Monetary stability, politics and prosperity

By Wilberne Persaud, Financial Gleaner Columnist

Three events and one unfolding development have implications for the capacity of our existing international monetary system to provide inflation-free expanded liquidity with stability, while assisting in combating rising unemployment.

They are the two party conventions in the United States and Fed chairman Ben Bernanke's presenta-tion, 'Monetary Policy since the Onset of the Crisis', at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming on August 31.

The unfolding development: reports that major banks, including Morgan Chase, have initiated preparations for handling clients' accounts should Greece exit the euro.

There are scenarios of transporting loads of currency to pay salaries and of international firms having prepared their computer systems to handle an exit. Ominously, French banks are set to pull out of Greece while Spain faces both capital flight to 'safer' euro jurisdictions and exit of professionals fearful of fallout from such an eventuality.

Let's start with the Fed chairman who began his address by reiterating for his audience, what was an unprecedented set of circumstances.

"When we convened in Jackson Hole in August 2007," Bernanke said, "the Federal Open Market Committee's target for the federal funds rate was 5 1/4 per cent. Sixteen months later, with the financial crisis in full swing, the FOMC had lowered the target for the federal funds rate to nearly zero, thereby entering the unfamiliar territory of having to conduct monetary policy with the policy interest rate at its effective lower bound. The unusual severity of the recession and ongoing strains in financial markets made the challenges facing monetary policymakers all the greater."

Bernanke speaks here of what Keynes called the liquidity trap.

The interest rate effect becoming minimal — like pushing on a string, taking the horse to the water but being unable to make it drink.

This is where we reached in the great recession, the depth and length of which no one knew how to plumb. It was indeed territory personally, entirely unfamiliar to anyone under the age of about 100 — almost nobody!

We're talking about the last event — the Great Depression of 1929, when the apparatus of which Bernanke spoke did not even exist, except perhaps in concept among a few forward-looking bankers, financial experts and economists.

As it stood, our knowledge, the historical record and economic theory enabled a bold, if hesitant, set of initiatives to cauterise the bleeding and unblock flows of financial resources to almost normal.

So yes, this was similar to what we might refer to as a 100-year event when speaking of natural disasters.

Purely fortuitously, for stuff happens, this event coincided with accession by Barack Obama to the presidency of the US.

Republicans, upon his inauguration, hit upon a strategy they inadvertently let slip out in the form of a comment by their Senate Minority Leader Mitch McConnell, who said: "The single most important thing we want to achieve is for President Obama to be a one-term president."

They did not wish for him to have any successes to show for his 'one term'.

Thereupon, recovery of the world economy became hostage to Republican political objectives and its associated strategy. Obama, to the chagrin of some supporters, continued offering an open palm only to be confronted with a fist. The fillibuster became a way of life as governing with an ordinary majority became impossible.

Stimulus became a bad word and 'big intrusive government' cast as the villain in the jobless recovery of the US economy. As the US economy stutters, so too does the world economy.

Why did the great recession occur? Conjuncture of circumstances: repeal of Glass-Steagall which had established the Federal Deposit Insurance Corporation, regulatedFederal Deposit Insurance Corporation, regulated banking activities and discouraged speculation, awfully poor Wall Street financial leadership. This happened in 1999.

Bubbles in high-technology development and the housing market, fuelled by easy money and financial innovation in the form of derivatives etc, lead to euphoria as sub-prime mortgages became collateralised debt obligations sold across the globe.

High-technology trading, relaxation of capital controls and unparalleled interconnectivity of economies, in part the result of enhanced globalisation, linked Ireland and Iceland to Minnesota and New York, to London and Zurich. When the bubble burst contagion was viral.

If the US does not recover quickly, China, Brazil and others face reduced demand. If Greece must leave the euro, chaos, at least in the immediate short run, must reign.

How do the two party conventions figure in all this? We must extrapolate to consider the impact of the policies underlying the platforms of the two contending visions.

Unfunded tax breaks

Mitt Romney it appears would go for a continuing tax break for wealthy people and corporations. It is exactly this policy of unfunded tax breaks with the view of job creators causing explosion in income and employment that caused President George W. Bush to eviscerate the Clinton surplus - not to mention two unfunded wars.

The Democratic platform allows these tax cuts to lapse and increases it for those in the US$250,000-plus bracket. This, of course, allows for other kinds of expenditure and growth in confidence as the US deficit becomes more manageable, controllable.

The visions are diametrically opposed. And they shall have entirely opposite impacts.

Bernanke in his speech made it as clear as a Fed chairman can, that he is concerned about unemployment and shall use powers available to him to influence economic activity.

Republicans have issued a veiled threat that were he to do this, he would certainly lose his job should they win the presidency.

Meanwhile in Europe, the New York Times' Dealbook reports Société Générale is in 'advanced discussions to sell its 99.1 per cent stake in Geniki Bank, one of Greece's biggest financial institutions' and Crédit Agricole, is in the process of selling its Greek operation. They clearly are cutting losses.

On July 26, Mario Draghi, president of the European Central Bank, said Europe remains ready to do within its mandate, "whatever it takes to preserve the euro. And believe me, it will be enough."

On August 3, this column noted his remarks and argued, "It is easy to believe Europe is committed to, and shall not allow the euro to disintegrate. Is there, however, sufficient 'political capital' to sustain this change? The weeks ahead shall provide the answer."

We haven't had the answer but the forecast suggests gloomy.

Wilberne Persaud is author of 'Jamaica Meltdown: Indigenous Financial Sector Crash 1996'. wilbe65@yahoo.com.