IMF + FOMC = ?

["Canova, Timothy" <CANOVA@xxxxxxxxxxxxx>]

Dear Clifford,

Thanks for your thought-provoking comments, which suggest that the two
discussions we've been following are leading to the same questions, and
maybe to similar conclusions.

The first discussion on the IMF ('globalization' and poverty) and the second
discussion on the independent structure of the Fed and other central banks
both lead to a fundamental question:  Who, in a democracy, should decide
upon the level of government spending on a wide range of activities?  The
answer, of course, should be self-evident.  In a democracy, it should be the
people's elected representatives that get to decide about the level of
government spending for health, education, public sector jobs and job
training, investment in emerging technologies, spending for defense, etc.
That's what elections are for; that's what elected representatives should
do:  decide fiscal policy, which in turn should help determine the overall
level of aggregate demand and economic activity.

Recall the "pegged period" (1941-1951) when the Federal Reserve was muscled
by the Treasury Department to purchase U.S. securities at any price
necessary to maintain short-term interest rates pegged at 3/8 of 1 percent
and long-term pegged at around 2 percent.  (It took a war-time emergency to
neutralize the power and prerogatives of the independent central bank).  Not
surprisingly, the pegged model delivered a production boom that shames the
so-called productivity boom of today's new economy.  Yes, there were no
doubt all kinds of wasteful spending programs and inefficient price controls
and subsidies, but the aggregate impact was a 1.2 percent unemployement rate
-- the closest we've yet come to genuine full employment (in the words of
the late William Vickrey).

But today in the U.S., public sector activity is increasingly dictated by
central bankers, some of whom are selected not by the President (upon advise
and consent of the Senate), but by the regional Federal Reserve Banks.  Even
members of the Fed's Board of Governors are given ridiculously long terms in
office (14 years, the longest of any federal officers).  The Fed is also the
only government agency over which Congress has absolutely no budgetary
oversight because of the unique nature by which the Fed raises its own
money.  And the Federal Reserve System is expressly exempt from provisions
of the Sunshine in Government Act and the Federal Advisory Committee Act
(the only other exempt federal agency is the CIA).  Let's not be too
surprised when Alan Greenspan gives his opinion to Congress on what their
spending priorities should be, on the overall size of the budget, on tax
cuts, on Social Security funding, on health care and medicare reform, etc.
Of course, this is ass-backwards.  Congress should be giving Greenspan it's
opinion on how the Fed should conduct the nation's monetary policy.  But
instead it's the Fed that's able to constrain Congress's fiscal powers by
refusing to accommodate federal spending -- i.e., by forcing a crowd-out
effect if Congress is more expansionary than the central bankers deem to be
prudent.

I will concede that in the U.S., this has been a less acute problem than
elsewhere, in large part because the soaring dollar draws in foreign
capital, keeps U.S. inflation low, and pumps up U.S. securities markets and
tax dollars to the Treasury.  But these are exeptional circumstances that
apply only to the U.S.  Others are not so fortunate.

Outside the U.S. this same phenomenom (the neutralization of fiscal policy)
takes place when public sector activity is constrained by the IMF's loan
conditionalities.  In addition, the IMF has successfully pushed for central
bank autonomy, therefore in most countries fiscal policy is also constrained
in that way as well.

I agree with you Clifford that IMF conditionality is misfocused, and at its
very core.  Yes, I am sure you are right that in the case of Russia the IMF
should not have "focused almost exclusively on meeting fiscal and monetary
targets", but rather should have paid attention to their banking system.  I
believe that the IMF's fixation on fiscal and monetary austerity condemns
many countries to severe economic hardships; ignores the grossly unfair
asymmetry in adjustment burdens; and constrains democratic possibilities
around the world.

