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Notes of a curious mind

Category: Economics (Page 1 of 2)

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

This is a general impression and overview of the book as my knowledge on economics is rather limited.

“For many centuries, money and banking were financial alchemy, seen as a source of strength, when in fact they were the weak link of a capitalist economy,” writes Mervyn King in his book The End of Alchemy.  He must know something about it. As Governor of the Bank of England for a decade, and before that a leading academic economist, Mervyn King has long been at the heart of the British policy-making establishment.

We have seen this alchemy when subprime mortgage bonds were given triple A-rating and more recently, when John “Mac” McQuown created a hybrid security, called  eBond, which would embed credit default swaps (CDS) into corporate debt and will be able to transform junk-graded debt into the equivalent of AAA-rated notes. What could possibly go wrong?

Mervyn King says he is not interested in the blame game, which is probably just as well considering that he was governor of the Bank of England at the time of the great crash of 2007-08.

“Blaming Individuals is counterproductive, he says….. A generation of brightest and best were lured into banking, and especially into trading, by the promise of immense financial rewards and by the intellectual challenge of the work that created such rich returns and the crisis was a failure of a system, and the ideas that underpinned it, not of individual policy-makers or bankers, incompetent as greedy though some of them undoubtedly were. There was a general misunderstanding of how the world economy worked.”

Apparently, the “brightest and best” somewhere, somehow, lost their way.

Disequilibrium, radical uncertainty, the prisoner’ s dilemma and trust, are the four concepts that Mervyn King have run through this book in order to explain the nature of financial alchemy and the reasons for the present disequilibrium of the world economy.

Even though the largest banks in the biggest financial centres in the advanced world failed, triggering a worldwide collapse of confidence and the deepest recession since the 1930s, King insists “that nothing much has really changed in terms of the fundamental structure of the Western banking industry”. Just increasing the money supply after a crisis “only perpetuate the underlying disequilibrium.” Without reform of the financial system, another crisis, bigger than the last one, is certain, he adds.

King insists the merging of risk-taking investment banking with retail and commercial banks handling the taxpayer-guaranteed deposits of households and firms altered the business model and culture of banks during the Eighties and Nineties. Rather than breaking up banks retail and investment divisions, he suggests a reform based on the “Chicago Plan” of the 1930s. It is, basically, the IMF’s “Chicago Plan Revisited” by Jaromir Benes and Michael Kumhof, which envisages the separation of the monetary and credit functions of the banking system, by requiring 100% reserves.

In addition, he argues, it is necessary to embark into a major programme of raising productivity. It should be a global effort that would take many years, and will require small and deferent measures in each country, but as long as people believe that there is a coherent plan to boost productivity in the future, then they will have more confidence in willing to spend more today.

It won’t be easy. Faith in capitalism, understandably, has been badly shaken, and will require bold action to restore this faith. “Capitalism is far from perfect – it is not the answer to the problems that require collective solution, nor does it lead to an equal distribution of income or wealth.” But it is the best way to create wealth because it provides incentives for the innovation that drives productivity growth. Only when people are free to pursue, develop and market new ideas will they translate those ideas into increased output.

The End of Alchemy is mostly a book about ideas.  A significant attempt to reach not only the economists but also a broader, more general audience.

Reaganomics vs. the Modern Economy by Michael Douglas Gilbert

Modern economy is different and more complex from primitive economy, says Michael Gilbert in his book “Reaganomics vs. the Modern Economy: The Conflict that divides America“.  The defining characteristic of the modern economy is the ‘impossibility of true self-sufficiency.’  Today we cannot go out and supply ourselves with food, clothing and shelter. In order to survive, we need to buy our necessities with money from a store, to interact with the marketplace. This kind of economy does not bode well for the economic theory known as ‘Reaganomics’, a term used to describe the economic policies of President Ronald Reagan that promoted tax cuts, slashing of government spending and the deregulation of domestic markets.

The prevailing view is that the high oil prices stemming from OPEC’s cartel’s oil embargoes in the 1973 has caused the stagflation that inflicted so much damage to the US and world economy. But, Fed Chairman Arthur Burns argued in his book “The Anguish of Central Banking” in 1979 that the inflation appeared to be the result of a plethora of forces:

“the loose financing of the war in Vietnam, the devaluations of the dollar in 1971 and 1973, the worldwide economic boom of 1972-73, the crop failures and resulting surge in world food prices in 1974-75, and the extraordinary increases in oil prices and the sharp deceleration of productivity.”

