are good at telling the general public, the government or anyone else what is good for them. Paul Krugman did so recently in Spain, recommending to lower wages and prices, but he is no exception. Could you think of a psychologist prescribing you how to behave?

Nonetheless, economists have hardly any authority to tell you what's good for you. They are social scientists and their object of study is dependent on what you and others are doing and longing for, individually and as members of groups and organisations. Economic advice is based on all kinds of assumptions about a limited aspect of human behaviour and should be discussed in a broader social and political context. Unfortunately, this rarely happens, thus promoting the status of economists to that of doctors of society -- a status they cannot live up to and ought to tell people they do not deserve.

This morning I read in the Telegraph that today, "Up to two million people were expected to take part in more than 200 demonstrations protesting against President Nicolas Sarkozy's handling of the global financial crisis. The biggest was in Paris, where militants called for an increased minimum wage and higher taxes for the rich."

Why are so few economists and politicians advocating higher minimum wages for the poor and higher taxes or lower salaries for the rich?

PS: Later I read that Krugman received 100,000 euros for his lecture in Spain. I did not find official confirmation that he indeed received that amount.

Halt (stop) and help !

In my previous post I said that citizens should not feel powerless vis-à-vis the current economic crisis and leave its resolution to the policymakers. However, I’m afraid Western policymakers themselves are increasingly feeling powerless too. They do not seem to be able to stop the crisis.

Initially the focus was on irresponsible behaviour of the banks, but now Western governments are getting under fire. In France, where Sarkozy as chair of the EU was internationally praised for his energetic approach to the crisis, a large majority of the population (70% according to a poll) supported a wide-ranging strike against the government held yesterday. The strikers blame Sarkozy that he is responding inadequately to the crisis, and helping the banks but not the ordinary people. The BBC reported: “So where, the French people are now asking, did the 360bn euro shore-up fund to guarantee banks come from? This, at a time when the government was busy slashing thousands of public sector jobs, trimming pension benefits and planning massive cuts to the education budget.”

Yesterday, at the annual meeting in Davos, China’s premier Wen Jiabao blamed the US (and the EU) for the current economic breakdown. “Inappropriate macroeconomic policies,” an “unsustainable model of development characterized by prolonged low savings and high consumption,” and “the failure of financial supervision” all contributed, said the Chinese leader. He also attacked Western financial institutions’ “blind pursuit of profit” and their “lack of self-discipline”.

Premier Wen also blamed the Western-designed global financial system for the world's current economic problems. He said: “The current crisis has fully exposed the deficiencies in the existing international financial system and its governance structure. We should expand the regulation of the international financial system, with particular emphasis on strengthening the supervision on major reserve currency countries.” Pointing to “major reserve currency countries”, Mr. Wen clearly thought of the United States in the first place, as the system is still based on the US dollar.

I share premier Wen’s critique of the dollar-based global financial system. More than twenty-five years ago, in a long article, I blamed the same system for the outbreak of the debt crisis in Latin America and warned that it would create future international crises. In the following years, as director of FONDAD, I organised international meetings where, time and again, high-level experts discussed the flaws of the global financial system and suggested ways to remedy them. Policymakers participated in these meetings and welcomed the constructive ideas presented. But they did not have the willingness, energy or power to put them into practice.

Now we are in the midst of a mess that policymakers find difficult to address. We should not leave it to them to come up with a better system and better policies.