But I would take this analysis a step further.  The IMF should get out of
the business of empowering private financial interests by pushing central
bank autonomy as a conditionality requirement.  In large part because of
central bank autonomy there is no room for any New Deal experiments anywhere
in the world.  (So much for the diversity of experience, pluralism, and the
needs of different cultures.)  I would submit that a better world would be
one in which the elected representatives could push the envelope a bit
further towards full employment and socially progressive policies, without
dire fear of their currencies collapsing.  Recall West European post-war
reconstruction -- with Marshall Plan assistance, but also behind the wall of
protective controls on capital and currency flows.  (Recall also that much
of Western Europe did not get to currency convertibility until the late
1950's, or to capital account liberalization until the early 1990's).

I would change IMF conditionalities by removing the requirement that a
country make its central bank independent as a condition for IMF financial
assistance.  (Central bank autonomy was, not surprisingly, a key feature of
the recent IMF and U.S. Treasury negotiations with Turkey).

Clifford, you write that you "would still prefer that the priorities of the
FED be legislated (as they are) and that Congress exercise effective
oversight. But I cannot imagine having monetary policy micromanaged to be
effective."  I too cannot quite imagine Congress effectively micromanaging
the Fed.  But what troubles me most about the Fed is the completely
undemocratic aspects -- that so many of society's interests are not
represented in FOMC meetings, and that the perspective of the so-called
financial community dominates to the point of monopoly.  Would it be such a
disaster for the perspective of industrial (as opposed to financial) capital
to be represented in FOMC meetings -- say the perspetive of the U.S. Chamber
of Commerce or the National Association of Manufacturing?  Or to take it a
step further, for the perspective of consumers, debtors, or labor to be
present in those meetings?  Would democratic discourse in the formulation of
monetary policy be such a clear and present danger to the stability of the
financial markets?  (Financial markets, we should remember, that have been
far from stable at home or around the world under today's configuration of
power).

Finally, I will not for a moment engage in the myth that Congress presently
exercises effective oversight of the Fed or that Congress somehow legislates
the priorities of the Fed.  Humphrey-Hawkins was always a toothless
oversight and vague (no, non-existent) ordering of monetary priorities.

IMF + FOMC = undemocratic (and elitist) policies.  Translation:  IMF
conditions (structural adjustment, fiscal and monetary austerity) +  central
bank independence (also encouraged by the IMF among others) = intolerable
constraints on the ability of democratically elected representatives to
conduct fiscal policy.

Of course the key word in the last sentence is "intolerable":  what is quite
tolerable, even preferable, to today's independent central bankers and
private financial houses, is often intolerable to those who are left behind
by today's economy.

Tim


Timothy A. Canova
Associate Professor of Law
University of New Mexico School of Law
1117 Stanford Drive N.E.
Albuquerque, New Mexico  87131

Tel:  (505) 277-5654
Fax:  (505) 277-0068
e-mail:  canova@xxxxxxxxxxx


-----Original Message-----
From: Clifford Poirot [mailto:cpoirot@xxxxxxxxxxx]
Sent: Sunday, May 13, 2001 10:41 AM
To: 'Canova, Timothy '; ''pkt@xxxxxxxxxxxxxxxx' '
Subject: RE: ``globalization'' and poverty


Tim,

I think you raise an interesting point about the IMF's focus on internal
policies causing the crisis. What I have found in my own research is that
the IMF often focuses on the WRONG set of internal policies. For example, in
Russia, the IMF focused almost exclusively on meeting fiscal and monetary
targets. What they ignored was that the banking system was a classic
Potemkin village. Mixing this Potemkin village with speculative capital
flows was a disaster.

One conclusion I have come to about IMF "conditionality" is not that
"conditionality" is bad, but that it is misfocused. On the other hand you
raise a good point about requiring adjustments by surplus nations. This was
of course part of the original goal of Bretton Woods-to coordinate
adjustments in ways that would not require painful adjustments and thus
threaten to destablize the system.

I found your discussion of the legal implications of monetary policy to be
of interest-but lack the knowledge to fully engage you on matters of law. I
would still prefer that the priorities of the FED be legislated (as they
are) and that Congress exercise effective oversight. But I cannot imagine
having monetary policy micromanaged to be effective.

