Can you utter the term without foaming at the mouth?

The “Washington consensus” has unjustly been branded as the neoliberal gospel preached — but not always practiced — by the US government and creditor country dominated financial institutions such as the IMF or the World Bank. John Williamson coined the term in 1989 in an attempt to persuade “Washington” that Latin America was committed to reform — not to write up a policy agenda for Latin America to submit to.

The objective was to generate real growth in a stable macroeconomic setting with one eye on an (more) equitable income distribution. The consensus itself consists of ten policy instruments to facilitate “prudent macroeconomic policies, outward orientation, and free-market capitalism” or in the words of a notorious critic: “stabilize, privatize, and liberalize”. → Read More

China Inc.’s shareholder value

China Ocean Shipping Company (Cosco) is one of the largest shipping companies in the world, operating a merchant fleet of hundreds of vessels. Some of these Cosco owns but a significant number of ships is chartered. Last month Cosco stopped making charter payments to the shipowners, causing a stir in maritime clubs. Not that Cosco couldn’t pay. It simply resorted to the age-old trick of coercion to drive down the terms on those long-term deals it had agreed to in 2008. Cosco claimed it acted in the interest of shareholder value – its supermajority shareholder being the Chinese government — who, incidentally, can hardly be suspected of being strapped for cash. → Read More

The business cycle trilemma

The sibling rivalry between finance and economics has some casualties célèbres. George Soros would gladly give up the bulk of his speculative gains if only academia would recognise him for his theory of reflexivity. Jack Treynor came up with the Capital Asset Pricing Model before any of its acknowledged economist-discoverers — with the exception maybe of finance fellow William Sharpe. And how many scholars are familiar with the writings on monetary economics or business cycle theory by Treynor’s world-famous-in-finance protégé Fischer Black? → Read More

Restoring Greece — Argentina redux?

Nouriel Roubini in the Financial Times called upon Greece to default and abandon the euro “to quickly restore competitiveness and growth, as it did in Argentina.”

To be sure, it’s easy to see the Argentina analogy work not only for Greece but for any Eurozone member country. Each of them has a banking system pegged to a de facto foreign currency, and each of their national central banks lacks the capacity to act as a full lender-of-last-resort. But the analogy does not extend much further. → Read More

ECB: lender-of-next-to-last-resort

Maybe you would like to see the European Central Bank engage in large-scale euro sovereign debt purchases. Maybe you do not.

But it cannot.

“To make large-scale open market operations in long bonds credible, the Treasury must idemnify the central bank against unexpected capital losses. Fortifying the central bank against capital losses would commit the Treasury to expand the public debt, perhaps substantially, in support of monetary policy. That fiscal commitment might require legislation.”

Or a eurozone Treasury to start with. → Read More

Reservations on bank reserves

Bank reserves in the United States have exploded from twenty billion before the crisis to close to a trillion now, in an effort by the Federal Reserve to mitigate the disruption in the interbank market. Lending evidently has not risen fifty-fold. What is wrong with the textbook multiplier of fractional banking? → Read More

“The eye has never seen, nor the hand touched a dollar”

Two articles on money and credit is the grand total of Alfred Mitchell-Innes’ contribution to economics. What is money? and The credit theory of money were published in 1913/4 in the Banking Law Journal, only to be forgotten for decades — even though John Maynard Keynes wrote a favourable review. “Credit and not gold or silver is the one property which all men seek, the acquisition of which is the aim and object of all commerce. [...] Money, then, is credit and nothing but credit. A’s money is B’s debt to him, and when B pays his debt, A’s money disappears. This is the whole theory of money.” Worth a thought? → Read More

BS on sovereign credit risk

Today, Lorenzo Bini Smaghi is delivering a speech at the Forum for EU-US Legal-Economic Affairs in Rome. The main subject of Policy rules and institutions in times of crisis is “the risk of a confusion of roles, which may generate moral hazard and ultimately delegitimise the institutions and undermine their credibility.”

The stability of public finances in particular, Bini Smaghi maintains, is based on two mechanisms: the credibility of the fiscal authorities, and the ability of the markets to accurately assess sovereign credit risk. Therein lies the rub… → Read More

Seven faces of the peril: Japanese event studies

Source: Société Générale Cross Asset Research, Global Research Alert, 29 August 2011

→ Read More

The fog of currency war

In his antimanual Vom Kriege, the great Carl von Clausewitz introduced friction in the theory of war. The imminent threat of bodily harm, the soldiers’ mental state (fear) and problems of information (uncertainty) all represent noncalculables which tend to infuse information with noise, and amplify or degrade signals.  These frictions render any straightforward military plan utterly useless. → Read More