Jens Weidmann

In 1986, when I was 38, I considered myself young, pragmatic and somewhat visionary and revolutionary. That year I created the international economic forum FONDAD to contribute to resolving the debt crisis of the eighties and preventing future crises. That same year Jens Weidmann was 19.

In the period 1987-2007, many economists around the world attended the conferences organized by FONDAD during those 20 years, including ministers of finance and central bank presidents.

Jens Weidmann is now 45 and is president of the German central bank. I doubt that he considers himself young and revolutionary. More likely, he sees himself as pragmatic and, perhaps, a bit visionary.

However, I do not think that Jens Weidmann is pragmatic, nor visionary, even though many who agree with him may think he is.

Better Global Financial Governance – The Need for Reforming the System and Abandoning Free Market Ideology

Here is a talk that I gave at a Shadow G20 Workshop in Paris (29-30 October 2011)

Better Global Financial Governance – The Need for Reforming the System and Abandoning Free Market Ideology

Speech by Jan Joost Teunissen (founder and director of FONDAD) at the Shadow G20 Workshop in Paris, 29-30 October 2011 (Columbia Global Center, Reid Hall, Paris)

What kind of world are we living in?

If a psychologist would say, ‘You should think this, do that and accept what I tell you,’ a normal person would react by saying: ‘Hey, wait a minute, you cannot prescribe me how I should think or what I should do or accept.’ If a sociologist would do the same and prescribe how people in a society should think and behave, a normal person would say, ‘Sorry, you cannot prescribe us how we should think and behave.’ But, for some strange reason, when an economist does the same and prescribes how we should think and behave and what we should accept, it is felt as normal.

But this is not normal. Let me give another illustration of the absurdity of our world.

“If your unions are too strong and fight against lower wages and unemployment, or for healthy labour conditions, we will lower your credit rating thus forcing you to lower wages, increase unemployment and make labour conditions tougher.”

“If Greece has a problem in repaying its debt, we will increase the costs of repaying its loans.”

“If you refuse to privatise public companies or refuse to make it easier to lay off workers, we will not give you the loans we have promised you.” (said to Greece and Italy)

This is the world that is presented to us as “normal”. Why do people accept it as normal? Because they are told so, because they think it’s OK, because they are indoctrinated every day.

1. In this panel we discuss Global Financial Governance (GFG) and I suppose we have to give ideas of how it can be improved. But my immediate question is: Better GFG of what? Of the current international monetary and financial system? No, please not. I would prefer better GFG of a better system, because the current system has enormous problems and should have been reformed and fundamentally improved long ago. Why?

Let me give four reasons (there are more):

- First, because the current system has led, since the end of the 1960s, time and again, to financial crisis and economic instability, creating a lot of suffering for ordinary people.

- Second, because the system gives too much power and freedom to the financial sector.

- Third, because it creates credit and debt bubbles, as some experts realised already many years ago and now, with the crisis in the heart of the system, has become clear to everybody.

- Fourth, because the current system gives too much priority to finance instead of the real economy.

I would like to dwell briefly on the second point that there is far too much power in the financial sector. Every day you can hear in the news that governments are warned by the financial sector that they should do this or that, otherwise the financial sector, or the financial markets as they are usually called, will punish them with a lower credit rating and higher interest rates on loans. Governments seem to be powerless victims of a monster that they themselves have created when they decided in the early 1970s to let the private financial sector dominate international finance, and not reform the international monetary system as they had agreed in 2-year long negotiations (1972-74). And in the 1980s they deliberately deregulated the financial sector embracing fully the neoliberal agenda of deregulation, privatisation and free capital, an agenda faithfully advocated by mainstream economists.

Even though I think many people working in the financial sector have behaved and are still behaving irresponsibly, given the economic facilitating role that they ought to play – finance should be a means and not an end – and given the public responsibility of the financial sector, I blame first of all governments and mainstream economists for the mess we are in. Historically and politically, they are the ones responsible for it. They allowed the foreign financing of US deficits. They allowed the greed of bankers to have free play. They allowed the United States to finance its wars and have its military around the world including Europe, to defend Europe, with dollars lent by the rest of the world. They allowed global imbalances to emerge. They allowed the creation of a huge derivatives market of so-called innovative financial products that amounts to over 600 trillion dollars. And now these same governments feel powerless, or show they are powerless, against the vagaries, greed and profit-seeking of people switching huge anounts of money through international financial markets.

