The case for a bigger IMF
The Wall Street Journal (Slater and Hilsenrath) reports that Brown Brothers Harriman estimates that Russia, Mexico, Brazil and India have spent $75 billion in the foreign exchange market defending their respective currencies so far this month.
The most the IMF ever lent in a year to the world’s emerging economies? About $30 billion.
Nor have emerging economies limited themselves to just intervening in the spot market. Brazil committed to doing $50 billion of currency swaps. Korea has guaranteed $100 billion of bank liabilities. Russia’s different commitments add up to something like $200 billion – though to be honest I have lost track.
The IMF’s total lending capacity (without drawing on its supplementary financing lines): roughly $200 billion.
Right now, the IMF is too small to meet the foreign currency liquidity needs of the larger emerging economies – those economies like Mexico, Korea, Russia, India and Brazil that have GDPs of around 1 trillion dollars and substantial financial ties with the rest of the world. At least if the IMF has to draw on its own resources. If Japan or China lends alongside the IMF, it could mobilize bigger sums than it can lend on its own.
The IMF clearly still has a role – whether supplementing the reserves of some larger countries in a modest way or supporting smaller countries. It is now lending — or soon will be — to Iceland, Ukraine and Hungary. But in a world where Dani Rodrik argues the IMF needs to be lending hundreds of billions rather than tens of billions (”What will be required now is more of the order of hundreds of billion dollars”), it lacks the resources* to be at the center of the international financial system.
In very broad terms, the dollar liquidity needs of borrowers outside the US have been met in three different ways.
– European banks effectively have been given access to the Fed. Not directly. But indirectly. European central banks can borrow dollars in the Fed in literally unlimited quantities by posting euro or pound or Swiss franc or Swedish krona collateral. And European central banks can then onlend the dollars they borrowed from the Fed to their own (partially nationalized) banks.
– Large emerging economies with large reserves (and almost all the large emerging economies started the current crisis with over $200 billion in the bank, and that – surprisingly – no longer looks sufficient) can use their own reserves to meet the liquidity needs of their own firms and banks. Russia ended the second quarter of 2008 with a bit less than $570 billion in reserves; Russian borrowers (mostly private sector borrowers) had around $410 billion in foreign currency debt. Russia consequently is a position where its government can meet – or try to – the foreign currency liquidity needs of its own residents without international help. Korea is too, perhaps.
– Small emerging economies with small reserves have turned to the IMF. And more are likely to do so. Some small emerging economies that are part of “Europe” have also turned to the ECB along with the IMF. The IMF and the ECB look set to lend to Hungary; Iceland will get support from the Nordic central banks as well as the IMF.
The gap between the IMF’s resources and the liquidity needs of emerging economies with foreign currency liabilities could be addressed in one of four ways.
– The set of countries with access to swap lines from the Fed could be expanded, allowing more countries to borrow dollars by posting their own currency as collateral.
– The IMF’s resources could be supplemented by lending from countries with large reserves.
– Asian countries with large reserves could pool their resources to support other Asian countries liquidity needs without making access to that reserve pool conditional on an IMF program. The Gulf countries could also do something similar for the Middle East.
– The IMF’s resources could be expanded so it would have a balance sheet large enough to be relevant for a broad set of countries.
The political implications of each option differ.
Expanding the Fed’s swap lines makes the US the central player in meeting the global need for dollar liquidity. The ECB presumably would play a similar role in meeting global needs for euro liquidity. Countries that aren’t close allies of the US and Europe would likely want to assure their own access to dollars and euros by self-insuring, i.e. holding huge quantities of reserves.
Relying on China and Japan to supplement the IMF effectively makes China and Japan the key players. It shifts global political power to those with large (some would say excessive) existing reserves rather than those with large votes in the IMF. Regional reserve pools would have a similar effect.
Expanding the IMF would by contrast strengthen the voice of those countries with the biggest votes in the IMF. Right now that is the US and Europe. But the IMF’s voting structure also could be adjusted.
The emerging markets’ sudden need for dollar and euro liquidity suggests an agenda for the new Bretton Woods conference (or G-20 Leaders meeting) that would goes beyond reaching agreement on the need for more counter-cyclical financial regulation and moving the trading of credit-default swaps and other over-the-counter derivatives to organized exchanges.
More and more borrowers need dollars and euros to pay off maturing debts that they can no longer rollover – and finding those dollars and euros has been hard. Buying them on the market is an option, but that adds to the instability in the currency market. Supplying the needed liquidity is in some sense an alternative to further (competitive?) depreciation by major emerging economies. Consequently, it is in the enlightened self interest of the US, Europe and even China to lend emerging economies the funds needed to avoid a major fall in their respective currencies.
* The IMF could do a “general SDR allocation” to increase the reserves of all its members. At this stage, nothing should be off the table.
Brad:
More and more borrowers need dollars and euros to pay off maturing debts that they can no longer rollover – and finding those dollars and euros has been hard.
So the steps in this would be as follows:
Step 1: Bank A in the US lends $1 million @ 5% with say 90-days maturity to Bank R in Russia.
