Monday, November 17, 2008

IMF and World Bank: Obsolete Financial Institutions?

Born out of the Articles of Agreement drawn up during the Bretton Woods Conference of July 1944. Are the IMF and the World Bank still relevant financial institutions in the 21st Century?

By: Ringo Bones

As the scheduled G20 Summit of the November 14, 2008 weekend at Washington, D.C. attempts to solve our current global financial crisis. Many leading academics of the financial world now wonder if there is a need to drastically overhaul the workings of the International Monetary Fund (IMF) and the World Bank since these institutions seem powerless in reversing the tide of current the global financial crisis whose worse is yet to come. Plus the criticisms of an overwhelming majority about the two institutions’ development programs which seems to entrap poor countries into an endless cycle of debt. Barring radical policy changes does the IMF and the World Bank still relevant in the 21st Century economic globalization that’s fuelled by credit and it’s derivatives?

Back in July 1944 at the Bretton Woods Conference - which was held in Bretton Woods, New Hampshire as a post World War II reconstruction and global development plan. The soon to be victorious Allied Nations were already planning their post World War II economic development in which Adolph Hitler was even powerless to utter the phrase “Are you already measuring the drapes?” in protest to this conference. The historic conference led to the establishment of The International Bank for Reconstruction and Development – also known as the World Bank – together with the International Monetary Fund or IMF under the Articles of Agreement. Among the main objectives of the former were stabilization of the foreign exchanges and improvement of foreign economic relations. Since the US dollar was then the form of currency in greatest demand, contributions to the Fund by the United States were to be an important ingredient in worldwide stabilization. The Bank’s headquarters are in Washington, D.C.

Presently, after many years of change, the consensus reached at the Bretton Woods Conference – were its used to be that various currencies were pegged against the US dollar and backed by gold as a means of global financial stability – no longer holds true. There are other countries that had managed to transform themselves into a formidable economic superpower rivaling that of the United States. Like China for example, with the country’s large currency reserves and strong economy has the ability to undervalue her own currency. Thus gaining an unfair advantage when it comes to the pricing of export products. But is our present global economic structure that’s modeled after the consensus reached in the Bretton Woods Conference of July 1944 is now having trouble keeping up with its commitment of promoting development of poor countries without entrapping them to an endless cycle of debt? The inability to efficiently adapt to recent financial trends, not to mention in tackling our current ever deepening global financial crisis.

Recently the G20 Summit in Washington with the official banner of “ Summit for Financial Markets and the World Economy” was beginning to be seen by many as “Bretton Woods Part II” or “Bretton Woods Version 2.0”. This is so because it has set some pretty lofty goals – in the staunchly conservative financial world it does pass muster as lofty - to end our deepening current global financial crisis. The world leaders in the G20 summit had very much reached a consensus to promote free market capitalism or free trade and the rejection of wholesale protectionism. Other notable reforms of the 10-page long G20 declaration include new regulations to curb risky practices of banks and other financial institutions. Credit Default Swaps – those extremely sexy financial instruments that instigated the current global financial crisis – are now targeted for stricter regulation by allowing them to be processed on a centralized clearinghouse for better monitoring.

The existing practices that make “common folks” bedevil the world’s two leading financial institutions, IMF and World Bank, were not tackled. Like measures to end free trade distorting trade subsidies and “debt entrapment” of poor nations. Though the powers-that-be say that the latest G20 Summit is only a part of a series of high-level meetings aimed at resolving our present financial crisis, I just hope that they will to their part to end our existing global financial woes. After all, this recovery process requires the involvement of everyone of us. I mean, isn't the G20's "Global Economic Crisis Action Plan" granting a bigger role for developing nations just a euphemism for "we need everyone's help"?

Thursday, November 13, 2008

Should the US Government Bailout Heritage Companies?

As the US financial crisis grows inevitably deeper, should the US Government bail out “heritage companies” via the American taxpayer’s money?

By: Ringo Bones

America’s “big three” automakers, namely: GM, Chrysler, and Ford had been in the headlines lately but not for the good reasons. The US top three automakers had been hard hit by the ongoing economic crisis, which if left alone the three leading car manufacturers would go bankrupt. But the question now is, should the US Government do what it can to save heritage companies – which America’s three leading carmakers surely does qualify as such – even to the extent of using the taxpayer’s money?

Throughout the developed world, heritage companies had always been perceived as an integral part of the country that they originate. The German government even legislated laws that only allow overseas Sovereign Wealth Funds extremely limited investments in their own heritage companies despite howls of protectionism accusations.

Ever since the global financial crisis became too big to ignore, the US Government acted upon several schemes to save ailing companies, which are perceived as heritage companies by many. Like the two leading equity loan providers of America: Fannie Mae and Freddie Mac, which if allowed to go bankrupt could make millions of American families homeless. Thus qualifying them as the most indispensable of the American heritage companies.

Though cars can be considered a luxury when compared to a secure roof over your head, America’s “top three” automakers are thus nevertheless very important heritage companies. Due to their historical significance and they also employ thousands of workers across the country. America would never be the same without them. But should the US Government save them? After all President-elect Obama’s economic recovery plan has a heavy emphasis on fiscal discipline.

To me at least, a financial bailout by the US Government on ailing heritage companies do make fiscal sense. And since the breakdown of the preexisting American free market capitalism is due to too much laissez-faire when it comes to government regulation. The switch over to state capitalism would be smoother and could serve as one of the conditions of a government funded bailout package. Which would make the economic recovery process more efficient since the companies can now be tailored to be in sync with the government’s economic recovery process.

