The Spectre of Public Debt C.P. Chandrasekhar

Pegging their arguments on the still-ongoing drama relating to sovereign debt in Greece, conservative opinion is making a case for a reduction of the size of public debt in developed and developing countries across the world. The latest signatory to the appeal is IMF chief Dominique Strauss-Kahn who reportedly told an audience at the inaugural conference of the Soros-funded (Financial Times, 10 April 2010) Institute for New Economic Thinking that public debt in the advanced economies is forecast to rise by about 35 percentage points on average, to about 110 per cent of gross domestic product in 2014. In his…

FDI and the Balance of Payments in the 2000s C.P. Chandrasekhar and Jayati Ghosh

The most quoted indicator of the success of economic reform is the noticeable rise in the inflow of foreign direct investment during the last decade and a half. However, the available Indian evidence on the performance of foreign direct investment companies suggests that their balance of payments consequences are adverse. FDI_Balance (Download the full text in PDF format)

Financial Euphoria and Aftershock Jayati Ghosh

It speaks volumes for the nature of capitalism that a slim little book first written more than half a century ago can still seem so fresh and relevant. John Kenneth Galbraith’s wise and delightfully written tract “A Short History of Financial Euphoria” has just been reissued by Penguin Books, but one variant of it has been almost continuously in print since it was first published to mark the twenty-fifth anniversary of the Great Depression. As Galbraith himself charmingly notes in his Preface to the 1993 edition, every time the book was about to pass out of print, some new speculative…

Speculation against the Euro Luiz Carlos Bresser-Pereira

This speculative attack is another evidence of the need to strictly regulate the banks and hedge funds Financial markets are incorrigible. Speculation now turns against the euro or, more specifically, against Greece, and will later attack Portugal and, subsequently, Spain - the most fragile countries in the eurozone. The price of the credit default swaps (CDS) aimed at protecting creditors against a possible Greek bankruptcy went from a level of 120 in October 2009 to 419 on February 9, 2010. People who buy CDS at such a high price are betting on the country's bankruptcy, which will convert this high price into…

The WTO as Barrier to Financial Regulation Jayati Ghosh

In most parts of the world today (except perhaps in India, where optimism about the benefits of unregulated financial markets still seems to dominate over the undisputable evidence of their many fragilities) most policy makers talk about imposing regulations on the financial sector. Of course, the events of the past two years in the world economy, and particularly in the core capitalist countries, have brought this about, for it is quite a change from the earlier presumption of “efficient markets” that led to widespread lifting of controls and shift to “self-regulation” in the financial sector. In the United States, President…

The Peril of Paradigm Maintenance in the Face of the Crisis Andrew Fischer

This paper addresses how Keynesian narratives are being used to reconstitute an orthodox policy paradigm in the face of the current economic crisis. These processes of paradigm maintenance need to be urgently addressed if the current crisis is to be leveraged for a return to a more progressive, inclusive and developmental policy paradigm in both the North and the South. Failing this, current orthodoxies risk being reconstituted or even reinforced, and we could find ourselves soon entering a new round of development debacles similar to those of early 1980s. paradigm_maintenance (Download the full text in PDF format)

Controlling Dangerous Financial Products through a Financial Precautionary Principle Gerald Epstein and James Crotty

High risk, opaque, and complex financial products have been among the key causes of the current economic crisis. Not only have these products helped cause the crisis but they have also made it extremely difficult to resolve. In response, a number of analysts have proposed a requirement that financial products be approved by a government regulatory authority before they can be marketed. In this paper the authors outline how a financial products regulatory authority would work. controlling_dangerous (Download the full text in PDF format)

Restructuring the Financial System: A synthetic presentation of an alternative approach to financial regulation Mario Tonveronachi and Elisabetta Montanaro

Rejecting the current approach to financial regulation based on a laissez faire regime on risk production and allocation, the authors advocate that regulation must contain and monitor systemic risks through a top-down approach, while the resulting morphology must be consistent with market discipline imposing bankruptcies. Apart from rules for risk containment with a sharp distinction between leveraged financial institutions, non-leveraged financial institutions and non-financial firms, the proposed new framework also covers rules for derivatives, markets, transparency, crisis resolution, multinational financial institutions as well as supervisors’ powers and accountability. financial_system (Download the full text in PDF format)

Are we heading for Another Global Primary Commodity Price Surge? C.P. Chandrasekhar and Jayati Ghosh

Following the unprecedented volatility of global commodity prices in 2007-08, it was widely predicted that the global economic crisis would generate a dampening effect on such prices. But the recent revival of prices especially in some commodities suggests that this perception may be premature. Examining recent trends in global commodity prices and the reasons behind them, the article assesses the prospects for prices in the immediate future. Commodity_Price (Download the full text in PDF format)

Some Observations on How to Deal with the Problem of “Too big to fail/save/resolve” Jan Kregel

The current approach to the financial crisis, of resolving small- and medium-size banks through the FDIC while giving direct and indirect government support to the banks that are considered too large to be wound up, has created an even smaller number of even larger banks. However, there are at least three separate problems associated with bank size that suggest that this approach may not reduce the systemic risks of large financial institutions that contributed to the current crisis. some_observations (Download the full text in PDF format)