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The problem with such insurance lies in the assumption that such failures will be uncorrelated. There is no way to insure against meltdowns, where correlations go to unity.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 21st, 2009 at 08:56:18 PM EST
[ Parent ]

The brilliance of Keynes' Clearing Union is that, by charging interest on both positive and negative balances, an automatic negative feedback loop is introduced that moderates imbalances in national accounts regardless of the direction of the imbalance.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Sep 22nd, 2009 at 04:16:58 AM EST
[ Parent ]

I see! Instead of merely accumulating reserves to pay for a crash, the tax on positive or negative trade balances works to discipline the international market so that the likelihood of a crash is diminished, and, should that discipline fail, to raise money in some reasonable proportion to the accumulated risk. Brilliant indeed.

The one risk that it can't control is that of deregulation ideologues successfully lobbying for a reduction of the tax rate or a pay out of the reserves on the grounds that they are a drag on the economy. Had we been able to resist that kind of deregulatory pressure we would likely not be here today for reasons other than a Keynes Clearing Union, but such an arrangement cannot hurt the stability of world trade. The transition to such a Union today would be interesting, to say the least.

Thanks for the timely explanation.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 22nd, 2009 at 09:27:24 PM EST
[ Parent ]

I had read the story of how Keynes' clearing union didn't come to pass from another source, but this just-googled one will do:

Monbiot.com » Clearing Up This Mess (November 18, 2008)

When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that "it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed"(5). Economists all over the world saw that Keynes had cracked it. As the Allies prepared for the Bretton Woods conference, Britain adopted Keynes's solution as its official negotiating position.
But there was one country - at the time the world's biggest creditor - in which his proposal was less welcome. The head of the US delegation at Bretton Woods, Harry Dexter White, responded to Lord Keynes's idea thus: "We have been perfectly adamant on that point. We have taken the position of absolutely no"(6). Instead he proposed an International Stabilisation Fund, which would place the entire burden of maintaining the balance of trade on the deficit nations. It would place no limits on the surplus that successful exporters could accumulate. He also suggested an International Bank for Reconstruction and Development, which would provide capital for economic reconstruction after the war. White, backed by the financial clout of the US Treasury, prevailed. The International Stabilisation Fund became the International Monetary Fund. The International Bank for Reconstruction and Development remains the principal lending arm of the World Bank.
The consequences, especially for the poorest indebted countries, have been catastrophic. Acting on behalf of the rich world, imposing conditions which no free country would tolerate, the IMF has bled them dry. As Joseph Stiglitz has shown, the Fund compounds existing economic crises and creates crises where none existed before. It has destabilised exchange rates, exacerbated balance of payments problems, forced countries into debt and recession, wrecked public services and destroyed the jobs and incomes of tens of millions of people(7).

That was when the US had 50% of world GDP and was a creditor nation. Maybe now that the US is drowning in ~~its own excrement~~debt they might be persuaded to implement something akin to Keynes' ideas. But would China (the new economic giant and creditor nation) and Wall Street (the US' creditor-within) allow it?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Wed Sep 23rd, 2009 at 04:48:33 AM EST
[ Parent ]

The head of the US delegation at Bretton Woods, Harry Dexter White, responded to Lord Keynes's idea thus: "We have been perfectly adamant on that point. We have taken the position of absolutely no"

Said the predator to the prey. "We don't like veggies, and you are our next meal."

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Sep 23rd, 2009 at 11:03:24 AM EST
[ Parent ]

Finance & Development September 1998 - Harry Dexter White and the International Monetary Fund

It's worth a look at Wikipedia on Harry Dexter White. Also an IMF article on HDW and Keynes at Bretton Woods:

