Financial governance and the crisis: New developments on the horizon

Ilene Grabel

In what follows, I flag a number of new developments that relate to developing country and international financial institutions responses to the ongoing economic crisis.

1. Central banks to investors: “Don’t worry–no capital controls here!”

As Triple Crisis readers know, a great many developing countries have deployed controls on capital outflows and especially on inflows in response to the myriad challenges they face in the current environment. For some countries, controls on outflows have been implemented to mitigate financial instability and currency depreciation following capital flight. Rapidly growing developing countries, on the other hand, are using inflow controls to reduce inflationary pressures, cool asset bubbles, staunch currency appreciation, and protect economies from the financial instability induced by significant future reversal of inflows. Indeed, capital controls have emerged as a key weapon of choice in the modern day “currency war.”

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The Future of the EU: Shaping economic governance

Daniela Schwarzer

The Triple Crisis Blog is pleased to welcome Daniela Schwarzer, head of the European Integration research unit at the German Institute for International and Security Affairs, Stiftung Wissenschaft und Politik (SWP), as a regular blogger.

The EU is heading for a crucial European Council meeting. On March 24/25, all eyes (in particular those of market actors) will be on the 27 Heads of States and Government who will tackle important questions on Economic Governance and on the future architecture of the euro area.

A broad debate has developed in the last twelve months drawing conclusions from the way the financial, real economic and sovereign debt crises have struck the EU. There is a growing gap between the academic view on where the euro area should move and the likely outcome of the current reform process: More and more observers advocate a leap forward in terms of political and fiscal union. But there is no political consensus on substantial budgetary integration, e.g. a larger European budget (ideally with a stabilizing function) or a pooling of public debt by issuing joint Eurobonds (as has been suggested for instance by Eurogroup President Juncker and the Think-Tank Bruegel).

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The coming crisis of renewed soaring food prices

Martin Khor

The events in Egypt that incredibly propelled President Mubarak out of power after 18 days of protests have surprised everyone, probably Egyptians too.

The main reason for the protests was political, the yearning of the people for the ending of repression and for a new era of democracy. But part of the anger of the people, especially the young, arose from serious economic and social problems. Poverty has been growing in recent years, affecting one in four people. Unemployment jumped to 10% while the rate was one-third for young men.

And then there are the increasing prices of food.  Food accounts for almost half the average Egyptian household expenditure. In 2008 there were riots in Egypt over the rising price of bread, which was part of the dramatic global food price inflation in that year.  The global recession ended that round of inflation, but in recent months the prices of foods and other commodities have been jumping up again.

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Commodity Speculation: Krugman leaves questions unanswered

Timothy A. Wise

The debate on commodity speculation continues, generating lots of heat but not as much light as I was looking for in my last post. Paul Krugman has responded to those of us bewildered by his position, basically reiterating that because these are physical commodities speculation can only happen if there is evidence of inventory accumulation by, essentially, hoarders. He sees no evidence of that now, except maybe for cotton and copper but not for food commodities. Instead he points to real weather issues that have reduced supplies. Yves Smith, at Naked Capitalism, called his analysis flawed, but took issue not with dismissing financial speculation but rather by pointing to the many flaws in the available data on inventories.

Okay, sure, weather and imperfect information, but please: Are you two really saying that the influx of non-commercial speculative capital into futures markets has no impact on real prices, on the functioning of these markets? If it doesn’t, why bother re-regulating the commodity derivatives market, as Dodd-Frank mandated and the CFTC has proposed?

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The New Politics of Trade in the United States

Susan Ariel Aaronson, Guest Blogger

For many years the U.S. debate over trade has been a little like a sixth grade dance. Proponents from business, academia, and government squirm on one side of the room.  Meanwhile, opponents who include members of labor unions, civil society groups, academics, and local government officials, refuse to move. But on December 6, 2010, two unions joined the dance.  The United Autoworkers and the United Food and Commercial Workers expressed support for the US-Korea Free Trade Agreement (KORUS), arguing that the agreement will not only “protect” but according to the UAW “grow more jobs.” These unions became the first U.S. unions to publicly support a free trade agreement since the U.S.-Canada free trade agreement (FTA) of 1988.  Meanwhile, several other prominent unions including the AFL-CIO umbrella organization continued to signal their opposition to the KORUS and other trade agreements.

