Archive for February 12th, 2009

Crisis 2007-?: Policymaking at crossroads

February 12, 2009

This is the title of my new paper. I have always been wary of policies in this crisis.The recent policy events just reinforces my views each time.

Taylor takes on Fed and Treasury Policies

February 12, 2009

John Taylor criticises the Fed and Govt in the crisis in this WSJ piece. The piece is a summary of this excellent paper from Taylor.

Basics and politics of Korean Crisis 1997-98

February 12, 2009

I came across this excellent speechfrom Kim Khiwan presented at this IMF seminar on Emerging Market crisis. The speech is a primer on the Korean crisis (just like this speech on Nordic crisis -1990).

Korean crisis was a result of mismatches- currency mismatch (borrowed in foreign currency and invested in home assets), maturity mismatch (borrow short and invest long), balance sheet mismatch (assets in Won and liabilities in USD)  

What were the crisis triggers? 1) Strengthening of USD (meant foreign liabilities became costlier), allowing a industrial group to fail ( Hanbo, just like Lehman now) , the South-east Asian crisis becoming a contagion. How was the crisis eased? Via IMF and US help. And since then Korea has tried to implement reforms but am not sure whether they have helped as it still looks in dire straits.

Anyways, What interested me more was this interesting aspect of Korean crisis management:

On December 19, at the Korean government’s request, the U.S. government not only persuaded the IMF to quickly enter into a new round of negotiations with the Korean government for a further frontloading of bailout money, it also exerted its credits to Korea for one month. In return for this favor, they were promised to have an opportunity to reach an agreement with the Korean government in restructuring their outstanding short-term loans to Korea. influence on the financial institutions of G-7 countries to roll over their short-term credits to Korea for one month. In return for this favor, they were promised to have an opportunity to reach an agreement with the Korean government in restructuring their outstanding short-term loans to Korea.

One would guess US did this for economic gains but Khiwan offers an interesting twist in the tale:

We should note that it was principally out of security considerations that the United States government took a series of actions that enabled Korea to meet its liquidity requirements. Put differently, the US felt that unless it helped Korea in a hurry, its security position could be jeopardized, particularly the safety and well-being of some 36,000 US troops then stationed in Korea.

Well, well. This is an insider’s version of the story and is really interesting. It is political economy of crisis management. Obviously, Khiwan raises concerns over this approach:

This point has disturbing implications for the IMF and others. Suppose another country with a size similar to that of Korea faces a financial crisis today. Under the existing charter, could the IMF arrange a support package that is comparable to the one offered to Korea at the end of renegotiations?

In addition, ask yourself who could arrange the kind of international rescue package that was put together under the US initiative. What’s more, ask if the US would take the initiative for that country if it had no special security relationship comparable to that of the US and Korea. I would like to invite you all to seriously consider these hypothetical questions.

In the current crisis we are seeing no such issues as US itself is struggling big time. However, it would be interesting to see the reasons for US interventions in previous other economies’ crisis. And you never know, as the crisis eases (whenever it happens) and US recovers, it could still try and help a few other economies which could still be struggling. If this scenario does take place and US does help, one should look for reasons other than economics.

Assorted Links

February 12, 2009

It is great to be back after a break. However, to read list has exploded.

1. ASB says we need a FSAP report for India. Fair enough, but do they matter?

2. TTR points IIT’s inviting PSUs for placements

3. Urbanomics points to TARP 3.0 

4. Indicus Blog says don’t push rate cuts quick and fast

5. MR points to Obama’s views on Sweden 1992 bank rescue plan. Krugman isn’t amused

6. WSJ Blog points to some job market papers

7. Nudges points to Shiller’s lectures on Behavioral Finance

8. Mankiw on his preferred fiscal stimulus

9. Rodrik on international finance regulation

10. Fin Prof points What is finance for?

11. DB Blog on how it helps

12. CTB points a need for a USD 2 trillion global plan

13. ACB points problem with dream teams. Also read this old humor of understanding economic systems with help of cows.

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