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Anglo Disease LQD : Stiglitz on Financial Hypocrisy

by Melanchthon Tue Feb 26th, 2008 at 01:13:48 PM EST

In "Financial Hypocrisy", a recent article published in "The Economists' Voice", Joseph Stiglitz  compares the current financial crisis with the East-Asia crisis which occurred ten years ago (see his book "Globalization and Its Discontents") and shows that the main actors (in that case IMF and the US Treasury) are promoting totally different policies. Have they learned from the East Asia crisis, or are they hypocritical?


Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. (snip) The fundamental problem was premature capital market liberalization.

(snip)

It is no accident that the very countries that had not fully liberalized their capital markets have done so well. Subsequent research by the IMF has confirmed what every serious study had shown: capital market liberalization brings instability, but not necessarily growth. (India and China, who have not liberalized capital markets, have been the fastest-growing economies.)

Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc.

(snip)

The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults. In the current crisis, the U.S. Federal Reserve and the European Central Bank cut interest rates, fearing the collapse that high interest rates could cause.

The countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation. But lack of transparency played a central role in this past summer's credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what. Yet, there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem). Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.

(snip)

Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture was needed. Why has nothing been done? Look no further than the fact that while the current system leads to unnecessary instability and imposes huge costs on developing countries, the current system serves the profit interests of many well. It is not surprising, then, that ten years later, there has been no fundamental reform. Nor, that the world is once again facing a period of global financial instability, with uncertain outcomes for the world's economies.

So, when we notice the fact that Anglo Disease promoters like Martin Wolf and Wolfgang Munchau seem to suddenly discover the nature of the crisis, should we rejoice or should we see it as a show of hypocrisy?

Poll
What do you think?
. There will be a major paradigm shift and a new model will emerge 25%
. A better regulated economic system will be implemented 16%
. We will go back to industrial capitalism 8%
. There will be afew cosmetic changes, but the system will remain the same until the next big crisis 33%
. We will see more neo-liberal "reform" 16%

Votes: 12
Results | Other Polls
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U.S. stocks rally as bond insurers' ratings are affirmed - International Herald Tribune

U.S. stocks rallied Monday after Standard & Poor's affirmed its ratings for Ambac Financial Group and MBIA, raising hopes that troubled bond insurers will emerge from the credit market crisis on solid footing. The Dow Jones industrials rose more than 100 points.

"This is essentially evidence that S&P has signed off any tentative deal," said Charlie Smith, chief investment officer at Fort Pitt Capital Group.

Chris Johnson, president of Johnson Research Group, said the market continued to look for any sign that financial stocks would make it through the credit crisis. Experts believe keeping bond insurers whole will spare greater losses for major global banks and brokerages.

"Even the smallest bit of positive news and the market takes off," he said. "Investors get excited if they sense a bottom in the financials because they've been the Achilles' heel of this market."



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Feb 26th, 2008 at 01:18:10 PM EST
An interestin diary about MBIA and Ambac bailout by Zandar1 on Booman Tribune.Also this information:

States are now asking the feds to bail THEM out of the muni bond mess.  

U.S. governors including New Jersey's Jon Corzine and New York's Eliot Spitzer may ask Congress to help reverse rising municipal debt costs stemming from the subprime mortgage market's collapse, Washington Governor Christine Gregoire said.

Gregoire, Corzine and Spitzer joined other governors Feb. 24 in forming a group that will ``produce something that gets us out of the problem, but most importantly produce something for Congress'' to deter a future borrowing squeeze, Gregoire, a Democrat, said during a National Governors Association meeting in Washington yesterday.

Interest on insured bonds, including debt with rates set at periodic auctions, rose to as high as 20 percent because investors shunned the securities or demanded higher yields on waning confidence in the companies guaranteeing repayment...

Seattle, Washington's biggest city, faces $80 million in additional costs on existing debt due to the recent turmoil in the credit markets, Gregoire said.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Feb 26th, 2008 at 02:35:33 PM EST
[ Parent ]
Have they learned from the East Asia crisis, or are they hypocritical?

You're joking rhetorically, right?

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Feb 26th, 2008 at 01:48:01 PM EST
A ton avis ?

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Feb 26th, 2008 at 02:13:16 PM EST
[ Parent ]
Ben sûr que oui, mais bon, fallait que je te le demande q-même.

Pour la forme.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Feb 26th, 2008 at 02:47:47 PM EST
[ Parent ]
Desperate. I don't know about the level of comprehension among the staff of IMF; but I think that the bankers, brokers, and insurers in the U.S. have no other theoretical base than: 1) simplistic, neo-liberal BS; and 2) game theory. After that, it's all about thrashing and churning, because they skim from every cycle.

There's just enough of them that actually can recognize a bad situation to prevent mass financial suicide in the short run. Meantime, they mill around, worrying about the fees and commissions that they're not getting, while they wait for someone to run the coin mint again.

Mon avis? Start over: reduce expectations; give 'things' to the poor; recycle; compost; grow your own; make and repair things 'by hand'; co-operate; develop renewable and sustainable resources; sing individually and in groups; empathize; help your neighbor; appreciate people; walk; exercise; discuss; create.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Tue Feb 26th, 2008 at 04:57:16 PM EST
[ Parent ]
Grand avis!

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Thu Feb 28th, 2008 at 03:19:46 PM EST
[ Parent ]
I think it was one of the Monty Python where a whole medieval town is in an uproar. A fair young fair lass everyone likes has been denounced as a witch, and vigorously pleads her innocense. But a witch is not a trifling business -- how to tell for certain if the lass is or is not a witch?

The village wiseman steps forward. "Tie her to a rock and throw her in the pond," he declares.

