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Entries tagged "financial crisis"

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Exchange Rates and Debt Bondage

August 1, 2012 ·

The increasingly sordid LIBOR scandal has pulled back the curtain shielding the international financial system, revealing decaying regulatory bodies and rampant corruption. People around the world are indignant that a key financial benchmark could be distorted with such ease and that this tampering could go unnoticed for so long. This should be a wakeup call around the globe to take stock of other financial tools that are also vulnerable to manipulation and under-regulated.

Argentina's Peso devaluation in 2001 reflected another case of investor speculation. Photo by Alex Proimos / Flickr.The means by which exchange rates are determined is one such example. Often, exchange rates changes are discussed as if they are part of a quasi-mystical realm that is completely disconnected from the real world. But currencies don't rise and fall in accordance with some divine will. They're set by investors and speculators in financial capitals around the world. Basic international monetary economic text books explain that the exchange rate between two countries is determined by the interest rates in each country and the expected future exchange rate between the countries. The formula is: E= Expected future exchange rate [(1+interest rate of the foreign country)/(1+interest rate of the home country)].

The term "expected future exchange rate" is nothing more than a way of making what investors in London, New York, and Tokyo think might happen seem legitimate. When developing countries announce any major policy shifts, new expenditures, or forecasts for their export-driven crops, investors around the globe take note. They change their expectations about the future exchange rate, which in turn shapes the current exchange rate.

The recent debacle demonstrates that financial actors neither impartial nor ethical. The LIBOR scandal should raise concerns about the validity of any financial indicator or benchmark that hinges on the whims of financiers.

The volatility of exchange rates wouldn't be nearly as damning were developing nations able to borrow in their own currency. Investors and financial institutions that loan money to developing countries prefer to be repaid in stable currencies such as U.S. dollars, yen, or euros. Investors contend that the currencies of developing nations are risky because of the likelihood that they will depreciate.

This laughably ignores the role that the investors themselves play in that depreciation. Though countries have the option of pegging their currency to another country’s to maintain a consistent exchange rate, such as Argentina did in the 1990s, international investors can speculate against the peg and break it. This can contribute to a currency's sharp devaluation, such as the one Argentina suffered in 2001.

Many poor countries owing dollar-denominated debts that must be serviced with revenue raised in part in their own depreciating currencies are thus forced to make payments on increasingly expensive, and often untenable, loans.

This constant threat of devaluation, in addition to mounting debt, has shackled developing countries for decades. Impoverished, debt-ridden countries have modeled their policies in accordance with the whims of financial institutions to no avail. The events surrounding the LIBOR debacle shouldn't be considered an anomaly within the financial world. It's simply a new, and rather reliable, red flag signaling the urgent need to repair our corrupt and broken financial system.

<p >Bankers, investors, and financiers wield too much leverage over key financial indicators and benchmarks and regulatory systems are too anemic. The LIBOR scandal isn't an anomaly in an otherwise efficient system. It's a natural outgrowth of an untethered and corrupt sector. Deep reforms that protect against the financial industry's abuses are long overdue.

Hilary Matfess is an Institute for Policy Studies intern and a Johns Hopkins University student.

Conservative Candidate Supports Wall Street Speculation Tax

April 5, 2012 ·

The conservative presidential candidate has decided he can't win unless he raises taxes on the financial sector. No, I'm not talking about Mitt Romney, but this isn't a belated April fool's joke either.

French President Nicolas Sarkozy. Credit: UMP photos.French President Nicolas Sarkozy has rushed through Parliament a new tax on securities trades, hoping it will give him a boost in what is expected to be a close election against Socialist Party candidate François Hollande on April 22. The French government will start collecting revenue from the 0.1 percent tax on stock trades in August.

This is the first clear win in a two-year campaign by labor unions, environmentalists, global health and other groups for taxes on financial speculation. The ultimate goal is to have broad-based taxes on trades of all financial instruments, including stocks, derivatives, and currency, in all of the world's major financial markets. Sarkozy described his new French tax, which applies only to stock trades, as a first step towards a more comprehensive levy at the European level.

Such taxes have garnered widespread popular support because they could generate massive revenue while discouraging short-term speculation that has no real social value and can undermine market stability. Hardest hit would be the computer-driven high frequency trading that makes up about 55 percent of all trading on U.S. stock markets. Such warp speed robot trading played a role in the May 2010 "flash crash" and there are growing concerns that it could cause the next "Big One." Since these guys make money through razor-thin profit margins on zillions of trades, a transaction tax of even a small fraction of a percent could throw a major wrench in their business model. For ordinary investors, the costs would be negligible.