Whatever the forces that caused the 1970s recession, the dominant view is that it was Reagan’s policies that ended it.  Michael Gilbert does not agree with this view. The improvements in the American economy in the 1980s, he says, “has nothing to do with Reaganomics”. It was the market forces – a market correction that would take nearly ten years – that worked beautifully to end stagflation in the United States and the rest of the western world. In other words, Ronald Reagan was lucky and the misconception that somehow he turned the economy around has distorted US’s economic policy. Furthermore, it is responsible for the attack, shrink, shut down and underfund government.

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The problem with the Europe is the euro, but can it be saved?

The problem with the Europe is the euro, or more precisely, the creation of the single currency without establishing a set of institutions that would enable Europe’s diversity to function effectively with a single currency. Yet, the euro is still worth salvaging, says Joseph Stiglitz in his book The Euro: And its Threat to the Future of Europe.

The eurozone was flawed at birth, argues Stiglitz.  While the euro was a political project, the “political cohesion” – especially the implementation of policies and the progressive transfer of   national sovereignty to EU – was not strong enough to give euro a chance to succeed.  Joseph Stiglitz was one of the many US economists that have been sceptical of the single currency project from the outset and rightly points out that the conditions and the rules laid down during the drafting of the euro by the 1992 Maastricht Treaty and later during its actual creation in 1999, have been inadequate. The lack of factors that could frame European monetary union, such as cross-border fiscal transfers, growth strategy, and employment, have contributed to the severity of the 2008 crisis.

Greece, a country which was hit particularly hard by the financial crisis of 2008, was furthermore affected by the Troika’s ideological views and presumptions, says Stiglitz. The troika policies are counterproductive, while the emphasis in austerity and the repayment of debts owned, rather than the restoration of growth and an increase of living standards of the people in the country have devastated effects in Greece’s economy. Taking into account Stiglitz’s experience with Greece’s social, political and economic system, he was consulting ex-prime minister George Papandreouit was rather odd to read at the book that ‘it was mostly private sector misconduct, not public sector profligacy that brought [the country] into crisis’. Without ignoring the mistakes of Troika, (IMF has released a critical report on how it handled the crisis in Greece and has identified where things went wrong), it was mainly Greece’s political system’s inability to handle a difficult situation.  What is irritating, coming from an experienced economist like Joseph Stiglitz, is Stiglitz’s view that it was ECB’s mistake – and not the Greek’s government’s –  the closure of banks in the summer of 2015. He totally overlooks  the  fanciful expectations of the newly elected Prime-minister Alexis Tsipras and the disastrous role of his finance minister Yanis Varoufakis during that traumatic period.

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The Reproach of Hunger by David Rieff

There has been a considerable reduction in extreme poverty over the last 25 years. The number of people living in extreme poverty worldwide has reduced by more than 50 percent. Still, according to most recent estimate of the UN Food and Agriculture Organization,  233 million people in sub-Saharan Africa are hungry or undernourished  and 795 million people are hungry worldwide.

The causes of poverty are varied; rapid population growth, harmful economic systems, local conflicts and deterioration in the environment, have a negative effect on families’ income. Poverty is the principal cause of hunger and undernourishment and malnutrition. Poor people are forced to devote a far higher share of income to buying food. A sudden fall on their income or rising food prices can have devastating effects. Without enough food, people are likely to become ill and unable to work to earn a sufficient income to buy food. They start reducing the quality of the food they eat and spend less on their other needs, such as clothes, shelter, medicines, school for the children.

Following the success of the Millennium Development goals (MDGs), UN have now committed to a bolder set of objectives, one of them is to eradicate poverty by 2030 and to do so in an environmentally sustainable way. It is a worthy and expensive objective. The role of philanthropy and private-public ventures in achieving this goal is crucial.

The Reproach of Hunger: Food, Justice and Money in the 21st Century is a dense, detailed and rather pessimistic analysis of the global food crisis.  David Rieff exposes the challenges and the contradictions of modern philanthropy and addresses some big questions.

There is now a new generation of wealthy technocrat philanthropists who offer a big part of their wealth to solve a few of the world’s problems.  Philanthrocapitalism or venture philanthropy, as it is known, because of its alignment with core business interests, has become a formidable and innovative force for social good. But it also raises some difficult questions, argues David Reiff. He emphasises that he does not doubt philanthrocapitalists’ sincerity to do good, but he is also criticising their un-democratic operations. David Rieff doesn’t claim to have all the answers. He argues that the solution to hunger is political but he falls into the trap of moralism to justify his position.  This is a convincing way to reason if you can get your readers to accept your moral rules. But people do not generally agree on the same moral rules.