Step 2: Bank R in Russia changes USD for Roubles
Step 3: Bank R lends Roubles @ say 10% with maturity in 5 years.
Step 4: Normally Bank A in the US would allow Bank R to rollover the 90-day instrument, so Bank R continues to make the spread between borrowing short and lending long.
Enter the US Leveraged Stomachache Excuse
Step 4: Bank A refuses to allow rollover.
Step 5: Bank R in Russia needs to pay back $1 million denominated in USD to Bank A, while the corresponding Rouble loan doesn’t mature till 5 years ahead.
Step 6: Bank R declares a liquidity crisis of its own.
Step 7: Somebody has to bailout Bank R.
Step 8: Once Bank R gets its bailout, it needs to buy USD. USD has rallied and there’s very little supply of USD to meet the sudden demand for USD.
Step 9: Russian CB sells USD out of its reserve to Bank R
Step 10: Bank R returns the USD denominated debt.
In case of Bank R being replaced by Bank E in a small emerging economy, and the E CB has no significant USD reserves:
Step 6: Bank E declares a liquidity crisis and hunts for a bailout
Step 7: No bailout, no USD ….
You would think that ECB is not ‘defending the EUR’ in this case, right?
It is amazing how quickly everyone has erased the phrase “moral hazard” from their vocabularies.
International moral hazard is an especially remarkable phenomenon. It is very interesting to see a supposedly sovereign nation which is in reality dependent on an agency of another government – or an “international” agency, which is in reality a creature of Washington. It can certainly induce some reflections on the term “independent” as used today.
The original Bretton Woods, of course, was not in any sense a collective endeavor. It was the policy of a triumphant United States. Its design was to make American paper the center of the financial universe for all time. Harry Dexter White proposed, the world accepted. 60+ years later, it’s a little amazing to see how intact this “star topology” remains.
For free and independent nations interested in preserving their monetary sovereignty, rollover dependency on foreign loans, especially FX denominated loans, is cretinous. Citizens of the countries now experiencing currency runs may wish a management transition to go with their IMF bailouts.
Brad/Moldbug:
I think both of you probably have little or no respect for the policies of Alan Greenspan, who should be recgnized for his veritable genius.
What Greenspan understands very well, and which both of you probably don’t, is that ‘economic value’ is a social construct rather than a ‘physical construct’.
Going deeper into the concept, the material world is fundamentally an illusion and socially constructed ‘realities’ govern economic activity, which is largely oriented in the material world.
Once you shift a social construct around what ‘economic value’ is you correspondingly alter the social aspects of economic relations as well.
Brad:
Is there any way to tell from data sources you may know about whether this is only a banking contraction of credit, or is there also domestic private capital flight to, say, yen or all those treasuries we’re selling to finance Fed global liquidity swaps?
Odd that the euro is dropping like a rock too, if euro denominated lending was done to eastern europe, etc. Tho I have been wondering if Trichet has been supplying liquidity differently since he doesn’t have a treasury to get it from?
p.s I don’t like the economy either.
Whoever is in charge of the department of blocking annoying commenters, will you please add Chidambaram to the list. Thnx.
sorry if anything irritated you specifically … wasn’t writing to annoy
(before we begin virtually rearranging the silverware)
wouldn’t GAB&NAB be the obvious (& easy) 1st option?
http://www.imf.org/external/np/exr/facts/gabnab.htm
would ratifying the 4th amendment help as well?
chid: So the only impact that dinosaur policy has ever had is on re-distribution of wealth among the rich,poor, middle class, etc. Dinosaurs have been stuck in the politics of the distribution of the existing material wealth among different sets of people rather than in increasing it overall.
if material wealth is a product of the biosphere, how can it be increased at all?
it can be extracted, harnessed, transformed, distributed, digested & disgarded, but every increase leads to a decrease somewhere else (& vice versa).
’tis is the law of nature, yes?
(of course, one can never forget energy in this equation either.)
this begs the question as to whether the dinosaur economic policies lead to dinosaur natural realities by depleting the material wealth before the energy has the opportunity to transform itself back into material wealth again.
(if u can figure out how this plays into brad’s IMF topic above chidam, i’d be happy to discuss it further, b/c it is quite interesting, but right now much too far O.T.L.F.O.S. for even moi, at least here.)
Brad, A bigger IMF is fine (and please allow more discretion on the private life of its director, he’s known to have a multipartner sexual life), but isn’t it the time also for a renewal of the idea of a world currency ?
The dollar has failed now. And we d all prefer China does not engage in a war to gain the priviledge of emitting the next world currency.
It s time for international trade to be labeled in the international currency.
Time for a new monetary system.
It s also time we consider seriously the hability of private agents to create money through loans.
This is the well known cause of all booms and bust.
SO either we find strong regulations able to act preemptively against the booms (and still active 50 years from now) (call it go the institutionalist way), or we simply bar that hability (go the Austrian way)
My question is, where does the currency swap model go from here? What happens when it’s time to pay off the swap? Yes, you can roll it over….and over…..and over but, like the securitized debt to distribute model, the trend line of value matters when it is time to pay off the loan. Trend up – good, trend down……rutt roe!