European State of Play

Beyond France, the European debate on financial transactions taxes has moved forward in fits and starts. In a major reversal of their earlier opposition, the European Commission introduced draft legislation last fall for a tax of 0.1 percent on shares and 0.01 percent on derivatives. But momentum behind the proposal has slowed as Germany, a key supporter, has had its hands full with another not so small matter -- the euro debt crisis. As it has sought to win over other key economies to its position on that front, Germany has tried to lower the tension level with opponents of the transaction tax by floating various compromise ideas. But the most vocal opponent, Prime Minister David Cameron, whose party receives more than half of its donations from the financial sector, has shot them all down. John Major, a previous prime minister from Cameron's party, went so far as to conjure up painful World War II memories by comparing the proposed tax to a "heat-seeking missile" aimed at the City of London (the UK's Wall Street).

Nevertheless, Max Lawson of Oxfam GB says that "despite fierce opposition and lobbying by the financial sector, there is a good chance that a coalition of European countries could push ahead and implement a financial transaction tax in 2012." He points out that nine countries representing 90 percent of Eurozone GDP recently wrote to the Danish EU Presidency to ask them to fast-track the debate on the European Commission draft legislation. A minimum of nine countries is needed for an "enhanced cooperation" agreement -- EU-speak for a pact that involves less than the full 27 member countries.

This week Germany's main opposition party, the Social Democrats, increased the odds of a breakthrough by announcing they would block a new EU "fiscal pact" to contain the debt crisis unless the ruling party moved forward on a coordinated European financial transactions tax. They have the votes to back up the threat.

U.S. State of Play

The Obama administration shifted to a neutral stance on the European proposal last fall but they have not yet expressed support for taxing speculation here in the land of Wall Street. There is, however, growing support for the general concept in the halls of Congress, thanks in part to a big educational push coordinated by Americans for Financial Reform. Last week, the 76-member Congressional Progressive Caucus released a budget proposal that includes a tax on trades of stocks, derivatives, credit default swaps, foreign exchange, and other exotic financial products that could generate an estimated $378 billion over the period 2013-2017. A summary of the bill explains that "this is a tax levied directly against the types of opaque, complex trades that Wall Street manipulators used to inflate their profits and were a direct cause of the financial crisis."

On May 18, National Nurses United will spearhead a major demonstration in Chicago to call on President Obama to tax Wall Street. Scheduled to coincide with a G8 summit hosted by Obama, the event will kick off campaigning events and activity around the world as part of a global week of action for financial transactions taxes. The AFL-CIO and other labor, environmental, and health groups have endorsed the Chicago rally.

The G8 summit offers an opportunity to shine a global spotlight on President Obama during a key moment of the election campaign. Perhaps he will be inspired by the conservative European leaders who have shown more nerve in taking on the mighty financial sector.

Getting Around Geithner

March 4, 2012 ·

I've been trying to get the Obama administration to come out of the Dark Ages on the subject of capital controls for three years. The light, however, seems to be shining only outside Washington.

I know capital controls aren't exactly issue No. 1 on Americans' minds. But these tools for managing volatile hot money flows have saved countless families around the world from economic disaster. And while they're most frequently used in developing countries, promoting financial stability anywhere is in the interest of all of us.

Tim Geithner is stuck in the Dark Ages. Photo by U.S. embassy in New Delhi.So in the wake of the worst financial crisis in 80 years, I thought it would be a no-brainer for the U.S. government to give up its longstanding policy of banning capital controls through trade agreements. The North American Free Trade Agreement and dozens of other U.S. treaties severely restrict our trade partners' ability to use capital controls. If governments break the rules, foreign investors can sue their pants off in international tribunals.

In 2009, I was appointed to an official advisory committee to the Obama administration on investment policy, where I talked myself blue in the face about the need for a rethink on capital controls. To pump up the volume, I partnered with Professor Kevin Gallagher of Boston University to organize more than 250 economists to sign a letter to the administration, urging trade reforms to allow capital controls.

Many fancy economists were eager to sign -- a Nobel Prize winner, a former finance minister and Central Banker, a Harvard department head, etc... We got coverage in the New York Times and Wall Street Journal, as well as the opportunity to present the letter to Treasury officials and trade negotiators.

Finally, we received a reply from Treasury Secretary Timothy Geithner. The administration would "seek to preserve" current policy, he said, since, in his view, governments have sufficient alternatives to capital controls to deal with volatility.

Ouch. Geithner made the International Monetary Fund look like a relative beacon of progressive enlightenment. After decades of blanket opposition, the IMF now endorses capital controls on inflows of speculative capital under certain circumstances. They have recommended outflows controls in a number of countries facing capital flight, such as Iceland, and are supporting inflows controls to prevent speculative bubbles in emerging market countries.

