Reckless Endangerment: Making Debt Owe-nership Easy

Gerald Epstein

In search of a new angle on the financial crisis, Gretchen Morgenson and Joshua Rosner’s (M&R) new book, Reckless Endangerment, seems to pin a lot of the blame on misguided do-gooders who were trying to make the dream of “home ownership” in America a reality for all. These include Bill Clinton, who they say pushed for making home ownership easy through his “National Partnership in Home Ownership” (p. 1), the Federal Reserve Bank of Boston’s researchers who did a path-breaking study of discrimination in lending, and even community organizing groups like ACORN. M&R say that ACORN and other housing groups let themselves be taken in and bought off by James A. Johnson, the CEO of Fannie Mae.

To be sure, Johnson, his successor Franklin Raines and other Fannie Mae executives, got very, very rich (Johnson pocketed more than $100 million in pay and Raines made more than $90 million, though he had to give more than $20 million back in a settlement for accounting fraud). While Johnson and Raines were making their fortunes, they were hiding under a protective cloak of pretending to make home ownership easy in America, viciously attacking their enemies while paying off their friends on both sides of the aisle.

But in spite of the authors’ desire to highlight the role of Fannie and Freddie, (the so called Government sponsored enterprises (GSEs) that helped finance home mortgages and after failing in 2008 have been taken over to the tune of 180 Billion dollars by the tax payers) what comes through clearly from the dozens of interviews and reporting in Reckless Endangerment, the real culprits were not primarily Johnson and his pals, but rather  the political establishment. These included the financial regulators, like Alan Greenspan and his subordinates at the Federal Reserve, the credit rating agencies, like Moody’s and S&P and the big bankers at Goldman, Country Wide, Citibank and elsewhere, who were dedicated to only one thing: paving their own road to riches by promoting widespread “debt owe-nership” that would lead to the ruin of millions of middle class and poor Americans.

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Foreign banks or foreign capital?

C.P. Chandrasekhar

One less emphasised lesson from the global financial crisis was that developing countries that are successful in attracting foreign financial investors take a hit when such a crisis occurs because of a reverse flow of capital. Foreign financial firms needing to cover losses or meet commitments at home withdraw their capital generating a credit crunch in emerging market economies.

It is to be expected, therefore, that the crisis-induced debate on regulating finance should revisit not just policies with regard to capital flows into these economies, but also policies with regard to the entry and operation of foreign financial firms. This is particularly important because since the 1980s and especially after the series of currency and financial crises in emerging markets starting in the late 1990s, the presence of foreign financial firms, especially foreign banks, in developing countries has increased substantially.

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Are the Latin American economies overheating?

Matias Vernengo

The International Monetary Fund (IMF) in spite of all the talk about reform is pushing for fiscal adjustment around the world.   The IMF argues overheating in the developing world, particularly in China and Latin America, and excessive debt accumulation in the developed world requires fiscal adjustment to reduce the risks of inflation and debt default.

The IMF has suggested in their last Regional Economic Outlook Report that the Latin American economies that have recovered swiftly from the global financial crisis may be at risk of overheating.  According to the report: 

“Overheating risks stand out in much of Latin America. Growth is moderating from fast rates last year, but remains above trend. Domestic demand has been growing even faster, pushed not only by favorable external conditions but also by macroeconomic policies that have been quite stimulative and are only gradually normalizing. Early signs of overheating pressures and possible excesses are appearing in several realms.”

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Changes needed at IMF

Triple Crisis blogger Martin Khor published the following opinion article in The Star on the IMF’s search for a new managing director and why the way its chief is selected and its policies have to be changed.

Changes needed at IMF

Last week’s arrest of Dominique Strauss-Kahn on charges of sexual assault was followed by his resignation as managing director of the International Monetary Fund (IMF).

This quickly sparked a race for his successor in the most important position in finance among international organisations.

European leaders were quick off the mark, arguing that the post should again be taken by a European, as according to the old but discredited tradition.

It has been increasingly recognised that the convention that the IMF chief must be a European while the World Bank president should be an American can no longer be justified.

The two leaders should be selected from persons from any country according to merit, and not on the basis of their being European or American, which is a colonial or neo-colonial principle.

Read the full article at The Star.

The IMF, Capital Controls and Developing Countries

Triple Crisis blogger Kevin Gallagher published the following opinion article in Economic and Political Weekly on the IMF’s new stance on capital controls, developing countries’ reactions, and how the IMF might devote more effort to the issue of managing global capital flows.

