Give the IMF credit (literally, and figuratively)
One issue to watch over the next few days, as the world’s finance ministers gather for the IMF’s spring meetings: whether or not the G-20 (and other) countries carry through on their pledge to expand the resources available to the IMF.
The IMF cannot supply credit to a host of troubled emerging markets unless it gets credit (via its supplementary credit line, or a bond issue sold to key central banks with excess reserves) from a bunch of countries in a (somewhat) stronger financial position.
But also give the IMF credit for producing analysis that has become an essential guide to the current crisis. Like Dr. Krugman, I am eagerly awaiting the release of first few chapters of the WEO tomorrow. That is something that I couldn’t have credibly said all that often in the past. The detailed WEO will provide a baseline, among other things, for assessing whether the fall in the world’s macroeconomic imbalances in the first quarter can be expected to persist for this year, and for the next.
The IMF’s Global Financial Stability Report – released today – already provides a baseline for assessing the scale of the losses that the last credit cycle will generate (gulp, over $4 trillion, with $2.8 trillion from the US – two times as much as the IMF forecast in October) and thus, in broad terms, the scale of the new capital the financial sector needs.
This crisis challenged the IMF. A truly global crisis calls out for a global response, underpinned by high-quality global analysis. A few years back, the IMF’s surveillance wasn’t perhaps as focused on the underlying risks of an unbalanced and highly leveraged world as it should have been. Just look at the IMF’s 2007 economic health check for the US , which declared – a minus a caveat or two – that the core of the US financial sector was well capitalized and “relatively protected from credit risk” (see paragraph 5, on p 10 of the staff report/ and paragraph 5 of the PIN/ ). Oops.
Of course, the IMF’s assessment of the US financial sector echoed the conventional wisdom of the time. And, in other areas, the IMF can credibly argue that it highlighted risks that others wanted to ignore. It, for example, consistently called attention to the build-up of balance sheet risk in emerging Europe.
Suffice to say that the IMF didn’t risk making the same mistake in its current Global Financial Stability Report. Chapter 1 of the Global Financial Stability Report makes for sobering reading.
The IMF paints a picture of a global economy where neither large financial institutions in the world’s economic and financial core nor those emerging market governments with large external financing needs can count on financing themselves in private markets. Both sets of borrowers, in effect, now rely on the support of official institutions, whether the IMF, the the world’s large central banks or taxpayers. The financial sector relies on official support for the money it can no longer raise in the “wholesale” funding market*, and emerging markets to offset the withdrawal of cross-border bank lending.
On p. 39, the IMF writes: “private bank funding markets are mostly closed – banks rely on central banks and the government (for guaranteed unsecured financing)” Even relatively healthy large the banks – the kind that are assumed to be too systemically important to fail – still cannot consistently obtain long-term financing without an explicit government guarantee. Call it the Fannie and Freddie problem: right now, a still-nervous market isn’t willing to accept implicit guarantees.
Table 1.7 shows the scale of European (eurozone and UK) banks reliance on wholesale financing. It is rather extraordinary. I would though be interested if Alea thinks the IMF’s analysis overstates European banks wholesale funding needs.
And on p. 58 (annex 2, figure 1.45): The IMF’s model for emerging market lending that the world’s big banks, which the emerging world about 2.5% of the emerging world’s GDP, will pull twice that much credit from the emerging world over the next few years.
“the model’s projection … implies a sudden stop, with substantial net outflows of other investment [bank lending, in balance of payments-ese] that average 5% of GDP over the next few years. Outflows of this magnitude were registered in the late 1990s by several southeast Asian countries in the 1990s, and in the early 1980s by Latin American countries.”
That may be a bit too pessimistic, but it does illustrate the overarching risk. The IMF, in effect, says that the there is a real risk that the world of the next few years will be marked by a long hard slog of deleveraging, not a quick rebound of confidence.
The good news – such as it is – comes on p. 34, in the widely cited IMF’s table 1.4. It shows the IMF’s estimates of the size of the financial sector’s losses. The IMF estimates that US banks need about $300 billion to get back to their pre-crisis leverage levels, and $500 billion to get back to their leverage levels of the 1990s. That is (roughly) 2-3% of US GDP.
I fully understand the political difficulties of getting this money – and putting equity into the banks it in a way that is perceived as fair by both the taxpayer and the banks’ employees. But this – as Dr. Bernanke has noted — isn’t a sum that is beyond the United States’ fiscal capacity.