Yes, I’d like to stress it’s PEOPLE who are doing this. The neutral term “financial markets” is misleading. Financial markets are being talked about as if they are part of nature, as storms or rain showers that plague us and we are unable to protect ourselves against. But markets are managed and run by individuals, by so-called financial experts and economists. And their colleague economists working in the ministries of finance, in the central banks and other supervising bodies, and in the international financial institutions, let them largely do their tricks. They do not really limit the power of people operating in financial markets.

So this is not the global financial and monetary system that I would like to see governed or managed better by having, for example, a more powerful representation of emerging economies in international financial institutions (which I favour), or by making these same international financial institutions more powerful players in the global financial and economic arena. We need to reform the system! And we need to reform the dominant values, the ideology that maintains the system.

2. Even though over the last 4 years, after the crisis started in 2007, there has been much talk about the need to reform the system, and even though there have been many good technical and political proposals by individuals and groups coming together for this purpose, the effort of policymakers still seems to be largely to keep the current system going – with all its in-built problems and the certainty that it will lead to another crisis. Why do policymakers stick to the current system even though it has such serious problems and shortcomings?

Let me give you three reasons (but there are more):

- First, because policymakers are afraid of reforms that they do not know or are not sure about how they will function and what effects they will have. They rather prefer to stick to the routines they are familiar with.

- Second, policymakers are against reforms or are scared of reforms that do not have the agreement of mainstream economists and of people operating in the international financial markets.

- Third, policymakers have an interest in keeping the system basically as it is and only are prepared to make minor adaptations (which they themselves may see as major adaptations) to it. How they themselves would define this interest, I do not know. But I think they defend certain economic interests, certain political interests, and certain power relations that guarantee the continuation of these interests. I also think that policymakers see international financial markets as a key element of the system, and believe that governments and international financial institutions should intervene as little as possible in these markets, and only where it is really needed.

3. It is not the first time that the need for reform of the international monetary and financial system is being discussed and that sensible proposals to this effect have been made. Neither is it the first time that sensible proposals were not adopted, let alone implemented.

Efforts at reform of the system have been made on various occasions since the 1960s. The first efforts date back to the 1960s when dollar crises erupted because of US balance of payments deficits and the loss of confidence by other countries in the capacity of the United States to exchange dollars for gold. So there was a flight into gold and European currencies. These gold-dollar crises were “resolved” in 1971-73 by decoupling the dollar from gold and by moving from a system of fixed to flexible exchange rates. Then, in 1979, when there was another crisis of confidence in the value of the paper-dollar, it was “resolved” by a steep rise in US interest rates and by embracing neoliberal, monetarist policies. After that, in 1982, we had, primarily as a result of this steep rise in the US interest rate, the debt crisis of the 1980s in Latin America and a few other countries. Then, in the 1990s, we had several debt crises in emerging economies. During all these crises, wise men and women came together to suggest sensible reform proposals. Why have they had so little success in getting their proposals adopted and implemented?

I think partly because of the same three reasons I gave already: (1) policymakers are scared of reform, (2) policymakers are against reforms that meet the opposition of mainstream economists and people of the financial sector, and (3) policymakers have an interest in keeping the system as it is.

Let me elaborate on the last reason.

Policymakers want to keep the system as it is, not only because of sticking to certain economic policies and interests, but also because of sticking to certain political policies and interests. For example, in the 1970s and afterwards, NATO countries saw an interest in maintaining the US dollar as the key reserve currency of the system, as this would allow the US to finance with foreign-held dollars its military force for maintaining western dominance in the international political arena, and for military intervention.

Now, elaborating on the second reason, policymakers’ resistance to reform proposals that do not have the approval of mainstream economists and people of the financial sector, I see a serious problem with mainstream economists. They largely determine the terms of the “real”, or one could also say, the “false” debate. The problem of mainstream economists is that they have a biased and limited view of man & society, of how man and society should behave, and of what is “normal” or economically sensible behaviour. They presume, for instance, that normal behaviour should be driven by competition instead of cooperation and solidarity, and ruled by so-called free markets. I think we need a broader, social, political, ecological and philosophical view of man & society instead of the narrow view of mainstream economists.