Continuing with its rethink on capital controls, the International Monetary Fund has now formally suggested that there may be situations when developing countries can gain from placing regulations on the inward low of foreign capital. However, the new “advice” comes with so many conditions and guidelines that the developing countries have rejected the recommendations and sent the IMF back to the drawing board. Rather than telling developing countries what to do and when, the IMF should perhaps focus more on helping governments enforce capital controls and it should stress the need for the global coordination of those controls.

Read the full article at Economic and Political Weekly.

Economic crises in a world of resource scarcity and wealth inequality

Ramón López, Guest Blogger

Repressing labor unions, reducing enforcement of minimum wages and lowering them over time, cutting unemployment benefits and welfare to the poor, are some of the new “institutions” to enhance labor supply and to lower reservation wages implemented in the USA and other countries over recent decades. These policies were complemented with massive tax cuts for the rich and financial deregulation. All this responded to the old bromides of the right, once sarcastically described by Galbraith as the doctrine that considered that the rich were too poor and the poor too rich to be productive.

This model of course brings much joy to the elites. It causes real wage stagnation so that productivity growth is entirely captured by the elites and income growth stagnates for almost everyone except the very rich. But the stagnation of the income of almost everyone also constitutes a problem for the model because it causes insufficient demand to sustain the expansion of production and profits.

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Economists Launch the World Economics Association

This week a group of 141 economists from 40 countries established the World Economics Association (WEA) in order to fill an important gap in the international economics community–”the absence of a truly international, inclusive, pluralist, professional association.” The WEA is committed to global democracy and plurality of economic thought, method and philosophy. Triple Crisis bloggers Jayati Ghosh, Kevin Gallagher, C.P. Chandrasekhar, and Stephany Griffith-Jones are among the founding members.

Read the World Economics Association Manifesto at WEA.

Economic Partnership Agreements: The last nail in the coffin for LDC industrialization and development

Mehdi Shafaeddin

The so-called Economic Partnership Agreement (EPA) being negotiated between EU and ACP countries can have more devastating impacts on industrialization and development of low-income countries than the 5 per cent rules imposed on colonies during the colonial era. It will lock the Least Developed and other low-income (ACP) countries in production and exports of primary commodities and at best in some labour-intensive industries and assembly operations.

The EPA is supposed to be a reciprocal free trade agreement between unequal partners-i.e. between countries with little or no industrial base and European countries which are already industrialized. While EPA does not provide any gain in market access for ACP countries, it restricts their policy space further. In fact, they are threatened that if they do not ratify the contract, their preferential market access to the EU will be withdrawn. Even if they do ratify EPA, their preferential market access will be lost in 5 to 10 years anyhow, while non-LDCs try to preserve their preferential market access.

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Doha Goes on Life Support

Timothy A. Wise

The impasse continues in the WTO’s Doha negotiations, to the point that even the relentlessly optimistic Secretary General Pascal Lamy, after another deadline-driven search for concessions, admitted that there is no movement and little basis for an agreement. Doha is on life support while he and the WTO leadership assess what can be salvaged from ten years of trade negotiations.

Life support is not a cure for what ails the Doha Round. As crisis after crisis roils the global economy, the WTO has drifted toward irrelevance. New market-access demands from the U.S. and other developed countries may make political sense at home, but they do nothing to make the Doha agenda compatible with its initial promise of development. Leave Doha on life support or pull the plug, but we should all use the crisis to remember why development matters and why a multilateral trading system is important to a complex global economy facing multiple crises caused not by too little liberalization but by too much.

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Trading Away Financial Stability in Colombia: Capital Controls and the US-Colombia Trade Agreement

Triple Crisis blogger Kevin P. Gallagher published the following Latin American Trade Network (LATN) policy brief on the Obama Administration’s revised US-Colombia Free Trade Agreement (FTA), which is the subject of today’s Senate Finance Committee hearing and will be sent to Congress this session alongside revised FTAs for Panama and South Korea. Gallagher demonstrates that the FTA has not been reworked to ensure that Colombia has the ability to prevent and mitigate financial crises.

The United States-Colombia Trade Agreement between the United States and Colombia was signed before the global financial crisis. As Congress and the President convene to rework the agreement, it will be important to ensure that the agreement is designed so that it given both nations the flexibility to put in place macro-prudential regulations to prevent and mitigate financial crisis.

As the treaty now stands, a number of actions that Colombia has successfully deployed in the past to prevent and mitigate treaties in the past would be deemed actionable under the agreement’s chapters on financial services and investment.

The global financial crisis has demonstrated that sound regulations are needed to stem the ability of speculative capital to create financial bubbles that burst and then leave ordinary Americans and Colombians worse off.

Read the full policy brief at LATN.