Spotlight G-20: Who Pays the Bill for the Fed’s QE2?

Kevin P. Gallagher
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.

Kevin P. Gallagher published the following opinion article on the US Federal Reserve’s approval November 3 of further “quantitative easing” to stimulate the US economy, which has implications for next week’s G-20 meeting of world leaders.

To no one’s surprise, the Federal Open Market Committee has sanctioned another round of quantitative easing – or “QE2”, as it is fashionably referred to. The Fed’s QE2 may not have the desired effect on the US economy, but will certainly accentuate currency tensions in the developing world. So, the US should not be surprised when its proposals to fix global finance are met with stiff resistance at the G20 meeting next week.

To its credit, the US Fed seems to be the sole believer (with any power) in the need for expansionary policies in the United States. The outcome of the US midterm elections has tied the hands of the government to engage in expansionary fiscal policy. The Fed alone has the power to act.

Read the full article at the Guardian.

Read more on Gallagher’s work on capital controls and foreign investment. And follow the debates over G-20 policies in our Spotlight G-20 series, with contributions by Ilene Grabel, Ha-Joon Chang, Jane D’Arista, Sarah Anderson and others.

Spotlight G-20: Revamp the International Monetary System

Aldo Caliari, Guest Blogger
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.

In the last few years the global economy has faced dangerous increases in exchange rate volatility. Global imbalances, after receding temporarily, are again on the rise.

These problems are certainly not new, but the currency tensions have rarely been so high since the fall of the Bretton Woods system in 1971. Countries are engaging in competitive devaluations to capture a higher share of diminishing export markets. The need for a monetary stimulus by the US –however necessary that stimulus is— threatens to further undermine the effectiveness of developing countries’ tools to keep their currencies in check.

Read the rest of this entry »

Spotlight G-20: We Need an International Commodity Reserve Currency

Leanne Ussher
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.

At the recent G20 meeting of finance ministers in Seoul, Timothy Geithner was right to put forward a proposal that asks countries to cap their current account surplus, but the manner in which he suggested such goals be achieved offered little incentive for surplus countries to commit to such restrictions. This is why solutions for global imbalances put forth by luminaries such as John Maynard Keynes and Nicholas Kaldor were grand plans to change the system.

Read the rest of this entry »

Spotlight G-20: For the Must-Do List: Retire the Dysfunctional Key Currency System

Jane D’Arista, Guest Blogger
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.

The most recent development in the blame-game over international payments imbalances is what the Brazilian finance minister has termed “currency wars”.  The US shares his concern about competitive devaluations in the sense that it blames trade balances on currency manipulation by surplus countries, pointing to China’s refusal to allow market forces to influence the value of the yuan.  As Secretary Timothy Geithner argued before the October meeting of G-20 finance ministers and central bankers in South Korea, this gives China a “huge” short-term advantage that is unfair to all its trading partners. Meanwhile, other countries see the 10 percent decline in the dollar against major currencies from June to October as the primary cause of currency tensions and Brazil’s central bank governor views the Federal Reserve’s prospective quantitative easing as a form of intervention that will create “serious distortions”.

Read the rest of this entry »

Spotlight G-20: Why Capital Controls Are Not All Bad

Ilene Grabel and Ha-Joon Chang, from Financial Times
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.

Last Monday, Triple Crisis contributor Ilene Grabel co-authored the following piece for the Financial Times with noted author Ha-Joon Chang, building on an FT-hosted debate that included an earlier contribution by Triple Crisis blogger Kevin P. Gallagher. They urge the leaders of the G-20 economies to acknowledge the need for a new international financial architecture in the wake of the global financial crisis and the widespread adoption of currency controls in the developing world at their upcoming summit in Seoul, on November 11-12. Their piece kicks off the Triple Crisis Blog’s “Spotlight: G-20” series. Starting today and running through the G-20’s crucial meetings, we will feature daily pieces from Triple Crisis bloggers and guest contributors on the key issues that need to be addressed at the upcoming summit.