Where the two founding fathers differed most was on the third theme: how independent and how powerful should the IMF be? To Keynes, what the world needed was an independent countervailing balance to American economic power, a world central bank that could regulate the flow of credit both in the aggregate and in its distribution. To White, what was needed was an adjunct to American economic power, an agency that could promote the balanced growth of international trade in a way that preserved the central role of the U.S. dollar in international finance.
Because White prevailed in that argument, and the IMF became a dollar-based institution, the Bretton Woods system contained a fatal flaw. For international reserves to keep pace with the growth in world trade required an ever-expanding supply of dollars, which as the economist Robert Triffin observed in the late 1950s was incompatible with the preservation of a stable value for the dollar.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Sep 23rd, 2009 at 11:11:57 AM EST
[ Parent ]

Because White prevailed in that argument, and the IMF became a dollar-based institution, the Bretton Woods system contained a fatal flaw. For international reserves to keep pace with the growth in world trade required an ever-expanding supply of dollars, which as the economist Robert Triffin observed in the late 1950s was incompatible with the preservation of a stable value for the dollar.

Even in the eyes of US financial and economic elites at that time, with the Depression still a clear and vivid personal and professional memory, a stable dollar came a distant second to the opportunity for more rapid enrichment for them and their class. What did dollar stability matter if stability itself would be defined in terms of the dollar? Clearly, it was other peoples' problem.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Sep 23rd, 2009 at 11:38:12 AM EST
[ Parent ]

Re: Clearing Union here we come (4.00 / 4)

ChrisCook:

"The 15-year period when the world economy can rely on the American consumer to drag the world out of recession is over," said one British official.

So the world economy since the early '90s has essentially been in recession, only "dragged out" of it by US consumer debt? That's an amazing admission from a British official, considering that New Labour's sizzling neolib economy that was such an example to fuddy-duddy Europe is entirely contained in those fifteen years.

And so we also get this other kind of rewriting of history:

ChrisCook:

Economists have long warned of the dangers of imbalances in the global economy - specifically huge trade surpluses and currency reserves built up by exporters such as China, and big deficits in the US and other economies.

Have they now? If my memory serves me well, there were no audible warnings before we hit the wall.

(Sorry, Chris, it's meta, I know...)

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 22nd, 2009 at 02:43:12 AM EST
[ Parent ]

afew:

And so we also get this other kind of rewriting of history:
ChrisCook:
Economists have long warned of the dangers of imbalances in the global economy - specifically huge trade surpluses and currency reserves built up by exporters such as China, and big deficits in the US and other economies.
Have they now? If my memory serves me well, there were no audible warnings before we hit the wall.

Well... At least since 2005, if not earlier.

Correcting Global Imbalances -- Avoiding the Blame Game, Remarks by Rodrigo de Rato, Managing Director, IMF (February 23, 2005)

For my remarks tonight, I have chosen to focus on the issue of global imbalances. In doing this, I shall also deal with a theme that FPA members like yourselves will relate to naturally, and that is the theme of international cooperation. As you will appreciate, it is such cooperation that will help us deal with the imbalances problem.
...
Looking ahead, last year's momentum should ensure that global growth remains robust in 2005. This is all good news so far. However, within these positive signs lie serious threats and challenges. We are all aware of the large US current account and fiscal deficits. These are matched--or financed, if you will--by growing surpluses in Japan, emerging Asia, and certain oil-exporting countries. This constellation of large deficits in one country, with counterpart surpluses being concentrated in a few others, is what we mean when we speak of global imbalances.
Related to these imbalances, and to complicate matters further, global growth has been, and remains, unduly dependent on the United States and China. Non-oil exports to the US in 2004, for example, accounted for 18 percent of global trade. In the euro area and Japan--which together account for nearly one-quarter of global output--under-performance continues to be the order of the day. If this trend persists, it will further widen existing imbalances, and increase the risks for abrupt disruptions to global growth. Yet, things need not be this way.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Sep 22nd, 2009 at 04:15:14 AM EST
[ Parent ]

I suppose examples can be found. But the overall tenor of discourse from patented economists was not to sound a warning about grave imbalances.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 22nd, 2009 at 04:59:24 AM EST
[ Parent ]

How Did Economists Get It So Wrong? - NYTimes.com

Um, we're talking the IMF managing director. And he did so repeatedly. And I think his predecessor did, too. And the OECD, and... It doesn't get more serious than that.

