Two supranational organizations exist for co-ordination among world's banks. The larger is the International Monetary Fund. It was created in 1945 to supervise the agreements of Bretton Woods and audits all the world's banks: its 182 member banks (the central banks of their respective countries) can turn to it for loans when things go bad. Originally it made loans for the rebuilding of postwar Europe. It has come to be known for strong-arming third world debtor countries into cutting spending on health care and education in order to repay loans and is often seen as an organization of financial enforcers. It's head office is in Washington & the US has had a highly dominant position.
The second organization for the co-ordination of the world banking system, the Bank for International Settlements in Basel, consists of central bankers from its ten founding countries, plus Swizerland. It began after the First World War to administer German reparation payments, and became a place where important questions could be addressed with the greatest discretion. No politicians, no treasury secretaries, and no heads of state are invited to join its debates. This club of central bankers, whose clients are other banks, holds its discussions in the greatest secrecy. It puts out a highly respected annual report on the state of the world's financial system.
The system in question has become increasingly unresponsive to measures available to the IMF and BIS. Explosive developments in the currency markets imply a shift of power out of the hands of even the largest of the nation states and into the financial market casino. When the president of France, Francois Mitterand, attempted reforms which were not to the taste of the financial markets in the eighties, he was forced to stop. The British and Scandinavian governments were similarly cowed by the markets in 1992, the Mexican government in 1994, the governments of Thailand, Malaysia, Indonesia and South Korea in 1997, the government of Russia in 1998. Billions of speculative investment dollars can flow into or out of a country in seconds- and does. More recently the governments of Greece and Ireland have been struck. This "hot money" has become a kind of world government, and has inexorably eaten away the power of sovereign national states. In addition to causing such a power shift, the speculative money flourishes maximally where there is highest volatility- the opposite to the wishes of central bankers for stability.
In the sixties, proponents of floating exchange rates theorized that with the "discipline of the free market " volatility in currency exchange would disappear. A study by the OECD in 1995 showed that the opposite had happened. It is not really so hard to see why volatility rises with increased volume of trading. If, in 1986 when the daily volume was $60 billion, 5% of currency traders disliked our currency and sold, it meant a $3 billion move against our currency. The central bank could manage what they call an "open market" operation to buy back that currency and stop the fall. With volumes of currency trading many times greater today, no central bank has enough money to do so any longer. This is what Ben Bernanke, the chief of the Federal Reserve, meant last week when he said that "capital flows are once again posing some notable challenges for international macroeconomic and financial stability."
(In 1944, the Bretton Woods conference created five institutions, another of which is the World Bank. It exists to provide loans to developing countries for capital development with the aim of reducing poverty. Until recently, that has not been seen as part of the central system for financial management)
The value of our money is currently determined by a global casino where over 98% of trades are speculative. Those who save money or have a retirement plan are exposed to this risk, even if they don't personally invest. Their banks invest, and so do their pension funds. Those who have no savings are equally exposed when their tax money is used up to prevent the collapse of the financial system, and is not available to pay for garbage collection, schools, public libraries and so forth. Our money is a system of symbolic mutual confidence, and many past civilizations have fallen along with their money. Rather than debating interest rates, the threat of inflation, or the gold standard, we need to rediscover our communities and the kind of world in which we want to live together. I recommend the website of Bernard Lietaer.
Saturday, February 19, 2011
Thursday, February 10, 2011
The "flow" of money!
Currency functions as a central nervous system: by its "flow" it sets the value of all other assets in a given community. Bonds are an attractive investment so long as the money in which they are denominated is stable and maintains its value: that is, when inflation is low or falling. Stocks fall when interest rates rise, and when an economy is in trouble, its interest rates can be expected to rise dramatically as the central bank tries (by offering high rates) to tempt investors (who notice the country's trouble) from taking their money out. The effect of currency value on real estate is more indirect. On the one hand, real estate is a well known "hedge against inflation", meaning that it keeps its relative value. Another way of saying "hedge against inflation" is that as the value of the currency falls, the price of real estate rises in a compensatory degree, so one is "hedged" or protected. Nevertheless, an individual in financial difficulties who can't pay his mortgage easily loses money if he can't wait for his price and has to sell right away. That is what is meant by real estate being a non-liquid asset....it can't immediately be turned into cash (liquid money!) After the 1929 crash, real estate values fell as much as stock value. At that time, the only assets that retained value were treasury bills...that is, the bonds of the US government, which could not declare bankruptcy, and could print more money if it needed. In his book "How Credit-Money shapes the Economy: the United States in a Global System", Professor Robert Guttmann says the only way we could see another real depression would be through collapse of the currency.
