To those of you that care, which are probably pretty sparse, I have recently finished All the President's Men, by Bob Woodward and Carl Bernstein. It's an account of the Watergate scandal through they eyes of two of the chief actors in the drama, Woodward and Bernstein, who were reporters for the Washington Post.
Not related to IPE, but a recomended read for anyone looking to get an interesting insight into this critical period in American politics. Also, will be doing some background research on a potential paper topic, so any suggestions would be appreciated, but I don't think that would be strictly legal under the Honor System. Oh well.
I was watching the Colbert Report last night, and one of the guests was Marc Keilburger, co-founder of Free the Children, a non-profit whose aims are to eliminate child labor in developing countries. The general topic was child labor, especially in light of a Finance Bill in the Senate introduced by Sen's Baucus and Grassley that seeks to make imports made with convict and forced child labor illegal.
I am not totally sure of all of the details involved, such as where this bill is within the Senate and what chance it has of being passed, but this would be an exceedingly important rule if it were passed. Dave Sirota, on his blog The Smirking Chimp (the hyperlink tool hasn't been working recently), provides a general analysis of child labor in terms of comparative advantage, saying that weak governments create unnatural comparative advantages by allowing cheap and child labor. I'm not sure I completely agree with his argument, but a good point nontheless.
In refrence to our talk yesterday about Wolf's labor progression, the Colbert interview reminded me that groups like Free the Children will play an integral role in improving the productivity of developing labor. One of the big problems in social science is determining how and why X->Y, and one argument is that individual actors play an important role in this equation. This theory makes sense in this context, as the subtle increases in productivity and working conditions will be important steps in the evolution of labor.
President Obama is in the middle of his trip to China, and most media outlets are covering the trip from various angles. Foreign Policy currently has an article up that addresses concerns about the size and strength of the Chinese military. While globalization has made the economic playing field relatively flatter, the US army is still the preeminent military force in the world. This article, however, describes how the Chinese military has made impressive strides, especially in their military technology sector. The author discusses how the US systematically underestimated the Japanese military prior to World War II, and raises similar concerns about the current situation in China.
Discussions of "new world orders" always seem a little to broad and void of detail, but the hypothetical situation where the Chinese military is of relatively equal strength with the US presents several interesting theoretical problems. The initial thought that comes to mind is a return of polar politics, much like during the Cold War. There is not, however, the similar economic differences between China and the US, as China has greatly liberalized its economy in recent years. The next concern that comes to mind is the trade relationship between the US and China. As the largest trading partners on the planet, greater conflict between the two could stagnate global trade. (Quick note: Decreased China-US trading may actually be a good thing for the global economy, re: the "global imbalances in trade" argument.) Another concern is a global competition for economic resources. This would be a sort-of "New Cold-War" mentality, where the main competition is over global economic spheres of influence.
Overall, this question is of increasing global importance. Many of the main questions in global politics might reflect this conflict in the coming decades.
The 2008-09 global financial crisis was a period of global economic turmoil that experienced many asset pricing bubbles, especially within the housing market. Understanding the underlying causes of the crisis is necessary to correct the global financial system and broader economy. The IMF has identified main problems as “a failure in the global architecture in providing adequate warnings prior to the crisis and regulatory failures at a number of levels” (IMF Annual report, 9). Among these regulatory failures are excessive risk taking driven by low long-term interest rates, poor financial regulations in individual countries and globally, and weak crisis management response mechanisms. Another concern is the focus on keeping inflation down, while not recognizing that asset price bubbles pose a similar inflationary risk. The ensuing recorrection of asset prices demonstrated gross overvaluing and speculation characterized by the crisis.
The main cause for concern, however, is the ensuing credit crunch and global lending freeze. The IMF hopes to enact a number of policy changes to stimulate global lending. Most important was recapitalizing the banking sector and providing stimulus packages for countries that required it. The IMF has also created a device called the Flexible Credit Line (FLC), which allows quick lending to member nations in the event of a crisis. Along with the increased general lending capacity and expanded Special Drawing Rights (SDRs) capacity, the IMF now has increased lending power and liquidity to offer its member nations.
The combination of regulatory failure and the need for increased international lending points to a necessary expansion of the IMF’s role. The lack of international cooperation before and during the crisis signals that a global regulatory system is necessary, and the IMF should expand to ensure cooperation. If the IMF were to act as a global regulator, it would be able to mitigate risks by ensuring its member nations follow sounds macroeconomic policies. In IMF parlance, a “new international financial architecture” is needed moving forward, and the IMF should play a key role in this new structure.