The UK, frankly, has it far worse. Its banks are estimated to need about ½ as much capital as US banks, and the UK’s economy isn’t close to half the size of the US economy.
Other tidbits that jumped out at me (underlying data can be found here):
– The IMF forecasts emerging markets will see outflows of 2% of their GDP from the banking sector (“other investment”) and 1% of GDP from the sale of their securities by investors in advanced economies (“portfolio investment”). On the banking side, the outflows seem a bit smaller than what the IMF’s model would blindly forecast based on its input variables. (p. 7)
– The IMF forecasts that the UAE will run almost as large a current account deficit as Pakistan (both are in the 5-6% of GDP range). Given its maturing debts and this financing need, the Emirates isn’t – based on this analysis – cash rich, though ADIA still has a large stock of assets. (p. 10/ table 1.1)
– The IMF forecasts a far bigger contraction in private credit growth to emerging economies than in the 97/98 crisis. That is probably too pessimistic – China will make sure of that. But most emerging economies are in a quite different position than China, which pushed up its external surplus by holding loan growth below deposit growth from 04 on (p. 16/ figure 1.15)
– Figure 1.20 (on p. 23) shows expected loan losses in the US relative to the history of the past 30 years – it isn’t a pretty picture. Figure 1.30 (p. 30) shows bank loan charge-offs over a very long time period. Forecasts charges (i.e. losses) aren’t expected to exceed those in the 1930s, but they are very large. Look at the figure. A core function of the financial system, presumably, is to lend money to those who can pay it back. If the IMF’s analysis is right, the US financial sector didn’t too a particularly good job of this – And presumably scaling bad loans across this lending cycle to financial sector pay across this lending cycle wouldn’t improve the picture.
After reading the IMF’s financial stability report, I find it hard to argue with Dr. Wolf, who writes:
‘Governments of wealthy countries have also put their healthy credit ratings at the disposal of their misbehaving financial systems in the most far-reaching socialisation of market risk in world history.
To take an extreme example, Ireland is — per the IMF (Table 1.10) planning to try to issue something like $640 billion in guaranteed debt. And Ireland is a rather small country.
* wholesale funding is, in very broad, terms bank financing that doesn’t come from small insured depositors.
Ask Washington Mutual bondholders about implied guarantees.
The $300 billion of losses projected for U.S. banks will mostly come from existing bank shareholders. The Treasury Secretary testified that he still has $145 billion of TARP money left. That should cover any needed top up of bank capital if we don’t use it to subsidize solvent banks.
Bloomberg is reporting that the Japanese economy is rebounding because March exports are only down 46% vs February decline of 49%. One “expert” was quoted as saying that it was because Chinese demand was rebounding.
That report is going to take some time to wade through. I looked first at the page number and thought, “Oh this won’t be much” and then realized they restart the numbering at each section so the total is like 240 pages! Yikes!
I’ve been reasonably sure the US financial system will weather this storm, in all but a true worst case scenario. (Reasonably sure is not quite within the 95% confidence interval but closer to that than the one deviation level.) As for the UK … I’m worried … a lot. That feeling may be influenced by the relatively empty state of public discussion there about their issues – an unwillingness to grasp the reality? – but their economic fundamentals bother me.
Beyond that what really strikes me about Britain is that London, IMHO, has a significantly larger impact nationally than NYC does here. London generates wealth, generates home values, generates investment, but much of that depended on discredited light-touch regulation and the secrecy regarding capital flows that you’ve bemoaned on occasion. That has been a significant competitive advantage* and now what will become of that?
Don’t get me started on Ireland. It became something akin to Ponzi. I tend to the belief that things in E. Europe are worse than current feeling.
*I see what’s happened in the UK as a fundamental statement about the long-term cost of competitive advantage.
Let me explain why I’m not the President of the US, and just a small time private investor. If I’d been the Prez, I’d have moved to a rapid compromise by now. I’d have given away something like 11% of the IMF stake, then I’d be sitting across a table to mass-convert my short term Treasuries into Long Bonds. Next, I would drop the environmental agreements, drop the Manas Air Base,the missile Shield deployment in Poland. Pull out of Afghanistan. Iraq, just suddenly disappear in a couple of weeks and save my money. Reduce the military bases from 1000+ to something like half a dozen. Make it explicitly clear that I won’t give a single dollar more to the banks. Nor will I pay the bondholders if the bank goes bankrupt, i.e. no nationalization.
