January 28, 2008 | posted by Michael Baxter in credit crunch, global economy | comments (0) |

The IMF, the World Bank and UN are increasingly looking like yesterday’s ideas for yesterday’s problems.

Of late, the IMF has been on the receiving end of enormous flak. Where was it when the foundations were laid for the credit crunch? Rewind the clock back to the last crisis but one, in parts of East Asia and in Russia, thanks to the way it dealt with that crisis, its name is mud. Maybe we need a new IMF, and World Bank. Well, in saying that, we are in good company.

If there was one theme that emerged above all others at Davos, it was calls for a new world order.

Gordon Brown was at it, so was George Soros, but perhaps most significantly are the ideas that are just beginning to gain global momentum from an economist called Joseph Stiglitz.

Note that name. If you are not already familiar with Mr Stiglitz, then here is a prediction. This is a name you will hear more and more often over the next ten years or so. For Joseph Stiglitz is increasingly being talked about in the same breath as Keynes. If Keynes was the greatest and most-influential economist of the 20th century, Stiglitz seems to be emerging as the top economist in the world in the modern era.

Stiglitz’s views are not dissimilar to Keynes’. In a recent interview with the Telegraph, while talking about a way through the credit crunch, he said, “As a Keynesian, I’d say the biggest back for the buck in terms of immediate stimulus would be unemployment assistance and tax rebates for the poor.” Actually, in this respect, Uncle Joe’s remedy is not that dissimilar from the $150bn tax breaks recently announced by George W. But, he said, “Set against the magnitude of the problem, even a fiscal stimulus package of $150bn is not going to be enough.”

To understand where Stiglitz is coming from, it is first necessary to recall the crisis that made the IMF so unpopular in parts of the world. The East Asia crisis, the Russian credit crisis, and then finally the collapse of Long Term Credit Management, were, in their own way, just as serious as the crisis reverberating around the world today.

The main difference is this. Back then, banks in the West had poured their money into the tiger economies of East Asia and Russia, creating a bubble, which collapsed. The result was nearly catastrophic for the western banks but, in the end, thanks to the action of the IMF and what Stiglitz calls the “Washington consensus,” it was largely the economies of East Asia and Russia that lost out. According to Stiglitz, in his book ‘Globalisation and its discontents’, some people in that region actually date events with respect to that period, describing something as pre- or post-IMF.

So actually, when we celebrate years of uninterrupted economic growth, of the way the global economy managed to avoid recession in the ’97 and ’98 period, just remember, there was a price to pay and that price came in the shape of major economic hardship in some regions.

This experience has in turn affected the attitude of certain developing countries to western institutions. Take India and China, for example, Stiglizt recently said, “These countries managed globalisation: it was their ability to take advantage of globalisation, without being taken advantage of by globalisation, that accounts for much of their success.”

Stiglitz, who was chief economist at the World Bank in 1990, believes that globalised collective action is required moving forward.

George Soros struck a similar note last week when he talked about the failure of market fundamentalism. He says this idea that markets have a self-correcting mechanism is false; in order to propel the global economy forward in a sustainable way, and to create prosperity for all, governments must act in unison.

As for our Gordon, while talking at Davos, he said he wants to see the IMF become like an independent central bank – and as for the World Bank, he wants it to change and become a bank for supporting environmental projects.

The IMF and World Bank were formed after the end of World War II. Their principal architects were Keynes and the American economist Harry Dexter. Because, at the time, the US had all the political clout, the final make up of the institutions was much closer to what Dexter and the US contingent wanted.

But today, the global economy is so completely different, it is inappropriate for the financial institutions that are supposed to make the global economy tick over to be so dominated by the US and Europe. The boss of the IMF, for example, is always a European, the boss of the World Bank always an American.

Maybe all we need to do is reform the IMF and World Bank a bit. It seems more likely, however, that we need to scrap these two institutions and start again – come up with something new. Here is the prediction. This debate will develop, and within a few years will become a major talking point, and don’t be surprised if that name Joseph Stiglitz comes up on TV and appears in the newspapers more and more often.

January 25, 2008 | posted by Michael Baxter in credit crunch, global economy | comments (1) |

And so George Soros says we are witnessing the “end of a 60-year credit boom.” Is he right, what can we do?

Maybe the problem lies with the man who is widely considered to be the greatest economist of the 20th century: Keynes.

Mr Keynes once said, “The long run is a misleading guide to current affairs. In the long run we are all dead.” He also argued that the solution to the economic depression that was hurting so much at the time he wrote his most famous theories, was to go out and spend.

The thing is, Keynes died over 60 years ago now. He was right, in the long run, he did indeed die, but right now, we are living in Keynes’s long run.

Now, in fairness to Keynes, he wasn’t omnipotent. When he was writing, inflation was not the big problem, at least it wasn’t in the UK and US.

But the post-war years have been characterised by high spending every time there was recession. This, surely, has created what Mr Soros calls the 60-year credit boom.

Back in the 1970s and 1980s it seemed to be changing. When he was Prime Minister, James Callaghan once said, “We used to believe you could spend, spend your way out of recession. But I tell you in all candour, that option no longer exists.” Margaret Thatcher tried to go against Keynes’s theory – and her way of dealing with economic disaster was to cut spending, to try and get finances on a solid footing. Reagan spearheaded a similar approach in the US, but it was short-lived.

Under George Bush senior, the US budget deficit went through the roof, and under Thatcher, Nigel Lawson’s credit boom took hold.

Economic text books used to say the most advanced economy in the world should have a balance of payments surplus, and the developing countries the deficit. But it is all different now, the US has the deficit, China the surplus. There is no precedent for this.

We are also seeing the increasing emergence of a new school of economics, though. George Soros is a signed-up member – he says that markets do not have a self-correcting mechanism, and the solution to the global crisis is global collective action. The man, though, who is emerging as the voice of this new school of thought is Joseph Stiglitz. He has even been hailed as the successor to Keynes. (By the way, Keynes was into global collective action; remember, the IMF and World Bank were partially his idea.)

Above (Good news strikes), we told how banks and the IMF saved the day back in 1998. Well, not everyone agrees. Some, people, including Mr Stiglitz, would argue the price of economic stability in the West back in the late 1990s was economic recession in Asia and Russia.

This time around, though, the problems seen in the US with subprime – which, by the way, we are sure marks just the beginning, are too close to home. It is not practical to get someone else to carry the can.

Then throw into the pot growing US protectionism. Peter Mandelson, the EU trade commissioner, is worried about Hilary Clinton. The Telegraph quoted him as saying, “The things she’s been saying reverberate around the world…This is the last year the Doha trade round can survive. There is little chance of a breakthrough after this president leaves office. People in the current administration tell me the US is turning into a protectionist country. It is a serious concern.”

So, in other words, at a time when Stiglitz and Soros call for collective action, the US could be in danger of turning in on itself.

The big hope has to be that the US is in such a mess, that it needs the Sovereign Funds. Maybe, by being forced to court foreign capital, it will be forced to toe the line on international trade.

These are the most important issues of the year – a theme we will no doubt return to many times.