Friday, March 27, 2009

Will The Storm be even wilder than we think? 

My Amazon account flags me that Vince Cable’s book ‘The Storm’ will be delivered to me on or about 6 April. Pre-ordered in January… So not long to go before we all can get Vince’s thoughts in detail.

Meanwhile this article in the current edition of the ‘Atlantic Monthly’ looks of interest. The summary says:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

The authors draw on their IMF experience and present a damning indictment. The United States (and some other countries?) fell into the hands of the kind of oligarchy that wrecked the emerging economies.
What are the politics faced by the IMF in their efforts to sort out tanking economies in countries such as Argentina and Russia?

….to IMF officials … the economic solution is seldom very hard to work out.
No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.
Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

When the crash comes these oligarchies act to protect their own interests even though this means disaster for the economies they meddle with. And in the past decades a similar oligarchy acting under the same motives captured the USA and still has the power to do a similar wrecking job.

The authors solution includes a ruthless restructuring of the financial market structure, including the breaking up of the megabanks, and the restoration of a more sober ‘utility’ basic banking sector. Now I wonder where we have heard that before.

The author’s conclusion is:

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

Indeed. Mind you some people are not entirely impressed with the ‘not very hard to work out’ economics underlying the IMF approach so may be a bit sceptical about some of Johnson’s other recommendations.

The ‘Atlantic’ article is by Simon Johnson and James Kwak. Johnson is a former chief economist of the IMF and is a professor at MIT Sloane School of Management. He runs the baselinescenario.com blog

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Tuesday, March 03, 2009

The torture of the Special Relationship 

The half-hour meeting between Brown and Obama (which will demonstrate to the world how special is Our UK Relationship with the USA) is billed to be on world economic affairs.

Given President Obama’s praise of The Blair Poodle Project it is perhaps too much to hope that Obama will actually use some of the time to discuss at least one torturous special relationship – namely the shaming mess on torture of terror suspects in which the UK has some urgent questions to answer. .

It is just possible to believe that Obama has so far refrained from letting in the light on his predecessors actions because key US Allies such as the UK are so deeply implicated that the truth would cause huge political upheavals in those countries. The diplomatic repercussions of the truth could be profound.

One way to prepare for an outbreak of open revelations by the USA would be to have face-to face meeting with the person most at risk to prepare him for the inevitable. This current meeting is Obama’s chance to do that. If he does not, we can begin to wonder whether the cover-up on the Bush torture agenda is actually current US administration policy.

For a really excellent summary of the Special Relationship and the European dimension see the ever-thoughtful Cicero.

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