I will spend all my money on electric cars and probably nuclear power plants. Fire something like 50% of everybody under the age of 40 in the Defence and order them to get jobs building power charging outlets and making electric cars.
No bailout for any auto firms. If they go bust I’ll take their remaining infrastrcuture for $1 and use it for making electric cars.
All this will make doubly the US dollar crashes through the bottom in the exchange, and improve my exports.
Next I bring the Special Economic Zone schemes. Mark out huge pieces of land as foreign territory for tax purposes as long as the people there are bringing foreign exchange earnings.
Next, Death Taxes. If anybody dies with a networth of more than $ 10 million, I get to keep 20% of everything they own before it goes to their descendants.
So, now you know why I’m not the US Prez.
Regards.
Mr. Geither
“enough left in TARP to get job done”
friends, remember this quote…
Time Capsules-Let’s Move to 2012
you ready?
-FOOD RIOTS
-SUATTER REBILLION
-TAX REVOLTS
-UNDERDEVELOPED NATION
-LOWERING IN LIVING STANDARD
-MIDDLE CLASSES=REVOLUTIONARY CLASS
-TENT CITIES
“We’re goin to see huge areas of vacant real estate with squatters living in them as well. It’s going to be a picture of which americans are not used to. It’s going to be a shock and with it alot of crime. And the crime is going to be alot worse than it was in 1929, Depression, because peoples minds weren’t as wrecked with all the modern the counter drugs, or prescriptions, whatever you call them”
Fences are up now, expanding tent cities, and special bracelets.
It’s goin to go from bad to worse. People have no idea how bad it’s going to get.
This message was delivered to me by a very trusted source who has worked and connected in the world of finance.
Good luck!
I think “IMF resources” need approval from Congress. Assuming that is true …
If any of my congressmen vote for any of this “stuff”, I will NOT BE VOTING FOR ANY OF THEM!!!!!!!!!!!!!
Too Much Fed,
How many congressman do you own?
The post crisis seems much more managed by guilt than BC (before crisis) efficiency.
IMF is much harsher on data and forecast but could be too linient on the applicable terms of its credit and loans facilities.
This paper provides for good material when the US banking stress test will be avaialble (see table 1 page 9)
The table does not cover UK and German Banks
The role of valuation and leverage in procyclicality
http://www.bis.org/publ/cgfs34.pdf?noframes=1
The IMF is mistaken as to the solution to a great recession caused by trade imbalances. The financial problem started in the United States, as Nouriel Roubini and Richard Duncan both predicted, because trade deficits caused debt which caused a financial crises.
The big banks have been turning American consumer debt into bonds for foreign sale. They are part of the problem. Having our government borrow $2.8 trillion from China to save them would not help our economy.
But if we balance trade then American corporations and foreign corporations will resume investment in American production and if we encourage domestic saving at the same time, then American savings will provide the capital needed for American investment.
Smaller banks will fill the void left by the failure of the big banks. Instead of trying to translate foreign loans into American investment, they will translate domestic savings into the capital needed by businesses.
The IMF economists still don’t understand what caused this great recession and they still don’t have a solution. They think that it is possible to go back to American consumers borrowing money from the Chinese government. That method has been tried. It wasn’t sustainable.
If the IMF’s estimates of US bank losses are accurate, then we are in decent shape, since the programs on the table right now will recapitalize the banks to the tune of $300-500 billion.
The problem with predictions is how rapidly they change. One thing that was both sad and funny was when the major rating agencies down graded Lehman bonds from investment to junk a few hours after Lehman went bankrupt.
One thing that would be useful is to start every report, talking about the last report that they issued, and what they think they got right, and what they think they got wrong.
Agree difficult to see how different sets of predictions can match the banks existing capital unless TARP is fully converted in equities.
April 21 (Bloomberg) — Worldwide losses tied to distressed loans and securitized assets may reach $4.1 trillion by the end of 2010 as the recession and credit crisis exact a higher toll on financial institutions, the International Monetary Fund said.
2fish — the imf’s calculations are for the equity needed on top of what has already been provided.
Do those estimates assume that equities remain at present levels?
I note that as the rate of losses has slowed in the new year that most banks have returned to profitability. Even Morgan Stanley’s loss is a result of a perverse increase in the value of its own debt.
