Re: Stiglitz on Global Financial Reform

[William F Hummel <wfhummel@xxxxxxxxxxx>]

Gunnar Tomasson wrote:

>In his article below, Joseph Stiglitz makes an imaginative proposal for SDR creation by the IMF.
>
>Stiglitz did not spell out the "details" of how his proposal might be implemented.
>
>As and when these were worked out, the proposal might become the cornerstone of an integral world-wide economic reconstruction effort, with newly-created IMF SDRs absorbing the external financing impact of public and private sector investment projects across the globe.

Stiglitz proposes the creation of new "global greenbacks" without
making clear how they differ from the existing special drawing rights
(SDRs) under the IMF.    He justifiably criticizes the IMF, yet
doesn't explain how this new global greenback will be created and
administered.  I'd appreciate any clarification on this.

Stiglitz condemns the huge US trade deficit, but notes that:
"The arithmetic of global trade implies that the sum of all trade
deficits equals the sum of all trade surpluses.  This means that one
country's deficit is another country's surplus.  If some countries,
like Japan and China, insist on running surpluses, then other
countries must run deficits.  Thus deficits are as much the fault of
surplus countries as they are of deficit countries."

As I have been arguing, the US trade deficit is not _caused_ by
excessive borrowing from foreign trading partners.  Rather it is the
inevitable result of their policies to promote trade surpluses for
domestic reasons, including actively supporting the exchange rate of
the dollar vis-a-vis their own currencies.

Stiglitz goes on to say:  "If every country tried simultaneously to
cut back on their trade deficits, but no pressures were imposed on the
surplus countries, earlier fears of a deflationary bias in the global
economy would be realized."

Indeed, if the US created effective barriers to imports in an effort
to reduce its trade deficit, the result would likely be a serious
world-wide depression.  Other countries without exception complain
about the US trade deficit because of the effect it may have on the
exchange value of the dollar and thus the value of their own
dollar-denominated assets.  Yet no country appears willing to revise
its policies to reduce its bilateral trade surplus with the US.  I am
well aware that the US also actively protects some of its industries
with tariffs or subsidies, but the aggregate result is obviously in
favor of those exporting to the US.

Stiglitz proposes some sort of an international body, a World Court,
that would administer cases of sovereign bankruptcy with the object of
providing work arounds that don't impose excessive demands on the
economy of the bankrupt nation.  While this is laudable, I find it
somewhat unrealistic.  To make it less so, he needs to be far more
specific on how it would be implemented.

Finally, it seems to me that there are many nations that simply don't
have the institutions necessary to make proper use of the funds that
Stiglitz would provide through his new "IMF".  This is  particularly
true of those nations in which autocratic rule has been the norm, as
in much of Africa, South America, southeast Asia, and the middle East.
Financial rescue packages in those regions have often simply ended up
in Swiss bank accounts and lavish lifestyles for the autocrat and his
retinue.  Stiglitz needs to address this problem and not lump the
countries together as if they were all well-behaved partners in his
grand scheme.

William F Hummel