World Economic Crises at the turn of the Millenium: What is happening, and why?
Globalization of markets, and its effects on workers and companies around the world, is part of a cycle of destruction and re-creation.
Greenspan: "It would be a great tragedy were we to stop the wheels of progress because of an incapacity to assist the victims of progress" (NYT, 4/17/99. Alan Greenspan in a speech to business executives and foreign ambassadors in Dallas, NYT P. B-15)
Hear also other voices....
Computerization outpaces peoples' ability to comprehend the pace of international financial activity.
Greenspan: "The crises seem to reflect, arguably, an inability of people to come to grips with the vastly accelerated pace of financial activity- its complexity and its volume... When events become too complex and move too rapidly, as appears to be the case today, human beings become demonstrably less able to cope...[which] invariably induces disengagement from an activity, whether it be fear of entering a dark room, or of market volatility.... " The result is flight from markets and deflation or, in Greenspan's works "bids are hit and prices fall..." (NYT, 10/6/98. Greenspan Speech on Global Turmoil, P. C6)
Computerization is also (finally) promoting efficiencies and creating enormous new wealth.
Greenspan: More efficient management of industrial capacity and inventories is dampening the swings of the business cycle. (NYT, 11/15/98. Inside the Head of the Fed,,Section 3, p. 1)
How should we value currencies? Float or peg to the dollar? Or give up national currencies altogether?
To defend fixed exchange rates central banks may have to spend dollar reserves and raise interest rates to levels that can crush domestic economies. On the other hand, floating a currency can substantially increase foreign debt denominated in stronger currencies. See Brazil, which floated its currency 1/18/99.
"Last year's dominate economic story might be summed up this way: When currencies float, economies sink." (NYT, 1/2/99, Era May End For Floating Currencies by Joseph Kahn)
Will this turn out to be true for Brazil as well? Watch for rising inflation and ballooning debt. And keep an eye on Argentina, Brazil's major trading partner, which uses a currency board to set an exchange rate tied to the dollar.
2/25/99 Buck Doesn't Stop: Now Argentina May Adopt it by Clifford Krauss, NYT
"A month after President Carlos Saul Menem first floated the idea of trading the Argentine peso for the U.S. dollar, U.S. and Argentine officials are considering the complexities of making the Federal Reserve the central bank of both countries. But officials of both countries say there is a long way to go... "
Is the era of national currencies ending? If so, what sort of power, responsibility, and accountability will the US Federal Reserve wield during the transition?
Jeffrey Sachs, Director of Harvard Institute for International Development: "Fixed rates become a trap if kept longer than necessary, say 18 months or so." (NYT, 9/20/98, When Lending Money Just Isn't Enough, p. C1)
Fixed rates get countries into trouble when investors spook and/or speculators place their bets. So Mr. Sachs urges the IMF to help countries whose currencies are under attack.. after the currency is set free....to mitigate the impact of devaluation on the poor and to reassure investors that the country's finances would be sound and its currency unlikely to plunge much further. (NYT, 9/20/98, When Lending Money Just Isn't Enough)
Stanley Fisher, first deputy managing director of the IMF: "It's no accident that countries turn to fixed rates to bring order to their economies." (NYT, 9/20/98, When Lending Money Just Isn't Enough)
Sebastian Edwards, professor of International Economics at UCLA: "The euro is a great example of how the world is going to look... The euro itself will float against the dollar and other currencies, but member countries will have rigid exchange rates among themselves." (NYT, 1/2/99, Era May End For Floating Currencies by Joseph Kahn) See above The Buck Doesn't Stop...
Era May End For Floating Currencies, by Joseph Kahn, NYT, 1/2/99
"Indeed, many economists see the world eventually dividing into two or three currency zones, one ruled by the euro, one by the dollar and perhaps a third, farther in the future, that uses the Japanese yen or Chinese yuan as an anchor. Each smaller country in a region would either simply accept the benchmark currency as legal tender at home or adopt a currency board. ... No one expects the transition, if it happens at all, to come overnight."
Can we effectively control capital flows?
Greenspan: Technology is changing the marketplace so fast that regulators will always have trouble keeping up. "...21-century financial regulation is going to increasingly have to rely on private counterparty surveillance to achieve safety and soundness." (NYT , 10/6/98. Greenspan Speech on Global Turmoil, p. C6)
Can we regulate speculation?
Greenspan said in Congressional testimony today (10/1/98) that they [hedge funds] probably should not be more strictly regulated. Otherwise, they would move overseas and operate in cyberspace, he said.
"The best we can do in my judgment is what we do Thursday: Regulate them indirectly through the regulation of the sources of their funds. We are thus able to monitor far better hedge funds' activity. If the funds move abroad, our oversight will diminish." (NYT online, 10/1/98. Greenspan Defends Fed's Rescue of Hedge Fund)
Jon Najarian of Mercury Trading in Chicago: "Maybe there were brilliant guys or something, but they made some very ordinary trades. They made the same dumb mistakes everyone makes, only with a lot more money at stake." (NTY, 9/26/98, Hedge Fund Debacle Offers Look into a Secret Financial World, p. C1))
The sale of Long-Term Capital's entire portfolio would undermine the value of financial contracts worth as much as $1.25 trillion. (NYT, 9/27/98, Fault Lines of Risk, p.A1)
Voices in support of "caring" Capitalism (all quotes below are from NTY, 11/14/98, Redrawing the Free Market, p. A17, 19)
Viviane Forrestier, French writer: "Shame should be quoted on the stock exchange for it is an important element of profit."
Pierre Bourdieu, French intellectual: "The central aim of the pure logic of the market has been to weaken every collective group... Ours is a Darwinian world of insecurity and stress, where the permanent threat of unemployment creates a permanent state of precariousness."
James D. Wolfensohn, President of the World Bank: "We have to learn to have a debate where mathematics will not dominate humanity."
Jean-Paul Fitoussi, French economist: "Capitalism survived after World War II because we invented a sytem where there were no consistent losers, everyone gained a little." The problem, he says, is that that is no longer the case.
Should we redefine role of the International Monetary Fund (IMF)?
See NYT, 10/7/98: Open Dissension between IMF and World Bank.
Created 10/1/98. Last updated
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