There is yet another reason why reform proposals are not adopted, and that is that policymakers base their policies on limited and biased analysis of the crises, both of the crises of the past, and the crisis of today. A good example is the debt crisis of the 1980s in Latin America, in which the standard explanation was that developing countries had borrowed too much and western banks lent too much, while the alternative explanation stressed that the crisis was caused by a dollar-dominated global financial system that should have been reformed at least ten years earlier. I am one of those who presented in the mid-1980s the alternative explanation in an extensive article for the journal Alternatives that included long conversations with the famous economist Robert Triffin, who had advocated reform of the international monetary system since 1958.

4. What reform proposals of the system have been made over the last couple of years? Various reform agendas have been proposed, both by individuals and groups. Let me mention three group proposals that are relatively moderate, the one more than the other, but have not been adopted yet.

- The first is a report by a UN Commission, “Reforms of the International Monetary and Financial System”, headed by Joseph Stiglitz and presented in March 2009.

Stiglitz highlighted its proposals in a short article (Guardian, 27 March 2009) as follows. ‘There are several important lessons from the crisis. One is that there is a need for better regulation. But reforms cannot be just cosmetic, and they have to go beyond the financial sector. Inadequate enforcement of competition laws has allowed banks to grow to be too big to fail. Inadequate corporate governance resulted in… excessive risk taking…’

The UN Commission recommended the establishment of a Global Economic Coordinating Council, to co-ordinate economic policy, to identify gaps in the global institutional arrangement, and propose solutions. ‘For instance,’ said Stiglitz, ‘there is a need for a Global Financial Regulatory Authority… There is a need for a Global Competition Authority… There is a need for a better way of handling defaults of countries…’

The other important recommendation by the UN Commission was the creation of a new global reserve system. ‘The existing system,’ said Stiglitz, ‘with the US dollar as reserve currency, is fraying. The dollar has been volatile. There are increasing worries about future inflationary risks. At the same time, putting so much money aside every year to protect countries against the risks of global instability creates a downward bias in aggregate demand weakening the global economy. Moreover, the system has the peculiar property that poor countries are lending trillions of dollars to the US, at essentially zero interest rate, while within their country there are so many needs to which the money could be put. A new Global Reserve System is "feasible, non-inflationary, and could be easily implemented".’

- A more recent set of proposals for Reform of the Global Reserve System – from an Asian perspective – was made in a June 2010 ADB report, edited by Jeffrey Sachs and others. Its contributing authors included Joseph Stiglitz, Charles Wyplosz and Wing Thye Woo among others.

In its Recommendations, the report states that the group sees the global reserve system evolving into a multi-currency reserve system, with Asia holding close to half of the world’s total reserves. At the regional level, the report recommends to increase regional economic integration and policy coordination in Asia. At the international level, it recommends to ‘strengthen prudential capital market regulations, given the obvious failure of the financial system to effectively police itself.’ It also recommends convening ‘a brain trust of independent international monetary experts as chronic current account imbalances and varying exchange rate regimes, for example, can cause unnecessary friction between countries.’

Haruhiko Kuroda, President of the Asian Development Bank (ADB), stressed in the preface to the report: ‘Asia is no longer a minor player. It must take a more active global role. (…) I sincerely hope that this report will stimulate constructive debate – both within and beyond Asia – on how we can move to a more stable, efficient and equitable global reserve system that will better facilitate global trade and capital flows.’

These ADB recommendations are not radical reform proposals. In the individual contributions, several authors advocated more radical reforms. For example, Stiglitz repeated his plea for a new global reserve system (like Triffin did before, for more than 30 years during the 1960s, 70s and 80s). ‘The choice facing the international community,’ he said, ‘is whether to create… a new global reserve system, or to “muddle through,” moving from the dollar-based system to a two- or three-currency reserve system, which could be even more unstable and volatile. This paper argues that a new global reserve system is absolutely essential, if we are to restore the global economy to sustained prosperity and stability.’