Does this development signal a new policy environment for trade? Perhaps. The UAW got special provisions to protect workers in the auto sector from import surges. But the politics of trade may be changing. The Obama Administration has made labor enforcement a top priority for trade policymaking and in so doing, has built trust with union leaders and members of Congress. Moreover, in recognition of changed economic and demographic conditions, some union leaders see opportunities in some of these agreements.

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The Environment as our Common Heritage

James K. Boyce

What does it mean to say that the environment is our “common heritage”? On one level this is a simple statement of fact: when we are born, we come into a world that is not of our own making. The air we breathe, the water we drink, the natural resources on which our livelihoods depend, and the accumulated knowledge and information that underpin our ability to use these resources wisely – all these come to us as gifts of creation passed on to us by preceding generations and enriched by their innovations and creativity.

Yet once we take seriously – as I do – the proposition that this common heritage belongs in common and equal measure to us all, we move beyond a positive statement of facts to a normative declaration of ethics. We move beyond an understanding of what is to an assertion of what ought to be.

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Corporate Lobby Groups Issue Weak Attack on Economists Who Support Capital Control Flexibility

IPS and GDAE Rebut U.S. Chamber of Commerce, Business Roundtable, Other Big Business Critics

Major U.S. corporate lobby groups have issued a rebuttal to a letter sent by more than 250 economists to the Obama administration calling for a fresh approach to capital controls.

The Institute for Policy Studies and the Global Development and Environment Institute at Tufts University (GDAE) initiated the January 31 economist statement that provoked the corporate response. That initial letter called for trade reforms to “permit governments to deploy capital controls without being subject to investor claims, as part of a broader menu of policy options to prevent and mitigate financial crises.” The statement’s 257 endorsers include an ideologically diverse array of academics and former IMF and government officials.

The February 7 corporate letter, endorsed by the U.S. Chamber of Commerce, the Business Roundtable, and 15 other lobby groups, urges the Obama administration to reject this call, based on unsubstantiated arguments that permitting U.S. trading partners to support financial stability through the use of capital controls would undermine everything from U.S. jobs to national security.

Two years into the global financial crisis, Americans and citizens across the globe continue to suffer because of the actions of footloose capital. If we have learned anything from the crisis it is that sound regulations are needed to stem the ability of speculative capital to create financial bubbles that burst and then leave ordinary people to live with the disaster that follows.

A point-by-point response to the corporate claims:

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High food prices cause for concern

Triple Crisis blogger Martin Khor published the following opinion article in The Star on the causes and implications of recent spikes in global food prices. Read more about this issue in recent posts from Triple Crisis bloggers Jayati Ghosh and Timothy Wise.

High food prices cause for concern

Food prices across the world have soared to their highest ever level, even exceeding the previous peak levels in mid-2008 before the recession caused by the global financial crisis dampened the prices.

The food price inflation is causing concern in many countries, as access to food is important for social stability.

The last time prices shot up to such high levels, in 2008, there were riots in many countries.

The soaring prices also contributed to the discontent that led to the current protests in Egypt and elsewhere in the Middle East, according to the World Food Programme.

“In many of the protests, demonstrators have brandished loaves of bread or displayed banners expressing anger about the rising cost of food staples such as lentils,” said its executive director Josette Sheeran.

Read the full article at The Star.

CDS Deja Vu: Speculation, stabilizing or destabilizing?

The following is a cross-post from Perry Mehrling’s new blog The Money View.  Mehrling is a Columbia University economist and his blog is part of a broader effort to re-think macroeconomics and finance sponsored by the Institute for New Economic Thinking.

CDS Deja Vu: Speculation, stabilizing or destabilizing?

Today’s Financial Times articles: US muni smackdown (Feb 2, 2011), Wall St looks to boost market in US muni CDS (Feb 6, 2011)

“Muni veterans are from Mars, Meredith Whitney is from Venus,” so says Lex, commenting on the wide divergence in current views about the future of the US municipal bond market. Whitney sees a coming wave of defaults; veterans see municipal debt/income ratios far below those that sovereign states routinely bear.

Lex frames the divergence as a matter of political judgment. Municipalities have made promises to bond investors, but they have also made promises to public sector unions in the form of wage and pension contracts. When the numbers do not add up, which promises will wind up being honored and which breached?

From a money view perspective, an alternative frame presents itself, namely the possibility of refinance. Quite apart from the possibility of public refinance, already we hear isolated stories of private refinance, which involve purchase of distressed municipal debt as a way of gaining control over the underlying assets, perhaps a hotel, or a stadium, or an airport.

Read the full piece at The Money View.