-----Original Message-----
From: Canova, Timothy
To: 'pkt@xxxxxxxxxxxxxxxx'
Sent: 5/12/01 5:32 PM
Subject: Re: ``globalization'' and poverty

Colin Danby wrote:

>As a matter of logic, blaming internal factors does not require one to
>be a neoliberal.

>In other words, it is possible that state policy is bad, but not for
the
>reasons that a standard IMF-style Polak model identifies.

>To blame all problems on the evil IMF, or on vague metaphors like
>"currency contagion," is just as simplistic as blaming all problems on
>too much government spending.

Dear Colin,

I don't see the term "currency contagion" as a vague metaphor, but as
short-hand for the very predictable consequences of capital account
liberalization, particularly the cross-border investment in stocks and
bonds.  (While currency futures are a response to exchange rate
volatility,
may they in certain circumstances also increase the potential for such
volatility?)

It is not completely balanced or fair to equate the placing of some
portion
of blame on the IMF with the simplistic blaming of all problems on
internal
factors.  The fact is that critics of the IMF are able to offer a
nuanced
analysis of the dangers of the entire range of IMF policy prescriptions,
from capital account liberaliztion to austerity and privatization; and
to
offer alternatives, such as placing the burdens of adjustment on chronic
surplus countries.  But such discussions are more complex than IMF
apologists prefer to engage in.  It's far easier to dismiss IMF critics
as
"simplistic" rather than responding to the particulars of the critics.
The
irony is that IMF apologists are the ones who are simplistic in always
finding fault with the internal policies and structures of deficit
countries
as an explanation for their currency problems, and in always calling for
the
same tired solutions.

I am not suggesting (and never have suggested) that everyone who finds
fault
with state policies is on board the IMF's neoliberal program.  Rather, I
am
suggesting that a recurring tactic of IMF apologists is to focus all
discussion on the sins of the deficit countries, to the complete
exclusion
of external factors and alternative monetary regimes.

Tim



-----Original Message-----
From: Colin Danby [mailto:danbyc@xxxxxxx]
Sent: Tuesday, May 08, 2001 1:26 PM
To: pkt
Subject: Re: ``globalization'' and poverty


Hello Tim,

Just real quickly on your points.

> (1) i agree that firms should be able to raise money, but permitting
> speculation in currency futures is a rather extravagent and dangerous
way to
> do that.

I'm not sure exactly how we moved from one to the other.  Portfolio
flows are going to be important for firms raising money.  Do you
literally mean currency futures?  In any case any cross-border ownership
of claims on payment flows is going to involve exchange rate risk.

> (2) even if, as you say, "Mexican banks have not been especially
wonderful",
> opening up the country's bond markets to foreign exchange risk is not
an
> appropriate response.

I'm not sure what this means.  When did this "opening" take place?
Mexican financial markets have been structurally subject to fx risk for
a long time -- this is part of the argument i made in a paper in the
spring 2000 jpke.

> (3)  it's my recollection that Fidelity and Merrill were both very
exposed
> to the tesobono crash.
> Mexico may not have missed a payment, but at what price and to whom?

as *banks* subject to BIS capital adequacy rules?

I do agree that having the U.S. government as a guarantor of Mexican
payment has over time been a bad thing.  (Jorge Castaneda, now foreign
minister, used to make this argument.)

> (4)  yes, BIS does give out seals of approval.  it's called the Basle
> Accord.  when home mortgages require substantial capital reserves, but

> Mexican government debt requires none, that certainly seems like a
stamp of
> approval.

I know what the Basle accord is, but does the BIS itself ratify
compliance?  I genuinely don't know the answer to this.  One usually
hears of this just in terms of sets of rules that countriew agree they
will try to enforce.

> (5)  yes, neoliberals always blame the "internal conditions" for
currency
> collapse and hardly ever identify the external factors.

As a matter of logic, blaming internal factors does not require one to
be a neoliberal.

In other words, it is possible that state policy is bad, but not for the
reasons that a standard IMF-style Polak model identifies.

To blame all problems on the evil IMF, or on vague metaphors like
"currency contagion," is just as simplistic as blaming all problems on
too much government spending.

Best, Colin