- A third report, “Reform of the International Monetary System” (the Palais Royal Initiative), published in February 2011, was prepared by Tommaso Padoa-Schioppa, Michel Camdessus, Alexandre Lamfalussy and others.

Recently, on 4 October 2011, Camdessus presented its key messages at a Conference on Reform of the IMS organised by the Triffin Foundation of which Lamfalussy is the chair (I am one of its board members).

Camdessus started his presentation by conveying two convictions of the group: ‘first, that our collective failure in establishing over four decades a system deserving really this name has been one of the key factors of the crisis. No real system means no effective discipline, weak and uneven surveillance, and excesses of all kind: in current account imbalances, in indebtedness, in accumulation of reserves, in exceedingly volatile and destabilizing swings in capital flows, in exchange rates fluctuations with unjustified deviations from fundamentals... These are major misgivings, indeed.

From there, the conviction n° 2 that, as long as no credible responses are given to these problems, our increasingly integrated world economy becomes all the more vulnerable as it is simultaneously engaged in a process of transition toward a multicurrency regime.’

To face these risks, the Camdessus group proposed four avenues for reform: (1) better surveillance by the IMF, with ‘real transparency, teeth and fairness’; (2) strengthening of IMF instruments ‘in a world where financial developments overwhelm now the mere monetary and current exchange developments’; (3) a re-examination of the scope of the SDR to play a greater role in the system as a reserve asset; and (4) improving the governance of the IMF and its relations with regional organisations.

5. What can be done to get these three and other reform proposals adopted? How to influence policymakers? I know that the authors of the three reform reports mentioned are doing their best. There is a large role for journalists, politicians, students, intellectuals, unions, social movements, and for economists and other academics working within the institutions.

But let me go back to the provocative remarks at the beginning of my talk. The danger is that when unions and other people who go out demonstrating on the streets or occupying squares, lead to the lowering of credit rating, higher financing costs, loss of investor confidence and threats to governments that they will not receive promised loans, democracy is seriously undermined. You need countervailing views and values. And there is the other danger that is already manifesting itself, the danger that the current capitalist system, with its privileges for business and political elites, creates anger and frustration among people and stimulates xenophobic, nationalistic, anti-establishment, anti-intellectual movements and parties like we already have in the Netherlands.

So there is a task for all of us to demonstrate our concern, to defend democracy, particularly in the sphere of economic and financial decision-making that is too much dominated by the power of the financial sector and the opinion of mainstream economists. We can all contribute to creating a more democratic world, a world that no longer is dominated by financial markets and mainstream economists, a world in which economists broaden their view and look at the social, political and ecological aspects of society, talk to people, and listen to them.

Austerity - Who is right, who is wrong?

A year before I established the Forum on Debt and Development in 1987 I wrote in the magazine Alternatives, 'Today there is probably no other area of human concern that affects more deeply the living conditions of people all over the world than that of international finance. Nevertheless, the main policy-making in this field is in the hands of an amazingly small group comprising central bankers and finance ministers in the rich countries, heads of international organizations such as the International Monetary Fund and big commercial bankers. The opinion of people outside this charmed circle of financial managers is hardly ever taken into account. This is a pity, since economic policy-makers tend by both temperament and training to be rather narrow-minded; their thinking moves in a groove.'

In the trailer of the film The Visitor shown above, it is said that 'You can live your life and never know who you are until you see the world through the eyes of others.' The film is not about the narrow-mindedness of a banker or a finance minister but of that of a university professor who drops into his standby New York flat one night, only to find that a young couple has been renting the place from a scam artist. Instead of having them arrested, the professor befriends his naive squatters - a Syrian jazz drummer and a Senegalese jewelry maker - who then get a chance to teach him about passion, playing the djembe, and post-9/11 immigration policies. As the professor fights to keep one of his new friends from being deported, his own world opens up.

Narrow-mindedness is a general human phenomenon, and not an exclusive quality or propensity of finance ministers and bankers. And obviously, not all finance ministers and bankers are narrow-minded. Johannes Witteveen, for example, a former finance minister and head of the IMF, is not narrow-minded. Nor is Tommaso Padoa-Schioppa (see my previous post), also a former finance minister and board member of the European Central Bank. Nor is Andrew Sheng, another former central banker who is part of the FONDAD Network (see for his views many of my previous posts on this blog).