However, nobody was listening.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Sep 22nd, 2009 at 05:03:24 AM EST
[ Parent ]

Nobody was listening (4.00 / 4)

I'll give you that.

There was a telling moment in 2005, at a conference held to honor Greenspan's tenure at the Fed. One brave attendee, Raghuram Rajan (of the University of Chicago, surprisingly), presented a paper warning that the financial system was taking on potentially dangerous levels of risk. He was mocked by almost all present -- including, by the way, Larry Summers, who dismissed his warnings as "misguided."
...
Take, for example, the precipitous rise and fall of housing prices. Some economists, notably Robert Shiller, did identify the bubble and warn of painful consequences if it were to burst. Yet key policy makers failed to see the obvious. In 2004, Alan Greenspan dismissed talk of a housing bubble: "a national severe price distortion," he declared, was "most unlikely." Home-price increases, Ben Bernanke said in 2005, "largely reflect strong economic fundamentals."
...
But there was something else going on: a general belief that bubbles just don't happen. What's striking, when you reread Greenspan's assurances, is that they weren't based on evidence -- they were based on the a priori assertion that there simply can't be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that "the word `bubble' drives me nuts," and went on to explain why we can trust the housing market: "Housing markets are less liquid, but people are very careful when they buy houses. It's typically the biggest investment they're going to make, so they look around very carefully and they compare prices. The bidding process is very detailed."

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Sep 22nd, 2009 at 05:12:09 AM EST
[ Parent ]

Who listens to the IMF's MD?

How many ~~divisions~~ bonuses does the IMF manage?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Sep 22nd, 2009 at 05:20:08 AM EST
[ Parent ]

More from 2005:

FRB: Speech, Bernanke -- The Global Saving Glut and the U.S. Current Account Deficit -March 10, 2005

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Sep 22nd, 2009 at 05:08:33 AM EST
[ Parent ]

But these pious speeches from functionaries who are supposed to show a certain prudential spirit don't characterize the message from economists in general. Though the media were certainly channeling the appropriate CW, economists were not making any notable counter-effort to be heard with a warning. It probably wasn't the best way to be taken "serious"ly.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 22nd, 2009 at 05:39:08 AM EST
[ Parent ]

Re: Clearing Union here we come (4.00 / 3)

The problem is not that "there were no warnings" or that the warnings that there were were "pious" or perfunctorily made by people whose job it is to sound grave and prudent. The problem is that, when well-placed individuals even at the top of the regulatory/policy apparatus saw that there was an imbalance and warned about it, they still believed that the best policy response was to leave the market to its own devices. As if saying "tsk, tsk" were enough to make speculators think twice about the soundness of their business decisions. To give an example not involving the US economy or Greenspan, consider Hungary's foreign-currency consumer loans. I wrote

What is remarkable is that the same causes of the currency fluctuations were quoted back then (large amounts of loans in foreign currencies) and nobody has done anything about it. Our friend Ambrose again (he seems to be the only one to have talked about that mythical unpublished report "deja vu all over again" from the IMF).
Borrowers have rushed to take out loans in francs and other currencies, but murmurs over the exchange risks are growing, reports Ambrose Evans-Pritchard in Budapest (21 Sep 2006)
...
Over 60pc of total loans to businesses and households are now in foreign currencies, and damn the exchange risk. Though Hungary is the region's pioneer with some $2bn a year in Swiss franc loans, Poland, Croatia, Romania, and lately Turkey are catching up fast. This is Europe's "carry trade", every bit as creative as the better-known yen trade that has juiced the world's asset markets with liquidity at near zero interest rates from the Bank of Japan.
...
"There is nothing we can do to stop foreign exchange borrowing, and we don't even try. As members of the European Union, we have to respect the free flow of capital," he [Hamezc Istvan, director of Hungary's Central Bank] said.
The Central Banker blames the government '4 years ago' (that would be 2002) for making a mess of the economy. Who was in power in 2002? A fistful of Euros also carried the story.