The Fed and Treasury proclaim their tactics are ’sterilizing’ debt in the markets but are they really? Could the currency swap model for relieving counter party debt obligations be a set up to force, or shall we say, gently nudge, second and third (financial) tier countries (x-China with $2 tr of reserves) toward a new, more homogeneous, globalized financial rules based system by way of duress? oops, I ment, during this time of de-leveraging and repricing of assets and risk?
When the dollar was weak, dollars were used around the globe to finance the purchase of dollar assets. Now those assets are decreasing in value (fast) and everybody needs more (new) dollars to meet their financing obligations, so they’re borrowing more and putting their own currencies up for collateral which should dilute and devalue their own assets and currencies. So Brad, the question I can ask that I think you may have answered is, when does debt sterilization become dollar dilution and is the currency swap model effective crisis management or affective great game capitalism?
Chidambaram, the problem is not what you say, it’s that you post ten times in half an hour, as if this were an instant-message conversation. It clutters the screen. Please try to make one long comment rather than a string of short ones.
Well, well, if what we need is “miracle” then why not turn-to “reason” first? It could produce one, IF applied. True, its preservation does not hedge against. But also true, it did enable time:
In the derivatives-upper-lying “reason-omics”, the rate of WIBs deflation correlates to the “special” (in the drawing Rs) depreciation. For that for all to see, one “reasonable” statement had to be. When produced, it did, in turn, awoke someone to allocate which could in turn re-value them. So that was “right”.
What’s “left” (for all to see) is, now, there someone else that tries to wake?
It(i)s about (the) time.
Whay attack of the wrong country with the right tools?
LB:
For a good study in hypothetical economics see “The Mote in God’s Eye” and the sequel “The Gripping Hand” by Larry Niven and Jerry Pournell.
It’s superficially a sci-fi novel and regarded as the best alien first contact genre work of all time.
But it is really an advanced economics text, tho it has been banned from the required reading list at all major universities, especially the ones that like to talk about fractional reserve banking.
But anyway, wormhole traveling humans finally discover aliens in a remote system in a part of the galaxy, far, far away.
As it turns out the alien race is millions of years old. Long ago they solved the energy problem with renewable fusion power. They already have mined all natural resources in their solar system and recycle to obtain materials for new value added products and thereby increase their standard of living. Tho they are not sure either if that has anything to do with quality of life.
But it may from viewing the following relationships:
1)coal + flint + straw = cookfire
2)old spaceship hull + fusion energy + alien value added = toaster oven
So long ago they also embarked on a genetic engineering/specialized breeding program to produce sub variants of the race that are super specialized for various tasks and skills. For instance there is a Master sub species adept at leadership and command, Ambassadors to negotiate between Masters, Engineers, Technicians, Doctors, Messengers, Farmers and Warriors.
So long ago the economy was optimized by availability of limitless renewable energy, recycling of materials, and super specialized skills were not only taught, they were genetically inherited.
This lead to a Peak Civilization millenniums ago. The only limiting factor now was the speed of light and they never discovered wormhole space travel to escape their solar system and continue growing the civilization in a new system with unexploited resources and space.
So natural resource(recyclables) wars broke out and they nuked themselves back to the Stone Age every few thousand years. The previous civilization left bomb proof technology museums for the survivors to discover and hasten their technological development back towards Peak Civilization.
Then they blow themselves back to the Stone Age, and the cycle repeated every few thousand years for the last few million years.
The proposed US Treasury controlled IMF monetary fund oversight of Asian Developing nations would be represent a regression to Neo-colonialism. During the late 1990’s Asian Economic Crisis, the IMF’s notorious retructuring program privatized Asian national assets to politically connected Wall Street banks while impoverishing hundreds of millions of formerly middle class Indonesians, South Koreans, and Thais. Across Asian developing nations, the IMF acronym refers to “I Am Fired”. The Washington based IMF’s affiliation to the US Treasury Dept and US Intelligence agencies renders any proposed IMF oversight of the China PBoC or Malaysian Central Banks as unrealistic.
Asian Central Banks seek financial independence
http://thestar.com.my/columnists/story.asp?col=behindtheheadlines&file=/2008/10/26/columnists/behindtheheadlines/2380112&sec=Behind%20The%20Headlines
For Asia, the financial crisis has meant fresh ideas, like a bold new Asian monetary fund.
THE idea of an US$80bil (RM287bil) Asian monetary fund as announced in Beijing on Friday is five months old. Yet it made the headlines, indicating how noteworthy the proposal still is.
The project by Asean Plus Three (APT, the 10 Asean countries with China, Japan and South Korea) is still so new that it does not yet have an official name. Financial concerns across East Asian borders had mooted the idea, and the overpowering need for it in the current global financial crisis simply made it a reality.
US disapproval
In December 1990, Malaysia proposed an East Asia Economic Grouping (EAEG) as a more workable project, without altogether rejecting Apec. The United States opposed it, Japan lacked the moral courage to participate, and the EAEG evolved into a vague Asean-sponsored East Asia Economic Caucus (EAEC).
