To be able to prevent a crisis one has to know its origins or possible causes. As with previous financial crises, the current crisis is generally treated in a too simple way, not taking into account more fundamental causes than the problem with mortgages and new financial instruments.
Jane D'Arista is one of those economists who have a broader and more profound view on crisis emergence and crisis prevention. Commenting on emails by John Williamson and Stephany Griffith-Jones, Jane applauds “the discussion of the yen carry trade and its role in both financing excesses and supporting balance of payments imbalances”. The yen carry trade is a topic discussed by John in his paper and Stephany suggested that macroeconomic action would be one way to curb it, but that it should be accompanied by regulatory actions, to ease the task of monetary authorities, “who if not face a wall of money, that makes their interventions more difficult and expensive.”
Jane adds, “Leverage, too, was a critical ingredient in the crisis”, and notes, “national regulators completely ignored the BIS and IMF warnings about the amount of speculation in the global financial system and the threat it posed for a systemic meltdown.”
Jane disagrees with Stephany's view “that there is no link between (global) imbalances and the financial crisis and that US budget deficits were the cause of the inflows that funded the consumption spree. The inflows were particularly strong during the period of the budget surpluses in the late 90s when the spending spree was shifted from the government to the household sector and took off from there. Policy was part of the problem - including the strong dollar policy supported by the Fed's attention to the interest rate differential between the dollar and other major currencies in that period - but the capital flows problem has been a mixture of many contributing factors.”
Jane stresses, “So far, the IMF has contributed good analyses of developments and has - like the BIS - called attention to both macro and financial excesses but without effect. Bill White and the BIS have also offered prescriptions for a macroprudential framework (including in the FONDAD volume) that need further exploration. The need to redirect central banks is, in my view, key to reviving stability and I am working on a paper for the Minsky conference at the Levy Institute (April 17-18) that deals with that issue.”
I look forward to seeing Jane’s paper, which should be ready by now, April 17, and hope to report on it in a next post.
I hope Bill White and others (Mark Allen? Charles Wyplosz?) will join the discussion.
There are more papers I will discuss on the blog like the ones I received from Jan Kregel, José Antonio Ocampo (co-authored by Stephany) and Rob Vos.