Presumably even a relatively shallow recovery, like the present one, would mean that the need to re-finance would be proportionately reduced.
Give the IMF credit (literally, and figuratively)…
One issue to watch over the next few days, as the world’s finance ministers gather for the IMF’s spring meetings: whether or not the G-20 (and other) countries carry through on their pledge to expand the resources available to the IMF….
bill
Everything remaining the same in stock term of losses and no change in term flows>
But few reservations
Accounting (BIS paper supra)Fair value against unknown methods (fair value is already embeded with strong assumptions)
Banks accounting their own bond price depreciation (treated as a capital gain)
Treatment of existing profits citi made profits betting against its own bonds trigering profits in CDS market and eventually depreciating its own bonds as an additional source of profits.
Reporting date changes Goldman sacks
It seems to be no limit in permissivity .
China’s recovery only boosting Asian neighbours: analysts
http://www.terradaily.com/reports/Chinas_recovery_only_boosting_neighbours_analysts_999.html
An emerging recovery in China is good news for the rest of Asia but the nation does not yet have sufficient clout to boost the global economy as a whole, analysts say.
While overall economic growth in the first quarter was at 6.1 percent — a near two-decade low, according to some analysts — investments in fixed assets in the cities were up by over 30 percent in March.
This reflected massive public spending, which the government launched in November soon after the global crisis broke out and which is now also benefiting major exporters to the Chinese market, analysts said.
“China’s role and influence as a growth engine in the region is growing fast while the US influence is certainly decreasing,” said Lee Moon-Hyung, an economist at the Korea Institute for Industrial Economics and Trade.
The nations in the region standing to reap the largest potential gains from a Chinese recovery included Australia, Vietnam and South Korea, Morgan Stanley concluded in a recent report.
But it is unlikely that a Chinese recovery will have a broader impact on the economies in Europe and North America, according to economists.
“It’s not going to support consumer goods exporters,” said Maguire. “Just because rural incomes have risen by eight percent, your average Chinese farmer is not going to rush out and buy a new BMW.”
bsetser: 2fish — the imf’s calculations are for the equity needed on top of what has already been provided.
The table stops at the end of 2008 and so it doesn’t include 2009 TARP injections or any of Geither’s new proposals.
Also the report seemed to have the standard IMF blind spots, which can basically be summed up as lots of numbers and statistics but no people. There wasn’t any discussion at all about the impact things like institutions, regulation, and unemployment have on financial system stability. Getting people jobs, and keeping people in houses will make far, far more difference than anything that the report suggests.
This is important because all of the numbers will be off if assumptions on the deepness of the recession change.
Lot’s of good data, some insight into parts of the problem, but it just misses the point…..
Also you can deleverage by printing money. It doesn’t necessarily have to be that painful.
Indian Investor,
Those sound like many of the reasons that I am not President. Plus the fact that you need to run for the position, which is a real pain in the arse.
Anyway,
The IMF credibility is not improving here in my view. They say US banks need 300B to get back to pre-crisis leverage levels?
1) Why would we want to when the old level of leverage was unsustainable (along with the old global GDP)?
2) How do you reconcile the other numbers of $2.8T in US bank losses(and $4T global) with a “need” for only $300B?????
And the IMF lends to governments…not the customers that banks are supposed to lend to. So I think the IMF will be dealing with another level of insolvency…not the one we see now with banks and the private economy.(yes, I know the governments will stimulate the private sector…but we always wonder about the path the money takes to get there.)
But the recent G20 announcement that the IMF will have $1 trillion to lend (we will have to see if that happens still, of course) was well received by foreign currency and sovereign bond markets.
Here’s a chart of my favorite foreign bond fund. It has been looking like a stock chart the past year, just less magnitude in the swings. It does have a average A credit rating and is mostly in better rated sovereign bonds but doesn’t have US treasuries and that AAA rating pushing up the fund credit quality.
http://finance.yahoo.com/q/bc?s=TGBAX&t=6m
But it tells a story…something magical happened on March 9th that I still haven’t been able to put my finger on, then it got another nice boost from the G20 announcement about IMF lending. So private flows are loosening up somewhat.