Liaquat Ahamed, in Lords of Finance, describes the period of the Great Depression through the lens of the chiefs of the heads of the central banks of Britain, France, Germany, and the United States. Extremely broad in scope and detail, Ahamed unveils the curiously parochial and cosmopolitan world of banking and finance during, before, and after the Great War into the 1920s and 30s.The main characters, Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve, Emile Moreau of the Banque de France, and Hjalmar Schacht of the Reichsbank, all played pivotal roles in shaping global finance.
Two main concerns hovered over the postwar period: the Gold Standard and German reparations.During the war, most nations had abandoned the Gold Standard in order to finance the war, yet the contemporary thinking was that a return to gold was necessary following the war, as the global economies would be less stable without gold.The state of German finances following the war had cascading effects for the global economy.As the United States receded into isolationism, global lending halted and the Deutschemark experienced hyperinflation.This prevented Germany from repaying its debts, and generally froze credit within continental Europe.Through a number of steps, decisions were made that allowed for European lending and market activity to reemerge, but underlying problems, including the undervalued franc, were essential to the collapse in 1929.In this vein, Ahamed essentially argues an accumulation of decisions, such as Britain reverting to the gold standard and wide-spread speculation within Wall-Street, caused the Great Depression.The problems were systemic, meaning that the financial system and corresponding policy decisions were at fault.
The essential strength of this book can also be considered a great weakness.The quote which precedes the introduction, “Read no history, nothing but biography, for that is life without theory,” attributed to Benjamin Disraeli, accurately depicts the vantage point of Ahamed’s work.Lords of Finance is a decidedly descriptive work, recounting the major decisions made by the world’s bankers with great intimacy and familiarity.On one hand, this is a major strength, as Ahamed provides an unbiased and accurate account of the events.However, the “amalgamation of decisions” argument can leave a bit to be desired.Perhaps my social science background begs for a more explicit causal flow, but it seems that Ahamed focuses too heavily on the historical aspect of his account, and not the financial and theoretical aspect of the Great Depression.
Overall, Lords of Finance is a captivating read that presents a clash between an old world order and an emerging one.Ahamed features as the guide, bringing the reader into a world of smoke-filled rooms where political and financial decisions were made in exclusive clubs.This account of the Great Depression in its depth, and provides unique insights into one of the most troubled times in modern history.
As a follow/summary to the conversation I had with Professor Dickovick after class today, I'll first restate the main question: What should the role of central banks be with regard to interest rates following a bubble-burst? The natural thinking is that interest rates should be lowered, allowing for freer capital flows, which would stimulate the economy.
I proposed in class that after bubbles burst is not the time to lower rates, as that encourages banks to add more risks to their balance sheets, which is probably the reason you got into this whole mess anyway. However, after talking with Professor Dickovick, I realized that the reality is a bit more nuanced. Following a crisis, a credit crunch usually ensues. This freezes lending and investment, contracting the economy. Thus, even if the central bank lowers interest rates, people will be less likely to borrow money. However, as the economy improves, people are more willing to take on risk and borrow money. This is when the central bank needs to step in and raise rates. There is a saying that goes something like "a central bank needs to be the person that takes away the bowl of punch at the party," meaning that the bank needs to raise rates to avoid bubbles. This is to ensure sustainable growth, not a "bubble-cycle" of over-borrowing followed by a credit crunch.
Obviously, the above is much more nuanced in practice, but I think it's important this argument is made in whatever form.
If this section of IPE were a story, one of the main elements would be China's currency valuation and its affect on international trade. We have mostly been talking about China's currency in relation to US trade and its current account deficit, yet another (more?) important story is China's currency in relation to its Asian neighbors. The Chinese government has worked hard to keep the Yuan tied to the dollar, meaning that the Yuan has been steadily falling in recent months in comparison to other currencies in Asia. As we've discussed in class numerous times, this makes Chinese goods cheaper relative to its neighbors. As the economies in Asia are largely export-based, more expensive goods is obviously bad for their respective economies.
In response, the central banks have been buying up dollars and building up their foreign reserves. The long-term story here is that Asia is viewed by many as the next global financial center, and devaluing a currency to promote exports is not a long-term growth strategy. Furthermore, one wonders if the strategy that "there's no such thing as too much reserves" is accurate or not. Either way, countries like Singapore and South Korea are stuck between the proverbial rock and hard-place, and it seems that they may lose money either way.