This is a thorough and well-researched book, rife with references on poverty, inequality, international development, and the “charitable industry”, but it lacks  perspective and it misses clarity.

And the Weak Suffer What They Must?

They say that men with huge egos need constant praise. It is not going to happen with Yanis Varoufakis and his book ‘And the Weak Suffer What They Must?’, I am afraid.

Sadly, there are no revelations about his disastrous five months as Greece’s finance minister, just a few anecdotes here and there. It is rather a history of the international monetary system that starts with the Nixon Shock of 1971 and the end of the gold standard system of monetary policy for international exchange of gold deposits. It was this event that forced Europe, Germany and France in particular, to create a stable monetary system of its own, “yet without the necessary shock absorbers”, meaning the mechanisms and the institutions that could help implement some sort of economic adjustment, namely, one fiscal policy, with at least some redistribution to address imbalances across the Eurozone.

Yanis Varoufakis is a clever man and a good story teller. He delivered an interesting book. But not a stimulating or thought – provoking book that one would expect from ‘the most interesting man in the world’ according to the quote at the back cover.

Crucible of Resistance

The Crucible of Resistance, by Christos Laskos, a lecturer of economics and member of SYRIZA and Euclid Tsakalotos, an economist and Greece’s new finance minister, replacing outgoing Yanis Varoufakis in July 2015, provides some interesting clues which help us understand what drove the political behaviour and method of the SYRIZA establishment through an analysis and description of the impact of austerity on Greece since 2008.

The book was written in 2013 and its general argument is that

“for first time in many generations the Left has a convincing interpretation of the present crisis, and this can become a materialistic force breaking old social alliances and forming new ones in favour of a strategy that begins the transcendence of capitalism itself.” (12)

It further makes “four interrelated arguments” ,

  • Non-Exceptionality. – It is a world crisis, Greece is not a special case;
  • It is a Crisis of Neoliberalism and Capitalism. – Rather than locating the causes of the crisis within Greece itself, Laskos and Tsakalotos identify problems in the global economy and the unevenness within the European Union. They highlight a number of “proximate causes of the crisis  – the financial system, social inequalities and macroeconomic imbalances  –  all”, they argue, “integrally connected to the neoliberal settlement”;
  • The Lack of Plasticity in the Post-2008 Political Order. – Austerity has not solved the economic crisis in Greece. Instead, a vicious circle of austerity-recession-more austerity commenced, undermining further Greece’s productive capacities. 

The question is, “why did the crisis of 2008 not present itself as an opportunity for social democracy to reassess its commitment to neoliberalism?” “Cognitive locking was clearly a factor” they claim: “after so many years of neoliberal hegemony they were unable to step out of the groove and see the world from a different perspective.”

The authors’ premise that “Thirty years of neoliberal economics [in Greece] seems to have dimmed peoples’ memories about how large recessions play out”, is questionable, as later in the book they claim “…. that Greece is in fact a small closed, and not open economy ……” (108)

  • No Turning Back. – “… to the period of neoliberalism as experienced in the period before 2008.” That suggests “that the most likely resolution to the crisis will be either in the direction of a far more authoritarian capitalist settlement, or moves to transcendent capitalism, in some important dimensions.” (1-10)

This is a book about ideas and alternatives. The ideas matter and they are “particularly important in moments of uncertainty when established institutions do not seem to be working”, the authors claim. In the Acknowledgements’ page they say that the ideas presented in the book

“have been tested over the five years” [over the consolidation of SYRIZA] in “countless meetings, conferences, student gatherings and other fora where literally thousands of people have expressed a remarkable interest in discussing the causes of current crisis and the nature of left wing alternatives or what Erik Olin Wright has labelled Real Utopias.”

If that means that the idea was to use the crisis and the struggle to shape the pathways of social empowerment, test the limits of possibilities and try to create new institutions that would neutralise some of the most harmful effects of capitalism, is not very clear.

The SYRIZA – ANEL government was elected in January based on its promise to try to bargain a better deal than the “severe neoliberal austerity” imposed through the memoranda signed by previous governments.  In its first five months of governance, the SYRIZA-led coalition has continually tested the limits of the country and the European Union.  After months of ferocious “negotiations” the SYRIZA-led coalition realised that they weren’t really negotiating. Faced with the country’s economic and financial disaster, the government was forced to make very serious concessions, testing the limits of SYRIZA’s own identity. Perhaps things would have been different if other persons have been placed in critical positions.  I guess, we will never know, we can only speculate.

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