By Susan Schadler
The debate about how to prevent future crises focuses largely on improving financial sector regulation. Few ideas have surfaced for strengthening institutional capacity to prevent macroeconomic policy faults, a key factor underlying the current crisis. Here, politicians seem to be settling for more of the same – “firm surveillance” by the International Monetary Fund. Clear thinking on a fresh start is needed.
First, some history. After 25 years of an essentially rules-based international macroeconomic order (fixed but adjustable exchange rates), the post-Bretton Woods system abandoned rules. Instead, flexible exchange rates (initially adopted by large countries and gradually by many others) were expected to put market pressure on countries with unsustainable policies. IMF surveillance -annual assessments of each member’s macroeconomic policies – was to buttress market discipline, especially when countries impeded market forces or markets sent wrong signals.
Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.
By Michael Pomerleano, Harald Scheule, and Andrew Sheng
The US Treasury just announced a Financial Stability Plan (revamped Tarp) to help purge banks of their bad bets by partnering with the private sector to buy troubled assets. The basic idea is to lend government money (US Federal Reserve) or guarantee borrowings (Federal Deposit Insurance Corporation) at a suitable spread over Libor to anyone- e.g., hedge funds and pension funds – who wants to buy toxic assets from the banks.
By Ronald McKinnon
Tensions between the US and China escalated recently when Timothy Geithner, the new US Treasury secretary, suggested that China might be designated as a “currency manipulator’. Premier Wen Jiabao mounted a vigorous defence of China’s existing exchange rate policy at a high level meeting of world leaders at Davos, Switzerland. Mr Wen pledged to keep the renminbi at a “reasonable and balanced level”.
The debate over bankers’ bonuses has polarised opinion, even within the Financial Times. FT.com invited Jo Johnson, editor of the Lex column, and Martin Wolf, our chief economics commentator, to share their spirited discussions with readers. Click here to read their posts.
By Roger E. A. Farmer
We don’t need to nationalise the banks. We don’t need to guarantee bad assets. We don’t need government to own voting shares in private banks. We don’t need to create a bad bank full of toxic assets. We just need a little faith in free markets and a little creative intervention. I propose that the central bank should support the price of an indexed fund of bank stocks.
I am living in New York at the moment. I find that Americans who are aware other economies exist have one source of comfort: the US is in bad shape, but the UK is worse. Reading the Green Budget from the Institute for Fiscal Studies forces one to agree: the UK is in a mess. Yet it should still be a manageable mess.
By Jeffrey Sachs
One of the vexing problems of the US banking crisis is the difficulty of valuing the toxic assets on the banks’ balance sheets. The government is proposing to remove these assets in return for taxpayer equity in the banks, but at what terms of exchange? It seems that if the government pays too much it bails out the banks, while if it pays too little it de-capitalises them. There is way, however, to be both fair and efficient, by settling the taxpayers’ ownership at a later date, after the toxic assets have been monetised.
By Jagdish Bhagwati
President Barack Obama faces protectionist pressures. These are not just from the labour lobbies that have led Joe Biden, US vice-president, to chide “pure free traders” and to ask for “fair trade”; and which, astonishingly, have also led the US president to use his first meeting with President Felipe Calderón of Mexico – overwhelmed by the brutal fight against drug cartels caused by the US failure to legalise drugs – to urge on him tougher labour standards, a protectionist demand that is clearly aimed at raising Mexican costs of production. The pressures come also from the lobbies pushing for a Detroit bail-out that is inconsistent with the World Trade Organisation.
A hyperpower’s place is in the wrong. This is particularly true when, as last week at the annual meeting of the World Economic Forum in Davos, the hyperpower in question is barely represented, at least at the official level. But, truth to tell, the critics of the US – led by prime ministers Wen Jiabao of China and Vladimir Putin of Russia – had an easy story of incompetence and malfeasance to tell.