Tuesday, January 19, 2010

Problem reaction solution

Bank of England Governor Mervyn King calls for merger of G20 and IMF

The G20 should effectively merge with the International Monetary Fund, under a radical proposal to overhaul management of the international economy issued by the Bank of England Governor. Mervyn King said that unless politicians act to create an international body with the authority to reform the monetary system, the world would be consigned to another crisis in a matter of years.

Posted by devo @ 09:56 PM (1416 views)
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9 thoughts on “Problem reaction solution

  • Johnny5thumbs says:

    Will the bankers earn any multi-million dollar fees out of the merger? I hope so – It would be a real shame if the lawyers got it all.

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  • tenyearstogetmymoneyback says:

    Is this because he is worried we might soon fall out of the G20 ?

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  • fallingbuzzard says:

    I think its a genuine statement and he is distancing himself from things. No-one wants to go down in history as the one who said nothing

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  • Blah blah, blah. ‘More global institutions required’

    The IMF has seen all this before – kleptocracies creating banking crises. The only difference this time is that the kleptocracies involved are at the centre of global capitalism and are too powerful to be taken down the way the IMF has taken down the kleptocracies of ’emerging market’ countries.

    In practically every crisis in emerging economies the government, banking and corporate elites have overdone it in the good times – taking risks with borrowed money and depending on the government to push any resulting problems onto taxpayers. At first it looks OK – the risky investments create employment and booming economies and governments reward the oligarchs with subsidies, tax breaks etc and pressure local banks to lend them more.. And foreign investors see the boom and invest yet more. Oligarchs build their empires on a mountain of debt.

    Eventually all this hits a wall, the gambles start losing, investors stop investing, the empires can’t roll over their debts and things quickly spin out of control. Government lean on taxpayers to help out their friends but in the end the government runs low on foreign currency and the IMF is called in. The only solution is for the government to get tough with their oligarch cronies, but they try everything to put this off as long as they can. The political problem becomes deciding which oligarchs and which banks take the hit – but the government goes to the IMF only when all else has failed, so the pressure to throw some oligarchs to the wolves is irresistable.

    Once that problem is solved it’s fairly easy to right the economy. It just needs an IMF/government-managed bankruptcy for banks and insolvent corporations.Banks may be told to write down their assets and raise new capital or be taken over by the govenment, shareholders lose out, banks are pruned back or broken up, toxic assets are purged from the system and things start up again.

    What’s different this time is that the oligarchs who hneed to take the hit are on Wall Street. Forget all this Mervyn talk of imbalances and the flow of savings from China, or the drive for homeownership, or lax regulation etc. It’s a crisis that’s no different from the others except that this time the main country (US) won’t run short of foreign currency for a while because it pays its debts in its own currency, which it prints. And instead of taking the necessary hits the oligarchs can get the government to keep supporting failed banks on the grounds that they are ‘the financial system, the sine qua non of all economic activity’.

    Just as with emerging economy crises the US/UK etc. crisis can’t be solved until banks come clean about their liabilities, and they won’t do that because most are insolvent. And bailouts won’t fix this – if the banks identified the size of the bailout needed to fix them they’d ipso facto be revealing how deep they are in the sh!t. So it’ll be a bit more here, a bit more there – without it ever being enough to clean up bank balance sheets and fix the problem. But that is the only way. Not more f**king conferences and global institutions.

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  • A bigger role for the IMF will just mean more moral hazard, this time not only for banks, but for countries who expect to be bailed out. This is precisely what has occurred in Spain, Greece and Ireland. Countries will get into more debt than they would otherwise, leading a rush to the bottom.

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  • Is this man trying to create a diversion?

    Mervyn King is a big part of the problem.

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  • I suppose that countries actually behaving as if they are sovereign states and creating money without the sleight of hand between the treasury and the central bank which make debt slaves of us all is out of the question? All government borrowing is a scam….

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  • Arbeit-macht-frei says:

    This crisis has been planned from the start to usher in the New World Order. With a single world government, a single central bank and a single monetary unit. King is a puppet of the international banking cartel. Lets enjoy the imaginary freedom while we have it!

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  • stillthinking says:

    Bretton woods was a new currency system and the IMF was born out of its failure, which was created to iron out the unavoidable trade imbalances under fiat currencies, the IMF being basically a meta-currency fudge to avoid trade imbalances/temporary largedeficits needing to be settled in gold (trade typically running in balance (!) ).

    King is quite right that system doesn’t work because somehow or other, some countries have managed to run persistent and large trade deficits, the cause incidentally of higher unemployment in those countries. The US are the only country which can run a persistent deficit due to the reserve role of the dollar but they have overstepped the mark considerably. The UK looks ugliest as usual.

    I think what Mervyn is saying is that the system doesn’t work as intended, IMO because dangerously high trade imbalances are being settled through debt being treated as tradeable, and we are now locked into a sick situation where the deficit countries have to produce additional debt to function and the export countries have to accept that debt to function -> eventual disaster.

    Irrespective of any lofty goals, including the governments of the G20 of necessity means that politicians pandering to voters (whose only desire is free money) dictate monetary values. This is interesting though because he is saying between the lines that the monetary system is broken and we have possibly less than a decade to go. I think at this point that there will never be debt write-offs and a cleansing of the banking system, possibly too rotten.

    In terms of gold, revaluation of the dollar in terms of gold was a choice that Nixon had when the original Bretton woods collapsed and it would have been a neat simple solution too. It wasn’t chosen because it rewarded those who hoarded gold and punished those who supported the dollar (and the system). So I very much doubt that gold will be a part of any new solution.

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