What about Geithner's argument that there are plenty of other policy tools to deal with financial volatility? An IMF paper from 2010 went through the alternatives and concluded that in certain circumstances capital controls are still needed.

Fortunately, there are ways to get around Geithner. The greatest hope lies in other countries that may put up a fight over this issue. The Obama administration is negotiating a Trans-Pacific trade agreement with eight other governments: Australia, Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, and Vietnam. Several of these have used capital controls effectively in the past.

For example, throughout most of the 1990s, Chile required a percentage of all foreign investments to be deposited in the central bank for a year, helping to prevent rapid capital flight. Malaysia imposed controls on capital outflows at the height of the Asian financial crisis in 1998. Nobel economist Joseph Stiglitz has written that this allowed Malaysia to "recover more quickly with a shallower downturn and with a far smaller legacy of national debt."

More than 100 economists from countries in the Trans-Pacific trade talks have signed a new letter urging more flexibility on capital controls. This time, signatories include prominent scholars from six of the nine participating governments, including well-known free trade supporter Professor Jagdish Bhagwati of Columbia University and former IMF officials Olivier Jeanne of Johns Hopkins University and Arvind Subramanian of the Peterson Institute for International Economics. The letter will be delivered to each of the nine governments on the eve of a big March 1-9 negotiating round in Melbourne, Australia.

This isn't the only fix needed in our trade agreements. But if we can't move beyond the Dark Ages belief in the wonders of unfettered financial flows, it's hard to imagine winning much else in the way of enlightened trade reforms.

Today Is A Good Day To Break Up with Your Mega Bank

February 16, 2012 ·

Protesters at a Move Your Money action in Wisconsin. Photo by Karen Hickey.Last week's announcement that the Obama administration had reached a $25 billion settlement with five of the nation's largest banks over charges of systemic and widespread mortgage fraud does not mean you should keep your relationship with those banks going. 

As Rebuild The Dream President Van Jones pointed out, the settlement is a rather small first step in his op-ed, "$25 Billion Down, $675 Billion to Go": 

Millions of homeowners and families are still suffering under the tremendous weight of a debt blanket that is smothering the economy. This $25 billion settlement helps only a fraction of those homeowners and addresses only a very limited set of fraudulent behaviors.

The behavior of the mega-banks has been hurtful to American society. That's what the folks at Green America have been saying for months, as they work to get people to move their money out of tax dodgers and prison profiteers such as Bank of America and Wells Fargo. 

Green America has created a ten-step guide for people to move their money to a new community development bank or credit union. 

The Wolf, The Wool and The 99%

November 14, 2011 ·

Who’s crying wolf and pulling the wool over our eyes when they should be hiring us to shear the sheep and make some wool hats for the young Occupyers facing a cold winter while fighting for the 99% of us? Is it the TEA Party? Is it the Republican Party? Is it the Democratic Party? Is it President Obama? Is it the Media?

Collectively, let’s stand with the Occupiers in at least 1400 communities nation-wide and make a few things clear to those who seek to mislead us:

There is no Deficit Crisis.
There is a Jobs Crisis.

There is no Budget Crisis.
There is a Priorities Crisis.

There is no Domestic Needs Spending Crisis.
There is a Defense and War Spending Crisis.

There is no Taxed Enough Already TEA Party Crisis.
There is a Corporate and Super-Rich barely-taxed-at-all Revenue Crisis.
There is no regulation crisis. There is a climate crisis.

Finally--There is no lack of federal funds.
There is a lack of political will to spend the funds on those things which matter most to the well-being of 99% of us.

These remarks and others were made at a recent Fund Our Communities Town Hall. Fund Our Communities is a growing coalition of community groups and concerned citizens who would like to see a reduction in military spending and a reprioritizing of federal dollars to our communities so that we may have good jobs and adequate access to vital human needs, such as quality healthcare, education, nutrition and transportation. IPS Fellow Karen Dolan and IPS Newman Fellow, Matias Ramos were speakers at a Fund Our Communities Town Hall in Prince George's County Maryland this month. Also joining them on the panel were: Congresswoman Donna Edwards (D-MD), Prince George's County Executive, Rushern Baker, MD State Senator Paul Pinksy, former MD State Senator David Harrington, MD State Delegate, Aisha Braveboy, and Fund Our Communities organizer Alex Welsch.

Matias' remarks focused on the Occupy Movement and the MD DREAM Act. Please listen to him here.

Karen's remarks are centered on the aforementioned. Click here to hear her full presentation and please comment and engage in dialogue below.

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