Financial Regulatory Reform and US Investment Treaties

Kevin P. Gallagher

The US Department of State is about to conclude its revision of US model investment rules.  The model forms the initial bargaining position for the US in negotiations over Bilateral Investment Treaties (BITS) and Free Trade Agreements (FTAs).   When completed, the Obama Administration hopes to proceed with official negotiations with China, India, Vietnam, and possibly Brazil.

The current “Model BIT” could make it difficult for the US and its trading partners to deploy effective policies to prevent and mitigate financial crises.   The US should ensure that no measures designed to maintain financial stability are actionable under US treaties.

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What We're Reading and Writing

What we’re reading:

Warwick Commission on fixing global finance

Heinrich Boell Foundation on climate change and the right to food

Stiglitz, Ocampo, and Rodrik’s Journal of Globalization and Development

What we’re writing:

Ghosh and Chandrasekha: Heading for another global commodity price surge?

Grabel on policy space for fixing global finance as if development mattered

Wise, Gallagher, and Zepeda on NAFTA lessons for fixing US trade policy

What We’re Reading and Writing

What we’re reading:

Warwick Commission on fixing global finance

Heinrich Boell Foundation on climate change and the right to food

Stiglitz, Ocampo, and Rodrik’s Journal of Globalization and Development

What we’re writing:

Ghosh and Chandrasekha: Heading for another global commodity price surge?

Grabel on policy space for fixing global finance as if development mattered

Wise, Gallagher, and Zepeda on NAFTA lessons for fixing US trade policy

How to Fire a Central Banker: Lessons from Argentina

Matías Vernengo

In the United States, the mismanagement of the financial crisis, in particular the ill designed Troubled Asset Relief Program (TARP), has led to a wave of populist protests, and to a narrow confirmation vote for Bernanke.  In Argentina, where the recession was considerably milder than in the United States and had no financial cause, the president Cristina Fernandez de Kirchner fired the head of the central bank, Martín Redrado, a holdout from the neoliberal 1990s.

The problem was caused by the plan to the use US$ 6.5 billion of the almost US$ 50 billion of the international reserves accumulated over the boom years, between 2003 and 2008, in which the economy grew at an average of 8.5% per year, recovering spectacularly from the 2001-02 crisis and external default. Redrado, harking back to his neoliberal years, refused arguing that this would violate central bank’s independence.

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The Risks of 21st Century Stagflation

Jayati Ghosh

Well before the global financial crisis finally broke in September 2008, most people in developing countries were already reeling under the effects of dramatic volatility in global food and fuel markets. From late 2006, prices of most primary commodities first increased very rapidly, then collapsed even more sharply from their peaks in May-June 2008.

This was not due to real economic forces, but rather financial activity, specifically the involvement of investors in index funds. Commodities emerged as an attractive investment avenue for financial investors from around 2006, when the US housing market showed the initial signs of its ultimate collapse. This was aided by financial deregulation that allowed purely financial agents to enter such markets without requirements of holding physical commodities. This generated a bubble, beginning in futures markets that transmitted to spot markets as well.

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Introducing the TripleCrisis Blog

Kevin P. Gallagher and Jayati Ghosh

Crises are not new to the world economy, or to developing countries. Indeed, our current predicament is a convergence of at least three crises: in global finance, development, and environment.  These areas are seemingly disparate but actually interact with each other in forceful ways to reflect major structural imbalances between finance and the real economy; between the higher income and developing economies; between the human economic system and the earth’s ecosystems.  This blog seeks to contribute to a more open and global dialogue around these three crises: about how they interact, and how they can collectively be solved.

Though the global financial crisis is seen as having started between 2007 and 2008, the underlying processes have been in operation for much longer. The preceding boom was not only unsustainable, it deeply accentuated existing global inequities.

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