Mortgage Backed Securities: A Serious Reaganomics Oversight?

The impact of unregulated Mortgage Backed Securities only reared its ugly head during the second half of 2007, turning the subprime mortgage crisis global. Human greed at it’s worst?

By: Ringo Bones

Well known for his staunchly laissez-faire economic policies, the former US president Ronald Reagan and his administration will forever be remembered for defending the underlying principles of American free enterprise. And also of promoting the Protestant Work Ethic as one of the leading principles that made the American economy what it was which made it outlast the former Soviet Union. But despite of the Reagan Administration’s sweeping economic reforms – affectionately nicknamed “Reaganomics” – that made the “Go-Go 80’s” possible. One of its serious oversights will forever mark the 1980’s as the “Decade of Greed”. Sadder still, the problem that drove our current global economy to the brink originated during this time period.

Back in 1977, Salomon Brothers and Bank of America jointly introduced the world’s first ever Mortgage Backed Securities or MBS. A college dropout initially hired to work in Salomon Brother’s mailroom, Lewis Ranieri, was assigned the task of selling these somewhat untested securities / bonds. Before the extensive Reagan Administration era lobbying in Capitol Hill made it available throughout America, Mortgage Backed Securities used to be legal in only 15 US states. Lewis Ranieri was then known to have a trader’s nerve and a salesman’s persuasiveness won lobbying battles in Washington that eventually removed legal and tax barriers against MBS. Ranieri then headed up a Salomon Brothers’ team that developed Collaterized Mortgage Obligations. Collaterized Mortgage Obligations are 2-year, 5-year, and 10-year Mortgage Backed Securities that are packaged to appeal to a variety of low, medium, and high-risk investors. Thus paving the way for the subprime mortgage crisis.

Though it is worth noting that the preexisting ideological climate of the Reagan Administration frequently confuses the Protestant Work Ethic with massive corporate earnings thus causing them to turn a blind eye when it comes to financial regulation. After all, it something earns money, then it must be good - right?

But everyone back then was too blind to see that Mortgage Backed Securities for all intents and purposes were high-risk bonds. As financial instruments, they are backed by more speculative or subprime mortgages, loans made out to high-risk borrowers. Which made them yield more interest than low-risk bonds. For 30 years or so, it was a veritable source of easy money until it triggered a subprime mortgage crisis that even hedge funds can’t even smooth out.

The incoming Obama Administration will now be facing a monumental task of solving a financial mess that can trace it’s roots back 30 or so years ago. It took 30 years of regulatory oversight to create our current financial crisis that is now sweeping across the entire world. Even the “greedy” people who caused this problem in the first place are no longer as rich as they used to be. And they used to claim that greed is good.

Monday, November 10, 2008

Is Obamanomics Socialism?

President-elect Barack Obama’s plan to save the US economic system has always been referred to by his detractors as socialism. But is “Obamanomics” merely just a system for spreading the wealth like it’s detractors claim it to be?

By: Ringo Bones

Our current global economic crisis can trace its pedigree back to the days of Reaganomics – i.e. the former US president Ronald Reagan’s view on economics that the Federal Government hinders rather than helps the US economic system. “Big Government” is bad for business and should get out of the way. Although right in many respects, I do find Reaganomics - as it was then affectionally called - somewhat hypocritical given that then president Reagan is staunchly against Marxist-Leninist Socialism / Communism. Yet he gave Wall Street overlords tax breaks and too much power.

It is a well-known fact that in the financial world – especially in the US – the existing financial power structure preclude their client’s opinions and views from ever becoming a factor in directing a financial company’s fiscal decisions. Thus the clients (this means every investing US taxpayer, including those government powers-that-be) must trust the financial company’s “top brass” – the Wall Street “ruling elite” to make the correct decisions for them. Using former president Ronald Reagan’s dictum “Trust but verify”, this makes the belief in an all wise and ever caring Wall Street a veritable twofold lie. A twofold lie because this assumes that the "ruling elite” at Wall Street knows what they are doing coupled with the assumption that the Wall Street “ruling elite” cares about the clients they are supposed to serve. But since socialism rests on the idea that one person can make a decision for another person without a working system of checks and balances, does this make the laissez-faire nature of President Reagan style economics / Reaganomics really just socialism in disguise?

I’m also one of those people who was never been able to have warmed up to the concept of trickle down economics – giving the ultra rich tax breaks to foster economic growth and working class prosperity. I’ve always viewed it like the way primitive cultures conduct human sacrifices to appease the gods. I mean if giving incentives to the very rich in the form of tax breaks really did benefit them, two things could have happened. Either they – the Wall Street ruling elite - would have been building mansions on the Moon by now thus generating an employment bonanza by hiring maintenance crews or have manage the economy so efficiently since the Reagan Administration that our current global financial crisis would not have happened. Ronald Reagan’s greatest oversight is probably the US financial system deregulation given that the root cause of the subprime mortgage crisis – namely mortgaged backed securities – had been busy making inroads into Wall Street since 1977.

Ever since the days of the Great Depression, successful schemes designed to fix the US economy always involved spreading the wealth. Each time the US Government creates roads, dams, and other infrastructure, it tends to spread the wealth around in the form of jobs. This scheme differs itself from Marxist-Leninist Socialism because it is governed by checks and balances that keeps corruption and malfeasance to the absolute minimum. But President-elect Obama better act fast on his plans to fix the American economy via infrastructure rehabilitation before the obstructionist policies of the opposing party can take hold. President-elect Obama should take advantage of this once in a lifetime chance of a party majority in the legislature to test out his Obamanomics to prove that there is hope yet for the long ailing US economy.