A few days ago I saw an animated cartoon video explaining today’s crisis in simple terms. It’s a bit fast, and you may like it, or dislike it. The explanation is based on a lecture given by a real university professor (opposite to the acting professor in The Visitor), David Harvey, whom you may also like or dislike. But the issue is that this video, and the lecture on which it is based, show on the one hand the attempt to make things clear that seem to be too complicated for the non-expert, and, on the other, the attempt or tendency to present explanations as if they are ‘reality’.

This brings me to the topic of this post: Who should we believe, those who preach austerity as a key ingredient for managing the crisis, or those who criticize austerity as being the remedy?

Austerity was for a long time a taboo word in France, but even there it is now elevated to official ‘wisdom’. So now we have policymakers in the rich countries, except the United States, propagating austerity saying it is urgent and inevitable, while a few economists are criticising austerity saying it is a silly thing to do as it creates, rather than solves, problems. The critics include Paul Krugman (we live in a US-dominated academic and financial world, in which Krugman’s words are echoed daily in almost every corner of the globe), Joe Stiglitz (same story), Martin Wolf (less known, except to readers of the Financial Times), and Robert Skidelsky (who knows him?) – to name a few of the critics (there are many more including those who criticise in a more fundamental way the power system and the power policies).

I will nor repeat or try to summarise the debates on austerity that are raging on, but instead focus on one element in them that is crucial: who is right, who is wrong?

The answer to that question depends on what you believe in. Or it depends on what you think the causal relationship is between, for example, austerity and gaining confidence of financial markets, or between austerity and addressing the fiscal debt problem, or between austerity and the resumption of growth. Or between austerity and the reduction of unemployment, or any other relationship you can think of.

Can those ‘causal’ relationships be established unambiguously? I don’t think so. There are other factors, other variables, at play. It is difficult to isolate any and each of these factors or variables – such is reality economists (and others) are dealing with. Moreover, this ‘reality’ is sensitive to human beliefs, practices, routines, power relationships, power dynamics, economic doctrines, political and economic ideologies, interest groups, government or market intervention (both governments and markets are determined by human action and thinking) and what else you have in the global economy.

If we cannot establish causal relationships in an unambiguous manner, what do we do? To repeat my question: Who should we believe, those who preach austerity as a key ingredient for managing the crisis, or those who criticise austerity?

I am afraid we can do no other thing than search for the best or most convincing or most challenging answers by exploring the given reality, or envisioning a possible different reality. For this, an attitude is needed of ‘seeing the world through the eyes of others’.

Such empathy and open-mindedness (and curiosity) would help to understand better the economic ‘reality’ we are living in. Obviously, empathy is needed with the needy and not with the greedy.

In the 1987 Alternatives article mentioned above I quoted Robert Triffin who said that 'the economy is far too serious a thing to be left to the economists'. I still believe that the living conditions of people all over the world are too important to be determined solely or mainly by financial policymakers.

Moreover, as I explained in a speech about Robert Triffin last year, I still believe that a fundamental reform of the international monetary system is needed to solve the crisis instead of just managing it. Unfortunately, the debate on the need of reform is much less prominent than the debate on austerity. Jane D'Arista and Korkut Erturk have written recently a very good paper on the need and ways to reform the international monetary system which you can read by clicking here.

Padoa-Schioppa: "The attackers will return"

Friends can turn into enemies. For many years governments and financial markets were close friends, governments giving the markets the freedom to do almost whatever they wanted and helping them when the credit crisis erupted. But in recent times that friendship is less obvious even though, or exactly because, markets continue to enjoy the same freedom -- and power.

Reflecting on the attacks over the past months by financial markets on Greece and other south European countries and the euro Tommaso Padoa-Schioppa, a former Italian finance minister and member of the executive board of the European Central Bank, has accused the financial markets of behaving like an invading army. He did so in an article published in the Financial Times of 13 May 2010.

