These are uncertain times for global economic governance. For over six decades after the second world war the west framed the rules of engagement for the global economy.
In the initial years, the United States was the preeminent power, which oversaw the creation of the Bretton Woods system (International Monetary Fund and World Bank) and the initial rounds of trade liberalization under the newly-born General Agreement on Tariffs and Trade (which became the World Trade Organization at the end of the Uruguay Round in 1993).
As Europe recovered from the ravages of war and Japan launched on its high growth phase, these new leviathans (especially Europe) increasingly asserted themselves and won greater voice and roles in world economic governance. But it was still an essentially western enterprise, with a demilitarized Japan content to go along in return for an American nuclear umbrella.
The Soviet Union and its satellites were not an integral part of this economic system and the developing countries didn’t carry significant economic clout, not even the populous Asian giants of China and India. Read more
Laurence Kotlikoff, economics professor at Boston University, writes an open letter to Lord Turner, chairman of the UK’s financial regulator, the FSA. Lord Turner examines Prof Kotlikoff’s proposal for a radical reform of the institutional structure for credit extension in a new book, The Future of Finance. This is the second of a two-part open letter. You can read the first part here.
The essential challenge indeed is that the tranching and maturity transformation functions which banks perform do deliver economic benefit, and that if they are not delivered by banks, customer demand for these functions will seek fulfillment in other forms.
As previously indicated, tranching (some investors taking more risk than others within a fund) is part of limited purpose banking. Indeed, CDOs are, to repeat, effectively mutual funds with this property. The fact that so many CDOs invested in toxic loans is because the loans were fraudulent, not because the loans were risky. We don’t say that stocks are toxic, even though the stock market has fluctuated dramatically since its peak. We say mortgage-backed securities are toxic because borrowers’ incomes were misstated, collateral values were misstated, and credit worthiness was misstated. Furthermore, tranching is just one way for some people to take more risk than others. A simpler way is for more risk-averse people to simply invest in mutual funds that purchase safer asset. I.e., tranching is not the end all and be all of risk allocation in the economy. Read more
Laurence Kotlikoff, economics professor at Boston University, writes an open letter to Lord Turner, chairman of the UK’s financial regulator, the FSA. Lord Turner examines Prof Kotlikoff’s proposal for a radical reform of the institutional structure for credit extension in a new book, The Future of Finance. This a two-part open letter; the second part will be published on the FT’s Economists’ Forum on Tuesday July 20.
Adair Turner’s Misplaced Concerns About Limited Purpose Banking
Your chapter in the just released Future of Finance is masterful. But the very strong concerns you express about Limited Purpose Banking are, I believe, misleading, misdirected, and rather surprising since LPB delivers precisely the reforms you advocate.
Let me respond in italics to the specifics of what you wrote (the bold text) and then indicate why LPB does what you say you want. Read more
Over this week some of the world’s leading policymakers and economists will be addressing in the FT the all-consuming contemporary economic debate: austerity versus stimulus. The writers, including Larry Summers, Jean-Claude Trichet and the FT’s Martin Wolf will argue whether cutting now risks suffocating the fragile recovery of the global economy.
You can follow the austerity debate – and leave your comments – at www.ft.com/austerity.
By Brendan Brown
There is a magic monetary wand out there which could accelerate economies along the road to prosperity out of the widespread destruction wrought by the global credit bubble.
This wand is not the creation of another monetary time-bomb labelled “quantitative easing”; rather the source of magic is an emergency conversion of banknotes. Read more