Paul Krugman and Dani Rodrik are out with dueling op-eds on the subject of the latest bout of financial-market craziness in places like Argentina and Turkey. Both men have been following emerging-market crises for decades; both indeed, are world-class experts on such episodes. What’s more, both economists have a broadly left-liberal worldview: there’s no deep ideological or philosophical rift here. And yet the two seem diametrically opposed.Reuters — Econoblog
Who’s to blame for the emerging-market crisis?
Felix Salmon
Who's to blame. First, the institutional structure imposed under neoliberalism that rests on the myth assumption of "free markets, free trade, and free capital flows." Secondly, the requirement that the economy and therefore, the financial system as well, be run by capital for capital preservation and accumulation, the myth assumption being that capital formation is the sine qua non of growth, which includes the myth assumption that "growth" is identical with greater prosperity.
Of course, this is only part of the mythology which is ultimately to blame for recurrent social, political and economic problems. But it is an important part of it. There is no fix in an ill-designed or broken system without overhauling the system, or at least reforming it in a major way.
Neoliberalism is not only antithetical to democracy but also incompatible with distributed prosperity.
2 comments:
Rodrik sounds good, like all Harvardites, he knows the sound bites and what is expected to be repeated to meet peer expectations but the analysis is about paper thick.
Every single time governments allow banks to make loans in foreign currencies, this happens.
My problem is that Salmon presents the issue as if there were some underlying deep issue that can't quite be quantified and that Krugman is "partially" right, while Rodrik "mostly" captures the essence of it. It's bleating simple.
Discourage trade in foreign currency with strong regulations that make it more expensive and difficult to hedge. Simply prohibiting domestic banks from lending in anything but domestic currency for any duration is how you accomplish it while at the same time prohibiting the sale of any domestic real estate or capital goods in foreign currency. If people/banks don't owe foreigners foreign currency there is no panic to hedge all at once.
This is exactly where the Chinese are right-on economically. The notion of a reserve currency is the problem. All trade should be done with bi-lateral currencies. Period. No country, United States included have sufficient fiscal ability to offset the wild swings, and long giant sucking sounds of capital flows into central banks and out of private banks, then back again. Most countries do it because they don't have capital and credit markets. It is circular though, they don't have capital and credit markets because they use foreign markets.
That's why people like Michael Hudson and Henry c. K. Liu have long advised the Chinese to do, and they seem to have picked up on it.
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