Let me quote the first three paragraphs of Padoa-Schioppa's article:

'Over many months, a mighty army has advanced on the citadel of the European currency with the cry: “It will never work!” The army was quick and single-minded, the citadel slow and divided. The besiegers were thousands, steeled by convictions all the more fervent for their extreme simplicity. Their reasoning was as follows: the euro area is not a political union and can never become one, because Europeans have no appetite for it and nation-states will not relinquish power. The citadel, therefore, is doomed to capitulate and its stubborn resistance merely serves to create profit opportunities for astute traders.

Equally strong and simple was the credo of the defenders, who countered: “It can work!” For years, Europe’s heads of government and central bankers had preached that a currency without a state is a smart invention that can last forever. It accomplishes the miracle of removing monetary and trade tensions, while allowing the nation-state to remain the unique master. The Maastricht treaty of 1992 was the final step in the construction of the European edifice. No other transfer of sovereignty will, nor needs to, occur. The European Union can do without the ordinary fiscal, financial and monetary instruments that all textbooks prescribe.

Enemies as they are, the two camps share the same prime article of faith: that the nation-state is and will continue to be the absolute sovereign within its borders. Both believe that international relations will continue to be based on the twin postulates of internal homogeneity and external independence, a model invented by the Treaty of Westphalia of 1648.'

And let me quote the last paragraph of Padoa-Schioppa's article:

'The attackers will return. The outcome will, for sure, be decided by the rivals’ relative strength, but also by the nobility of the cause they fight for. The army is formidable but it bets on the wrong cause: a return to the old world of flexible exchange rates, where each country deludes itself that it can be insulated from its neighbours and tries to foster growth through competitive devaluations, reneging on debts when it sees fit. This can only produce economic misery, conflict and dangers for global security. The citadel fights for the good cause (saving Europe’s monetary union), but its persistent credo, which has for too long kept it disarmed, still hinders it from going all the way with the necessary reform. At stake in this struggle, ultimately, is the ideology of the omnipotent nation-state.'

Padoa-Schioppa's article prompted Andrew Sheng, a former deputy chief executive of the Hong Kong Monetary Authority and chairman of the Hong Kong Securities and Futures Commission, to write a 2-page comment. Let me also quote from his comment the first three paragraphs:

'The recent Greek debt crisis has brought into the fore the conflict between two major philosophies. One the one hand, there is the nationalists who believe that the nation-state will remain dominant in the new world order. On the other, there is the free market fundamentalists who believe that markets have changed the world into a borderless market space, whereby the market has more power than the state. Indeed, the market space camp laugh at the old guard, especially those bureaucrats who still think that the state remains more powerful than markets.

The reason why I bring this up is that one of the foremost thinkers behind the European Monetary Union, Tommaso Padoa-Schioppa, former Minister of Finance in Italy and former member of the European Central Bank, has recently written about the defense of the citadel of Euro against the army of market speculators who think that “the euro area is not a political union and can never become one, because Europeans have no appetite for it and nation-states will not relinquish power”. Who are the attackers? Mr Padoa-Schioppa identifies them as the army, whose “battalions were thousands of dealing rooms, connected into a global network acting round the clock. Its targets were selected by the intelligence of three rating agencies. Its morale was sustained by an unwavering faith: that we, the market, are those who know best.”

Who are the defenders? The European Union and the member state bureacrats, who are determined to regulate the market and bend the market to the dictats of the state. The Euro as a currency cannot be allowed to fail. On the other hand, the army of market traders think that “the citadel, therefore, is doomed to capitulate and its stubborn resistance merely serves to create profit opportunities for astute traders.”'

And let me quote another three paragraphs in one of which Sheng describes the financial market traders as "the very beasts that they [the governments] have rescued":

'In plain language, we cannot sacrifice the common good to the individual greed of market traders. But he or I have not appreciated that this generation of market traders were creatures of our own creation. A whole generation of fund managers, investment bankers and even retail traders have grown up in the last 20 years, feeding on the food chain of growing asset bubbles, precisely because central bankers and ministries of finance have allowed the markets to win with huge moral hazard. If markets quiver, the central bankers have lowered interest rates in Greenspan puts or ministries of finance have taken private sector losses into public books through total fiscalization or nationalization of bank deposits and losses.