However, $1 trillion is still just a drop in the bucket relative to a $55T global GDP…
The IMF can’t solve the debt problem that has simply grown to large to repair:
It’s a real mess, and the problem is that there’s just too much debt. Martin Wolf of the Financial Times summed it up like this in Monday’s article:\
“Consider the salient example of the US, on whose final demand so much has for so long depended. Total private sector debt rose from 112 per cent of GDP in 1976 to 295 per cent at the end of 2008. Financial sector debt alone jumped from 16 per cent to 121 per cent of GDP over this period. How much of a reduction in these measures of leverage occurred in the crisis year of 2008? None. On the contrary, leverage rose still further.
The brutal truth is that the financial system is still far from healthy, the deleveraging of the private sectors of highly indebted countries has not begun, the needed rebalancing of global demand has barely even started and, for all these reasons, a return to sustained, private-sector-led growth probably remains a long way in the future.” (Martin Wolf, Why the ‘green shoots’ of recovery could yet wither, Financial Times)
Debt is at the very center of the current financial crisis. The massive debt-overhang can only be resolved by writing down losses, restructuring capital, and initiating debt-relief programs.
But what is debt? Well it depends who owes what to whom.
If workers owe debt to bankers – its a source of future profits. It is an advance of wages at the expense of future wages. It doesn’t have to be paid back it simply has to be paid. Once the redundant debt that can no longer be paid is written off, it remains a source of profit.
If non-financial corporations owe debt to the banks its a redistribution of profits away from non-financial corporations towards financial ones. Actually although endebtedness has increased for these firms the rate of interest has fallen so fast that the cost of servicing these debts is relatively low historically.
For financial corporations its simply an internal transfer of funds.
For the government its a charge on future taxes to the banks and financial corporations. As these are now nationalised, not nearly as much of a problem as would first appear!
Brad,
I was wondering whether you had done any analysis on what total G-7 net sovereign issuance looks like this year and how much that might need to increase to account for the recapitalization that the IMF is talking about?
By my calculations it’s just over $4T USD right now, BEFORE the extra $1.7T needed to recap banks to 17x leverage.
Where is this incremental pool of cash going to come from? How will the G-7 find 13-19% of its GDP for new sovereign bonds? Even assuming there is zero net corporate or household debt issued, is there enough in new household and corporate savings and exG-7 trade surpluses to cover this – assuming that people even want to buy sovereign debt with a 2% coupon? Or are we destined for central banks to be the majority purchasers at government bond auctions?
Richard,
Sounds to me like QE is the vehicle of choice by world leaders. So far Japan, England, the US, and even Switzerland have taken this route. Some forecasters don’t think the Fed will stop at $300B, but the total will go to a cool trillion in a newly minted dollar swaps with longer maturity Treasury bonds by this time next year.
So far the ECB is holding out, but when Eastern Europe refugees start invading France and Germany, they may change their tune.
Not that QE is necessary. In the US alone we have $15T in short term M2. It’s just that governments are too cheap to pay a realistic interest rate to attract funds. So they will screw everyone with eventual inflation later. Then we will get inflation popping the global sovereign debt bubble. That will make the residential real estate pop sound pleasant.
So we are saving the world today so we can live in the Stone Age tomorrow.
Disclosure: I am NOT a gold bug.
Cedric: 1) Why would we want to when the old level of leverage was unsustainable (along with the old global GDP)?
The IMF gives two numbers. One was a return to 2005 levels of leverage, the other to 1990’s levels. The 1990’s levels require about $500B.
Cedric: How do you reconcile the other numbers of $2.8T in US bank losses(and $4T global) with a “need” for only $300B?????
Because some of the losses are passed on to other people, either directly or indirectly. For example, the fact that the Dow is at 7000 rather than 14000 is because hedge funds sold stocks massively to raise cash to cover real estate losses.
bill j: But what is debt? Well it depends who owes what to whom.
One very important point is that most savings is debt. If you have a savings account, then that’s a debt from the bank to you. That $20 bill that you have in your pocket is a liability of the Federal Reserve Bank.
Large amounts of debt aren’t necessarily bad, and low leverage rates aren’t necessarily good. Having a low leverage rate may simply mean that you are in the middle of a stock market bubble.
sources of demand:
money market funds (who still don’t like unguaranteed bank paper)
pension funds, who may prefer a secure low yield to the risk of further losses. some funds were likely quite underweight gov bonds (see ontario teachers)
banks (if yield curve is judged attractive, e.g. depositors)
central banks — at home (eg quantitative easing) and abroad.
domestic household savings is rising; domestic investment is falling — that creates a new pool of spare savings domestically.