The International Monetary Fund (IMF) expectedly rebuffed it, fearing that an Asian fund might compete with it and even work better. The US Treasury across town in Washington, DC, also rejected it for much the same reason.
Significantly, the Asian fund was officially announced in Beijing, the capital of a rising China. Interestingly, the announcement just preceded the two-day Asia-Europe Meeting (Asem), when Europe was excluded from Apec before and now suffers from the US contagion.
U.S. has plundered world wealth with dollar hegemony: China government
http://www.reuters.com/article/newsOne/idUSTRE49N1XX20081024
BEIJING (Reuters) – The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.
The front-page commentary in the overseas edition of the People’s Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.
A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.
“The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar’s hegemony to plunder the world’s wealth,” said the commentator, Shi Jianxun, a professor at Shanghai’s Tongji University.
Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington’s sole concern had been protecting its own interests.
“The U.S. dollar is losing people’s confidence. The world, acting democratically and lawfully through a global financial organization, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance,” he wrote.
Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan.
LB – NAB and GAB provide another $50b. If the IMF is going to be relevant for the emerging world in the future, it will need more than $250b. My strong sense is that desired reserve holdings have soared — which has me a bit scared if there isn’t an easy way of meeting the need, since I am not convinced sustained us deficits are a great way of meeting EM demand for reserve assets. So i am casting around for options.
Chidambaram — i agree with the notion that you might enhance the impact of your comments by making fewer of them; frankly you are posting more than I can read, which hardly achieves your intended result I suspect
This is to congratulate Mr. Setser for his recent excellent posts and his amazing capacity for being up-to-date and transcending the day-to-day newsreel.
His insight is really superb. However, as would be normal in such a complex field as international economics, I don’t agree in some important points. In particular, it seems to me that the recent events that Brad develops in this post and past ones are disproving the ’savings glut’ thesis for explaining global imbalances.
What has changed since most emerging markets accumulated global imbalances? Certainly Asian nations haven’t changed their savings patterns. Their productivity hasn’t changed. And neither have they changed their propensity to avoid appreciations in their exchange rates. If they could, they would still be accumulating reserves.
And now emerging market currencies are experiencing serious downward pressure, their reserves are being burned at a frantic pace and commodities prices plunge-putting their current account surpluses at stake. All this seems clearly related to the major financial events of the last months: The massive ‘deleveraging’ and the blocking of the US and Euro monetary transmission mechanism. A purely financial and monetary explanation of global imbalances seems to square much better with the facts than the ’savings glut’ thesis.
In any case, excess domestic absorption (consumption that was conscientiously “stimulated” by keynesian economic policies) in the US and other developed countries rather than “excess Chinese production” seems to have been the real problem and cause of global imbalances.
I really don’t see why in the grand scheme of things the IMF should play a larger role. The basic problem is that the IMF has a decision making process based on slow, opaque bureaucratic consensus, and organizations that require bureaucratic consensus simply cannot act quickly enough to deal with crises. You end up being trapped in committee meetings over the color of the fire hose while the house burns down.
Adding money and more actors to the IMF is going to make decision making even more slow, and what you will end up with is trapping hundreds of billions of dollars that can’t be used in a crisis because the required committees haven’t met.
If you streamline decision making, then you just duplicate the Fed and the ECB and the IMF becomes just another wheel.
Personally, I think that the IMF *shouldn’t* be the central agency to deal with emerging market currency crisis. The larger emerging markets should be allowed, even encouraged, to keep current account surpluses in boom times so that when (and this is a *when* and not an *if*) there is a crisis, those economies can have the capital reserves to deal with that crisis and avoid a run.
The IMF should be focused on providing funding to smaller markets that don’t have the ability to maintain current account surpluses. If the IMF doesn’t have to worry about Mexico and China, it can focus on Iceland and Pakistan.
This runs against the whole framework of Bretton Woods I, and global balance, but emerging markets have so far come out much better in this crisis than they have in any previous crisis, and I’d argue that this is because the IMF’s role has been limited.
Lets hope the IMF isn’t given a central role here. That’s all we need – a rash of engineered currency devaluations and sharply higher tax rates throughout the EM world. Its no time for more root canals.
Brad, you quoted Alan Ruskin the other day – perhaps that was from a newswire story, but if you get his work, you might have seen he provided this interesting insight this morning:
“G10 Banking losses – External lending to the developing world has been dominated by European banks in recent years. European Banks have over 7 times more claims on developing countries than the US ($3.6trn vs $508bn). In Asia, Europeans have out lent US banks by 3.7 to 1, In the US’s own backyard Latam by 4 to 1 and In European’s own backyard in Eastern Europe, by a staggering 25 to 1, with European bank claims of as much as $1.6trn. In currently ‘troublesome’ countries like Hungary and Romania, the relative exposure is 50 to 1 and 75 to 1 in favour of European banks. Japan has less lending in the developing world than any one of Austria, Italy, the Netherlands, Spain or Switzerland.”
