Thursday, July 22, 2010

Dodd-Frank must be the first – not the last – step in a long-term restructuring of financial markets

By Michael Prowse, Senior Visiting Fellow

After Britain’s first military victory against Germany in the Second World, at El Alamein in Egypt, Winston Churchill cautioned against excessive optimism. “This is not the end,” he said. “It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Thursday, July 15, 2010

Why the governance rules of the Financial Stability Board will not satisfy any true democrat

By Michael Prowse, Senior Visiting Fellow

Plato would have supported the Financial Stability Board (FSB) because he believed in rule by benevolent “Guardians”. He rejected democracy partly on the grounds that only an elite of knowledgeable experts can be trusted to make the “right” decisions for the rest of us.

Wednesday, July 7, 2010

Moises Schwartz makes the IMF’s critics an offer they should not refuse

By Michael Prowse, Senior Visiting Fellow

Moises Schwartz, the new director of the IMF’s Independent Evaluation Office (IEO), is reaching out to the Fund’s critics. At a briefing at New Rules last week he urged the non-governmental sector to propose topics for investigation. As Mr Schwartz is drawing up a work programme to present to the IMF’s Executive Board this is an opportunity that should be grasped.

Tuesday, July 6, 2010

Korea's opportunity: the G20's Seoul summit is shaping up to be the most significant since London, 2009

By Michael Prowse, Senior Visiting Fellow

Toronto was just a holding operation for the G20. Amid signs of flagging growth in many countries, the assembled leaders agreed to disagree on the need for further fiscal stimulus. All the other important decisions – for instance on bank capital requirements, on IMF reform, on the broader financial regulation agenda, on the European sovereign debt crisis, and on what to do if the world economy does sink back into recession – were postponed until the Seoul meeting.

Tuesday, June 29, 2010

Toronto, the ghost of Keynes and the future of the international monetary system

Toronto, the ghost of Keynes and the future of the international monetary system

By Michael Prowse

If Lord Keynes were alive today how would he have reacted to last weekend’s G20 meeting in Toronto?

Like President Obama, he would probably have accepted the consensus view that fiscal deficits should be halved by 2013, while worrying that too much fiscal consolidation too soon could derail the global recovery. He would also have accepted the logic of delaying the implementation of more stringent rules on bank capital until the recovery is better established.

Wednesday, June 23, 2010

Austerity versus growth: why can’t Europeans be more like Americans?

By Michael Prowse

Debate at this weekend’s G20 meeting in Toronto is likely to focus on the rift that has opened between the US and Europe on macroeconomic policy. The US view is that governments should spend now, so as to create jobs and sustain economic growth, and save later. The European view is that fiscal consolidation is the urgent priority: governments must spend less, now and in the future.

Friday, June 18, 2010

The significance of leverage in financial crises: what Shakespeare can teach economists and regulators

By Michael Prowse

Who remembers the interest rate that Shylock charged Antonio in the Merchant of Venice? Nobody – but everyone remembers the pound of flesh that was agreed as collateral.

John Geanakoplos, the James Tobin professor of economics at Yale, argues – only half in jest – that Shakespeare had a better understanding of finance 400 years ago than do most regulators today. Shakespeare understood that most loan contracts involve negotiations over two variables, rather than one. The borrower must worry not just about the interest rate demanded but also about the collateral that he has to put up to get a loan at all. Sometimes the collateral demanded is far more significant than the interest rate – as in Antonio’s case.

Monday, June 14, 2010

The G20 and global finance: 20 ministers in search of a policy

By Michael Prowse

In Luigi Pirandello’s famous play there were six characters in search of an author. Each had a story to tell but as yet nobody to relate it. The situation in global finance today is somewhat similar: a rather larger number of presidents and finance ministers are just as desperate for a script. They have the best opportunity in decades to redraw the ground rules of international finance. But so far they have no long-term strategy worth talking about.

Wednesday, June 9, 2010

Incomplete globalization, human nature and the problem of current account imbalances

By Michael Prowse

One of the striking aspects of today’s global economy is a distribution of external surpluses and deficits seriously at variance with what textbook theory leads us to expect.

The advanced economies ought to be running current account surpluses and the emerging economies current account deficits. As the counterpart to their trade surpluses the rich nations ought to be lending to, and investing in, the poor developing world. Why? Because returns on investment ought to be much higher in regions of the world where capital is scarce and labour abundant. In effect, young workers in emerging economies ought to be paying the pensions of the ageing populations of the developed world.

Friday, June 4, 2010

Soros, bad economic theory and the origins of the financial crisis

By Michael Prowse

Writers of detective fiction typically waste little time describing the murder. They reserve their ingenuity for the part that grips their readers. Who did it and how? Once the shock of the ghastly event has worn off, the focus naturally shifts to causes and motives.

It is much the same with the financial crisis of 2007-09. We are no longer so much interested in what happened as in why it happened. Who or what caused it? Broadly speaking there are four competing views.

Wednesday, June 2, 2010

EU financial regulation: Michel Barnier’s chance to outshine Tim Geithner and Larry Summers

By Michael Prowse

Don’t worry: I don’t expect Michel Barnier, the top European financial regulator, to come up with startlingly bold proposals this summer – proposals that would prove his critics wrong. But there is little doubt that the EU could, if it chose, take a tougher line than the US Treasury against what it calls “systemically important financial institutions” (SIFIs) – the likes of Goldman Sachs, Citibank, J P Morgan, Barclays and UBS.

Thursday, May 27, 2010

Europe cannot agree with itself, let alone the US on financial market reform

By Michael Prowse

If Tim Geithner, US Treasury Secretary, did any blunt talking in Europe this week, it was strictly reserved for off-the-record meetings. In public he was as diplomatic as he was optimistic. He failed to chide Germany for not adopting more expansionary macroeconomic policies and claimed that the US and Europe are “in a very good position to reach agreement on a global framework to implement common rules for regulating financial institutions”.

Wednesday, May 26, 2010

Don’t write off the EU

By Michael Prowse

From a US perspective Europe may appear to be self-destructing. Speaking on Tuesday Oli Rehn, the EU monetary affairs commissioner, warned of a “lost decade” in the wake of the financial crisis if member states failed to introduce structural economic reforms to boost productivity and innovation. The euro, meanwhile, seems in free fall with talk of parity against the dollar against $1.60 as recently as the summer of 2008.

Introducing New Rules Blogger Michael Prowse

Dear Members of New Rules',

It is my pleasure to introduce Michael Prowse, a volunteer with a background in journalism. Thanks to Michael, New Rules will be setting up a blog—which in turn requires an overhaul of our website. We should be operational in about a week.

Michael’s first posting is copied below. He is a British citizen, so not surprisingly his first posting is on the financial situation in Europe. Please join me in welcoming Michael, and start writing your own submissions, or comment on Michael’s piece.

Jo Marie