Was it really just over a decade ago that the International Monetary Fund and investors howled when Malaysia imposed capital controls in response to the Asian financial crisis? We ask because suddenly those times seem so distant. Today, the IMF is not just sitting on its hands as country after country resurrects capital controls, but is actually going so far as to promote their use. What about the investors whose freedoms are eclipsed by the new controls? Well, their enthusiasm for foreign lending and investing has not been damped in the least. So what is going on here? In our view, nothing short of the most significant transformation in global financial management of the past 30 years.

Read full article at Financial Times

Read more capital controls from Triple Crisis and at the Global Development and Environment Institute.

Capital Controls are Prudent but not Easy

Kevin P. Gallagher, Financial Times, October 20, 2010

Triple Crisis blogger Kevin P. Gallagher was invited to submit an article for the Financial Times as part of a three-way debate on the use of capital controls. His piece begins below, and you can read the full article at Financial Times, as well as the other positions written by Guillermo Calvo and Gerard Lyons. For more on the issue from Triple Crisis, see Ilene Grabel’s recent post, and other contributions on capital controls. Read more on Gallagher’s work on issue for the Global Development and Environment Institute.

Emerging markets have their hands full trying to stem currency appreciation and asset bubbles due to their higher interest rates and formidable economic recoveries relative to the west. The situation will only worsen as world leaders continue to fail to reform global finance and the US moves to another round of quantitative easing.

In times like this, capital controls have regained their legitimacy as a tool emerging markets can resort to.

One can make the argument that many emerging markets eventually need to let their currencies appreciate, in real terms. But flows of speculative capital that stop and start suddenly are a destabilizing way to that end….

Read the full article

Capital Controls, ‘Currency Wars,’ and New Global Financial Architecture

Ilene Grabel

For those of us advocating change in the global financial architecture, the last few months have been fairly exhilarating.  Let’s recap…

Capital controls, as I’ve written previously, have become the ‘new normal’ in the developing world.  It’s hard to keep up with developments in countries that have introduced or tightened existing controls since I last wrote about them here (see below). IMF staff now write about capital controls with a taken-for-granted attitude (see even the institution’s October 2010 Global Financial Stability Report, which contains the by now customary bland language on the role and efficacy of capital controls, e.g. p. 28).

Read the rest of this entry »

Ecuador after the Financial Crisis: Room for Internal or External Policy Space?

Diana Tussie

Paul Krugman has drawn attention to the plight of Ecuador, noting that, since the country does not have an exchange rate policy (and hence a monetary policy), it stood deprived of a variety of policy instruments to face the crisis. With tied hands it resorted to the expedient of restricting imports.

Dollarization was no doubt a straightjacket. Ecuador nonetheless worked against the current and found policy space in a two pronged strategy to strengthen the financial system under threat of runaway deposits; and to provide support for domestic agriculture and industry.

Read the rest of this entry »

Currency Wars and Global Rebalancing

Matias Vernengo

Guido Mantega, the Brazilian Finance Minister, said recently that Brazil is in the middle of a currency war.  His preoccupation with exchange rate appreciation is not directed to global imbalances, in general, or China, in particular.  A more depreciated currency provides protection for domestic production, and makes domestic goods and services cheaper for foreigners.  In that view, a stable but competitive (i.e. depreciated) real exchange rate (SCRER), as Roberto Frenkel and Lance Taylor call it, would be an essential tool in the development strategy in developing countries.  The message is that competitiveness of domestic markets matters for development.

Read the rest of this entry »

Remittances, Migration and Other Panaceas: The end of outward-looking development strategies?

Ilene Grabel

In a 1965 essay, the great development economist Albert Hirschman bemoaned the tendency of those in his profession to look for the next panacea. Unfortunately, various panaceas have come in and out of fashion since Hirschman wrote.

During three decades of neo-liberalism, development economists and policymakers have celebrated three inter-related strategies:  (1) free markets, (2) private ownership, and (3) private international capital flows. The latter refers to several types of flows—loans by foreign banks, foreign direct investment (i.e., the purchase of more than 10% of the assets of a foreign corporation), portfolio investment (i.e., the purchase of foreign financial assets, such as stocks or bonds), and worker remittances (i.e., the funds that migrant workers send home generally to their families, but sometimes also send collectively through “home town associations” to fund infrastructure projects in their towns of origin). Policy in the neo-liberal era sought to maximize all four of these financial flows.

Read the rest of this entry »