I think this probably explains why the Dollar liquidity sqeeze seems to have “rolled” from Europe to EM’s in recent weeks. Does anyone know why the “unlimited”
FX swaps being provided to Euro banks via the Fed / ECB lines are not making their way to EM Dollar debtors? The obvious answer is counterparty risk, but I’m not sure if there might be something more subtle about the machanism that prevents the transmission.
On to your point about China or Japan perhaps using reserves to bail out the rest of Asia, this may well be where they’re heading. (Note, they would have to sell U.S. assets – likely Treasuries and
Agencies – to raise USD to provide to trading partners via FX swaps). The Chinese, for one, seem to have just about had it with U.S. mismanagement of the global economy, via our gross mismanagement of the world’s primary unit of account.
http://www.reuters.com/article/companyNewsAndPR/idUSPEK466920081024
On a last note, there is a lot of chatter overnight about intervention to stem the strength of the Yen. Although France’s FinMin Lagarde kindly let the markets know that any intervention would be “purely a Japanese affair.” Of course, the markets need intervention to take USD out of the market like they need a hole in the head right now. What the Japanese SHOULD do (but won’t) is to engage in massive unsterlizied intervention to sell JPY / Buy USD, and simultaneously offer those USD to other Asian CB’s via FX swaps.
Asia Times Editorial on IMF Gross Mismanagement
http://www.atimes.com/atimes/Global_Economy/JJ28Dj09.html
Note: Asia Times is based in Hong Kong, PR China.
The IMF has over the past decade renounced its monetary role. Dominated by political slogans, it has portrayed itself, instead, as a poverty fighter. Both institutions wanted to promote good governance and fight corruption in Africa, as if corruption existed only in Africa and nowhere else. Although fighting corruption has no clear or measurable meaning, most likely turning humans into angels, such demagoguery shows how far removed the institution has been diverted from its Bretton Woods mandates.
While intransigent and dictating policies to developing countries, the IMF has always been congratulatory of US policies. Staunchly supporting former Federal Reserve chairman Alan Greenspan’s bailing out of hedge funds and excessive monetary and deregulation policies, the IMF has urged the European Central Bank to lower interest rates and pursue the same policy stance as the US Fed. In contradiction with its mandate to stabilize exchange rates as well as take an orthodox monetary approach to the balance of payments, the IMF was strongly, and at the same time wrongly, supportive of a deep depreciation of the US dollar through very low interest rates, as called for in its past World Economic Outlook documents, to solve external imbalances.
Even after the financial crisis broke in August 2007, the IMF continued to be supportive of present Federal Reserve chairman Ben Bernanke’s aggressive monetary policy, which has precipitated economic recession and downfall of giant financial institutions. Recently, the IMF has fully endorsed gigantic bailouts proposed by US Treasury Secretary Henry Paulson and European authorities and socialization of the banking sector, without explaining reasons for such endorsements and their economic, financial, and social implications.
At the same time, the management of these institutions is dominated by the US and a handful of European countries. While the institutions preach good governance and management, they have been unable to adapt themselves. China is arguably the most important economic power in the world after the United States. Yet Britain and France dwarf its influence. Latin Americans are similarly under-represented. The list goes on.
“It is amazing how quickly everyone has erased the phrase “moral hazard” from their vocabularies.
International moral hazard is an especially remarkable phenomenon. It is very interesting to see a supposedly sovereign nation which is in reality dependent on an agency of another government – or an “international” agency, which is in reality a creature of Washington. It can certainly induce some reflections on the term “independent” as used today.’
I accept what I call Bagehot’s Principle:
If the B of E exists, it will be the lender of last resort, and we need to figure that into our reasoning.
If the IMF exists, it will be the lender of last resort, and we need to figure that into our reasoning.
Good luck on that moral hazard reasoning. Bagehot has proven to be more prescient again and again, or so I believe.
By the way, like Bagehot, I’m actually very sympathetic to the moral hazard reasoning being put forward.
The rally seems to have started … increased sales of existing and both new home in September vs. August reported.
For Cedric:
Earlier I had three words:
Follow the Money!
Now I have three new words for you:
Buy! Buy! Buy!
brad — how much more beyond the $250B are you considering being needed?
what is your time frame for “IMF future relevance” — 5y, 1y, 6mo, 90days, 30days, tomorrow?
but as Timothy Ash (in someone’s bloomberg link) says, “The money is only half of the issue, conditionality is key.”
should/would/could on-the-fly conditionality reform be on the table as well?
2fish: “but emerging markets have so far come out much better in this crisis than they have in any previous crisis”
towhich EM’s do you refer sir?
soxfan: “there might be something more subtle about the machanism that prevents the transmission.”
could u please elaborate on your subtle speculation?
“What the Japanese SHOULD do…”
what’s in it for japan, besides goodwill?
cedric — muchas gracias for the book for the book tip. definitely in crazy eddie mode 2day…
I been thinking also that Japan and China are in a quandary about the idea of regional support to the rest of Asia. China would have to abandon their dollar peg efforts. Japan corporate profitably is well below zero at 95 Y/USD, and generally this causes corporate Japan to scream at the BOJ to start pegging against the buck. I don’t think just buying USD and doing FX swaps with Asian CBs will peg the yen to the dollar. The way I understand it is they have to complete the transaction buying a US asset. So bottom line that would help other Asian CBs, but Japan still has the strong currency.