The result is that I realized that these hordes of institutional investors, fund managers, analysts, and researchers, many of whom are dedicated professionals and my personal friends, have collectively become a mob that thrives off volatility and momentum. The level of bonuses and rewards are such that they all seek the instant analysis of complex information and if the thundering herd moves in one direction, they win. If they lose, the public pays. The agents of fiduciary trust have become the masters of the game. The regulators and state bureaucrats are still under an illusion that they are in charge.

The sad part of the current defense of the Euro is that I think that the EU bureaucrats are defending an imaginary Maginot Line, where the fiscal breaches are larger than they think (or they think they can plug). This is not to say that I think that they are wrong to defend, but that their tools and techniques are obsolete, because they are trying to defend by succouring the very beasts that they have rescued. Those who try to make the fiscal debt sustainable by keeping interest rates low are pouring ammunition to the attackers, whose carry trades thrive on low interest rates. The larger the guarantees for states and banks that are not viable, the more the ammunition that will be used to speculate against the Euro and to create arbitrage opportunities.'

In this battle, and other battles between governments and financial markets, citizens are mere watchers of the game. Unfortunately, they are the ones paying the costs.

Austeridad - ¿Quién tiene razón, quién está equivocado?

Un año antes de establecer el Foro sobre Deuda y Desarrollo en 1987, escribí en la revista Alternativas, "Hoy en día probablemente no hay otra área de actividad humana que afecte más profundamente las condiciones de vida de personas en todo el mundo que el de las finanzas internacionales. Sin embargo, la formulación de políticas en este campo está en manos de un grupo increíblemente pequeño que comprende los banqueros centrales y ministros de finanzas de los países ricos, los jefes de organizaciones internacionales como el Fondo Monetario Internacional y los grandes bancos comerciales. La opinión de la gente fuera de este círculo mágico de los gestores financieros casi nunca es tomada en cuenta. Es una lástima, ya que los responsables de la política económica tienden tanto por temperamento y formación a ser más bien estrechos de miras, su pensamiento se mueve en una ranura.

En el trailer de la película The Visitor se dice que "Se puede vivir su vida y nunca se sabe quién es hasta que vea el mundo a través de los ojos de los demás." La película no es acerca de la estrechez de miras de un banquero o un ministro de finanzas, sino de la de un profesor universitario que una noche entra en su apartamento en Nueva York para descubrir una joven pareja que ha estado alquilando el lugar de un estafador. En lugar de hacerlos arrestar, el profesor se hace amigo de sus ocupantes ingenuos - un baterista de jazz de Siria y un artesana de joyas de Senegal - que luego tienen la oportunidad de enseñarle acerca de la pasión, tocar el djembe, y post-9/11 políticas de inmigración. Mientras el profesor lucha para prevenir la deportación de uno de sus nuevos amigos, su propio mundo se abre.

La estrechez de miras es un fenómeno humano general, y no una cualidad o propensión exclusiva de los ministros de finanzas y banqueros. Y, obviamente, no todos los ministros de finanzas y banqueros son de mente estrecha. Johannes Witteveen, por ejemplo, un ex ministro de Hacienda y jefe del FMI, no es de mentalidad estrecha. Tampoco lo es Tommaso Padoa-Schioppa (ver mi post anterior), también un ex ministro de Hacienda y ex miembro del directorio del Banco Central Europeo. Tampoco lo es Andrew Sheng, otro ex banquero central que forma parte de la Red FONDAD (véase, por sus puntos de vista muchos de mis posts anteriores en este blog).

Hace unos días vi un vídeo de dibujos animados que explica la crisis actual en términos sencillos. Es un poco rápido, y es posible que les guste, o no les guste. La explicación se basa en una conferencia dada por un profesor universitario real (en vez del profesor actuando en The Visitor), David Harvey, quien también les guste o no les guste. Pero la cuestión es que este video, y la conferencia en la que se basa, muestran por un lado el intento de aclarar cosas que parecen ser demasiado complicadas para los no expertos, y por otro, el intento o la tendencia de presentar explicaciones como si fueran "realidades".

Esto me lleva al tema de este post: ¿A quién debemos creer, a los que predican la austeridad como un ingrediente clave para la gestión de la crisis, o a los que critican la austeridad como el remedio?