Brad,
If I understand the IMF report, they think that the primary problem is that there is not enough liquidity (i.e. not enough dollars) available to finance trade in much of the world. Their solution is for governments to give more money to bankers (with the IMF being the primary bankers who deserve government money).
But there is a much simpler solution. The Fed could start buying lots and lots of these underdeveloped country currencies, as they have been allowed to do on their own account since 1962. They would be killing two birds with one stone:
1. Weakening the dollar so that U.S. products again become competitive.
2. Providing liquidity so that the rest of the world can use the additional dollars to finance trade.
I must be missing something. This solution is too obvious! What am I missing?
Howard
Howard:”I must be missing something. This solution is too obvious! What am I missing?”
Sounds OK, until we remind ourselves the Fed is broke.
The IMF may believe a shortage of dollar liquidity is the problem, but the real problem is creditors believe there is a shortage of credit worthy borrowers.
Unfortunately, the USG seems to believe the same thing as the IMF. Ergo the current “fix” is for the Treasury and the Fed to stick their thumbs in their mouth, squint their eyes shut, and blow real hard in the hope of re-flating first the banks, then housing prices and prices in general, credit growth, and then finally the real economy.
I think we get a farting noise, then someone lites a match.
Cedric,
Loved your post. But I disagree that you have hit the reason why I am wrong.
The Fed is not too broke to do this so long as American interest rates are low. The Fed just needs to borrow (i.e. sell bonds) in US markets and use the the dollars borrowed to buy foreign currencies.
The result would be higher U.S. interest rates, weaker dollar, and improving trade deficit creating more aggregate demand for U.S. products.
Howard
I’m traveling today, but tell me: does the IMF book have a happy ending? I assume Harry kills Voldemort.
The IMF forecasts growth in 103 of the 182 economies it covers. There are, however, a few caveats:
1.) Those 103 comprise just 17.7% of global GDP, and 6.7% if China and India are left out.
2.) Their growth will slow from 7.4% in 2008 to 4.8% this year (5.6% to 2.9% absent China and India)
3.) The remaining 79 economies, accounting for 82.3% of global GDP, will contract by 3.7%, down from +1.2% in 2008.
Howard:”The Fed is not too broke to do this so long as American interest rates are low. The Fed just needs to borrow (i.e. sell bonds) in US markets and use the the dollars borrowed to buy foreign currencies. ”
I did think about that too, but the Fed already sold their inventory of marketable treasuries(it got replaced by “colaterall”). They also have non-marketable notes they swap with the Fed member banks to manage base money supply, but these are short term in nature and foreign central banks are not considered to be Fed member banks, at least officially(Japan will deny it if asked). So they would need to have the Treasury give them real marketable bonds to sell and that would add to the national debt. We don’t need more of that.
But the Fed did do a little of what you are suggesting last year. They did currency swaps with a number of countries which, if I remember correctly, came to close around 200-300 billion. This was when the Libor spiked and they tried to get international interbank lending going again.
I think the dollar needs to weaken, but the ball is not in our court on that one. It would be difficult for the US to force it unilaterally by any means other than heading closer to bankruptcy(although I like Buffet’s trade voucher idea). US exports were doing pretty well when the dollar index was in the low 70s(it’s 86 today). The dollar index is heavily euro and yen weighted and most economists think the fair value gap with the RMB is something more like 40%. So what needs to happen is for the world to stop treating the USG like a bank account, and the USG needs to stop acting like a bank.
Ironically, the Chinese proposed a solution to this. Perhaps unwittingly, but they did say they would like to lend thru the IMF. So if they curtailed T-bill and bond purchases, and maybe even sold some, they could raise cash to fund the IMF, and the IMF could be China’s bank. They would of course want more voting rights and the US would have to give up some. They also lose their power to peg the currency. But that is the simplest most direct way I can think of towards re-balancing the global economy and also fund the IMF to do it’s thing.
The caveats are that the US doesn’t want to give up it’s control of the IMF, especially to a “communist” country, the US likes it’s source of cheap deficit funding, and China and the ROW don’t really want a cheaper dollar and a more competitive US.
In that case we are back to the status quo until something really big breaks.
Richman: But there is a much simpler solution. The Fed could start buying lots and lots of these underdeveloped country currencies, as they have been allowed to do on their own account since 1962.
Two problems.