Tho as Brad mentioned above they could keep EM currencies from tanking way down there, and that goes in the right direction anyway for Japan’s exports in the region.
Also, I’ve been hoping European banks don’t have dollar denominated loans to EMs. I don’t know why, other than it makes my head hurt to think about that. It sounds too much like we are investing in filling up EM gas tanks.
So I really think it is a credit contraction, or call it unwillingness to roll over a loan.
Really if I had a dollar loan I was worried about and someone told me they could pay it in an equivalent amount of euros, I would say fine!
ps. LB, so you’ve read it already.
chidam’s claim that a 2% annualized increase off a 17yr low in housing is a sign to ‘buy buy buy’.
+
2fish’s claim that a 2% decrease in IB bonuses in 2007 v. 2006 is ‘not so good’.
=
0
Dr. Setser,
To follow up on your footnote, why is everyone so reluctant to resort to a general SDR allocation? It would seem like the only way the IMF could bulk up reserves on its own on the scale required for this crisis, but nobody seems to be interested. Is there a reason for the reluctance?
Cedric Regula,
The BoJ operation as i envision it would work as follows;
A) BoJ prints JPY
B) BoJ Buys USD in the FX Market
C) BoJ Sells USD spot / buys USD fwd with Asian CB XYZ
D) Asian CB XZY swap those USD to local entities unable to service / roll USD liabilities
The Yen should decline as a result of the newly created Yen. That serves Japan’s purposed. On the USD side, the supply of USD is unchanged, USD simply having changed hands from FX market participant A, to Asian central bank B, to Asian local bank / corporate C, and presumably back to U.S. or European bank / investor D, who is causing the problem in the first place by refusing to roll over his loan to “Asian local C.”
The all powerful US financial oligarchy arises. Say goodbye to liberal democracy and equality. LOL.
By MICHAEL HUDSON
October 27, 2008
http://www.counterpunch.com/
Class warfare is being fought in the United States. Indeed, living standards for most wage earners today are down from the “golden age” of the late 1970s. But the U.S. economy had its own financial deus ex machina to soften the blow: Alan Greenspan’s asset-price inflation that flooded the banks with credit, which was lent out to homebuyers and stock market raiders. Rising home prices were applauded as “wealth creation” as if they were a pure asset, much like dividends suddenly being awarded to one’s savings account. Homebuyers were encouraged to “cash out” on the rising “equity” margin, the (temporarily) rising market price of their homes over and above their (permanent) mortgage debt. So while most mortgage money was used to bid up the price of home ownership, about a quarter of new lending was reported to be spent on consumption goods. Credit card debt also soared. In the face of a paycheck squeeze, U.S. consumers were maintaining their living standards by running further and further into debt.
This could not go on for very long. It never has. Debt-financed bubbles can’t last for more than a few years, even when fueled by a self-feeding inflation of asset prices in which households and corporate industry borrow more and more against the rising price of their collateral. But once the housing bubble burst the game was up.
Evans-Pritchard rightly accused the world’s central banks of having created this mess. “It was they – in effect governments – who intervened in countless complex ways to push down the price of global credit to levels that warped behavior, as the Bank for International Settlements (BIS) has repeatedly noted. By setting the price of money too low, they encouraged debt and punished savings. The markets have merely responded with their usual exuberance to this distorted signal. Private equity was tempted to launch a takeover blitz at a debt-to-cashflow ratio of 5.4 because debt was made so cheap. The US savings rate turned negative because interest rates were held below inflation.” He should better have said, asset-price inflation. Gains for wealth-holders at the top of the economic pyramid polarized economies. What was rising for the bottom 90 per cent was debt, not asset-price gains from easy money.
beau butts — i suspect opposition to an SDR allocation is rooted in the difficulties understanding an SDR allocation. Plus it has the feel of turning the IMF into a global central bank.
China could lend its dollar reserves to others via swaps without changing its currency policy; it would need to increase its cash balances a bit but i suspect it already has been doing so.
LB — right now conditionality should be light in those countries that don’t have big current account deficits, and the conditionality in the current account deficit country should be directed at the steps needed to facilitate adjustment. Money matters at least as much as policy in some cases. And in cases like brazil and korea, the key adjustment (a major depreciation) has already happened.
Moral hazard isn’t the key concern now; a seizing up of a host emerging markets that is transmitted back to the US and Europe is …
Cedric: European banks were lending in $ to places like Russia and Ukraine, drawing on wholesale dollar financing. and yes, they now don’t want to renew those lines.
LB: 2fish’s claim that a 2% decrease in IB bonuses in 2007 v. 2006 is ‘not so good’.
Bonuses went down sharply between 2006 and 2007 for everyone except for Goldman-Sachs which caused no small amount of ill-will on the street. Between 2007 and 2008, the numbers I’ve heard are down 30 to 50% assuming that you get to keep your job.