The crowd falls silent, perplexed. What to make of this test? "If she is a witch, she shall free herself with magic," the wiseman explains.

All the villagers nod in understanding. But someone speaks up from back in the crowd. "But what if she drowns?"

"Well, then," replies the wiseman, "we will have learned that she was an honest woman."

I would deal with Wolf and Munchau the same way.

by NBBooks on Tue Feb 26th, 2008 at 05:45:21 PM EST
"and the European Central Bank cut interest rates,"
Can you explain this a bit more? The leading interest rate of the ECB remained stable. All intervention had at least a small penalty rate. How has the ECB cut interest rates?

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Tue Feb 26th, 2008 at 05:46:23 PM EST
I had the same reaction when I read the paper. In fact, IIRC, the ECB was planning to raise its rates and just maintained them. And, more recently,  they resisted to strong pressures to cut them.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Feb 26th, 2008 at 06:34:54 PM EST
[ Parent ]
The poll needs another option.

"The global financial crisis leads to an apocalyptic collapse of civilization, and the scattered survivors return to the ways of our distant ancestors."

I mean, ET has a reputation for top-quality Doom Porn, and I think it's an important reputation to keep.

by Zwackus on Tue Feb 26th, 2008 at 06:07:01 PM EST
you call this doom porn? Clearly you've never read through a theoildrum.com thread.

you are the media you consume.

by MillMan (millguy at gmail) on Tue Feb 26th, 2008 at 07:32:17 PM EST
[ Parent ]
No, I'm complianing that it's not doom-y enough!
by Zwackus on Tue Feb 26th, 2008 at 08:10:28 PM EST
[ Parent ]
Haven't they changed the name to oildoom yet?

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Thu Feb 28th, 2008 at 03:23:37 PM EST
[ Parent ]
Plus Mel Gibson. Returning to the ways of your distant ancestors is cool in Mad Max style. But beware of global warming! It might lead to Waterworld and Kevin Costner!
by GreatZamfir on Wed Feb 27th, 2008 at 04:26:34 AM EST
[ Parent ]
That would be truly frightening.
by Zwackus on Wed Feb 27th, 2008 at 07:53:54 PM EST
[ Parent ]
One more point why even standard theory may result in different advises for developing nations and the US in the current situation may be the that the US holds it debt in its own currency, while many developing nations have a big part in foreign currency.
For Europe I see no political theory, which would it make attractive to make the Euro even more expansive as it is right now, but that point my be better discussed in Jeromes diary "Is Greenspan now trying to sink the dollar?"

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Tue Feb 26th, 2008 at 06:48:27 PM EST

We must curb international flows of capital

First large downhill flows of capital - from rich countries to poor countries - led to the Latin American debt crisis of the early 1980s. In the 1990s similar flows begat the Asian financial crisis.

Since 2002 the flows have been uphill, from emerging markets and oil-exporting countries to the developed world, especially the US. But the outcome has not been very different. So, it does not seem to matter how capital flows. That it flows in sufficiently large quantities across borders - the celebrated phenomenon of financial globalisation - seems to spell trouble.

(...)

Some would claim that the problem in all these instances was not liquidity but lax regulation, which turned what should have been prudent borrowing into a destructive binge. But this argument is too optimistic about the potential of prudential regulation to stem excessive risk-taking. In the US the entire policy apparatus avoided any regulatory action against lax lending. Even when the will is there, prudential regulation is bound to remain one step behind financial innovation.

If the risk-taking behaviour of financial intermediaries cannot be regulated perfectly, we need to find ways of reducing the volume of transactions. Otherwise we commit the same fallacy as gun control opponents who argue that "guns do not kill people, people do". As we are unable to regulate fully the behaviour of gun owners, we have no choice but to restrict the circulation of guns more directly.

What this means is that financial capital should be flowing across borders in smaller quantities, so that finance is "primarily national", as John Maynard Keynes advised. If downhill and uphill flows are both problematic, capital flows should be more level.

(...)

Financial globalisation has not generated increased investment or higher growth in emerging markets. Countries that have grown most rapidly have been those that rely least on capital inflows. Nor has financial globalisation led to better smoothing of consumption or reduced volatility. If you want to make an evidence-based case for financial globalisation today, you are forced to resort to indirect and speculative arguments.

They call for taxes on oil, an appreciation of Asian currencies, and stricted capital controls. And this is Dani Rodrik and Arvind Subramanian, is senior names in the economics field...

We no longer need ATTAC - se have the FT!

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Feb 26th, 2008 at 07:08:54 PM EST
of the current situation to even publish such a view. Your Anglo Disease rubric really does capture the context.

Not directly related, but here is another "Wow!" - one of the stupidest pronouncements yet from the Bushits:
"Fed Vice Chairman Donald Kohn, in a speech Tuesday, said the Fed remained concerned about the weak economy, signaling the possibility of further rate cuts. While noting recent "disappointing" news on inflation, he said, "I do not expect the recent elevated inflation rates to persist," in part because the slowing economy should ease pressure on wages."

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Tue Feb 26th, 2008 at 07:51:55 PM EST
[ Parent ]
Very interesting paper! However, to be fair, Dani Rodrik has been criticising the dominant model/narrative for a long while.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Feb 26th, 2008 at 07:58:05 PM EST
[ Parent ]
If those are ´senior names in economics´, the juniors must be ant brains.  

These two do not deal with ´reality´, they just make it up as they go along and then they confuse their sick-value system with topography, while catching a glimpse of the gun problem somewhere, to come to an unsupported conclusion.  Truly seni..le minds.

Give ´em more rope.

P.S.  Maybe you should be charging the fool times for translating into real life.


Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Thu Feb 28th, 2008 at 04:11:20 PM EST
[ Parent ]


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