Re: Re: Re: Re: Re: Re: Re: Re: beginning of the end?

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

At 08:07 PM 10/14/2000 -0400, you wrote:
> Jim Devine wrote:
>
> > notable is the absence of an international lender of the last resort, or
> > even an international central banker concerned with the health of the
> > world economy but without l-o-l-r facility. The IMF acts instead as a
> > creditors' cartel, so the closest to playing this role is Alan the G and
> > informal contacts with other CBers.
>
> Well, what's that, chopped liver? It's a bit of an understatement to
> describe the consultations of CBers as "informal" - they G10 have monthly
> meetings at the BIS, and no doubt all kinds of crisis strategies worked
> out. And while the IMF does exist to protect creditors, it has acted as a
> focal point at least since the debt crisis broke out in 1982 for CBers and
> finance ministers to coordinate rescue strategies. They can't prevent
> global recessions, but they have repeatedly kept financial panics from
> turning into generalized meltdowns (and in shifting the costs of
> adjustment onto the poor and weak).

Okay, so I was being excessively glib.[what me, glib? no, never! well,
hardly ever!]

But think of it. Suppose the dollar is falling and with it US paper-asset
markets -- because both are caused by an outflow sparked by a loss of
confidence in the US future (perhaps when the newly-elected President,
George W., is caught smoking crack). Let's look at situation this initially
ignoring recessionary effects (as central bankers are wont to do).

If  the Fed decides to pump up asset markets (with lower interest rates),
it not only encourages the dreaded inflation -- still a major nightmare for
the bankers and much of Wall Street, especially with recent oil price-hikes
-- but also spurs a steeper fall in the dollar. On the other hand, if the
Fed decides to defend the dollar (with higher interest rates), it
encourages US asset markets to fall. The Fed has a hard time dealing with
such linked crises.

How does policy coordination help here? The other CBs would have to lower
their interest rates to prop up the dollar -- which would also help US
asset markets -- but do they want the Euro to fall even further (the
logical flip-side)? That would also stimulate the inflation they fear
(especially the Germans).

Further, a US asset deflation/dollar drop would be a very large nut to
crack, much larger than the East Asian financial crises and the 1982 debt
crisis. The whole idea of the US flopping -- and having Keynesian aggregate
demand repercussions around the world -- is alien to the CBers' thoughts,
in this age of triumphalist market rhetoric in which Keynes has been
relegated to the dust-bin of history (or de-fanged as in Mankiw's textbook,
which amounts to the same thing). My feeling is that the CBers tend to be
like the stereotyped French generals who are always fighting the last war,
which would make it even harder to unite on a clear program. This problem
with unity would be made worse because the "first among equals" (Alan the
G) would be facing the policy dilemma sketched above.

If the Europe reflates it would help, even though it's not the trend these
days. Even if they do, the world-recessionary effects of the "race to the
bottom" and the widening gaps between the working classes and the rich,
along with accumulating US consumer, corporate, and external debts, still
remain.

Awhile back, I predicted (jokingly, it should be noted, since no-one can
predict) that the house of cards was likely to collapse when the next US
President was inaugurated. I hope I was joking...

Jim Devine jdevine@xxxxxxx & http://bellarmine.lmu.edu/~JDevine