RTRS-RUSSIA, CHINA TO SIGN 20-YR OIL SUPPLY DEAL ON TUESDAY
RTRS-CHINA IN TALKS TO LEND $20-$25 BLN IN EXPORT-BACKED LOANS TO RUSSIAN FIRMS TRANSNEFT, ROSNEFT
MOSCOW, Oct 27 (Reuters) – Russia and China will sign a much-delayed long-term oil supply deal on Tuesday and Beijing is in talks to lend Russian companies $20-$25 billion in export-backed loans, industry sources said on Monday.
The deal will give Beijing access to 300 million tonnes of Russian oil over the next 20 years, accounting for 4 percent of its annual demand, while allowing Russian firms to sort out immediate financing needs during an acute liquidity squeeze.
The deal will be on the agenda when Chinese Premier Wen Jiabao meets Russian officials on Tuesday. The Kremlin is seeking to diversify its export routes away from the West and is targetting China as the main market for its East Siberian oil.
“It is a huge deal. The biggest ever between Russian and Chinese oil firms,” said one source with the knowledge of the situation.
Monday, 27 October 2008 12:48:52RTRS [nLR558454] {EN}ENDS
The problem with the IMF is not primarily a problem of size it is a problem of legitimacy. Emerging market governments in South America and East Asia spent the last decade amassing dollar reserves so that they could avoid going to the IMF and paying off existing IMF debts like it was a loan shark. Just last year the IMF was contracting because it wasn’t collecting as much in interest as a result of these actions by it’s erstwhile borrowers. If the institution doesn’t reform enough to not only offer financing to Eastern Europe but also do a good job in serving those governments it will become completely irrelevant as an institution.
Chidambaram
what if some people act. read what you write
and then in-between magician changing hats from “credit crisis” to “magic solution” throw in all the treasuries and all the agencies and all the swaps and all the rest, forcing all the rabbits to buy buy buy buy all the stuff and then stay where they are. put.
this is exactly how the label would change from “shrinking assets” to “AAAAA all domestically owned mega debt”, allowing all the rabbits plus the magician to enjoy the weimar classic, the sequel.
hrh:
The USD are the rabbits. The rabbits, meaning money, doesn’t disapper, ever.
The rabbits can move among various buckets, like Treasury, Agency, Private Bond, Bank Savings Account, Equity, Swap, Collateral against long CDS, etc
But they can’t disappear.
Now lots of rabbits, meaning USD, have moved from the ‘equity’ bucket to the ‘low risk Treasury’ bucket. Soon they will move back.
Soxfan — most interesting (China lending v its future oil purchases … )
Soxfan:
Yes, I forgot the BOJ could just print money. Screwing up your currency is the easiest thing in the world. And if you are a net exporter, you will have foreign reserves to buy back excess yen someday after panic demand for liquidity/credit subsides and keep from ending up with more inflation and/or currency devaluation than you wanted.
So they could even do a mix. Dollar swaps if lack of dollar liquidity is a problem, or just make direct loans in yen if insolvency due to a credit crunch is a problem.
In the mean time they could help head off destructive deflation in the region.
Now I have this funny thought of China, Japan, Korea, and Taiwan all in the same room discussing terms.
Isn’t it possible to shut down Chidambaram?
The forum was of high quality before he entered. It doesn’t make sense to have a forum where 80% of all messages are from the same guy.
Thanks for considering this.
Chida is the man and very perspicacious.
http://www.voxeu.org/index.php?q=node/2488
“Another benefit would have been to ameliorate currency crises in emerging markets and smaller countries”
A very interesting post on Vox by John N Muellbauer:
The current financial crisis will probably lead to a deep recession. This column suggests that European central banks, misguided by outdated econometric models, should have cut rates faster and deeper in a coordinated fashion. They should now scrap these models and agree on a large, coordinated cut of 2 percentage points.
When future economic historians look back to trace the triggers for the October 2008 financial panic and the unnecessarily severe recession of 2009, they will likely put their fingers on two.
* The failure to keep Lehman Bros functioning as a going concern.
* The failure of the ECB and the Bank of England to use their interest rate setting firepower to organise a substantial globally co-ordinated interest rate cut (the 8 October 2008 cut was too timid).
Read the post. On smaller countries, note this:
“Another benefit would have been to ameliorate currency crises in emerging markets and smaller countries such as Denmark. Their exchange rates depend in part on interest rate spreads with the major currencies. A co-ordinated global interest rate cut would have widened spreads without these countries having to raise rates to support their currencies in the face of severe recessions. Moreover, as late as October 21st, many other central banks would have felt able to join a co-ordinated cut without exposing their currencies.
More generally, the reduction in policy rates, and the prospect of more to follow, would have reduced returns on safe assets, such as government bonds, and induced investors at the margin to rebalance towards riskier assets, such as equity and corporate debt. The rise in such asset prices would eventually have helped to restore collateral values, slowing the spiral of rising bankruptcies.