(my emphasis) Here's another regulator who sees his country's private borrowers engage in a carry trade and, what does he say? "There is nothing we can do".

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Sep 22nd, 2009 at 09:47:18 AM EST
[ Parent ]

No argument from me on that, except to point out that the regulator in the example is presumably himself competent/trained/got some degree in economics, and that the important bit is the blind assumption that the market would work out the problem if left undisturbed. This conventional wisdom is the fruit of years of economic orthodoxy that a few sincere and a few less sincere voices did not break through.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 22nd, 2009 at 04:21:23 PM EST
[ Parent ]

Well, among others, Nouriel Roubini, Brad Setser and Joseph Stiglitz did repeatedly warn about global imbalances long before we hit the wall (street).

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Tue Sep 22nd, 2009 at 06:54:24 AM EST
[ Parent ]

How much support did they get from their fellow economists? Or rather, how many economists were content to let them be seen as doom merchants, or politically motivated, or fringe?

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 22nd, 2009 at 07:20:28 AM EST
[ Parent ]

What, so you agree that "nobody could foresee...?"

We know it could be foreseen because it was foreseen by economists (not just by bloggers), who did voice their concerns about the global imbalances. Even Greenspan talked about "irrational exuberance" in the 1990's. Krugman thought the depression woud hit after the .com crash. And so on.

The fact is that these warnings were not heeded, not even by the people with the power to do anything about it (such as Greenspan ca. 2003).

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Sep 22nd, 2009 at 07:41:05 AM EST
[ Parent ]

FRB: Speech, Greenspan -- Central banking in a democratic society -- December 5, 1996

Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Sep 22nd, 2009 at 07:47:41 AM EST
[ Parent ]

Of course I don't agree that "nobody could foresee...". But that line was only made possible because economists - in general - did not shout and wave their arms about the danger. Any economist should have been capable of reading the global-imbalances-writing on the wall. How seriously did they decide to speak out, to work together to get the message across?

As I suggested to Melanchthon, most were content to leave those who did speak out to carry on as voices in the wilderness.

(PS Greenspan doesn't count as one who "spoke out" ;)).

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 22nd, 2009 at 08:10:44 AM EST
[ Parent ]

If you mean that the economists as a body/institution did not play the role they should have played, then I totally agree. I think it's me that coined the name "Sacred Congregation for the Propagation the Economic Faith" or "Holy Economics Office", meaning that most so-called "economists" were mere catechists/preachers, not scientists.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Tue Sep 22nd, 2009 at 08:25:45 AM EST
[ Parent ]

how many economists were content to let them be seen as doom merchants, or politically motivated, or fringe?

Not many. On this we agree. But it's another thing to say:

there were no audible warnings before we hit the wall.

Unless you're saying none of them was "audible".

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Tue Sep 22nd, 2009 at 08:17:17 AM EST
[ Parent ]

My point up there at the beginning was about the way a narrative was being presented about the years preceding the breakdown. Audible, in the sense that enough people could hear loud enough to start taking notice, no, there was not much. Audible neither in the MSM, nor the business and financial media. Those who spoke out were easily marginalised, which means that the majority of economists did not accept their views as serious, or at least were not willing to join their voices in warning. If enough of them had done so... it still might not have changed the face of things, but today we could fairly say "the economists did try to warn us".

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 22nd, 2009 at 04:36:23 PM EST
[ Parent ]

I agree. The question then is: how come the economists who foresaw it did not succeed in being heard, despite the fact that some of them were well-known and had media access? It is a multidimensional problem: political, economic, sociological, psychological and cultural. I pointed to that in this comment. It would require a whole diary.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Tue Sep 22nd, 2009 at 05:19:58 PM EST
[ Parent ]

The real problem is that those who sounded warning still subscribed to the panglossian view that the market is the best of all possible worlds, even if it is out of balance.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Tue Sep 22nd, 2009 at 05:32:14 PM EST
[ Parent ]