The interconnectedness of financial markets means that currency collapse is a contagious disease. Such befell the currency of Thailand in 1997, when it fell 42%. This was followed by falls in the currencies of 9 other countries: four fell less than 42%, but the Indonesian currency fell 80% and the Russian currency 86%
Banks have always been "special". The nature of their classical business was to take in (low risk) deposits for which they paid a small interest to depositors , and loan out this money at a higher interest rate to entrepreneurs, that is to say, people who were willing to risk entering or expanding some business. This has always called for bankers to assess those who take loans. If they make good calls, they keep the profits, but when they lose, depositors lose as well. These days the government insures depositors, so the tax-payers lose when the bankers succumb to the temptation of higher profits and make risky loans. The profits of the banks stay with the banks, but the problems of the banks become everybody's problems, as we have clearly seen in 2008.
No one has ever figured out how to keep the banks under control, but "central banks" have been one attempt at it. Central banks were so called because they were usually located in the capital of whatever country, and they had a monopoly on the emission of "legal tender" for that country. When some local bank got itself in trouble, the central bank could be called upon for a loan -"the lender of last resort". This arrangement could prevent "runs on the bank" (such as the one prevented by Jimmy Stewart as a banker in "It's a Wonderful Life" where the local community itself saved the day and does not need to call upon the central bank)
From time to time the central banks themselves gave way to temptation and the bank of one country might discretely bail out the bank of a neighboring country when it managed to get itself into trouble (The Bank of France bailed out the Bank of England in 1825, and in 1860 the Bank of England bailed out the Bank of France in return) Such episodes were infrequent, and hushed up. The Federal Reserve System in the US was created in 1913 on the model of these earlier central banks. It wasn't until the Bretton Woods in 1944 that modern central banks formally took specific responsibilities- a formal commitment to being a lender of last resort for smaller banks, and the control of inflation.They do this indirectly: they set the interest rates that other banks must pay, and they buy and sell treasury bills. In the past thirty years, more and more economic turmoil has spilled over from one country to another, so that the International Monetary Fund and the Bank for International Settlement have been increasingly involved in attempts to contain the contagions. This is far from the "world government" that so frightens to many people. More about them next time.
The interconnectedness of financial markets means that currency collapse is a contagious disease. Such befell the currency of Thailand in 1997, when it fell 42%. This was followed by falls in the currencies of 9 other countries: four fell less than 42%, but the Indonesian currency fell 80% and the Russian currency 86%
Banks have always been "special". The nature of their classical business was to take in (low risk) deposits for which they paid a small interest to depositors , and loan out this money at a higher interest rate to entrepreneurs, that is to say, people who were willing to risk entering or expanding some business. This has always called for bankers to assess those who take loans. If they make good calls, they keep the profits, but when they lose, depositors lose as well. These days the government insures depositors, so the tax-payers lose when the bankers succumb to the temptation of higher profits and make risky loans. The profits of the banks stay with the banks, but the problems of the banks become everybody's problems, as we have clearly seen in 2008.
No one has ever figured out how to keep the banks under control, but "central banks" have been one attempt at it. Central banks were so called because they were usually located in the capital of whatever country, and they had a monopoly on the emission of "legal tender" for that country. When some local bank got itself in trouble, the central bank could be called upon for a loan -"the lender of last resort". This arrangement could prevent "runs on the bank" (such as the one prevented by Jimmy Stewart as a banker in "It's a Wonderful Life" where the local community itself saved the day and does not need to call upon the central bank)
From time to time the central banks themselves gave way to temptation and the bank of one country might discretely bail out the bank of a neighboring country when it managed to get itself into trouble (The Bank of France bailed out the Bank of England in 1825, and in 1860 the Bank of England bailed out the Bank of France in return) Such episodes were infrequent, and hushed up. The Federal Reserve System in the US was created in 1913 on the model of these earlier central banks. It wasn't until the Bretton Woods in 1944 that modern central banks formally took specific responsibilities- a formal commitment to being a lender of last resort for smaller banks, and the control of inflation.They do this indirectly: they set the interest rates that other banks must pay, and they buy and sell treasury bills. In the past thirty years, more and more economic turmoil has spilled over from one country to another, so that the International Monetary Fund and the Bank for International Settlement have been increasingly involved in attempts to contain the contagions. This is far from the "world government" that so frightens to many people. More about them next time.
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