Following the panic beginning on October 22nd, the task of restoring confidence is far harder. With asset prices so much lower, the bad loan position of the banking system looks worse, and with it, the potential burden on tax payers. The damage for the UK looks particularly severe, with its debt and housing market vulnerability – reflected in the sudden decline in Sterling and in Treasury gilt prices.”
In other words, lower interest rates to deter people from moving money towards the big countries, in order to give them an incentive to keep money in the smaller countries
I’m of the opinion that arguments as to whether or not Lehman should have been bailed out need to be made with the very clear understanding that there is no way that Paulson politically could have bailed out Lehman even if he wanted to. Paulson had enough people screaming at him about moral hazard and crony Wall Street deals as it is.
One interesting facet is that had Paulson bailed out Lehman and nothing bad happened, he would be political toast since this would have been considered proof-positive that the bail out was unnecessary. This is one reason that it is important to slow down the crisis. If there is no crisis, you won’t be allowed to do anything, and by the time you can do something, things are moving so quickly that what you are doing is useless.
Also, I don’t think it would have been possible for the central banks to move more aggressively at cutting rates than they were. It’s like trying to pump on the accelerator when your gas lines are broken. Something that did happen was that whatever cuts in interest rates that the central banks were doing, simply were not being transmitted to the rest of the market. Once people start worrying about losing 90-100%, a one or two percent rate cut is not going to make much difference.
Also, if we are in a situation where this crisis leads to a deep recession, I think that is a cause of joy and celebration, because we were seriously seeing something much worse in mid-September.
the farmer puts a rabbit in the bank, and the bank then lends out 30 rabbits to the conjuror. that is ‘fractional reserve banking’, i think.
usually the rabbits, being rabbits, breed. but sometimes even if the rabbits live, the conjuror decides or is asked to bring the rabbits back – whereupon they disappear again.
in fact banks conjure with electronic digits not rabbits, so i would advise what the other contributors are too polite to advise – stick to farming.
I don’t like taking comments down, but i also have detected a fall in the quality of the conversation/ will be aggressive in taking down off topic comments that hijack the discussion. that is why several comments disappeared from this thread.
capitalism is a natural and thus self regulating system.
there is no great need for new regulation. what those now losing money into thin air are learning, will not be forgotten for a generation or two. people will regulate their own risk taking. just as it took a generation or two for the folk memory of the great depression to be forgotten.
after the great war, there was w.w.2.
so now after the great depression are we into g.d.2 ?
someone paid 6.5 million pounds sterling for a damien hurst art object this september.
so cheer up it could be worse. you might be waking up to spending g.d.2 in a hostel for the homeless, one that has a space for you and another for a pickled shark in a tank, that you can’t even eat.
«For free and independent nations interested in preserving their monetary sovereignty, rollover dependency on foreign loans, especially FX denominated loans, is cretinous.»
The USA are surely rolling over a truly colossal amount of debt. In their own currency, though. Balance of financial terror indeed.
As John Authers wrote recently the international reference currency has turned out to be the yen. Which is in many ways a proxy for the renmibi.
A lot of people here make the mistake of thinking that central banks care about their balance sheets and profit&loss; but mostly they don’t they only case about the growth and power of their economies. They are instruments of statist policy. The Bank of China first and foremost.
The problem IS Bretton Woods and the debt-money system.
We’re the global dog that caught the truck.
Hmm, what remains unknown at this point in time is what “stipulations” the IMF would recommend for countries that borrow from it? Most people would probably agree that “austerity” is off the table? Wonder what the asian countries who listened to the IMF would say?!
fwiw, if you’d like to take a step back, i came across this the other day
i prefer gellner to polanyi, but _the great transformation_ is worth revisiting i think, wrt the ’sociology of economics’ or political-economy of the market system (or american system); gellner would say that ’statism’ (state capitalism again!) is required for industrialised societies…
oh and i’d just add that while the IMF is trying to get more involved (be relevant) the BIS might be the more appropriate forum
cheers!
Brad, can you please explain what looks wrong about a global central bank ?
Logically we all should be in favor of a global central bank. I mean except may be the US bankers who would like to keep dollar as the international reserver currency, and possibly Chinese who would like to replace dollar with RMB.
Outside those two nations, and in reality outside the bankers in those two nations, the rest of the population can only win if a global central bank is created. It would reinforce the urge of a global government, global elections etc.
All this is fine and is the goal of all those who believe in democracy. Or is it ?
IMF should be printing SDR and its stipulation should be to inflate private debts away and enforce regulations that put a maximum to private debt emissions, a maximum debt/GDP ratio.
Once most of private debt is inflated away, penalising the debtors (fall of capital good prices relative to consumption goods prices) and the lenders (fall of the real value of the money lent) and hence reducing moral hasard (those who did neither borrow nor lend in excess are favored), then everything is fine.
I would favor a complete ban on consumer debt, except may be on some durable goods (as laundry machines). Credit emission needs be very strictly regulated, with the clear signal that money emission is a state monopoly, outsourced to private agents only under very strict obligations.
[...] The case for a bigger IMF [...]