1) Underdeveloped nations have tiny economies. The Fed’s balance sheet is about $4 trillion. The GDP of Mexico is $800 billion.
2) Just because you want to buy, doesn’t mean that anyone would want to sell.
Also there are political problems. You just aren’t going to be able to politically sell a program to give Mexicans and Chinese hundreds of billions of dollars. You might argue that giving Mexicans and Chinese hundreds of billions of dollars would stimulate the US economy as they buy US goods, except that there is no reason for them to take the money and buy US goods.
What you can sell (and what is going on now) is a program to give American’s hundreds of billions of dollars to buy Mexican and Chinese goods.
Richman: The result would be higher U.S. interest rates, weaker dollar, and improving trade deficit creating more aggregate demand for U.S. products.
Except that no one wants higher US interest rates right now.
Cedric: Sounds OK, until we remind ourselves the Fed is broke.
Fed can print money. It’s never going to be broke.
Cedric: The real problem is creditors believe there is a shortage of credit worthy borrowers.
The real problem is that creditors don’t care if there you are credit worthy or not. If the economy is going to hell, then the creditors are going to look out for themselves, and they aren’t going to lend you any money.
Cedric: Ergo the current “fix” is for the Treasury and the Fed to stick their thumbs in their mouth, squint their eyes shut, and blow real hard in the hope of re-flating first the banks, then housing prices and prices in general, credit growth, and then finally the real economy.
And this won’t work because?????
The basic problem is that because the banking system is a mess, when the Fed pumps money into the system, it goes into this leaky fire hose and just disappears before it gets out the other side. The Fed’s solution is to pump harder.
Anyone got any better ideas?
[...] Give the IMF credit (literally, and figuratively) [...]
[...] Give the IMF credit. That is, their due, and some money. Hearings on the Waxman-Markey climate change bill are underway this week. Meanwhile, the EPA’s analysis suggests that the law would cost households just 0 a year. [...]
2fish:”And this won’t work because?????”
I just get this feeling that we have done this so often that it is like a one trick pony ready for the glue factory. And this go-around is now the biggest one in all of history. It has surpassed the Greenspan 1% and Bush tax cuts/deficits by an order of magnitude, and calling the last 8 years a success is too charitable in my view. Also that would mean that Obama screwed everything up on January 21st, 2009.
The reason it may not work is we have a huge consumer credit bubble. We have interest rates which have been manipulated to artificially low levels by every trick in the book. Likewise we have done everything to inflate housing prices with cheap money and lax lending standards. The “fix” is do more of the same, but lots more of it.
I just heard TG say today that the big risk is the USG putting the brakes on too fast ! Another instance of him trying to convince us that he just arrived on the planet and it wasn’t him running the NY Fed, he didn’t know anything about CDO/CDS even tho he eats lunch at Goldman Sachs, and he never new anyone by the name of Greenspan and wasn’t paying attention when Greenspan slipped that 2 year long interest rate hike past everyone while denying the housing bubble the whole time.
I’m not really sure how to get out of the mess, but I’m not the only one. But if we try and inflate out of it I think we could get the Great Recession Act 2 when inflation busts the government debt bubble, and brand new mortgage asset bubble, resulting in Housing Crisis Act 2.
Then don’t forget we need a sizable tax hike, and that’s bad for the economy.
Also, central banks can go bankrupt. Just ask Zimbabwe, England, Iceland, or Argentina. Brazil has been doing Bankruptcy Lite by issuing a new currency at least every 10 years for as long as I can remember.
Can’t happen here? Never say never.
It is the credibility towards long term capacity that matters here most. Any individual economy apart from the EU, the US, and Japan could be bailed out easily, as long as it is an isolated case. The new global stability board clearly does not have anything like that, and nor does the IMF despite all the sweet-but-empty talk.
Ultimately, guaranteed contributions, independent policy formation, and enforceable rules will be the new name of the game.
Cedric,
You were correct when you wrote:
“I think the dollar needs to weaken, but the ball is not in our court on that one. It would be difficult for the US to force it unilaterally by any means other than heading closer to bankruptcy (although I like Buffet’s trade voucher idea)….”
I, too, think that Buffett’s plan is the best answer at present. In fact we recommended it as one of the alternatives in our 2008 book, “Trading Away Our Future.”
You might be interested in my recent blog posting about the Levy Economic Institute of Bard College’s recent analysis of Buffett’s plan.