Austeridad fue durante mucho tiempo una palabra tabú en Francia, pero incluso allí ahora es elevada a "sabiduría" oficial. Así que ahora tenemos gobernantes promoviendo políticas de ajuste en los países ricos, a excepción de Estados Unidos, diciendo que la austeridad es urgente e inevitable, mientras que algunos economistas critican la austeridad diciendo que es una tontería aplicarla ahora porque crea, y no resuelve los problemas. Los críticos incluyen a Paul Krugman (vivimos en un mundo dominado por académicos y financieros de los Estados Unidos, en el que las palabras de Krugman se repiten a diario en casi todos los rincones del mundo), Joe Stiglitz (la misma historia), Martin Wolf (menos conocido, con excepción de los lectores del Financial Times), y Robert Skidelsky (quien lo conoce?) - por nombrar algunos de los críticos.

No repetiré ni trataré de resumir los debates sobre la austeridad que se están llevando a cabo, pero me centraré en uno de los elementos cruciales: ¿quién tiene razón, quién está equivocado?

La respuesta a esa pregunta depende de lo que uno cree, o depende de lo que usted piensa qué es la relación causal entre, por ejemplo, la austeridad y ganar la confianza de los mercados financieros, o entre la austeridad y abordar el problema de la deuda fiscal, o entre la austeridad y la la reanudación del crecimiento. O entre la austeridad y la reducción del desempleo, o cualquier otro tipo de relación que se pueda imaginar.

¿Pueden estas "relaciones causales" ser establecidas de forma inequívoca? No lo creo. Hay otros factores, otras variables, en el juego. Es difícil aislar cualquiera y cada uno de estos factores o variables - esta es la realidad que los economistas (y otros) están tratando. Por otra parte, esta "realidad" es sensible a las creencias humanas, las prácticas, las rutinas, las relaciones de poder, la dinámica del poder, las doctrinas económicas, las ideologías políticas y económicas, los grupos de interés, la intervención de gobiernos y mercados (tanto los gobiernos como los mercados están determinados por la acción humana) y cualquier otra cosa que se tiene en la economía mundial.

Si no podemos establecer relaciones causales de manera inequívoca, ¿qué hacemos? Para repetir mi pregunta: ¿A quién debemos creer, los que predican la austeridad como un ingrediente clave para la gestión de la crisis, o los que critican la austeridad?

Me temo que no podemos hacer otra cosa que buscar las respuestas más convincentes o más desafiantes mediante la exploración de la realidad dada, o imaginando una realidad diferente. Para ello, es necesaria una actitud de "ver el mundo a través de los ojos de los demás."

Tal empatía y apertura de espíritu (y curiosidad) ayudaría a comprender mejor la "realidad económica" en que estamos viviendo. Obviamente, la empatía que se necesita es con los necesitados y no con los codiciosos.

En el artículo de 1987 en "Alternativas" mencionado anteriormente, he citado a Robert Triffin diciendo que "la economía es algo demasiado serio como para dejarlo en manos de los economistas." Sigo creyendo que las condiciones de vida de gentes en todo el mundo son demasiado importantes para ser determinadas exclusiva o principalmente por los gobernantes de las políticas financieras.

Por otra parte, como lo expliqué en una conferencia sobre Robert Triffin el año pasado, sigo creyendo que una reforma fundamental del sistema monetario internacional es necesaria para resolver la crisis en lugar de limitarse a su gestión. Desgraciadamente el debate sobre la necesidad de la reforma es mucho menos visible que el debate sobre la austeridad. Jane D'Arista y Korkut Erturk han escrito recientemente un artículo muy bueno sobre la necesidad y la manera de reformar el sistema monetario internacional que se puede leer haciendo clic aquí.

PS1: Pinchando los enlaces salen textos en un mal castellano que, de origen, son en inglés. En el texto original de este post (en inglés), que se puede ver en la entrada más arriba, o pinchando aquí, los enlaces dan acceso a los textos originales en inglés.

PS2: Este post no es del 26 de febrero sino del 23 de julio 2010. Lo publiqué en un viejo post borrador.

"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.