Yes and the political decision is to invest in things that are long term profitable (Morgan Stanley) rather than things that will likely lose money but are useful for other reasons (soft loans to Angola). What is “political” is not necessarily non-commercial or unprofitable. The need to make money is a constraint, but there are plenty of ways to make money.

It’s very interesting when “politics” suddenly becomes a dirty word. There is the “bureaucratic fallacy” that you can make decisions free from a political context, and that bureaucrats are somehow “more objective.”

The interesting thing is when people use the word “political” and “non-political” is to define exactly what they mean when they use the term. In the case of the IMF and World Bank that seems to mean loaning out money based on standards that all rational people agree are correct. Trouble with that definition is that if you don’t agree with those standards, then you become irrational.

wonder how many of Luxembourg and Switzerland’s immigrants ‘need help to make better use of their skills, which will improve economic prospects’

“…immigrants now make up 7.5% of the population of the rich countries as a whole, with the highest proportion in Luxembourg (32%), Australia (23%) and Switzerland (22.6%)…” http://news.bbc.co.uk/2/hi/business/7254743.stm

Manipulation of the supply and allocation of credit and capital is a very effective method of deriving political gain without official fingerprints. It has been so for centuries, and we delude ourselves to think it could be otherwise today.

If anything, the SWFs bring transparency to the process which the Americans and British and others have resisted. Whether it was BCCI, BNL, Silverado, Riggs or others not disclosed, banks have been used for covert operations by our own governments quite intensively in recent decades. At least SWFs are overt in their stakes and more forthright in their objectives.

Laughter. It’s impossible to deal with billions of dollars without having political considerations. Even seemingly objective standards have associated political assumptions and value judgments behind them. Governments should cut subsidies to farmers before they default on payments to foreign banks, for example, is a highly political statement.

Any statement that A is better than B will get you into the realm of politics since there are likely to be people who assert that B is better than A.

I think it hurts the institutions more to pretend that decisions aren’t political than to admit that they are and deal with the politics rationally.

Iceland has been buffeted by the carry trade more than most, and while i am big fan of floating, i recognize the difficulties it has caused iceland. I haven’t given the subject a lot of thought, but i don’t have a major objection to it. Iceland is more integrated with Europe than the uS (for pegging/ joining the euro) — tho it is also subject to aluminum and fish price shocks that the rest of Europe isn’t (which argues against pegging). Above all the gap between iceland’s gDP and the main european economies isn’t huge, so there isn’t as big a risk of inflationary real adjustment (some countries in the east/ south have opposite problem as Iceland — low real rates and too much investment including in real estate!). Don’t hold me to any of this tho — I haven’t looked closely at Iceland in about a year and never have really looked at the currency issue rather than is a crisis imminent issue.

it also worked — in part b/c a lot of the same funds ended up getting caught short yen when the yen rallied sharply (supposedly b/c of a large hedge fund that had to deleverage). and after the hedge funds were forced to pull back, it certainly did seem that things calmed down.

on the other hand, the “double” play reflected a judgment that HK’s peg wasn’t in its interest. And given that the peg resulted in several years of deflation and slow growth, i am not sure that the funds macro judgment was wrong.

speaking of HK — real rates are not very very negative, as unlike in the late 90s, HK is experiencing a bit of inflation not deflation. and that seems to be fueling a bit of a real estate boom (bubble?). I suspect the HK$ needs to depreciate v the CNY along with the US$ so I am not sure HK’s currency is now totally out of whack, but the US cycle isn’t closely aligned with HK’s cycle, so I am also not sure the peg still makes sense …

Now it is true that two of the largest IMF programs, relative to quota, were provided to Korea and Turkey, and both are important US allies (and Turkey is kind of important to Europe too). But it is also true that both countries had unusually small IMF quotas, so the large size of their loans relative to their quota doesn’t necessarily translate into large loan relative to their GDP. Tho Turkey in particular got a large amount relative to its GDP.

And it still didn’t let the US 4th division march through Turkey on the way to Iraq :).

then again, uruguay — which has no obvious strategic significance to the imf’s largest shareholders — got the largest loan of all relative to its gDP. and turkey’s big loan — which likely was influenced a bit by politics — has turned out to be the IMF’s most successful rescue, as Turkey was a lot closer to the brink of long-term unsustainability than Korea in a lot of ways.

More seriously, the g-7 could commit that the IMF will only lend to support countries with large and temporary balance of payments needs, and thus commit to make IMF loans on the basis of economic criteria. the imf after all cannot technically do otherwise. Of course, there is so much ambiguity in the imf’s economic lending critiria that their application would likely be shaded to reflect the willingness of the imf’s biggest members. the IMF likes to help countries in need, and if its key board members are more keen to help, the IMF is usually more keen to lend.

17% of the seats on a board — especially is no one else is much above 5% — gets a bit of influence. worth remembering.

the g-7 would have a much harder time committing to lend bilaterally only on “economic” criteria.

my point is that there is the economic v political distinction is extremely hard to apply in practice. And this is a topic on which I think I can fairly claim at least some real world experience!

What I have in mind is Iceland pegging to the Euro, as a step towards eventually joining the EU in not too distant future. People are getting restless with the interest rate here, which is roughly 10% higher than USA and the rest of the civilized world.

Our commercial banks are trying to get permission from the central bank to keep their books in Euros, saying the shaky status of ISK is a hindrance for them. Most of their business being outside of Iceland, and so forth…

Would you consider this approach, to peg to Euro, as a folly, or perhaps as a reasonable way forwards for a small country?