World Bank Economist Sees the Problem:
Capitalists are Afraid of Free Markets
Here are two recent news items about the World Bank and the International Monetary Fund (IMF). You can see the problem -- capitalism has become anti-free market, with the biggest capitalists becoming monopoly-seeking croneys. As the split widens, it gets more and more obvious that free markets frighten capitalists.Item One
World Bank chief economist Joseph Stiglitz charged that problems blamed for the financial crisis in Asia were also rife at troubled US-hedge fund Long-Term Capital Management.
Stiglitz, speaking at the annual board meeting of the UN Conference on Trade and Development, said woes blamed for Asia's turmoil, such as crony capitalism, conflicts of interest and high debt levels, were also hallmarks of the fund.
LTCM, a once high-flying and sophisticated hedge fund, narrowly avoided collapse last month with a 3.5 billion dollar bailout by 14 firms, including some sharehoders, led by the US Federal Reserve Bank.
Stiglitz charged that "there was at least an appearance of crony capitalism" at LTCM, where "one of the principals was a former vice chairman of the Fed, which led the rescue effort."
While South Korea, Thailand and Indonesia were heavily criticized for acquiring mountains of debt, the "magnitude of debt (at LTCM) was unbelievable," Stiglitz said.
LTCM had an exposure of "somewhere between one to one and a half trillion dollars based on a capital of between three to five billion dollars," he said.
"And American and Swiss banks were lending to this higly leveraged hedge fund."
There was much talks in East Asia about (lack of) competition, he said. "And yet what's remarkable here is the concentration of economic power, the fact that the actions ofone firm could have a systemic effect on global capital markets," which was one justification for the bailout.
Stiglitz, in a 90-minute speach to UNCTAD delegates, focussed on the flaws of what he called the "Washington consensus" such as its number crunching singlemindedness and on outlining a new development plan taking into account social and psychological realities.
Friction between the World Bank and International Monetary Fund surfaced at their annual meeting in Washington at the beginning of October.
World Bank president James Wolfensohn told world finance officials it was now time "to go beyond financial stabilization" to engage in a debate "where mathematics will not dominate humanity, where the need for often drastic change can be balanced with protecting the interests of the poor."
IMF, World Bank Officials Differ On Response To CrisisA split emerged Friday between the World Bank and the International Monetary Fund (IMF) over the appropriate monetary policy response that should be followed by countries that are swept up in the financial maelstrom that is swirling around the globe.
On Wednesday, the IMF's chief economist Michael Mussa stood by the Fund's view that countries whose currencies come under severe downward pressure should raise interest rates to prop up their currency and to slow the outflow of capital when this occurs.
But Joseph Stiglitz, chief economist of the IMF's sister organization, the World Bank, told journalists on Friday that he favors a policy approach that is diametrically opposed to that put forward by Mussa. In remarks to a press conference on Wednesday, Mussa said that in a country whose currency is "very enormously depreciated" by market pressures and where domestic banks and businesses have a high degree of foreign currency indebtedness, "monetary conditions have to be firmed at least moderately in order to resist overwhelming depreciation."
Mussa noted that higher interest rates in Thailand and Korea had helped to stabilize the situation in these countries even though the monetary tightening had been "somewhat tardy."
He observed that interest rates have come down again in these countries, and in Korea's case to below the levels prevailing prior to the crisis. In Indonesia, where monetary conditions weren't really tightened, Mussa said, there was "a disaster" in which the exchange rate depreciated "out of sight." Mussa observed that "I think those who argue that monetary policy should have been eased rather than tightened in those economies are smoking something that is not entirely legal."
Stiglitz from the World Bank observed wryly that "I didn't inhale; I wasn't even smoking." He said that in his view, Mussa "hasn't looked at the econometric evidence of this."
"Looking at this approach not from an ideological perspective but looking at it from the way anyone who is serious about economics would look at it, looking at the data sets, we go through both the theory and the evidence. on the issue and you'll see that Mr. Mussa is wrong," Stiglitz said.
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